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Markets lower after Fitch downgrades US government debt – Industry roundup: 3 August

Markets fall in response to US government debt downgrade

Global markets fell on Wednesday after ratings agency Fitch stripped the US of its triple-A borrower status.

Fitch issued its downgrade of US government debt, ranked among the safest in the world, from AAA to AA+ late on Tuesday after markets had closed and warned of the US economy’s rising debt burden and the recent debt ceiling crisis, slowing growth and repeated threats to “fiscal governance”.

Fitch is the second major rating agency strip the US of its triple-A rating. In an earlier debt ceiling crisis in 2011, Standard & Poor's (S&P) cut the top AAA rating by one notch a few days after a debt ceiling deal, citing political polarisation and insufficient steps to right the nation's fiscal outlook.

Fitch had first flagged the possibility of a downgrade in May this year amid ongoing US debt ceiling negotiations, then maintained that position in June after the crisis was resolved, saying it intended to resolve the review in the third quarter of this year.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.

“The repeated debt limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

US treasury secretary Janet Yellen said she disagreed with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data”.

The White House adopted a similar tone, saying it “strongly disagrees with this decision“.

“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” said Karine Jean-Pierre, the White House press secretary.

Argentina reaches debt deal with People’s Bank of China

Argentina’s government said that it has reached an agreement with thePeople's Bank of China (PBOC) to secure US$1.7 billion in yuan (CNY) through currency swaps to meet its US$2.7 billion payment obligations to the International Monetary Fund (IMF).

The remaining balance of the payment will be covered by US$1 billion loaned by the Development Bank of Latin America, aka CAF, based in Caracas, Venezuela.

Under the arrangement, Argentina deposited pesos with the PBOC, which granted renminbi in return. Buenos Aires was then able to make its payment to the IMF without having to draw upon dollar reserves, now estimated by the Central Bank of Argentina to be worth minus US$8 billion.

Sergio Massa, the Argentine economy minister, thanked the PBOC and Chinese government "for making the decision to authorise the disbursement”, which would. "ensure that Argentina can continue its exports while meeting its payment obligations” to the IMF.

The deal marks a further step in the South American country’s wider usage of China’s currency following its decision in June to allow commercial banks to open customer accounts in CNY. Argentina’s securities regulator also recently approved the issuance of CNY-denominated securities in the local market.

Reports suggest that the swap is expected to be a short-term debt repaid with reserves, with China’s involvement possibly serving as "a temporary bridge” until the funds committed by the IMF arrive.

The IMF debt dates from 2018, when then-president Mauricio Macri secured a US$44 billion loan, the largest in IMF history at the time. The debt was later renegotiated by the government of Alberto Fernández, Argentina’s current leader.


Bank of England confirms 14th successive rate hike to 5.25%

Although the UK's inflation rate appears to have peaked, the Bank of England (BoE) has met market expectations by confirming 0.25% increase in the base rate to 5.25% after recent half-point hikes.

The increase pushes UK interest rates to their highest since early 2008 and further hikes are expected later this year. Today's increas was the the 14th successive rise to the base rate since December 2021 and will pile more pressure on borrowers.

The UK base rate has been continually raised to tackle high inflation which was recorded at 7.9% in June, a monthly fall from 8.7% in May, but still significantly higher than the government’s 2% target. Minutes of the meeting by members of the monetary policy committee (MPC) noted: "Consumer price index (CPI) inflation remains well above the 2% target. It is expected to fall significantly further, to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation."

Of the MPC's nine members, six voted for the 0.25% increase, two wanted a bigger rise of 0.50% and one argued for keeping rates on hold this month.

The BoE decision comes after the US Federal Reserve also increased rates on July 26 to their highest level for 22 years. The US central bank pushed up rates for the eleventh time since 2022 to a range of 5.25% to 5.5%.


ICE relaunches sweeps protocol for corporate bonds

The exchange and clearing house operator Intercontinental Exchange (ICE) has relaunched ICE Risk Matching Auction (RMA), its sweeps protocol for corporate bonds, effectively expanding its fixed income liquidity offering, in response to market demand, reports

ICE invested both human capital and technology to relaunch the ICE RMA product – part of the ICE Bonds’ suite of trading protocols. ICE RMA is used in dealer-to-dealer fixed income trading. Initially launched in 2015, the service now conducts multiple auctions each week, with 50 registered firms and more than 400 connected users.

