TheChek News Flow

Europe lacks a monetary response to Trump

Uncertain inflationary effects leave the ECB hoping for the best

What do we want? Economic growth without inflation. When do we want it? Now.

If there is one thing that Eurozone central bankers agree upon, it is that their political masters should implement the recommendations of the Enrico Letta report into the EU single market and European competitiveness report by Mario Draghi. This, they say, would improve structural elements of Europe’s economy, making monetary policy better able to control the economic cycle without risk of recession.

Back in the real world, they have the day job of controlling inflation regardless of whether politicians agree on ways to improve the economic foundations.

And there is quite an argument about inflation risks at the moment.

In the past week François Villeroy de Galhau, governor of the Bank of France, floated the idea of a large half-point rate cut at the December meeting of the ECB, saying there was every reason to cut and calling on his colleagues to “remain open on the size of the cut, depending on incoming data, economic projections and our risk assessment”.

In contrast, ECB executive board member Isabel Schnabel stressed she had “a strong preference for a gradual approach” to rate cuts in an interview with Bloomberg. She warned against moving rates into anything like accommodative territory, which she defined as between 2 and 3 per cent, the upper bound of which was half a percentage point higher than Villeroy de Galhau estimated.

Overseeing this emerging argument, ECB president Christine Lagarde did not mention monetary policy or interest rates in a wide-ranging FT interview. She did speak extensively, and much more openly than most officials dare, about the effects of Donald Trump’s election on Europe’s economy and inflation.

“Sit down and talk” to Trump, she advised. “Not to retaliate, but to negotiate”. It is worth reading the whole interview.

ECB watchers will note, however, that the central bank’s executive board does not have a consensus view about the effects of tariffs or Trump on Eurozone inflation.

Lagarde said “the actual net effect on inflation is uncertain at this point”, with perhaps a leaning towards a view that “it’s a little net inflationary in the short term, but you could argue it both ways”.

Schnabel was a little more definitive, saying tariffs were likely to be bad for growth and “on inflation [the effect] is, if anything, slightly positive”. Even with weaker activity, she said the positive inflationary impact implied that tariffs “cannot justify an accommodative policy stance”.

Speaking on Soumaya Keynes’ economics show this week, the ECB’s chief economist, Philip Lane, brought out why the inflationary consequences of tariffs were causing the ECB so much analytical pain. He said it mattered what tariffs were imposed, how long they would last, whether there would be retaliation, whether the world trading system would fragment, whether the macroeconomic hit to European investment would also damp inflation, whether the dollar would appreciate and how far that would go, whether China would flood Europe with the cheap goods it could not get into the US and whether through any turmoil European companies thought they would have pricing power.

That is quite a long list of caveats.

Lane said the ECB understood the various scenarios and needed to “be very closely working out, meeting by meeting essentially, which of these scenarios look like they were fake news . . . [and] which of those scenarios look like they may take hold in the data”.

I spoke to Thomas Harr, chief economist of the Danish central bank and co-author of The great inflation resurgence, who said that working out the likely inflationary consequence of a Trump presidency was “really tricky for central banks”.

“In our book, we stress that inflation is a global phenomenon, but now I am uncertain about whether Trump will be inflationary or disinflationary for the rest of the world,” he said.

The problem of setting policy in an environment with so many caveats is that it makes it essentially impossible to forecast inflation, just as it was when Russian troops were on manoeuvres near the Ukrainian border in 2021.

Work at the ECB highlighted by Lane in a speech last month examined how the central bank’s main economic model performed at predicting inflation after Covid. On one level, it was terrible — in the chart below, the dark blue line of actual inflation far exceeds the December 2021 forecast in light blue.

On another level, the ECB has identified the source of most of the errors as the conditioning assumptions (natural gas price, exchange rates etc) that the model used.

Plugging in the correct conditioning assumptions, the pink line shows the model would have done a reasonable job in forecasting inflation had it had the right data to work with. It would not quite have forecast the extent of the rise in prices, but it is hard to claim that the model failed.

