According to Chris Burt, Director of the Risk Coalition Research Company, “where the market suspects the organisation is taking more risk than might be appropriate,” shares may be lower than expected due to financial results and company performance.

“Imagine the Titanic moving at full speed across the Atlantic, making fantastic progress,” he continues.

While European banking shares increased by 20% between January and July 2024, hitting nearly nine-year highs, “the STOXX Europe 600 Banks index was down 0.5% after a raft of bank earnings fed into analyst and investor concerns about the sustainability of the sector’s profit growth. Eurozone banks see investment banking boost but outlook stalls shares,” according to Mathieu Rosemain, Tom Sims, and Valentina Za’s article.

A legal provision related to Deutsche Bank’s failing Postbank unit contributed to the company’s quarterly loss and 7% stock decline. The company also scrapped plans for a repurchase and increased bad loan loss charges. Although BNP Paribas anticipates exceeding its €11.2 billion net profit goal, an 11% decline in net interest income (NII) has raised worries in its retail division.

Additionally, Moody’s Ratings thinks that UniCredit and Santander’s NII have essentially peaked. As a result, risk charges will go up, even though growing profits have improved investor mood. Despite this, lenders have traded below their tangible book value, which raises questions about whether their profitability can last.

Despite this, the investment banking businesses of BNPP and Deutsche helped to diversify revenue streams in recent quarters by offsetting any shortfalls.

“At BNPP, revenue from equities trading and prime brokerage services jumped 58%,” added Rosemain, Sims, and Za.

Ambivalent attitude

According to Olivier Panis, Associate Managing Director of Financial Institutions Group at Moody’s Ratings, the outlook for Eurozone bank earnings remained rather stable. In 2023, the banks in the zone increased their net interest margins (NIMs).

“We expected profitability to stabilise in countries where variable-rate lending predominates,” he said.

In the first half of 2024, HSBC and other Italian and Nordic banks did better than their counterparts. In 2025, Moody’s Ratings predicts that bank profitability in the Eurozone will “remain strong” notwithstanding a drop.

As per Panis, Moody’s Ratings believes most profit margins have peaked as policy rates began to decline this year. However, the move from current accounts to more costly term accounts will slow down.

After two years of low lending activity, Panis continues, “Stable economic growth and inflation near central bank targets will offer the opportunity for stronger lending volumes while also supporting asset quality and risk charges.”

However, he believes that operating costs will continue to rise. Higher compensation costs and technology are to blame for this. As a result of higher interest rates in nations like Spain, Portugal, and Italy, Moody’s Ratings believes that there may be some divergent profitability trends among banking systems with a larger percentage of assets at variable rates.

According to Fitch Ratings, the biggest banks in Europe are expected to be profitable in 2024, matching the high levels of 2023. Fitch’s September 2024 “Large European Banks Quarterly Credit Tracker” indicates that most of the 20 major banks experienced strong results in the first half of the year.

Due to their “better than expected earnings,” it raised its full-year projections for a few banks. For instance, according to a press release, HSBC and other Italian and Nordic banks did better than their counterparts in the first half of 2024.

They were expected to continue performing at a high level from July to December. French banks, on the other hand, are falling behind their counterparts and are only predicted to see modest increases in profitability.

According to Z/Yen Senior Research Partner Hugh Morris, the outlook is generally favourable. He claimed that the Eurozone’s growth rate is likely between 3-4%, which should boost bank profits throughout the banking industry because mortgages account for half of bank lending in the Eurozone, and demand for them has been generally weak over the past few years.

He clarifies that the European Central Bank (ECB) “believes the banks will be able to improve with a forecast of global GDP growth of 3.4% for the next two years.”

ECB believes that the Eurozone is expected to closely align with this forecast. One of the driving factors behind this is the anticipated long-term increase in mortgages, in contrast to their previous period of stagnant growth in the region.

Income from net interest

Morris finds the banks’ net interest incomes (NIIs) among the most intriguing aspects. They are crucial to the medium-term financial gains of banks. He claims that cost management has been a major driver of BNP Paribas and that it is one of the factors that drive short-term development.

He underscores that while other criteria may fluctuate, NII remains the benchmark. For instance, cost control helped BNP achieve record profits, Morris continues. During a 40–50-year cycle, banks manage costs when they have to and don’t when they don’t.

The market examines NII because it has doubts about BNP’s ability to maintain rigorous cost control. That is the crux of the problem. For what reason does the market have doubts about BNP? A significant portion of the solution is NII.

“A full-scale conflict in the Middle East is another possibility. The entire world will get sick if someone sneezes in that region. More than Ukraine is to blame for the rise in the price of Brent crude oil. These kinds of price shocks will impact bank lending and investment decisions. Although no one can predict what will occur, these are the main contributing elements. Morris also believes that the Eurozone is growing slowly and that banks’ expansion would be constrained by the West’s latent productivity,” Morris added.

The banks resist

It is possible that certain banks were undervalued and are not receiving the full reflection of profitability, which is why they have been held back. Morris thinks that worries about NII and the long-term viability of headline profits may be to blame.

He said, “A lot depends on how each bank is made up, and there is cyclical falling in love and out of love with investment banking as a way to kick start growth.”

Deutsche Bank incurred significant losses as a result of this mistake. Twenty years ago, Deutsche Bank aimed to establish itself as a global investment bank to rival the American market, but within five to ten years, everything crumbled. Despite having fewer assets than Santander, it is the 22nd largest bank globally. In terms of assets, it is only somewhat larger than the Toronto Dominion Bank.

