Nato torn over Ukraine’s membership bid

This is an audio transcript of the FT News Briefing podcast episode: ‘Nato torn over Ukraine’s membership bid’

Marc Filippino
Before we get started, I want to flag a quick correction. Yesterday, we called the UK Chancellor’s annual speech, the Madison speech, when it’s actually the Mansion House speech. Sorry for the slip up there. Now on to today’s show.

Marc Filippino
Good morning from the Financial Times. Today’s Tuesday, July 11th, and this is your FT News Briefing.

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Marc Filippino
Hedge funds are ditching their bets on US stocks, and American banks might have to adapt to tougher capital rules. Plus, Nato’s annual summit kicks off today. Take a look at why it’s so difficult for Ukraine to get a seat at the table. I’m Marc Filippino, and here’s the news you need to start your day.

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Marc Filippino
The US stock market has been going strong this year thanks to Big Tech companies. But that hasn’t stopped hedge funds from slashing their bets on a rising US stock market. Wall Street’s exposure hit its lowest level to US equities since 2013. Some managers are worried that the Federal Reserve will continue raising interest rates, which could cause an economic downturn. Instead, the funds are paying record-setting attention to European stocks.

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Marc Filippino
Big US banks may have to start keeping a bigger rainy day fund. The Federal Reserve’s vice-chair for supervision, Michael Barr, laid out possible capital changes yesterday. The big one is for lenders with $100bn or more in assets to store additional capital in order to handle an emergency. The capital rules are being floated after Silicon Valley Bank and several other midsized regional lenders collapsed earlier this year. I’m joined now by the FT’s US economics editor Colby Smith to explain more. Hi, Colby. 

Colby Smith
Hi, Marc. 

Marc Filippino
So what are in the guts of these proposals? 

Colby Smith
So at the end of the day, the overall premise here is that these bigger banks need to be stashing away more capital that then could be used to absorb any losses that could come from, let’s say, an adverse market event, any kind of unpredictable loss that, that could have to be booked at a later date. These proposals basically suggest that banks are going to have to think a little bit more aggressively about how much money that they’re putting aside for this. So one of the proposals in particular would require banks to basically include paper losses on their investment portfolios when calculating how much capital to put aside. So the point here is to kind of beef up the financial system. It just seems like the kind of right time to do that from the Fed’s point of view. 

Marc Filippino
If banks are required to keep more capital on hand in the case of an emergency, does that mean that potentially that that’s less going toward investors in the form of dividends? 

Colby Smith
So that’s one of the consequences that, that if you hear from bank lobbyists they talk about. Some say that this is going to crimp lending to small businesses and other institutions that need it because banks are going to be forced to meet these higher capital requirements. Others say that, you know, this could have then an impact on economic growth. But, I mean, at the end of the day, Barr and the Fed, they really do try to kind of push back on those kind of initial criticisms. They say that, you know, a well fortified banking system, which means a well capitalised one, is actually one that is healthier and means more lending is extended. It means that, you know, the economy is functioning on a more efficient level. 

Marc Filippino
Colby are these proposals, will they be confirmed any time soon? 

Colby Smith
So it’s really going to be a long drawn out process. I mean, these are proposals first and foremost. So there’s going to be an extensive kind of comment period that the Fed holds. Then they have to be voted on by the board of governors at the Fed. And then in order to ensure that, you know, these rules don’t have some severe market impact, the Fed usually phases in rule changes like this over, you know, an extended period. So we could be looking, we’re probably looking at a multiyear process at this point. 

Marc Filippino
Colby Smith is the FT’s US economics editor. Thanks, Colby. 

Colby Smith
Thank you. 

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Marc Filippino
Nato’s annual summit starts in Lithuania today with some big news. Turkey has agreed to support Sweden’s bid to join the military alliance. Turkey’s president Recep Tayyip Erdoğan decided to lift his veto after hours of negotiations last night. Erdoğan has been blocking Sweden’s path to Nato for more than a year. Now, all eyes are on Ukraine. Most Nato member countries want Kyiv to join but there are two pretty big holdouts, the US and Germany. Here to talk more about this is the FT’s European diplomatic correspondent Henry Foy. Hi, Henry. 

