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When It Comes to Public Finances, Credibility Is Key

By Raphael Espinoza, Vitor Gaspar, and Paolo Mauro عربي, 中文, Español, Français, 日本語, Português, Русский Ending the health crisis…

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This article was originally published by IMF Blog

By Raphael Espinoza, Vitor Gaspar, and Paolo Mauro

عربي, 中文, Español, Français, 日本語, Português, Русский

Ending the health crisis and addressing its immediate fallout remains the top priority, but governments would also benefit from committing to fiscal responsibility.

From the outset of the COVID-19 pandemic, governments have extended massive fiscal support that has saved lives and jobs. As a result, public debt has reached a historic high, although it is expected to decrease marginally in the next few years. These developments raise questions about how high debt can go without being disruptive.

Commitment to budget discipline and clear communication of policy priorities pays off.

Addressing the health emergency remains crucial, especially in countries where the pandemic is not yet under control, and fiscal support will be invaluable until the recovery is on a strong footing. The appropriate timing for starting to reduce deficits and debt will depend on country-specific conditions.

But governments also need to consider fiscal risks and the vulnerability to future crises. Fortunately, interest rates have been very low globally. But there is no guarantee this will last.

Greater predictability

Our new Fiscal Monitor argues that committing to sound public finances, with a credible set of rules and institutions to guide fiscal policy, can facilitate fiscal policy decisions at the current juncture. When lenders trust that governments are fiscally responsible, they make it easier and cheaper for countries to finance deficits. This buys time and makes debt stabilization less painful. For instance, when budget plans are credible (as measured by how close professional forecasters’ projections are to official announcements), borrowing costs can fall temporarily by as much as 40 basis points. And even for governments that do not borrow from markets, fiscal credibility can attract private investment and foster macroeconomic stability.

Governments can signal their commitment to fiscal sustainability while addressing the ongoing crisis in various ways, such as undertaking structural fiscal reforms (for example, subsidy or pension reform) or adopting budget rules and establishing institutions that are geared toward promoting fiscal prudence.

Unwelcome debt increases

When governments conceive and put in place budget rules and institutions, they should strive to consider all risks to the public finances. Debt sometimes increases beyond what is forecast in the baseline. These jumps typically range between 12 and 16 percent of GDP at five-year projection horizons, our research shows. Underlying such negative shocks are disappointing medium-term GDP growth and other drivers of debt, including bailouts of businesses and exchange rate depreciation. Many countries now face heightened fiscal risks as a result of record loans, guarantees, and other measures taken to protect firms and jobs from the fallout of COVID-19.

Such shocks put pressure on budgets and fiscal institutions such as fiscal rules, which need to be flexible to allow for larger deficits when needed. Well-designed risk mitigation strategies—such as restrictions on loan eligibility or limits on loan size and maturity—can reduce these risks, or limit fiscal costs if they materialize. But these frameworks must also ensure steadfast debt reduction in good times, so that fiscal support can be deployed again in the future.

Budgetary rules and institutions

A robust set of budgetary rules and institutions should seek to achieve three overarching goals: sustainability; economic stabilization; and, for fiscal rules in particular, simplicity. However, it is difficult to fulfill all three goals at once.

Although simple numerical rules can sometimes be rigid, we show that they promote fiscal prudence. For instance, countries that follow debt rules generally manage to reverse debt jumps of 15 percent of GDP in about 10 years in the absence of new shocks—significantly faster than countries that do not follow debt rules. Numerical rules need not rely only on debt: other indicators, such as the interest bill or the net worth of the government, can complement traditional debt and deficit indicators. Procedural rules offer more flexibility than numerical fiscal rules, but it may be harder for governments to communicate and monitor compliance without numerical targets, particularly in the absence of sound fiscal institutions.

Our research shows that a country’s commitment to budget discipline and clear communication of policy priorities—backed by transparency about government spending and revenues—pays off. Many countries suspended their fiscal rules in 2020 so as to rightly increase health care and social spending to address the pandemic. Our analysis of newspapers shows that media reporting of the suspension of fiscal rules was more positive in places with higher fiscal transparency.

Strong budget rules and institutions, backed by clear communication and fiscal transparency, enhance credibility. That, in turn, improves access to credit and secures more room for maneuver in times of crisis. Ultimately, fiscal frameworks are only effective if they have sufficient political support. Even so, they help focus discussions and can thus help reach political consensus on credible fiscal policies.



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eToro expands its crypto offerings in Australia with 15 extra assets, plus staking

Global multi-asset investment platform eToro has good news for its Australian crypto investors, adding 15 more assets to buy, trade … Read More
The post…

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Global multi-asset investment platform eToro has good news for its Australian crypto investors, adding 15 more assets to buy, trade and HODL, as well as soon introducing staking functionality for passive yield generation.