Peter Borstelmann, president of ICE Bonds, said that there was a notable demand for improvement in the space and the development of a product superior to that already in the market. He told The TRADE: “We heard from our partners that they wanted a strong competitor in this space and nobody had yet been able to step [into] that capacity. 

“We saw this as an opportunity to invest in something that we were the initial creators of and would be a nice complement to our existing alternative trading system (AT liquidity network. 

ICE RMA, a proprietary algorithm matches the buyers and sellers of the same bond – or list of bonds – following traders’ upload of their inventories.The protocol proposes pricing levels for bonds by leveraging ICE’s Continuous Evaluated Pricing (CEP). Subsequently, traders confirm or reject, wither on a line-item basis or in bulk.

“The sweeps protocol continues to be an important tool for dealers for additional liquidity and risk management,” said Borstelmann. “With our relaunch, we’ve delivered a highly intuitive and easy to use platform that incorporates direct user feedback.”

ICE Bonds’ offering includes: click-to-trade, request-for-quote, sweeps and portfolio auctions. Through its CEP it provides streaming intraday fixed income evaluations for front-, middle- and back-office processes, leading to increased pre-trade transparency.


UBS to close Credit Suisse's Crossfinder trading platform

UBS Group is winding down the electronic-trading platform it inherited from Credit Suisse as the Swiss bank looks to shed more assets from the defunct rival it took over last March.

Reports suggest that the bank plans to shut off Crossfinder, the alternative-trading system, and AES, the affiliated algorithmic-trading business, will stop routing orders to the system, citing unidentified insiders. Both businesses were once at the forefront of electronic trading and innovation on Wall Street.

Crossfinder’s last day of ATS operations will be August 31, and AES will no longer route orders to Crossfinder after that date, according to the people. Clients were directed to contact UBS Cash Equities ATS staff for assistance with alternative options.

The closing of Crossfinder is the latest in a string of sales or wind-downs by the Swiss bank, which acquired Credit Suisse in a Swiss franc (CHF) 3 billion (US$3.42 billion) government-brokered rescue deal. UBS has said it will give investors more details later this month about the size of the non-core unit that will house the businesses and assets it is looking to shed.

At its peak, Credit Suisse’s Crossfinder was among the largest alternative-trading systems, but volumes have dwindled since the blowup of bill Hwang’s Archegos Capital Management and the UBS takeover of Credit Suisse. Volume on Crossfinder ATS fell by 70% in the four months through May following the bank’s collapse, as trading desks removed the so-called dark pool from their routing tables, Bloomberg Intelligence wrote last month.


Saudi Arabia's borrowing costs hit record high

The ambitions of Saudi Arabia’s Crown Prince Mohammed bin Salman to transform its economy is reported to be at risk as banks' borrowing costs surge to a record high.

Enormous growth in Saudi banks’ borrowing costs, triggered by successive interest rate hikes in the US, will put the Crown Prince’s projects under pressure as the former kingdom experiences a sharp economic slowdown.

He is channelling hundreds of billions of dollars into projects such as the US$500 billion Neom region, which will feature a ski resort and a 170km linear city consisting of two vast parallel mirrored buildings.

The projects are partly funded by oil revenues but also rely on foreign investment and borrowing. Saudi Arabia’s Public Investment Fund and its subsidiaries already borrowed tens of billions of dollars even before the cost of borrowing rose to an all-time high in Saudi Arabia.

The three-month Saudi Interbank Offered Rate, aka Saibor, has jumped from less than 1% in early 2022  to more than 6% this week, exceeding the earlier peak of around 5.5% recorded during the financial crisis.

James Swanston, a Middle East specialist at Capital Economics, said: “A very high interest rate environment could be a headwind to the kingdom’s non-oil sector and with diversification plans, possibly denting those plans in the near term. We have seen private sector credit growth slowing over the past few months and obviously high interest rates will play into that.”

Saibor has been risen fast because the riyal (SAR)is pegged to the US dollar, requiring the Saudi Central Bank to track the US Federal Reserve’s interest rate decisions although inflation in the Arab state remains well below than in the US.