This is exactly the problem about modelling tariffs. What Lane was agonising about in the podcast was exactly the same conditioning assumptions that need to be given to an economic model. And no one knows.

Since the Trump administration is best viewed as a medieval court with various flunkies seeking to impress the king, predicting what will happen is near to impossible. As Alan Beattie wrote last week, many people will have theories but no one knows.

Another Lane speech last month, however, allows us to get an idea of the scale of inflation risks through trade. It is not that encouraging. A “severe decoupling” of US, Chinese and European trade blocs, which would include a full trade ban in all sectors, was likely to be very bad for growth and inflationary.

The chart below for Europe in this extreme scenario suggests an initial 4 percentage point rise in Eurozone core inflation with ongoing further inflationary outcomes dependent on how much workers seek to avoid taking the inevitable pain through reductions in their real wages. That is essentially a repeat of the inflationary episode we have just experienced.

Of course, that scenario is largely made up and extremely severe. Another way of looking at the same question is to look at financial market pricing, since traders cannot say “it’s all too uncertain”, and have to take a view.

For what it is worth, the market view since Trump’s election is that trade wars will raise US prices and force the Federal Reserve to slow US interest rate cuts. Their view of the Eurozone is reversed, suggesting that growth and inflation will be weaker so the ECB will cut rates slightly more aggressively.

Harr thinks this is as good a bet as any. “The 2021-22 inflation was a global phenomenon and we underestimated the spillovers — that said I have a lot of sympathy with financial markets pricing that this time is different,” he said.

The market outcome on inflation and interest rates is just one aggregated view, however. And it’s predictive power in 2024 has been shocking.

So it is best, probably, to say we just don’t know how inflationary Trump’s tariffs will be. It is not a satisfactory answer, but it is, again, the best one we have got. Anything else is just a hunch.

A revolution in communications is happening in Frankfurt. The ECB has analysed all of its monetary policy statements since 1999 and found that the latest, read by Lagarde, requires much less formal training to understand than earlier versions both by herself and her predecessors. Average readers now need US high school levels of reading proficiency rather than undergraduate level to understand the text.

The chart highlighted by ECB chief economist Philip Lane at the Bank of England watchers conference underpins the reality that most people get their monetary policy understanding intermediated through the media in brief headlines, so you want to get those right. Simple language does not help more expert audiences understand the reaction functions of central banks when officials themselves are not sure how they will react to events.

Company is first commodity trader to face trial for corruption in Switzerland

Trafigura lost a last-minute legal gambit on Tuesday to have evidence against it from the star witness in a Swiss corruption trial struck from the case. 

The trial against the natural resources trader, in which its former parent company Trafigura Beheer BV and chief operating officer Michael Wainwright are accused of bribery, opened at Switzerland’s federal criminal court in Bellinzona on Monday. 

It is the first time a commodity trading company has faced trial for corruption in Switzerland and the first time globally a top executive at one has been directly accused of criminal acts. 

A panel of Swiss judges declared that the trial should proceed as planned over the next fortnight, with evidence from the prosecutor’s main witness — a former top Trafigura executive Mariano Marcondes Ferraz — to be heard “on its merits”. 

Ferraz, a former trading prodigy at the firm who ran the Angolan subsidiary of Trafigura at the centre of the alleged bribery scheme, is imprisoned in Brazil after being separately convicted of bribing Petrobras executives in 2018.

Prosecutors say TBBV and Wainwright, working with Ferraz, paid more than €5mn to an Angolan official between 2009 and 2011 to secure hugely lucrative oil shipment rights in the country.

Over several hours of dense procedural argument on Monday, lawyers for Trafigura had argued that Ferraz’s testimony was inadmissible because of what they described as a secret plea bargain.

Presenting emails between Brazilian and Swiss authorities, they said they had uncovered a “sophisticated [and] camouflaged” deal cut over how Ferraz’s testimony could be put to use.

Plea bargains are illegal under Swiss law. 

Trafigura’s lawyers also argued that swaths of Ferraz’s testimony were unusable because they contained unprovable accusations against the company’s founder and former chief executive Claude Dauphin, who died in 2015.

