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The Fed is on a clearly flagged path to reduce stimulus, with at least two more rate rises to go this year. But if normalisation was difficult to start for Janet Yellen, Mario Draghi faces three policy dilemmas that make a tightrope walk look easy.

The eurozone has consistently beaten growth expectations over the past quarters. Yet under the hood there is a two-speed recovery in growth and inflation among its members. Core countries are leading together with Ireland and Spain, who have been early on reforms — while France, Italy and Portugal remain behind. Armed with mostly one-size-fits-all tools, the ECB will need extra skill to withdraw stimulus and keep the eurozone together.

The first dilemma is about timing. Normalising policy early can curb inflation where it is already rising, like in Germany or the Netherlands, but could also choke any recovery elsewhere.

The second dilemma is the trade-off between higher long-term yields versus keeping government borrowing costs in check. Current 10-year core yields, below 1 per cent, do not compensate for inflation, expected to be around 1.5 per cent over the same horizon. Tapering bond purchases further can help savers to meet their pension goals and revive banks’ profitability, but it can also make it more expensive for governments to borrow, penalising public spending and investment.

The third dilemma is about short-term rates, currently still negative at -0.4 per cent. While negative rates have kept the euro low and helped to boost exports, they also hinder bank profitability and lending activity even more than low long-term yields. The ECB has been trying to compensate for this collateral damage by paying banks to borrow under its TLTRO loans — the last of which was issued in March — but with scarce results.

Today, the consensus is for the ECB to follow the same normalisation path as the Fed: tapering bond purchases later this year or next and bringing interest rates back to zero only after that. This sequence worked well in the US. We believe Europe needs a different course: bringing rates back to zero before the end of tapering.

The ECB weighs its bond purchases following the share of capital contributions of its eurozone members, the so-called capital key. This means it buys more bonds from larger economies such as Germany and France, not the ones with the most debt outstanding. The result is that core debt has become so scarce that investors are hoarding it, pushing its yields even lower than the central bank’s overnight deposit rate. Investors pay -0.75 per cent to lock cash in German two-year notes.

As for short-term rates, the longer the ECB leaves them in negative territory, the more it depresses bank lending. Bank loans account for nearly 90 per cent of corporate funding in Europe and small businesses, which generate 80 per cent of jobs, rely mostly on banks. This means the central bank should look at credit, not monetary aggregates to judge a successful transmission of its stimulus. Corporate loans have stabilised, but they aren’t growing.

For these reasons, we think the ECB should normalise interest rates before ending bond purchases. This is the best policy option for financial stability. It is also the most challenging. To do it, the central bank would have to justify a delay or an adjustment in tapering, acknowledging that some countries need more support than others. This may sound unpopular in Germany, where elections are approaching, but it is the right long-term decision.

In his latest press conference, Mr Draghi repeated the standard statement saying that policy rates are likely to remain low beyond the end of QE. But some in the ECB governing council are pointing in a different direction: Ewald Nowotny recently said the central bank doesn’t have to follow the same normalisation sequence as the Fed, while Ignazio Visco said the time between the end of QE and rate hikes can be shortened.

To hang together, eurozone leaders need to make a number of difficult decisions. These include giving leeway to Greece over its debt, establishing a common budget for infrastructure and defence, and recognising that monetary policy needs to adapt to the different rates of growth of its members. Like in the past, the ECB will need to lead the way.

Alberto Gallo is partner at Algebris Investments and manager of the Algebris Macro Credit fund

Auto Asset Quality to Weaken Further, Fitch Says

Chinese credit stimulus and higher demand for steel helped boost prices

Record production and sales at iron ore miner Ferrexpo helped drive a sharp rise in profits last year and allowed the company to reinstate its dividend after suspending it for 2015.

The company, which makes iron ore pellets in Ukraine for use in steelmaking, said pre-tax profits rose to $231m last year, from $25m in 2015.

A year ago it suspended its dividend after the collapse of the bank where most of its cash was deposited cost it $175m, while a commodity price slump created uncertainty about future iron ore prices.

Last year a Chinese credit stimulus, lower domestic iron ore production and higher demand for steel helped boost prices.