The NII is a significant measure of medium-term performance, and stock markets are attempting to price in the value of future performance. If they observe that the NII’s performance deviates from short-term gains, they will pay closer attention to that.

Interest rate issues have hindered certain banks, according to Panis. The sustainability of banks’ profit growth may be affected, he believes, as the advantages of higher rates to their net interest margins have begun to wane.

Despite rate reduction by central banks, he predicts that borrowing costs will continue to be higher than they were before 2022. This will have an impact on borrowers’ capacity to refinance and repay debts.

The increased cost of living and the fact that asset values in Europe have not changed significantly since 2022 only make the situation worse.

“As a result of the monetary tightening, the cost of funding has materially increased, with the end of targeted longer-term refinance operations (TLTROs) and a material shift in the deposit mix toward more expensive term deposits,” he continues, adding that he believes this could affect asset quality and moderate lending volumes.

Even while this change may have stabilised, the deposit mix hasn’t changed since 2022, and central banks have started lowering interest rates once more.

The revenue and expenses from the stock market compound these difficulties.

According to him, capital markets income helps sustain revenue, but inflation in salaries and one-time expenses are driving up costs, which may hurt the long-term viability of profit growth.

He agrees with Morris that “geoeconomic fragmentation, which could increase volatility, impact banks’ operating environments, their asset risk, and profitability,” has several sources of uncertainty. The turmoil in the Middle East and the war in Ukraine are two prime examples of this.

The effect of NII

However, Morris believes that NII is primarily responsible for the worries regarding the durability of profit increases.

Before adding that the market has witnessed the emphasis on cost management and the interest in erratic industries, like investment banking, come and go, he states, “It is the bread-and-butter business, and it is not looking so rosy.”

The biggest banks in Europe are probably going to be profitable in 2024, matching the high 2023 levels.

Despite the market’s attempt to incorporate its likely performance into the current stock price, NII remains a persistent presence. Since the share price ought to reflect the present value of anticipated medium-term profit streams, Morris views it as Economics 101.

He believes that this indicates that “the markets’ perception of forward value will outweigh one set of half-year results.”

He doesn’t know Unicredit well, but he thinks it’s an unusual strategy that the CEO, Andrea Orcel, decided to give back almost all of the company’s profits to shareholders in the form of dividends and buybacks.

Morris further says it is unclear whether the choice to purchase a digital bank in Belgium resulted in a decline in quarterly revenues, especially with regard to the latter, and whether it caused a 3% decline in shares.

Even if purchasing a digital bank costs money up front, Unicredit may benefit in the long run. At the same time, it will not become distinctly apparent for a considerable amount of time.

“This uncertainty would cause its shares to decline, and although the markets appreciate innovation, they are leery of money pits and white elephants,” Morris noted.

According to Panis, increased market volatility is driving activity for investment banking, and client transactions are increasing capital markets revenue. He claims that this will help revenue growth in 2024. This is especially true for banks that “may suffer from low lending activity in commercial banking, as is the case for French banks, for example.”

Nevertheless, he notes that the growth of the capital markets division “drove a 6% rise in adjusted revenue to $65 billion for European global investment banks in Q2 2024, with a significant boost from equity and investment banking income.”

Then there are the fees associated with underwriting and advising on debt issuances, equity, and M&A transactions. According to him, each of them adds to the total earnings.

“When a deal is there to be done, the fees and margins are probably better than they have been,” Morris adds, even though there are fewer opportunities available.

Leverage against the cost base is necessary, and he discovers that if three individuals are needed to complete a $50 million deal, it might take all of them to complete a $500 million contract. He asserts that while this approach is advantageous for finding deals, it may leave you with an uncovered cost base when market conditions change. This indicates that the cost base stays essentially fixed. Growing economies of scale tend to make profitability highly volume-dependent.

Capital market diversification

However, diversification of capital markets activities in Europe has benefited investment banking, in part because of the COVID-19 pandemic, which caused several banks to suffer considerable losses. Panis pointed out that certain banks also decided to lower their risk appetite restrictions for specific equity derivatives with exotic structures.

Banks have also developed more balanced worldwide market divisions with a more diverse product mix as a result of geopolitical crises, such as the Russia-Ukraine war, which generated price instability.

“This diversification is rather credit-positive when implemented successfully because it exposes less of the overall business model of those banks to market turbulence and makes capital market revenues relatively less volatile,” he says, adding that not all European banks have equal access to the depth of the US capital market.

Nonetheless, Morris holds the belief that certain banks are concealing issues and should return to their fundamental role as a value store. He believes that banking should be a boring, medium-margin industry.

However, he believes that balance sheets are very challenging to correctly understand since “human ingenuity has added multiple layers of risk and complexity to that, to the point that banks’ report and account. This leads to a wobble and a misconception of share value.”

According to author and banking futurist Brett King, a conceptual shift is necessary to align investments with broader social initiatives and evolving value creation. This requires a re-evaluation of how performance is assessed.

He argues that, despite the profitability of investment banking, it is not appropriate for the modern world. He believes that investment banks, along with banks in general, must adopt a fundamentally new way of thinking to continue thriving. To achieve this, they need to develop more diverse revenue sources that align with contemporary value systems.

High interest rates and strong investment banking revenues have driven banks’ profitability, but market scepticism persists, reflected in restrained stock performances. Analysts attribute this hesitation to factors such as declining net interest income (NII), rising operational costs, and geopolitical uncertainties.

Geopolitical tensions, inflation, and fluctuating deposit mixes further complicate the outlook. While stable economic growth and improved lending volumes offer hope, rising operating costs and risk charges may offset these gains. The banking sector’s ability to navigate these challenges will depend on strategic cost management and adaptability to evolving financial conditions.