Citing a ruling by Switzerland’s Court of Appeal handed down last week, they argued the testimony, which accuses Dauphin of being the mastermind of the alleged bribery scheme, could not be used because Dauphin could not contest it.

In the Court of Appeal ruling they referenced, judges threw out a money laundering conviction against Credit Suisse on November 28 because the banker at the centre of that case, in which the bank was accused of laundering Bulgarian cocaine money, died last year, meaning questions crucial to upholding the conviction could no longer be answered.

“Claude Dauphin’s death cannot constitute an impediment to proceeding,” said the presiding judge in the Trafigura trial, rejecting that line of argument and pointing out differences with the Credit Suisse case.

The evidence to support the notion of an illegal plea bargain having been struck was also too scant, he said.

“The assessment of the credibility of Ferraz’s statements will be made on their merits,” he declared.  

He and fellow judges nevertheless accepted arguments from Trafigura that there was a valid case to be heard for time-barring certain accusations from the case. 

Under Swiss law, serious bribery accusations are time-barred after 15 years have elapsed.

The prosecutor’s case against Trafigura centres on about €5mn of payments made to Paulo Gouveia Junior, a former executive of the Angolan national oil company, between April 2009 and October 2011. 

The payments are alleged to have helped secure hugely lucrative oil shipment rights for Trafigura.

Prosecutors argue a “unity of action” means payments over the entire period should be considered. The judges indicated the matter was not settled and would have to be addressed in any final ruling. 

The Consumer Financial Protection Bureau has proposed a new rule that would block data brokers from selling personal and financial information on Americans, including their Social Security numbers and phone numbers, under the Fair Credit Reporting Act.

In proposing the new rules, months after President Biden signed an executive order to curb the sale of Americans’ private data, the U.S. consumer protection agency said it aims to “rein in” data brokers, who sidestep federal law by claiming that they are not subject to the FCRA’s legal provisions.

The CFPB’s director Rohit Chopra told reporters on a call Monday that the proposed rule would “curtail the widespread evasion” of the FCRA, which is the federal privacy law that protects personal data collected by consumer reporting agencies, like credit bureaus and tenant screening companies. The rule would also “make it clear that many of these data brokers, like credit bureaus and background check companies, are subject to federal protection under the FCRA.”

The move to close the regulatory loophole at the federal level comes at a time where data brokers face increasing scrutiny for profiteering from selling access to — and sometimes losing — vast amounts of Americans’ personal information. By acknowledging the “widespread evasion” of the federal privacy law, Chopra said the agency recognized that data brokers have long taken advantage of the law, and warned of the “staggering” problem caused by data brokers who are “making this data available to anyone willing to pay a price.”

According to the CFPB, the proposed rule would treat data brokers the same as credit bureaus and background check companies, or any other company that sells data about income or credit scores, histories, and debt payments, which are already subject to the FCRA. The proposed rule would also limit data brokers from selling information that can identify individuals, such as Social Security numbers and phone numbers, which would be covered under the FCRA going forwards.

“Today’s proposed rule is a major step forward to ensure that companies trafficking in Americans’ most sensitive information face real consequences for violating long standing law and for putting people and our country at risk,” Chopra said.

The CFPB said it was proposing the new rule to “further Congress’ goal” of protecting Americans’ personal data, as intended when it voted to pass the FCRA in 1970. Since then, the United States has become the only Western democracy to not have passed nationwide data protections into law.

The proposed rule will remain public in the Federal Register until early March 2025.

It’s unclear whether the rule will last under the incoming Trump administration, which has promised widespread deregulation across the U.S. government. CFPB officials would not say, but told reporters that there was “broad bipartisan recognition that data brokers pose real dangers.”

World’s largest asset manager continues its push into private markets with its third major acquisition this year

BlackRock BLK -0.26%decrease; red down pointing triangle has agreed to buy private credit manager HPS Investment Partners in a roughly $12 billion all-stock deal that would substantially add to its coveted private asset pile.