On Wednesday Ferrexpo said it would pay a final dividend of 3.3 cents per share for 2016 and a special dividend of the same amount.

The company reported record sales volumes and an improved cash position in January.

Its share price climbed more than 2 per cent after an initial dip on Monday, defying the 1 per cent fall in the wider FTSE 250 index. The company’s shares have risen by more than 400 per cent in the past two years.

Ferrexpo is the third-largest exporter in the world behind Brazilian-based Vale and Swedish miner LKAB, with a 10 per cent market share. It accounts for nearly 2 per cent of all Ukraine’s export revenue.

Iron ore prices recovered from eight-year lows of $42 a tonne in January last year to $80 by December, driven by the developments in China. Prices have continued to rise, with the average over the past three months reaching $86 a tonne.

Ferrexpo also benefited from restricted global supply after the shuttering of the Samarco iron ore mine in Brazil following the collapse of a dam there in November 2015, and higher demand caused by rising coking coal prices. Using more pellets and high grade iron ore in the blast furnace to make steel allows manufacturers to cut the amount of coking coal they use in production.

Steve Lucas, chairman of Ferrexpo, said cash generation so far in 2017 had been strong. The company has already almost halved its net debt to ebitda ratio, which now stands at 1.57 times, down from 2.78 times in 2015. Mr Lucas expected further improvements during this year.

High barriers to entry in the industry have limited growth in pellet capacity to 5 per cent over the past 16 years.

In China, the company said a rationalisation in Chinese steel capacity, with a bias towards larger and more environmentally efficient blast furnaces that consume more pellets, should support strong demand for its higher-grade pellets, while environmental controls should limit local production of iron ore.

EU negotiator lays out the consequences of failing to reach a deal

Britain will face nuclear fuel shortages, truck queues at Dover and “serious disruption” to air traffic if Brexit talks fail, the EU’s chief negotiator has warned as he outlined conditions for an “ambitious” UK-EU trade deal.

In a wide-ranging speech ahead of Article 50 exit talks, Michel Barnier warned London it must agree “principles for an orderly withdrawal” before trade talks, including its financial dues and the rights of 4m UK and EU migrants.

While endorsing Theresa May’s call for a “bold and ambitious free-trade agreement”, Mr Barnier insisted that ambition must also maintain “a level playing field” on tax, labour law and consumer rights.

“The sooner we agree on the principles of an orderly withdrawal, the sooner we can start preparing this future relationship,” he said. “On the other hand if we do not address these uncertainties and put off difficult subjects to the end of the negotiations we will be heading for failure.”

Mr Barnier did not completely rule out the possibility of agreeing a free-trade deal in time for Britain’s exit — one of London’s key demands. However, he said the new partnership would “take time” and that transition arrangements may be necessary.

Brushing aside one of the British prime minister’s redlines over the future role of European judges, he explicitly stated the EU’s demand that interim measures “will be within the framework of European law” and the European Court of Justice. Such a transition could not allow Britain to pick and chose access to areas of the single market.

In one of the most provocative parts of his address, Mr Barnier tackled head-on Mrs May’s assertion that “no deal is better than a bad deal”, setting out a bleak vision of the “serious consequences” from leaving without agreement.

“More than 4m British citizens in the EU and European citizens in the UK faced with complete uncertainty about their rights and their future; the reintroduction of binding customs controls, which will inevitably slow down trade and lead to queues of trucks at Dover; serious disruption to air traffic; an overnight suspension in the movement of nuclear materials to the UK,” he said.

“A no-deal scenario is not our goal. We want an agreement. We want to succeed.”

Although Mr Barnier was uncompromising on the need for Britain to “settle its accounts”, he avoided putting a figure on any exit payment, or explaining in more detail what principles for a withdrawal would need to be agreed.

The European Commission is also keen to show it will be constructive and ambitious in its handling of trade talks, once the basics of a divorce are worked out.

“We agree with Theresa May in her call for a `bold and ambitious free-trade agreement’. Yes to ambition!” Mr Barnier said. But in a sign of the how difficult trade talks may become, he added: “This ambition will also apply to social welfare, tax, environmental and consumer protection standards to which our citizens are rightly attached”.