Ultimately, while Eurozone banks have demonstrated resilience, doubts over their long-term profitability persist. The market remains cautious, weighing short-term earnings against the broader economic landscape. As interest rates shift and global uncertainties loom, the banking sector must strike a balance between growth and risk management to sustain investor confidence and maintain profitability in an increasingly complex financial environment.

The post Eurozone banks struggle despite strong earnings appeared first on International Finance.

RTP has major commercial applications in payroll, utility bill payment, insurance and even retail payments, to name a few. With instant funds settlement, it has the potential to improve the payment experience and reduce transaction risk.

Knowing RTP up close

RTP was first launched in 2017 and is the newest electronic bank payment method available. The network is managed by “The Clearing House,” a membership organisation owned by all the major American banks. It has also become the first new payment rail to be launched in the United States in the last 40 years. Any federally insured depository institution can join the RTP network. They don’t need to be a member of The Clearing House.

RTP has increased the speed of bank transfers cost-effectively, apart from reducing transaction risk by eliminating payment reversals and returns, and supporting a richer context for payments. Unlike ACH, RTP only supports credit or ‘push’ payments. The user can not ‘pull’ or debit another bank account using RTP.

RTP also allows for more data to be attached to each payment. For example, a marketplace like Airbnb could include details about the reservation, like duration and reservation ID, on payments made to hosts, or an accounts payable solution could include the invoice number on payments sent.

RTP have been a game-changer in terms of enabling businesses to move their money in a much faster manner, apart from offering near-instant transfers that enable greater liquidity management and operational efficiency.

Once primarily the domain of consumers, RTPs are increasingly becoming a critical tool for businesses looking to optimise cash flow, reduce reliance on costly intermediaries, and gain a competitive edge in an era of digital finance.

According to Juniper Research, despite reaching $22 trillion in turnover in 2024, the high cost of digital transfers has kept many businesses on the sidelines. However, that is about to change, with global RTP volumes projected by Juniper to more than double to $58 trillion by 2028, driven by regulatory changes, technological advancements, and evolving business needs.

Also, factors like growing corporate demand for instant liquidity, advancements in payment technology, and government initiatives aimed at promoting cashless economies will make RTPs the new normal in our formal economy.

Matthew Purnell, a senior research analyst at Juniper Research, said, “Businesses are beginning to realise the strategic benefits of real-time payments: not just speed, but enhanced control over working capital, and reduced counterparty risk.”

The Single Euro Payments Area (SEPA) Instant Credit Transfer regulations, which took effect in the European Union (EU) in January 2025, are poised to accelerate RTP’s business adoption by mandating that eurozone transactions be priced the same as standard credit transfers. Meanwhile, in the United States, networks such as the “Clearing House RTP” and the Federal Reserve’s “FedNow” are increasing transaction limits to accommodate larger business payments.

“While RTP adoption in developed markets has been gradual due to entrenched reliance on traditional payment systems, emerging markets such as India, China, and Brazil have experienced explosive growth. India’s Unified Payments Interface (UPI) processed an astonishing 172 billion transactions in 2024, valued at nearly $2.9 trillion, a 46% increase in the number of transactions and a 35% increase in value over the previous year. The surge in RTP adoption in developing economies is largely due to the absence of widespread debit and credit card penetration, offering businesses and consumers alike an accessible digital-payment solution. RTP provides an accessible payment solution for a population that is becoming increasingly banked,” Purnell added.

Factors fuelling RTP adoption

As per Purnell, three major factors are driving the adoption of RTP. One of the factors was the COVID-19 pandemic, which accelerated demand for digital transactions as businesses sought alternatives to in-person payments and cash handling.

Then came advances in technology, such as smartphones equipped with digital wallets like Google Pay, and the proliferation of 5G wireless coverage, thereby making RTP more widely available. Also, governments worldwide are implementing policies to encourage the transition to cashless economies.

Meanwhile, in February, the Clearing House’s RTP network processed a $10 million real-time transaction, the largest instant payment in the world’s largest economy to date. With the transaction cap now at $10 million (as of March 2025), up from $1 million, corporations can transfer high-value funds instantly. This will unlock new possibilities for treasury management, supply chain financing and interbank settlements.

Financial institutions are also strengthening their real-time infrastructure. FIS secured full send certification for the “FedNow Service,” supporting the full payments life cycle and enabling partner banks to offer instant payments for loans, rent and utilities. The development marks a critical step toward a financial system where real-time money movement is the norm, not the exception.

“Beyond the US, real-time payments continue to advance. Brazil’s Pix Automatico, launching in June, will introduce automated recurring payments. This will make it easier for businesses and consumers to manage subscriptions, utility bills and other regular expenses. By removing the need for multiple banking agreements, Pix Automatico simplifies cash flow for businesses while improving convenience for consumers. With higher transaction limits, deeper digital wallet integrations and global adoption accelerating, these faster payments are reshaping finance,” PYMNTS reported.

Cost hurdle for businesses

According to Purnell, “Consumers have until recently been the primary beneficiaries of RTP, with apps like Venmo in the US and Alipay in China allowing customers to pay for a Starbucks Frappuccino or split the cost of a meal with a half dozen friends. However, businesses have been relatively slow to utilise the technology for making business-to-business payments due to several hurdles, primarily cost. As a result, less than 10% of RTP transactions in Europe, for example, originate from companies.”

“The one thing that’s holding back business adoption is differential pricing. Real-time payments are anywhere from three to five times more expensive for a business than a traditional payment rail,” said Uzayr Jeenah, a Toronto-based leader in the global payments practice at consulting firm McKinsey, while referring to the term for digital payment infrastructure.