With the new additions, eToro, which has offices in the UK, US, Cyprus and Australia (Sydney) and more than 23 million users globally, can now offer 36 different cryptocurrencies to Australians.

The new tokens include: Solana (SOL), Polkadot (DOT), Cosmos (ATOM), The Graph (GRT), Curve (CRV), 1inch (1INCH), Maker (MKR), Enjin (ENJ), Shiba Inu (SHIB), Dogecoin (DOGE), Filecoin (FIL), Aave (AAVE), Compound (COMP), (YFI) and Decentraland (MANA).

The growing number of dog-meme supporters will be pleased with at least a couple of the new additions…

According to an announcement, eToro’s Australian users opening crypto asset positions “can now purchase the underlying asset”. And, from November 1, they’ll also be able to earn monthly staking rewards on their Cardano (ADA) and TRON (TRX) investments, through eToro’s new staking service.

eToro’s Australian Managing Director, Robert Francis said: “eToro has been a pioneer in the crypto markets and we are excited to observe more Australians dipping their toes into this emerging asset class.

“The crypto ecosystem is expanding with the emergence of new altcoins and as a result we are seeing Australian investors looking at crypto beyond a store of value, instead using it as a way to diversify their portfolios beyond traditional assets like stocks, in order to hedge against risks such as inflation.”


Solid additions to eToro bullpen: SOL, CRV, SHIB pumping

eToro’s new crypto additions have some notably solid recent gainers. The layer 1 smart-contract platform Solana, for instance, hit an all-time high yesterday, reaching US$219. Cosmos, too has been gaining some traction of late, up more than 20 per cent over the past 14 days.

Meanwhile another high-profile layer 1, Polkadot, is building buzz ahead of its parachain crowdloan event on November 11, which many believe could be a major price catalyst for the DOT token heading into the last couple of months of the year.

DeFi DAO favourite Curve is another on a bit of a tear this week, too, having busted above its previous yearly high set back in April. It’s up 17 per cent in the past 24 hours and more than 75 per cent across the past week.

With more than 89 per cent of its supply now locked up in DeFi protocols, CRV tokens have clearly been in high demand for the protocol’s high-yield-enabling utility, much like (YFI).

In terms of gainers in eToro’s newly added crop of coins, however, nothing quite beats the remarkable rise of Shiba Inu, recently dismissed by Michael “Big Short” Burry as “pointless“.

The SHIB token recently surged to no.11 on the market cap lists, and has clocked a 544 per cent gain over the past month, not to mention being up a staggering 55,366,343.7 per cent over the period of one year.

Don’t even torture yourself trying to work out the sort of money you might’ve made if you’d thrown some spare change at it 12 months ago and HODLed.

Can SHIB really keep rocketing from here, though, with a market cap now above 23.5 billion? That’s the question those speculating on this one probably need to ask themselves.

Oh, and just a timely reminder to finish on here, from eToro’s Australian MD Robert Francis again…

“As we continue to strengthen our crypto offering Down Under, we urge investors to keep in mind that crypto is a highly volatile asset class. Investors should remember the basic tenets of investing: diversify, understand what you are investing in and never invest more than you can afford to lose.”


The post eToro expands its crypto offerings in Australia with 15 extra assets, plus staking appeared first on Stockhead.

Author: Rob Badman

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Doing 90mph On Deadman’s Curve: A Few Thoughts On Risk

Doing 90mph On Deadman’s Curve: A Few Thoughts On Risk

Authored by Charles Hugh Smith via OfTwoMinds blog,

When the wreck is recovered, witnesses…

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Doing 90mph On Deadman’s Curve: A Few Thoughts On Risk

Authored by Charles Hugh Smith via OfTwoMinds blog,

When the wreck is recovered, witnesses will wonder why they took such heedless, foolish risks.

You’re in the back seat wedged between tipsy revelers, the driver is drunk and heading into Deadman’s Curve at 90 miles per hour. Nobody’s worried because the driver has never crashed. Before they slid into euphoric incoherence, the other passengers answered your doubts with statistics and pretty charts showing that the driver had never had an accident, so there was nothing to worry about.

They also said that the driver’s Uncle Fed had rigged the vehicle with an anti-accident device, so a crash was impossible. One passenger blurted out that a fellow named Goldy Sacks said the driver could easily “melt up” and take Deadman’s Curve at 120 miles per hour without any trouble.

You see the problem here: the risk of crashing and expiring is soaring but the giddy occupants are completely confident there’s no risk, and this confidence is the source of the danger. If you’re sure Uncle Fed’s device can protect the vehicle from any crash, then why not take Deadman’s Curve at 90 miles per hour?

And if Goldy Sacks says you could actually take it at 120 miles per hour, then taking it at 90 MPH is actually quite prudent and cautious.

