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The well runs dry

Mar 5th 2016 | From the print edition

OIL PRICES have perked up a bit, but producers are still reeling from the slump in crude prices last year. The boss of Pemex, Mexico’s state-owned oil firm, said this week that the company faced a “liquidity crunch”. Malaysia’s state oil firm is laying off workers. Petrobras, Brazil’s troubled oil giant, recently secured a $10 billion loan from the China Development Bank to help it to pay off maturing bonds. The trouble at these firms underlines broader concerns about the burden of corporate debt in emerging markets. A particular worry for resources firms is the rising cost of servicing dollar debts taken out when the greenback was much weaker than it is now. Short-term dollar loans to be repaid with earnings in falling currencies featured prominently in past emerging-market crises. But the concern about the role of dollar lending in the current cycle is different.

The numbers are startling. Corporate debt in 12 biggish emerging markets rose from around 60% of GDP in 2008 to more than 100% in 2015, according to the Bank for International Settlements (BIS). Places that experience a rapid run-up in debt often subsequently endure a sharp slowdown in GDP (see article). An extra twist is that big emerging-market firms were for a while able to borrow freely in dollars. By the middle of last year, the stock of dollar loans to non-bank borrowers in emerging markets, including companies and government, had reached $3.3 trillion. Indeed until recently, dollar credit to borrowers outside America was growing much more quickly than to borrowers within it. The fastest increase of all was in corporate bonds issued by emerging-market firms.

Jaime Caruana, the head of the BIS, argues that a global liquidity cycle—the waxing and waning of dollar borrowing outside America—helps to explain the slowdown in emerging-market economies, the rise in the dollar’s value, and the sudden oil glut. When the dollar was weak and global liquidity was ample thanks to the purchase of Treasuries by the Federal Reserve (so-called “quantitative easing”, or QE), companies outside America were happy to borrow in dollars, because that was cheaper than borrowing in local currency. Capital inflows pushed up local asset prices, including currencies, making dollar debt seem even more affordable.

As long as the dollar remained weak, the feedback loop of cheap credit, rising asset prices and strong GDP growth could continue. But when the dollar started to strengthen, the loop reversed. The dollar’s ascent is tied to a change in America’s monetary policy which began in May 2013, when the Fed first hinted that it would phase out QE. When the Fed’s bond-buying ended in October 2014, it paved the way for an interest-rate increase 14 months later. The tightening of monetary policy in America has reduced the appetite for financial risk-taking beyond its shores.

The impact of this minor shift on the value of the dollar has been remarkable, particularly against emerging-market currencies (see chart 1). Wherever there has been lots of borrowing in foreign currency, the exchange rate becomes a financial amplifier, notes Mr Caruana. As companies scramble to pay down their dollar debts, asset prices in emerging markets fall. Firms cut back on investment and shed employees. GDP falters. This drives emerging-market currencies down even further in a vicious cycle that mirrors the virtuous cycle during the boom. Since much of the credit went to oil firms, the result has been a supply glut, as producers pump crude at full tilt to earn dollars to pay down their debts.

Mr Caruana’s reading of events has dollar borrowing at its centre. Yet the sell-off in emerging-market currencies has more to it. Rich countries that export raw materials, including Australia, Canada and Norway, have also seen their currencies plummet against the dollar. Falling export income as a consequence of much lower oil and commodity prices is likely to have played a similar role in the slump in other currencies.

Some analysts think the problem of dollar debt is blown out of proportion. There are countries, such as Chile and Turkey, where dollar debts loom large (see chart 2). But the average dollar share of corporate debt in emerging markets is just 10%. Chinese firms account for more than a quarter of the $3.3 trillion of dollar loans to emerging markets—and since August, when fears surged that the yuan would be devalued, they have been swapping dollar loans into yuan, notes Jan Dehn of Ashmore Group, a fund manager.

Much of the foreign-currency debt taken out by companies elsewhere was long-term: the average maturity of bonds issued last year was more than ten years, for instance. That pushes refinancing, and the associated risk of default, far into the future. In many cases, dollar debt is matched by dollar income—even if, as in the case of oil exporters, it is much diminished by low prices. And there are pots of dollars in emerging-market banks to which indebted companies may have recourse.