Jeenah says the implementation of the European Union’s “Instant Payments Regulation,” adopted in March 2024 and encompassing SEPA, will be a “big catalyst for change” in RTP pricing in 2025.

“In most of the Eurozone, there is no charge for a standard credit transfer. I think in the near future virtually all business payments in the EU are going to be real-time because the system is going to be free, or virtually free,” says Scott McInnes, a partner in the Brussels office of Bird & Bird who specialises in payment questions. He further added that this probably means RTP for most businesses in Europe will have no cost.

McInnes says the EU was motivated in part by a desire to offer a European alternative to credit and debit card issuers such as Visa and Mastercard, American card services corporations that charge high transaction fees to merchants.

The EU RTP regulation, SEPA Instant, will begin affecting outgoing payments in October 2025 for Eurozone payment providers, including banks and fintech companies. Payment providers outside the region will have until 2027 to comply, allowing time to address settlement challenges related to different currencies.

The EU rules will also affect foreign banks that have branches in the Eurozone, potentially creating opportunities for RTP expansion beyond the euro. For example, a UK bank with a branch in Paris could receive instant payments through the UK Faster Payment system and could conduct euro-denominated RTP transactions via its European branch. Additionally, Australia’s New Payments Platform (NPP) does not impose any upper limit on transaction amounts, a trend aimed at accommodating large businesses that handle significant transactions for settling invoices.

Challenges remain

Existing RTP systems have a common drawback: their domestic focus, with limited capabilities for cross-border transactions (except in the Eurozone, where the euro provides a common currency). This limitation also presents a significant challenge for companies with global supply chains that require rapid payment transfers to overseas vendors.

According to Statista, the total value of cross-border payments was approximately $190 trillion in 2023 and is projected to reach $290 trillion by 2030, highlighting the sector’s rapid expansion and the growing demand for innovation.

Currently, most cross-border transactions rely on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, which does not transfer funds directly but rather facilitates payment orders between banks using intermediary correspondent banks to settle transactions. However, SWIFT transactions are costly and can take several days, thereby posing a challenge for businesses operating in fast-paced international markets.

Several fintech companies, such as London-based Wise (formerly TransferWise), and Harbour & Hills, based in Hong Kong, have entered the market to provide faster, lower-cost alternatives to SWIFT. By using their internal networks to transfer money locally instead of depending on interbank transfers, these fintechs enable cross-border payments. Although this lowers expenses, these services don’t always result in appreciable speed gains.

The BIS is also working to connect domestic RTP systems globally through “Project Nexus,” a central hub that allows payment networks to link to a single platform rather than integrating individually. Project Nexus involves central banks from Singapore, Malaysia, Thailand, the Philippines, and India, with Indonesia as a special observer, aiming to enable seamless cross-border transactions among these nations by 2026.

In October 2024, JP Morgan introduced Wire365, a 24/7-dollar settlement system that allows businesses to settle transactions globally at any time. On the other hand, distributed ledger technology, such as blockchain, has the potential to become an alternative for real-time cross-border payments.

Ripple Labs, a fintech based in San Francisco, has developed its own cryptocurrency, XRP, to facilitate near-instant global transactions. Before being settled in the recipient’s local currency, funds are first converted to XRP as an intermediate currency. However, some companies have been discouraged from implementing cryptocurrencies due to their volatile nature.

Ripple launched the US dollar-pegged stablecoin RLUSD to combat volatility. This might provide a more alluring cross-border payment option by enabling companies to transfer money without being exposed to currency changes.

The post RTP: The future of instant banking appeared first on International Finance.

On the other hand, there is Europe, whose economy avoided a recession by the narrowest of margins. GDPs across the 20 countries using the currency Euro stagnated in the October-December 2023 quarter compared with the previous three months. Over the whole of 2023, GDP rose 0.5% both in the Eurozone and in the European Union.

Europe’s economy has been hit hard in the post-COVID period, affected by high inflation and rapid interest rate hikes. The Ukraine War 2022 also took the countries here to the verge of an ‘Energy Poverty’, as natural gas prices soared high in the continent, amid falling supplies.

Talking about the French economy, Europe’s second-largest, it grew 0.7% throughout 2023. German inflation fell in January to 3.1% in a buoying sign for the continent’s largest economy, whereas the United Kingdom saw an inflation of 4% in December. It is to be pointed out that the country faced the worst of the inflation and the cost-of-living crisis, throughout 2022 and for a good part of 2023, with food and energy bills remaining on the upward trajectory. The inflation hit a record-breaking 11.1% in October 2022.

Experts Not Happy

According to Christoph Weil, a senior economist at Commerzbank, “This (the current data on the European economy) does not really change the picture. The massive tightening of monetary policy brought economic growth to a standstill in the summer. It is unlikely that the economy will emerge from this weak phase before the spring.”

Weil also pointed out the “persistently high inflation” making it unlikely for the European Central Bank (ECB) to lower its key interest rates, apart from noting that the positive economic impact of the rate cuts (if happen) will only be felt from 2025 onwards. If the ECB doesn’t reconsider revising its interest rate, it will result in higher costs dampening the borrowing activities of households and businesses.

As per Jack Allen-Reynolds, a Eurozone economist at Capital Economics, “The region dodged a technical recession. This is just semantics though. The big picture is that Eurozone GDP has been flat since Q3 2022 when gas prices surged and the ECB started raising interest rates.”