The deal would give Chief Executive Larry Fink a significant foothold in what is now one of the hottest markets on Wall Street. Fink has given priority to expanding BlackRock’s private-market business through acquisitions in an effort to keep more of its clients’ business in-house and generate higher fees.

New York-based HPS was founded in 2007 by three former Goldman Sachs employees including investment banking head Scott Kapnick. Its once obscure business of lending directly to companies has boomed in recent years while banks have pulled back from risky lending. Kapnick is among the HPS leaders who will join BlackRock’s global executive committee once the deal closes.

HPS manages nearly $150 billion, making it one of the few private credit managers with enough scale to move the needle for the world’s largest asset manager.

“Combining public and private credit is the future of fixed income,” BlackRock Chief Financial Officer Martin Small said in an interview. “We’re seeing clients use public fixed income and private fixed income in a barbell together. And we’re just going where they’re going.”

For most of its 36-year history, BlackRock focused on public stock and bond management. Its timely embrace of passive, index-tracking investment products made it into a behemoth. But as alternative investments such as private equity, private credit and infrastructure became institutional investor favorites in recent years, BlackRock lagged behind.

The HPS deal would boost BlackRock’s alternative asset tally by more than 25% to nearly $600 billion if completed, putting BlackRock’s alternative business on par with private market giants KKR and Apollo Global Management. Those companies command market values in the same ballpark as BlackRock’s despite managing just a fraction of the assets, thanks to the high fees private investments generate.

Adding HPS is expected to increase BlackRock’s private market management fees by about 35%.

The deal would mark BlackRock’s third major private-markets acquisition in recent months. It agreed earlier this year to pay $3.2 billion for Preqin, which provides data on private assets, and $12.5 billion for Global Infrastructure Partners, an alternative asset manager focused on infrastructure.

Unlike private equity, which has been around for decades and has grown more slowly in recent years, infrastructure and private credit are believed to still have significant growth potential.

The market for private credit is expected to double to $3 trillion in the next three years, according to estimates from Moody’s Ratings. Helping to drive the expansion is a push by firms, including HPS, beyond corporate loans and into the vast world of asset-backed financing, which involves everything from credit-card loans to equipment financing to mortgages.

In addition to such loans, HPS lends to midsize companies, real estate and energy and power companies and provides specialized financing to companies in need of more tailored solutions.

As the lines between public bonds and private credit increasingly blur—more companies with blue-chip credit ratings are beginning to turn to direct lending—BlackRock is hoping the HPS deal will give it a comprehensive offering for clients such as insurance companies that invest in both assets. BlackRock manages some $700 billion in assets for insurance companies.

“I think the biggest growth vector in private credit over the next decade is the expansion of our focus from the non-investment-grade world into the investment-grade world,” HPS co-founder Michael Patterson said in an interview. “The industry is changing really rapidly.”

Originally known as Highbridge Principal Strategies, HPS was part of Highbridge Capital Management, a unit of the asset-management business of JPMorgan Chase. The bank struck a deal in 2015 to sell most of HPS to its management team as part of a wave of deals by banks aimed at simplifying their operations and limiting riskier assets in the wake of the 2007-2008 financial crisis. The deal valued HPS at around $1 billion, according to a person familiar with the matter.

In addition to Kapnick and Patterson, HPS is led by principals Scot French, Purnima Puri, Faith Rosenfeld, Paul Knollmeyer and Kathy Choi.

Kapnick, French and Patterson are set to join BlackRock’s global executive committee. They will lead a new private financing services business that combines HPS with BlackRock’s existing private-credit businesses across corporate and asset-backed finance.

HPS’s principals are set to receive 9.1 million BlackRock shares, worth about $9.3 billion, when the deal closes, followed by the remaining consideration of three million shares in five years. The deal includes an additional $1.6 billion worth of stock in potential earn-out payments if certain financial targets are met.

BlackRock expects to retire or refinance about $400 million of existing HPS debt as part of the deal, which is expected to close in mid-2025.

Once affiliated with Islamic State and al Qaeda, Jawlani professes religious tolerance. Many have doubts.