In any event, the dollar’s ascent has stalled because of concerns about America’s faltering economy and doubts that the Fed can raise interest rates again. Yet the cycle of dollar lending nevertheless has implications that may not be fully appreciated. A recent study of firm-level finances by Valentino Bruno and Hyun Song Shin of the BIS found that emerging-market firms with strong cash balances are more likely to issue dollar bonds. That goes against a tenet of corporate finance, that firms only borrow to invest once they have exhausted internal sources of funds. It suggests that financial risk-taking was the motivation for borrowing. On average, 17-22 cents of every dollar borrowed by an emerging-market company ends up as cash on the firm’s balance-sheet. Such liquid funds could go into bank deposits, or be used to buy other firms’ commercial paper or even to lend to them directly. In other words, the authors say, companies seem to be acting as surrogate financial firms. As a result, dollar borrowing spills over into easier credit conditions in domestic markets.

This is one of the ways the dollar-credit cycle exerts a strong influence over overall lending in emerging markets. The credit cycle took an apparently decisive turn last year. The stock of dollar credit to emerging markets stopped rising in the third quarter, says the BIS, the first stalling since 2009. Dollar credit is much harder to come by than it was. So are local-currency loans. Bank-lending conditions in emerging markets tightened further in the fourth quarter, according to the Institute for International Finance. The dollar may have peaked but, for emerging markets, tight financial conditions are likely to endure.

The Socialists are torn over a move to dismantle the 35-hour week

Mar 5th 2016 | PARIS | From the print edition

IN THE eyes of many foreigners, two numbers encapsulate French economic policy over the past decade or so: 75 and 35. The first refers to the top income-tax rate of 75%, promised by François Hollande to seduce the left when he was the Socialist presidential candidate in 2012. The second is the 35-hour maximum working week, devised by a Socialist government in 2000 and later retained by the centre-right. Each has been a totem of French social preferences. Yet, to the consternation of some of his voters, Mr Hollande applied the 75% tax rate for only two years, and then binned it. Now he has drawn up plans that could, in effect, demolish the 35-hour week, too.

Mr Hollande’s government is reviewing a draft labour law that would remove a series of constraints French firms face, both when trying to adapt working time to shifting business cycles and when deciding whether to hire staff. In particular, it devolves to firms the right to negotiate longer hours and overtime rates with their own trade unions, rather than having to follow rules dictated by national industry-wide deals. The 35-hour cap would remain in force, but it would become more of a trigger for overtime pay than a rigid constraint on hours worked. These could reach 46 hours a week, for a maximum of 16 weeks. Firms would also have greater freedom to shorten working hours and reduce pay, which can currently be done only in times of “serious economic difficulty”. Emmanuel Macron, the economy minister, has called such measures the “de facto” end of the 35-hour week.

At the same time, the law would lower existing high barriers to laying off workers. These discourage firms from creating permanent jobs, and leave huge numbers of “outsiders”, particularly young people, temping. For one thing, it would cap awards for unfair dismissal, which are made by labour tribunals. Laid-off French workers bring such cases frequently; they can take years and cost anything from €2,500 to €310,000 ($2,700 to $337,000) by one estimate.

The underlying principle, laid out in government-commissioned reports over the past six months, is simple and radical. The country’s ponderous labour code, currently longer than the Bible, should limit itself to basic protection of workers, and leave bosses and unions within firms to hammer out finer details. This is based on the belief that French employees—only 8% of whom belong to a union—are more pragmatic and flexible than the national union leaders in Paris who supposedly negotiate on their behalf. At a car factory making Smart vehicles in eastern France, for instance, a recent deal to work 39 hours a week was approved by most employees, yet blocked by the firm’s unions. Under the new law, if no deal can be reached with a company’s unions, employees may vote in a binding internal referendum.