Allen-Reynolds also expects the Eurozone economy to “flatline” in the first half of 2024 “as the effects of past monetary tightening continue to feed through and fiscal policy becomes more restrictive.”

The fact of the matter is United States has already outpaced Europe in terms of GDP and the trend will continue in 2024 too.

Government Spending Making The Difference

As the COVID pandemic disrupted the economy from 2020 to 2022, the United States mitigated it through a USD 2.2 trillion economic stimulus bill, named the Coronavirus Aid, Relief, and Economic Security Act (CARES).

The CARES Act, which stood as the largest financial rescue package in US’ history, provided benefits like unemployment assistance, business relief packages, tax breaks and credits, mortgage, student loan and rent relief, hospital and health care assistance, help for the state governments and last but not the least, earmarked spending for the sectors.

Economists credit these expenditures for the swift recovery of the US economy, with the pandemic-related recession lasting only three months.

“What the money did was to basically make sure that when we could reopen, people had money to spend, their credit rating wasn’t ruined, they weren’t evicted and kids weren’t going hungry,” said Louise Sheiner, an economist with the Brookings Institution, while interacting with the New York Times.

Meanwhile, Joe Biden became the United States President in 2020. His administration had to deal with the COVID and the economic fallouts caused by the Ukraine war. Domestic inflation soared to more than 9% in 2022. There were talks among economists on whether American households and businesses would be cutting back on their spending.

However, the American economy grew faster than expected in 2023. Things have been more than manageable for American households, in comparison to their European counterparts.

The Biden government spent massive money in the form of unemployment allowances, universal stimulus checks, and expanded child tax credits. All these moves resulted in the Americans accumulating enough savings to fight inflation. Also, average pay increases peaked at 6.4% and rose as high as 7.5% among the lowest-wage workers, which helped things further.

Uncle Sam went big and bold with his forceful fiscal spending, which helped to sustain consumer spending, which accounts for 70% of US’ economic activity.

In comparison, the United Kingdom provided 330 billion pounds in emergency support for businesses, apart from introducing a furlough scheme for employees, as COVID kicked in. There were plans like stamp duty holiday, cut to value-added tax (VAT) for the hospitality sector, job retention bonus for employers and the ‘Eat Out to Help Out scheme’, to boost the hospitality industry. The ‘Winter Economy Plan’ helped the British economy to sail through the pandemic disruptions throughout 2021.

As the cost of living crisis started in 2022, the UK came up with a 5 billion pound windfall tax on energy companies to help fund a 15 billion pound support package for the public. However, everything was undone by a 50-day disastrous rule of Liz Truss.

US’ Resilient Jobs Market

The unemployment rate in the US has been below 4% since February 2022. Despite inflation reaching close to 10% in 2022, real wages rose as well, with low-income households especially benefiting from the trend.

As per the Bureau of Labour Statistics, the unemployment rate remained flat for the third month in a row at 3.7% for January 2024. Job gains for the month were double the expected amount with the total coming in at 353,000.

For the week ending February 3, weekly jobless insurance claims decreased too, after remaining steady throughout 2023.

Now talking about the similar ratios in Europe, the Eurozone’s unemployment rate fell to 6.4% in November 2023, a record low since the ‘2008 Great Recession’.

However, the ratio is higher than that of the US. As per the International Labour Organisation, the global unemployment rate will rise to 5.2% in 2024, whereas in the United States, the same ratio has been below 4% since 2022.

Despite interest rate hikes (which cooled demand, borrowing and investment), the world’s largest economy, by October 2023, had been generating new jobs for 33 consecutive months. Some 14.4 million jobs were created at a record pace. The unemployment rate remained below 4% for 20 consecutive months, the best streak in half-a-century.

There were a record 161.6 million employed people in the country and the number has been at the higher territory since then.

If one makes the assumption of Uncle Sam outpacing Europe in the ‘Race of Economy’, he/she won’t be that dead wrong. While Washington has been able to prove the ‘Recession Alarmists’ wrong to some extent, Europe’s tale has been the opposite one, with the continent somehow avoiding ‘Technical Recession’ till now.

The post IF Insights: Making sense of United States’ ‘economic supremacy’ over Europe appeared first on International Finance.

The think tank urged Chancellor Rishi Sunak to take decisive action to subsidize low-income households who are struggling with their day-to-day expenses and prevent a rise in children growing up in poverty.

In a report titled The Living Standards Outlook 2022, the think tank said, the gains made by the increased benefit packages introduced in 2020-21 in terms of reduction of poverty, and inequality will also be wiped out. They projected that absolute poverty, which fell to 16% in 2020-21 from 18% in 2019-20, will again decline to 18% in 2022-23.

The Resolution Foundation has said the drastic hike in oil and gas prices across the globe would mean that inflation in the country to rise above 8% in spring and a fall in incomes by 4% in the next fiscal. “Our preliminary estimate is that the conflict in Ukraine could push peak inflation in 2022-23 to above 8%. This could leave the typical real household income for non-pensioners 4%– or £1,000 – lower than in 2021-22. This is a scale of fall only previously seen around recessions,” they said in its report.

This comes at a time when the UK was already experiencing high levels of inflation at 5.5%, the worst since the last three decades before Russia’s invasion.

This inflation will be triggered by a global fuel price rise even though the UK is not dependent on Moscow for its gas requirements with only 5% of its total supply coming from Russia.

The report added, “We now assume that prices in 2022-23 will on average be 7.6% higher than in 2021-22, up from the Bank of England’s forecast of 6.2% in February. This ignores any possible impact on food prices which, if it did occur, would be particularly skewed towards low-income households.”