Abu Mohammed al-Jawlani boarded a bus in Damascus in March 2003, heading across the desert to Baghdad with fellow volunteers eager to repel the looming American invasion of Iraq.

When he returned home in 2011, after a five-year stint in an American-run prison camp in Iraq, it was as the emissary of Islamic State founder Abu Bakr al-Baghdadi. Jawlani arrived in Syria with bags full of cash, and a mission to take the extremist movement global.

Last week, 42-year-old Jawlani triumphantly entered Aleppo, Syria’s second-largest city, as the leading commander of the Turkish-backed rebel force dominated by his group, Hayat Tahrir al-Sham. Unexpected and swift, his victory marks one of the most dramatic moments in a Middle East that has had no shortage of drama.

Compared in its shock value—and strategic importance—to Islamic State’s seizure of Iraq’s second-largest city of Mosul in 2014, the fall of Aleppo has been a very different affair so far.

Far from engaging in a murderous spree against religious minorities, the hallmark of Baghdadi’s self-proclaimed caliphate, Jawlani issued edicts ordering the protection of Christians and Shiites, and demanding that his men not exact retribution. “In the future Syria, we believe that diversity is our strength, not a weakness,” said the latest such decree on Monday. There have been no reports of massacres in Aleppo so far, and Jawlani’s HTS has allowed encircled Kurdish forces to leave unharmed.

“The day they said they took over Aleppo, before seeing them, I felt like the Titanic was sinking,” said a Christian woman in Aleppo who didn’t want to be named because she feared retribution from the Syrian regime. But there was no looting, and shops and restaurants reopened the next day, she said. “Everyone was shocked because they were treating us nicely. They look scary. They look exactly the way you imagine when someone says a terrorist: long beards and crazy hair. But they’re nice.”

Jawlani’s Aleppo victory—which sets up a man the U.S. still designates as a terrorist as a potential contender to become Syria’s ruler should President Bashar al-Assad’s regime collapse—follows a remarkable political transformation of the kind rarely seen in the region.

Born Ahmed Hussein al-Sharaa, he adopted the nom de guerre of Jawlani, a reference to his family’s roots in the Golan Heights that Israel seized from Syria in 1967. The militant leader broke with Islamic State in 2012. He cut ties with al Qaeda in 2016, and since then he has fought both organizations in bloody campaigns.

In doing so, he steered the HTS away from the transnational jihadist movement that is more interested in waging war on America and the West—and that sees national borders in the Muslim world as an artificial construct imposed by the infidel colonialists.

“His and his group’s break with Islamic State and al Qaeda is very genuine. They haven’t been part of these entities longer than they were with them, and it’s now been essentially 8½ years that they have forsworn global jihad,” said Aaron Zelin, senior fellow at the Washington Institute for Near East Policy and author of a recent book on HTS.

Instead, Jawlani has turned HTS—which has run a statelet of its own in Syria’s northern Idlib province since 2015—into a well-disciplined force that focuses squarely on Syria, a blend of Islamism and nationalism that is closer to Afghanistan’s Taliban and the Palestinian Hamas. Instead of the banner of Islam, HTS troops choose to fight under the Syrian flag that dates back to the republic that existed before the 1963 Baath Party revolution that eventually brought the Assad family to power.

“HTS from its very foundation said that we don’t have transnational objectives, we are focused on Syria, we want to fight in Syria, and that has been the essence of its disagreement with other jihadist groups,” said Dareen Khalifa, a senior adviser at the International Crisis Group who has met Jawlani repeatedly in Syria.

“The HTS leadership is pragmatic and utilitarian, and less ideological,” she added. “Jawlani is not a cleric, he is a politician who is ready to strike deals and is very compromising on a lot of things—except fighting against the regime. Don’t underestimate this guy’s ambition.”

Despite all the differences, HTS remains listed as a terrorist organization by the U.S., and Washington offers a $10 million bounty on Jawlani. Yet the U.S. hasn’t targeted Jawlani or other top HTS commanders since he proclaimed nearly a decade ago that he doesn’t seek to be America’s enemy. Since the first Trump administration, which negotiated a deal with the Taliban in Afghanistan, Jawlani and HTS have sought an agreement that would lift the Syrian group’s terrorist designation.