The draft law does not deal with all the rigidities of the French labour code. Nonetheless, “it’s the most important piece of labour-market legislation for 15 years,” says Ludovic Subran, chief economist at Eurler Hermes, a credit-insurance firm. It is the closest France has got to the reformist Jobs Act rammed through in Italy by Matteo Renzi’s government. And it could be the legacy that Manuel Valls, the ambitious centre-left prime minister, seeks as he and Mr Macron try to steer the Socialists in a more market-friendly direction.

The great difficulty is political. For much of the left, the 35-hour week remains not only a badge of progress but the mark of a preference: for shorter hours, more holidays and higher productivity—even at the price of fewer jobs. French productivity per hour remains far higher than Britain’s and even a touch above Germany’s (though yearly hours worked in France are lower, and the unemployment rate twice as high). In fact, the French already work more than 35 hours a week on average, partly because so many employees get extra holidays to compensate. White-collar employees at EDF, an energy firm, average 39 working hours a week, but until recently got 23 extra days off each year on top of the statutory five weeks’ holiday. (A hard-won deal has reduced this to a mere 16.) Managing so much absence has become an art. “Employees prefer to work less, earn less and have more time,” says Pierre Vauterin, who runs a firm that makes ball bearings on the outskirts of Paris.

Challenging this doctrine is becoming a stinging headache. Already, Mr Valls has postponed the presentation of his draft law to the cabinet, thanks to an uproar within his own party and the threat of street protests by unions and students. In a barbed article in Le Monde, Martine Aubry, mayor of Lille and architect of the 35-hour week, accused him of selling out socialist ideals. “Who could imagine”, she asked, “that making redundancies easier…will encourage employment?” Mr Hollande is enfeebled. Even France’s more moderate unionists are wary. If Mr Valls waters down the draft, his reformist credentials will be damaged. If he pushes ahead, he could find himself with a choice between unmanageable unrest—or resignation.

每週工作35小時　在法國快行不通？

作者：經濟學人，黃維德編譯 2016-03-06 經濟學人

在許多外國人眼中，法國過去十多年的經濟政策可以用兩個數字來總結：75和35。第一個數字為總統歐蘭德（François Hollande）提出的最高級距薪資所得稅率75%，第二個數字則是每週最高工時35小時。兩者都是法國的社會主義圖騰，然而，歐蘭德政府不但在實施兩年後就取消75%稅率，現在更提出了等同於取消35小時工時的計畫。

歐蘭德政府目前正在審視的勞動法草案，將取消一系列法國企業面臨的限制。其中之一即為讓企業有權與本身的工會協商工時和加班費，35小時上限仍舊存在，但它會變得比較像是觸發加班費的門檻，而非嚴格的工時上限。新法案也會降低裁員的限制；嚴苛的裁員限制讓企業不願提供正職工作，使得許多人只能擔任臨時雇員。

新法案的原則簡單又基進，亦即，法國那極為繁雜的勞動法規應有所限縮，僅為勞工提供基本保護，並將細節交由雇主和工會決定。其信念在於，法國勞工比全國工會領袖更務實、更有彈性。以法國東部的一間汽車工廠為例，大多數員工同意了每週工作39小時的協議，但此協議卻被車廠的工會擋了下來；在新法之下，若企業無法與工會談定協議，員工就可以舉行具有實質效力的表決。

新法並未處理所有的法國勞動規範問題，但專家認為，它是15年來法國最重要的勞動市場法案，也可能會是中左派總理瓦爾（Manuel Valls）的重大成就。新法案最大的難處在於政治；對大部分左派來說，35小時工時象徵著某種偏好──即使以就業機會減少為代價，也要追求更短的工時、更多假日和更高的生產力。法國的每小時生產力仍舊遠高於英國，甚至稍稍高過德國（但年度總工時較低，失業率更是2倍）。

挑戰前述偏好已經成為非常讓人頭痛的問題。由於黨內反彈與工會和學生威脅發動示威，總理瓦爾已延後向內閣提交新法案。減低新法的改革力度，可能會傷害瓦爾的改革派名聲；繼續推動新法，則可能會迫使瓦爾在嚴重動盪和辭職之間二擇一。