The study said that real incomes are projected to also fall in 2023-24, by 2%, driven by weak pay forecasts and the end of the government’s energy bills support package.

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In a recent report Goldman Sachs warned Italy risks falling into a new recession, suggesting financial markets could end up forcing the government to change its economic policy. Investors are far from reassured by the political instability created by the Italian populist government, which has engaged in a “budget saga” with the European Commission for months. Brussels said that Italy’s budget plans were in “particularly serious non-compliance” with the rules, raising doubts about the solidity of Italy’s public finances due to its massive public debt pile. This has led some commentators to make a comparison with a Greece-like crisis. However, the circumstances that put Rome under the European Commission radar are very different from those that brought Athens under the Trioka’s supervision. Italy’s problem is so not much of a financial nature, but in its absence of political will in observing the rules of the European Monetary Union (EMU).

The row between Brussels and Rome has had a direct impact on Italian banks, which are the main buyers of Italian sovereign bonds, while investors’ demand for Italian debt has slowed down considerably and the sale of bonds dropped. A bigger selloff in two-year debt prompted deep concerns about the nation’s near-term financial solidity, mixed with the European Central Bank’s decision to tweak capital key and adjust the capital shares of national central banks in 2019, cutting Italy’s share in bond-buying. Moreover, it’s still unclear how the ECB will deal with its holdings of Italian securities as it rolls back gradually its loose monetary policy.

Niall Walsh, an analyst at Oxford Analytica, says “market optimism is unlikely to last for long” if the Italian government doesn’t respond adequately to EU’s demands the equity market could fall again and the spread could widen above 300 basis points. If interest rates on debt repayment were to grow to levels over 4%, the write downs of Italian banks on their government bond holdings would be so high that they would have problems with their capital ratios. Walsh noted “if the spread widens to 400 basis points, they will likely require fresh capital injections”.

Mario La Torre, a finance professor at the Sapienza University in Rome, also agrees that higher spread will impact first on the value of banks’ government bond portfolios, which lastly will put pressure on their free capital. However, he points out “Italy does not face any risk of a new banking crisis as the Italian banking system has put in place a significant effort in cleaning their balance sheets from non-performing loans”, while its largest banks have performed well at the last European Banking Authority (EBA) stress test.

Overall the Italian banking system doesn’t show any particular deviations that could trigger fears of a new crisis. According to figures from the Italian Banking Association (ABI) in October 2018 the spread between the average lending rate and the average rate on household and non-financial corporations funding remained at 188 basis points, showing a sharp decrease from more than 300 basis points prior to the onset of the previous crisis.

The Italian financial system, unlike the Greek one, can count on current account surplus and its debt has a longer debt maturity profile. Moreover, private savings and deposits offer a significant cash buffer, which makes it very unlikely that Italy would run out of money or miss its debt obligation, as instead was the case for Greece. The Italian national debt is about eight times larger the size of Greece’s debt, but over 70% is held by domestic creditors, and contrary to Greece, has yet no difficulty in refinancing its debt. Domestic savings can easily be used to cover for even a bigger fiscal deficit. Iain Begg, a Professorial Research Fellow at the European Institute of the London School of Economics (LSE), argues “we are still quite a way from a scenario equivalent to Greece because Italy is not insolvent, and unlike Greece, much of Italian debt is owned domestically by Italians”.

The nature of the Italian populist government, led by Eurosceptics forces, suggests that tension between Rome and Brussels is likely to continue in the upcoming months in the run-up to the European elections in May. However, the worst-case scenario of a possible “Italexit” is far from materialising anytime soon as that would have unquantifiable political and economic negative ramifications on Europe and the rest of the world.

The post Too big to fail but big enough to trigger a financial crisis appeared first on International Finance.

For a long while, that has replaced with a uncertainty about its future. In simple terms, Europe has been in a long-term financial crisis– and some of the important nations it holds together have been on the verge of a collapse—one whose ramifications stand to cripple the entire global economy.

It’s been ten years since it began, and it has been the subject of endless analysis, counter- analysis and speculation.The European Banking Crisis has become a major global daily topic – and its consequences and ramifications arediscussed at length.

The Euro is under threat of collapse.

It was formed proudly in 1999 as an integrator of various prominent economic nations within Europe, as a means to bring an era of shared prosperity — and allow a never seen before economic soveregnity within the continent. Now, it has been on an increasing volatile and uncertain path for the better part of a decade. As acknowledged by Jean-Claude Trichet himself, during his tenure as the European Central Bank president, who had stated : “We have in front of us a global crisis of sovereign risk and we [the eurozone] are the epicentre of this global crisis.”

To start with, let’s focus on when the crisis became most apparent. When Lehman brothers collapsed in 2007/2008, triggering the sub prime mortgage crisis that severly weakened the entire world – European banks were also severly affected. Since, they were directly explosed to all the bad debts in the US – they themselves experienced a severe fall in bank lending and investment. This bought about a recession and led to the fall of real estate prices – which further increased the losses of many major banks.

This is only half the story though. In fact if anything the crash only revealed that banks across european countries had been carrying bad debts even before the recession. Most major European countries had already fallen in the bad habit of having surplus deficits—and their banks were identified to share similar traits to their US counterparts. They were leveraged up to the brink and relied too much on borrowed money. This was emphasized by Kiyohiko G. Nishimura, the Deputy Governor of the Bank of Japan in 2012, where he criticized “the excessive risk taking of European financial institutions.”