Henry Foy
Hey, Marc. 

Marc Filippino
So, Henry, like I said, pretty much the majority of Nato wants Ukraine to join. France, the UK, eastern European countries, they all want them in. The US and Germany are more hesitant. How come?

Henry Foy
Nobody wants Ukraine to join the alliance today because to bring Ukraine into Nato right now would mean Nato has to go to war with Russia. The key priority right now is to make sure Ukraine wins this war, so anything else distracts from that. The second issue is about escalation. It’s, if we say that one day this country will definitely become a member of Nato, and not only that, but we have a plan for it and we’re going to start that plan today here in Lithuania, that is a red flag to Russia. And it’s only going to escalate the war. It’s only going to drag it out longer, and it’s only going to give Russia a reason to want to, at some point, hit back at other Nato states. 

Marc Filippino
Are there compromises on the table for the two sides? 

Henry Foy
The compromise we may see after the leaders sit down and haggle personally over the table is likely to be something that acknowledges Ukraine’s progress towards membership that takes into account the war but also reminds Ukraine that there are lots of obstacles, lots of hurdles, lots of rules and processes. And so it’s not going to be something snappy. It’s not going to be something easily instagrammable that President Volodymyr Zelenskyy of Ukraine can sell to his people. It’s what diplomats involved in these talks are telling me is being hashed out at the moment. 

Marc Filippino
One of the things that I think is interesting is that this war kind of began Russia had used the excuse that they were worried about Ukraine membership to Nato, and they use that as an excuse for invading Ukraine. How does that kind of play into all this? Does it play into all this? 

Henry Foy
That’s a great question. I mean, that is what a lot of the eastern countries, the Brits and the French, are saying to the Americans and the Germans right now, while these negotiations are going on. They’re saying, look, if we don’t send a really strong signal not just to Ukraine but to Russia and the rest of the world, that this country is going to become a member of our alliance. And not only that, but we have a plan. We have a pathway. We have a structure for them to join. We are effectively allowing Putin to win on that count. We are allowing him to achieve one of his strategic aims from this invasion, which was to delay, block or make impossible Ukraine’s entry into this alliance. And so simply, if only for the reason that we need to do it because Putin has tried to stop it, we need to show Ukraine that we’re serious about this and that we have a plan. 

Marc Filippino
Henry Foy is the FT’s European diplomatic correspondent. Thanks, Henry. 

Henry Foy
Thanks a lot, Marc.

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Marc Filippino
The prime minister of the Netherlands is quitting politics. Mark Rutte made the announcement yesterday. His coalition government collapsed last week after he tried to introduce a tougher immigration policy. With 13 years of service under his belt, Rutte is the EU’s second longest serving leader after Hungary’s Viktor Orbán. 

Andy Bounds
I mean, he’s the real survivor of Dutch politics. 

Marc Filippino
That’s our EU correspondent Andy Bounds. 

Andy Bounds
There’s 20 different parties in the lower house of parliament. So he’s the one guy who’s been able to sort of hold them together and find ways of building coalitions with enough seats to actually govern the country. 

Marc Filippino
Rutte will stay on as caretaker prime minister until the next election, which will probably take place in November. Andy says Rutte’s legacy, well, it’s a bit of a mixed bag. 

Andy Bounds
He’s a consensus builder. He sort of hovers slightly above the fray to some extent. I mean, his last government actually collapsed over a child benefit scandal. And then he came back as prime minister after the elections with the same parties in power. So he’s sort of become the default go-to politician. But populist parties are on the rise. There’s been quite, you know, fraught, fractured debates in society in the Netherlands about they’re trying to reduce the amount of nitrogen. They emit nitrates. The immigration issue has sort of festered and is now one of the biggest, you know, issues. The housing crisis, there’s not enough affordable housing. So there’s a number of issues. The Netherlands is a very well-off country, but it feels a little bit uneasy with itself at the moment, I think.

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Marc Filippino
Andy Bounds is an EU correspondent for the FT.

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.