“They’ve learned how to play the game,” said Alberto Miguel Fernandez, vice president of the Middle East Media Research Institute and a former State Department coordinator for counterterrorism communications. “They still have what we would call extremist ideology, but they are not stupid extremists, and they are nationalist extremists. Jawlani knows that he has to moderate his tone, for example, on minorities, because this is something that people in the West will throw in his face.”

It is unclear to what extent Jawlani’s transformation is genuine, and to what extent his appeals to moderation are designed to lull other Syrians and the West into complacency as he pursues his quest to replace the Assad regime. The Taliban in Afghanistan also promised an inclusive government and greater respect for women’s rights before seizing power in 2021, but has since ousted women from the workplace and education, returning to the way it governed before the 2001 U.S. invasion.

“The transformation from a small-time Syrian jihadist in Iraq to the leader of the Syrian revolution? I am rather doubtful,” said Fabrice Balanche, a specialist on Syria at the University of Lyon 2. “Yes, Jawlani probably became more bourgeois with age, and may have renounced part of his radical ideology. But I think it’s more likely that he’s playing taqiya—concealing his real intentions.”

Rights groups have accused HTS of arbitrarily detaining activists, journalists and other civilians voicing critical opinions, and have alleged torture and ill-treatment of those in detention, charges that Jawlani denies.

“They went from global jihad to local regime—and now they are similar to a lot of regimes in the Arab world in their authoritarian tendencies,” said Zelin.

After overrunning Aleppo, Jawlani’s fighters knocked on the doors of some Christian homes and told the residents that they came in peace, according to George Meneshian, an Athens-based foreign policy analyst with relatives in the city. “They told them, ‘You can celebrate your Christmas,’” he said. A Christmas tree is visible in a video filmed at a market in a predominantly Christian neighborhood after the HTS takeover. Despite those assurances, many remain wary.

“Even if their leadership says that they will respect the minorities, you can’t control every individual fighter,” Meneshian said.

Indeed, the presence of hundreds, if not thousands, of foreign fighters within the HTS ranks—Chechens, Turks, Iraqis, Central Asians and especially Uyghurs from Xinjiang, China—represents a major issue for the international community. Jawlani, when asked in a meeting with the International Crisis Group in 2020 about these men, said that they don’t pose a threat to anyone outside Syria.

“As Uyghurs, they face persecution in China—which we strongly condemn—and they have nowhere else to go. Of course, I sympathize with them,” he said. “But their struggle in China is not ours, so we tell them they are welcome here as long as they abide by our rules, which they do.”

In a 2021 interview with PBS’s “Frontline” in Idlib, Syria, Jawlani said he had no regrets about celebrating the Sept. 11, 2001, attacks on America by al Qaeda, or about fighting against U.S. troops in Iraq.

“If there was no American presence, there would not have been a resistance,” he said about Iraq. “Anyone who lived in the Islamic or Arab world at the time who tells you he wasn’t happy about [the Sept. 11 attacks] would be lying. But people regret the killing of innocent people, for sure.”

Absorbing Aleppo—with a diverse population of more than two million—will pose a formidable challenge for Jawlani, especially as the Syrian regime and its allies strike back.

“The situation is really chaotic,” said Mohammed Eisha, an activist who returned in recent days to Aleppo—which he last saw 14 years ago—and who has been living in HTS-administered Idlib.

Security and administration are better in areas under Jawlani’s control than in those held by other rebel factions in northern Syria, he said. In recent years, the group has interfered less in people’s lives. Unlike Islamic State, which used to impose a hard-line interpretation of Islam, HTS didn’t ban the smoking of waterpipes or force men to dress and style their hair a certain way, Eisha said. The nongovernment organization he works for runs several women’s shelters without interference from HTS—for now.

“We are always scared,” Eisha said, “about whether they will stay that way or not.”