The ‘Eurozone’ as its called, once proudly integrated—now shares the collective blame for reckless fiscal irresponsibility. Greece for example has become a generational cautionary tale– infamous for having the highest debt, collapsing under its own weight, and requiring urgent stimulus pacakges – but other countries like Italy, Spain and Ireland, among others were all culpible in letting their deficit run much higher than it should have been. It also did not help that Markets were under the assumption that the Eurozone debt was impervious after the 2007/2008 crash. Hence, investors were wiling to hold low- interest rates, even in countries with high debts. That did not end well for any party involved. Also, Eurozone countries that had debt problems are also generally uncompetitive. They have a higher inflation rate, and high labour costs. This means that there is a lesser demand for their exports, a higher current account deficit and challenges towards driving economic growth.

Germany – the biggest and most stable economy in Europe, had hence was required to get other countries out of trouble by lending them to cover up the deficits. It is by far the most economically stable nation in Europe—and has reluctantly agree to help out. It has also, imposed strict austerity measures on the economically struggling nations –which have also resulted in their own problems and backlashes.

Major nations across europe have hade turbulent elections in recent years – no doubt motivated by the economic severity. The European economy also continues to be under heavy scrunity worldwide. There is some hope, as in 2017, the euro grew to a 2.5 % rate – suggesting a slowly forming stability across the region. France and Poland also experienced growth in the same year—of 1.9% and 4.6% respectively.

However there is enough data that suggests that the crisis is far from over.The latest statistics, — indicate that Greece, Italy and Portugal have anon performing loan ratio of over 10%–and have only provisioned around 50% of these losses. The Total GDP of the European Union in the last 10 years is also in the negative. Sure, Eurozone debt is gradually decreasing, but it still remains historically high.

Milton Ezrati, Chief Economist of Vested, laid out premonitions of a warning sign, in an article for Forbes he wrote. He stated : “But Berlin knows Greece and others in this predicament cannot keep their austerity promises. Even the International Monetary Fund (IMF), sometime ally of Berlin in this regard, admits that German demands are impossible.” He mentioned how past austerity measures have weakened the Greek economy and made the country more politically fragile. In the same article, he paied emphasis to the fact that Unemployment in the country had risen to over 25 %, with youth employment being on the verge of 50%.

“ Europe will go through another financial crisis, probably centered in Greece, but not necessarily.” he also stated in the article itself.

German chancellor Angela Merkel finally in June of this year, publicly revealed her vision for the bailout –after being coy on it for an extended period. Under her watch, the current body responsible for lending money—the European Stability Mechanism (ESM), will continue its lending efforts. It however, will also monitor each country, making sure they are following fiscal rules strictly. While the future is, as always uncertain, it is important to note that fiscal responsibility is what built Germany to what it is – and measures to introduce it to other nations via this channel may go a long way into controlling the deficit and minimising further losses.

The post Banks of Europe: A Cautionary Tale appeared first on International Finance.

Political turmoil in Italy is nothing new. According to Deutsche Bank researchers there have been 90 governments in the past 116 years. This equates to an average tenure of just 1.3 years. The Italian election was nearly three months’ ago, since when the far-right League and anti-establishment Five Star Movement have failed to form a coalition. Events over the weekend imply even the resulting caretaker government may not have the confidence of parliament, hence markets are preparing for yet another Italian election.

In itself this is no big deal, except for the risk that a groundswell of support for populist parties might ultimately threaten the very fabric of the Eurozone if Italy decided to leave. As an aside, this is arguably a reason why the Europeans might not want the Brexit process to be painless for the UK. They are incentivised to inflict damage and for that to be a lesson to others.

Italy is the third largest Eurozone member in an economic sense and has one of the biggest bond markets. Given the country’s indebtedness (the ratio of debt to GDP is the fourth highest in the world) and relatively weak growth backdrop, it’s small wonder that investors are beginning to price in the negative implications of an Italian exit. This has entailed higher bond yields, a weaker currency (in this case expressed via the euro), wider credit spreads and lower equity prices. Even the cost of protecting against an Italian default in the next five years has spiked to levels last seen in 2011-13.

Are we exposed?

Our exposure to Italian government debt is non-existent and to Italian credit negligible. We have a modest exposure to Italian equities in our higher risk strategies where we are running a small overweight in Italian banks. But because our position has been sized appropriately, i.e. small due to the risk involved, the drag on portfolios has been small. European equities in general, for all the headlines, are down less than four percent (in euro price terms) over the last week or so. The inevitable flipside is that safe-haven plays, such as UK gilts and gold have benefitted, so diversifiers such as these have fulfilled their role.

What’s our outlook?

We are mindful of Italian developments, but for now, are sanguine as to their implications.

Firstly, Eurozone break-up risk is not zero, but it is still very low. A benign Italian electoral outcome remains a real possibility, which would allay fears to a considerable degree. When or how this scenario unfolds is rather hard to forecast given the history of Italian politics.

Secondly, the European Central Bank is already in the throes of quantitative easing (QE), which entails buying a great deal of Italian government debt. This is different to the European crisis of 2010/11/12 in as much as building the consensus in favour of beginning monetary support  – QE – back then, was troublesome to say the least.

Thirdly, yesterday the Italian government auctioned EUR5.6bn of 5-year, 7-year and 10-year debt. Whilst it had to pay up compared to a few months prior, the government still raised close to the top end of what was hoped.

Taken together, these points leave us feeling far from panicked and more inclined to possibly treat this as a buying opportunity. To this end we are monitoring events closely.

The post A peek into Italy’s politics and economy, as populist government comes to power appeared first on International Finance.

“Supporting investment matters terribly, it is part of the overall common economic policy response of the EU,” said European Investment Bank President Werner Hoyer at the EURO50/C breakfast in the margins of the annual meetings of the World Bank Group and IMF.