High debt costs are impacting as Saudi Arabia undergoes a major slowdown in economic growth.

A series of oil production cuts announced in April meant Saudi Arabia received the biggest growth downgrade of any major economy in the International Monetary Fund’s (IMF) World Economic Outlook last week.

Growth in the Middle East’s largest economy is forecast to reach only 1.9% this year against 8.7% in 2022. Although supply cuts made by the Saudi-led Organisation of the Petroleum Exporting Countries (Opec) have boosted crude oil prices over the past month, prices are still well below the levels recorded last summer.


Kenya puts brakes on Worldcoin free money project

Kenya’s government has ordered cryptocurrency project Worldcoin to stop signing up new users, citing data privacy concerns.

Worldcoin, founded by US tech entrepreneur Sam Altman, offers free crypto tokens to people who agree to have their eyeballs scanned and thousands of Kenyans have queued up at registration centres this week to get the currency worth about US$49 (£39).

Kenya warned citizens to be cautious giving their data to private companies. The Communications Authority of Kenya cited concerns over how the biometric data was stored, offering money in exchange for data and having so much data in the hands of a private company.

The ministry of the interior has launched an investigation into Worldcoin and called on security services and data protection agencies to establish its authenticity and legality.

Worldcoin says it cannot say how many people have had their eyeballs scanned in Kenya under its initiative to create a new global “identity and financial network”.

“We are creating the world's largest identity and financial network as a public utility, giving ownership to everyone. And establishing universal access to the global economy regardless of country or background," according to a statement on the Worldcoin website..

Altman, who founded Open AI which built chat bot ChatGPT, says he hopes the initiative will help confirm if someone is a human or a robot. He also says this could lead to everyone being paid a universal basic income but has not suggested how.

GTreasury and Convera partner on integrated payments offerings

Treasury, payments, and risk management software provider GTreasury and Convera the largest non-bank global business -to-business (B2B) payments provider announced a partnership to offer an integrated payments service on GTreasury’s treasury management system (TMS) software.

Convera has a global customer base of over 30,000 to move money across more than 200 countries and territories and in more than 140 currencies. The partnership will enable GTreasury’s network of over 800 large corporate and enterprise clients to integrate with Convera’s payments platform to access global banking networks and help make global business payments efficient, transparent and cost-effective.

GTreasury facilitates transactions totaling US$12.5 trillion from 48 million payments, annually, in 160 countries. Focusing initially on Asia Pacific (APAC), GTreasury clients across Australia, New Zealand, Singapore, and Hong Kong will be able to fund payments from any Convera or third-party bank account.

“Working with GTreasury, we will immediately expand cross-border solutions in the APAC region. We look forward to working together to service the wider GTreasury client base globally,” said Patrick Gauthier, CEO at Convera.
German Karaivanov, Vice President, Product Management at GTreasury added: “The speed and ease of global payments processes are business-critical for enterprises, and combining Convera and GTreasury technology is a major win for our joint customers.”


Japan’s MUFG joins Contour blockchain trade finance network

Japan’s largest bank Mitsubishi UFG (MUFG) has joined the Contour blockchain network for digital letters of credit (LCs), the eighth systemically important member of the trade finance network and twentieth bank to join. The other major banks are Bank of China, BNP Paribas, Citi, HSBC, ING, Standard Chartered and fellow Japanese bank SMBC which joined three years ago. Cojtour was first established in 2016 with 12 founding banks.

MUFG is reported to be undergoing a digitalidation push in its Singapore office to reduce the reliance on paperwork. Last year the Bankers Association for Finance and Trade (BAFT) estimated that 30% of time in trade finance is spent paper pushing, costing US$150 million a year. Using digital LCs, the processing time is reduced to less than 24 hours.

Contour already has good global coverage, but with MUFG’s presence in 50 countries its reach could expand significantly, particularly in the Americas, where coverage is mainly from Citi and Standard Chartered.

Belinda Han, MUFG’s Managing Director and Head of Transaction Banking for Asia Pacific said the collaboration “is consistent with MUFG’s ongoing commitment towards integrating digitalisation into driving strategic growth and enhancing the client experience.”

A key factor that should help Contour’s growth is the push towards digital letters of credit, with major container shippers committing to go digital with electronic bills of lading (eBL).

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