This confidence inspires tremendous risk-taking that eventually ends very badly for all the revelers. The irony is rich: the greater the confidence, the greater the risk, the greater the risk, the greater the odds of a crash. The greater the risks being taken, the greater the odds that the crash will be fatal to all occupants.

The confidence in Uncle Fed’s safety device is delusional because it’s never been tested. The fact that the driver hasn’t crashed doesn’t mean the risk is low or Uncle Fed’s device works perfectly, it simply means luck has been on the driver’s side.

It also doesn’t mean the driver can take Deadman’s Curve at 90 MPH without any risk. It simply means the driver hasn’t taken on more risk than he can handle until now.

When the wreck is recovered, witnesses will wonder why they took such heedless, foolish risks. What they couldn’t know is the occupants were all giddily confident that a crash was impossible no matter how great the risks. So why not take more risk?

Indeed. This makes perfect sense: if a crash is impossible, then by all means take Deadman’s Curve at 120 MPH.

*  *  *

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Tyler Durden
Tue, 10/26/2021 – 08:30

Author: Tyler Durden

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Bond Market Crash Will Surprise Only The Uninformed

Bond Market Crash Will Surprise Only The Uninformed

By Bloomberg macro commentator and analyst Tommi Utoslahti

A global bond market meltdown…

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Bond Market Crash Will Surprise Only The Uninformed

By Bloomberg macro commentator and analyst Tommi Utoslahti

A global bond market meltdown is only a matter of time. One fine morning, traders will wake up to find all benchmark yields sharply higher, 10 to 20 basis points or more, and no buyers around.

Bond price indicators are flashing deep red right now, from decade-high inflation expectations to waning auction demand and whispers of depressed liquidity. Last week, the U.S. 5-year breakeven rate briefly topped 3% for the first time since the maturity was restarted in 2004
Bloomberg’s U.S. Treasury index is on track for its worst annual loss since 2009, and that’s only the beginning. Expect the Treasury 10-year yield to top 2%, Bunds to end their two-year trek in the sub-zero wilderness and Gilts to continue pushing higher toward levels last seen in 2018.

It’s not a taper tantrum. The time for that passed months ago, and the Fed’s well-telegraphed intention to start slowing its $120 billion monthly bond purchases at next week’s meeting is all baked in.

Bonds will collapse on investors’ delayed realization that inflation is here to stay, and won’t be tamed without serious policy tightening.

Equally serious concern stems from the fact that a big part of the recent inflation spike is supply-shock driven. Conventional policy tightening would do little to resolve supply-chain problems, leaving policy makers unable to directly influence rising prices.

If all that sounds unrealistic, or just a mere tail risk scenario, consider this: wagers for Bank of England rate hikes over the next year have been ramped up to more than 100 basis points in only a few weeks. A Hundred basis points! Saying that aloud would have been seen as a joke as recently as early September.

Perma-bulls often point out that yields fell following the 2013 taper tantrum. That is correct, but it only happened after the Treasury 10-year yield had surged about 140 basis points in four months and took well over a year to return to where it was before the selloff. A similar move now from August lows would take Treasuries above 2.5%.

The biggest difference is in the macro backdrop. In 2013, the headline U.S. inflation rate was well below 2% — it’s been over 5% for five months now. The ISM index of prices paid for inputs is hitting levels not seen for a decade and the inflation expectations of the University of Michigan consumer survey are the highest since 2008.

Everyday consumer items are only about to get more expensive amid stubborn supply-chain disruptions. There’s an energy crunch brewing in many of the developed economies and crude oil appears more likely to hit $100 than fall back toward $50.

Fed Chair Powell on Friday said that “risks are clearly now to longer and more persistent bottlenecks”. Other Fed officials have earlier acknowledged that “transitory” has become a dirty word. And the global financial commentariat is now more often talking about “policy error.”

Treasury yields are now almost exactly where they were just before the 2013 taper tantrum or the 2016 reflation trade following Trump’s election victory. In both cases, yields eventually topped 3%.

Portfolio holders suddenly find themselves bracing for potentially massive losses. Duration hedging will only work to drive bond prices lower. The dollar should benefit from the dual tailwind of higher U.S. yields and haven demand.

Risk assets won’t be able to ignore severe bond market carnage. Earlier this year, when 10-year Treasuries were testing 1.70%, the S&P 500 index retreated about 5% before resuming its rally. Investors shouldn’t count on such a benign reaction this time. Wall Street near records and the VIX at its lowest since the pandemic started show that stocks are hopelessly unprepared for tighter funding conditions.

It’s not all gloom. Previous cycles have shown that the world economy can handle higher borrowing costs. Equities may even see firmer yields as a sign of a strong economy. But there’s no denying recalibration to higher yields after years of ultra-low rates will be a painful exercise for those not ready for it.

Tyler Durden
Tue, 10/26/2021 – 09:50

Author: Tyler Durden

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