He added: “Our research at the EIB suggests that investment in infrastructure has now stopped declining, but it has stabilised at 20% below pre-crisis levels. This is bad for Europe’s long-term growth potential, and it is also bad for the process of economic convergence in the EU and the Eurozone… The countries that score worse in terms of infrastructure quality. In other words, convergence has weakened.”

At the same time when it comes to European companies he said “Our own EIB Investment Survey of European firms shows that their outlook for investment remains positive… But there are important exceptions: conditions have not improved for small firms, for young and innovative firms that tend to invest a lot in intangibles and can’t offer much collateral, and for firms in certain countries where financial systems are still showing strain.”

President Hoyer also addressed a possible new relationship with an evolved European Stability Fund (ESM). He said, “The evolution of the ESM into a “European Monetary Fund” is an idea that the EU Bank looks at with special interest. The EIB provides very important investment financing to programme countries. A future EIB-EMF relationship might be rather like that between IMF and the World Bank. There is great potential for complementarity and mutual reinforcement between the two institutions. We should give this scenario serious thought as we consider how the roles of the different EU bodies fit together.”

President Hoyer pointed to the impact of EIB financing, including through the Investment Plan for Europe via the European Fund for Strategic Investment:

“I am proud of what the EIB – the EU bank – has already been able to do in this regard. We provided over 80 billion euros of financing in 2016 – that’s around 0.6% of EU GDP. That supported investments amounting to 1.8% of GDP. The way we have implemented the European Fund for Strategic Investment demonstrates that the EU budget can be used more effectively to have a greater impact on the real economy by crowding-in financing.

“EFSI is a clear success so far” he added, “After almost 2 years, we are three quarters of the way to our first 315 billion euros target for investment supported.”

A set of findings recently released by the EIB, estimates that the 272bn euros of EIB Group supported investments in the EU for 2015 and 2016 – which include EFSI related investment – will around 2.25 million extra jobs after 5 years, with a 2.3% increase in GDP. After twenty years, the findings predict a level change in the EU economy of around 1.27 million extra jobs and GDP that is 1.5% higher than it would have been in a baseline scenario.

The post EU Bank President urges a new push for investment and reform appeared first on International Finance.

The tour, which rebranded a ‘Brexit Bus’ used by Vote Leave campaigners in last year’s referendum, offered new and existing customers the chance to send €350 million in fee-free money transfers between their UK and Eurozone accounts.

PrePay Solutions’ comprehensive prepaid programme management was central to the launch of Monese’s full service mobile-only banking account in July, the first of its kind in Europe.

The launch of the new account strengthens that relationship, with PPS having already helped Monese to deliver both UK and Eurozone accounts to over 50 nationalities, and Mastercard-enabled Monese cards in over 20 countries.

Ray Brash, CEO, PrePay Solutions, said, “Joining our strategic partner Monese for the Europe-wide launch of the Eurozone account is a significant step for PrePay Solutions. By combining our long-established expertise in the digital banking and payments industries, we have rapidly developed and launched a uniquely comprehensive, mobile-first current account that makes international transfers of money easy.’’

Customers can register for a Eurozone account via the Monese app while simultaneously holding a UK account. By removing the excessive fees associated with international money transfer, PPS and Monese have allowed individuals to receive salary payments into their local account, even when working in a different European country.

Norris Koppel, CEO, Monese, said, “Since launching in September 2015, Monese has been committed to making mobile money-management more straightforward. Partnering with PrePay Solutions has allowed us to build on that commitment by delivering the new customer-focused Eurozone account. With over 7,000 accounts opened already, we look forward to building on our partnership to break down financial barriers within the EU and beyond in the near future.”

The tour saw Prepay Solutions and Monese pass through Paris, where Monese CEO Norris Koppel met French Prime Minister Édouard Philippe alongside a delegation of other UK tech entrepreneurs. Having continued through Brussels and Frankfurt, the tour finished in London on September 30.

The post PrePay Solutions boards Monese’s ‘Brexit Bus’ appeared first on International Finance.

The company quietly launched its new Eurozone accounts to existing customers a month ago and has already seen 6,000 accounts opened. Over 50 different nationalities now have both a UK and Eurozone Monese account and already there is a Monese card in each of the 20 countries.

Customers are free to move anywhere in the Eurozone and the UK, safe in the knowledge that their local bank account will be accessible and usable consistently via the app in any one of eight languages. To celebrate, Monese has launched its ‘Free Movement of Money’ campaign. Giving its customers the ability to transfer their money, fee free, offering the service to the total value of €350 million across its existing and new users.

Norris Koppel, Founder and CEO of Monese, said, “Our expansion is aimed at breaking down financial barriers when crossing borders within the EU, by providing a simple way to manage your money on the go. We believe that people should be able to live, travel, and work freely, without the administrative burdens and restraints of legacy financial systems. Monese takes the stress and hassle out of making this possible — and I’m delighted that we’re already seeing a growing demand from our existing customers. To celebrate our official launch to everyone, we wanted to give all our customers an additional benefit to using Monese, by enabling them to send their money, fee free. To drive this message home, we’re taking the now infamous Brexit Bus on a tour across Europe. But changing it to a promise we know we can keep.”

Monese launched in September 2015 and was the first 100 per cent mobile bank account in the UK. In order to join, users download the app and use it to take a video selfie, providing a snap of their passport or national ID, alongside some basic profile information.

In addition to the Eurozone account, Monese users can now benefit from eight new languages.

The post Monese enters Eurozone with ‘Free Movement of Money’ offer appeared first on International Finance.