Latin American central banks’ head start

This is an audio transcript of the FT News Briefing podcast episode: ‘Latin American central banks’ head start’

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Marc Filippino
Good morning from the Financial Times. Today is Monday, August 7th. This is your FT News Briefing.

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Private equity firms are handing out perks to get investors on board. And US regional banks are still on government life support. Plus, Latin American central banks are cutting interest rates. We’ll take a look at why they’re ahead of the game.

I’m Marc Filippino, and here’s the news you need to start your day.

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It is a pretty good time to be a private equity backer. PE firms are increasingly offering sweeteners to deep-pocketed investors. We’re talking about blue-chip firms like CVC Capital Partners, TPG, and Cinven. They’ve all recently started offering investors some kind of incentive like discounts on management fees. Some firms are even offering big backers like pension plans and sovereign wealth funds a slice of the management fee that usually goes to the fund manager. The fact that these firms are even offering these perks shows that there’s an increasingly competitive fundraising market, and many big investors have been unwilling or unable to allocate fresh funds. To put this into context, so far this year, firms around the globe raised $517bn, which sounds impressive, but it’s a 35 per cent drop from the same period last year.

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It’s been nearly five months since the collapse of Silicon Valley Bank triggered a crisis across the industry, and regional lenders are still relying on hundreds of billions of dollars in government financing that was critical to shore up the sector back in March. Here to explain is the FT’s US banking correspondent Stephen Gandel. Hi, Stephen.

Stephen Gandel
Hi, nice to be with you again.

Marc Filippino
OK. So why are banks still relying on these funds?

Stephen Gandel
It’s still happening because the banks have a hole, they have a mismatch. They have loans that are long-term and they have bought with some of the money they have from depositors’ long-term securities to try to get as high a return as you can. Now, the problem is some of those depositors pulled their money out and they can’t sell those securities yet because those securities have big losses. And when Silicon Valley Bank and other banks tried to sell some of their securities with losses, people really freaked out. So they’re not gonna do that again. So the regional banks need money, loans themselves. (Chuckles) The lenders need loans themselves to pay back some of these depositors that want money immediately and that they have but they’re locked up in these securities that won’t come due for a while and they don’t want to have to sell in a loss.

Marc Filippino
How does the amount of government support now compare to what banks were getting back in March and April? You know, when we were in the thick of the banking crisis.

Stephen Gandel
So the banks have paid back some of what they borrowed from the government, some of this, kind of, financial aid they’re getting, but not nearly as much as you would expect. I mean, it looks like the second-quarter earnings were really good, pretty good for the banks. And yet they paid back maybe a quarter of what they borrowed from the government. So that’s kind of curious. It paints a picture that the banking sector is in a worse shape than what the quarterly earnings seem to suggest.

Marc Filippino
Stephen, do we have a sense of whether this level of government assistance is gonna continue? Is it gonna peter out? What do you think?

Stephen Gandel
I was told by one of the heads, the president of the San Francisco Federal Home Loan Bank, and she said she expects it to stay elevated for a while. That’s because as long as interest rates stay elevated, what they’ve been for the past few decades, banks are gonna have this mismatch where their longer investments and their longer loans are worth a lot less than what they said on paper. So as long as that disconnect continues, there’s gonna be excess lending.

Marc Filippino
Stephen Gandel is the FT’s US banking correspondent. Thanks, Stephen.

Stephen Gandel
Thanks.

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Marc Filippino
UK investors have gone bearish on British defence companies. Fund managers in the UK have cut their holdings in companies, including BAE Systems and Qinetiq, and they’ve done it by an average of 9 per cent since the start of 2022. That’s according to data from the London Stock Exchange Group. But EU investors have plugged that gap and increased their ownership of British defence groups by the same amount, 9 per cent. They’ve also raised their exposure to European companies. Now the UK government has blamed environmental, social and governance (ESG) guidelines. It says there are barriers to investment in the defence sector. But sustainability experts and defence industry figures actually downplay ESG’s role.

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Latin America’s central banks are declaring victory against inflation. Brazil actually started cutting rates last week. Chile did the same about a couple of weeks ago, but some economists think they’re acting too quickly. Here to talk more about this is the FT’s Latin America editor, Michael Stott. Hey, Michael.

Michael Stott
Hi, Marc.

Marc Filippino
So, Michael, why are Latin American central banks cutting rates so far ahead of other central banks like the US Federal Reserve and, you know, the Bank of England?

Michael Stott
Well, this is something of a Latin American success story. So Latin America started raising rates long before the Fed and Europe. In fact, a full year. Brazil was a full year before the Fed. And so reaping the benefit now, they’re able to start cutting because inflation has come right down.

Marc Filippino
Now, just for context, when we see periods of high inflation, is it typical that Latin American central banks are the first ones to raise rates?

Michael Stott
Yes, so I think what’s changed, Marc, from the last time that we had a rate-tightening cycle is that Latin America’s central banks have become independent and they’ve consolidated their independence. So Brazil, for example, the central bank only became independent under the last government of President Bolsonaro. And these independent central Latin American banks are now keen to sort of flex their muscles and prove their credentials in fighting inflation. And so this time round to this rate-tightening cycle, they acted very, very quickly. They were very fast off the mark, very aggressive. Partly also because they didn’t have the reputation, if you like, that the Fed or the ECB have had in inflation fight and markets trusted them less. So they felt they had more to prove. And this time around, they have proved it.

Marc Filippino
Got it. So then why are economists so worried that these countries are declaring victory too soon?

Michael Stott
So in Brazil, there’s been quite a lot of political pressure on the central bank from President Lula’s government. Brazil did push rates very high, so they pushed interest rates right up to 13.25 per cent was the peak, which is well above the levels that we’ve seen in Europe or the United States. So there was a lot of concern about the damage that was doing to the economy. And the Central Bank of Brazil did decide to cut by half a percentage point last week, partly in response to those concerns about the economy. So there was a concern among some economists that it might have been better to wait a little bit longer because perhaps the pressures of inflation were a little bit stronger than people realised. But the central bank felt that on balance it was justified to do this.

Marc Filippino
Yeah, but how are the economies in Brazil and Chile actually doing after these really aggressive tightening cycles?

Michael Stott
Well, Brazil’s held up surprisingly well, so growth in Brazil is expected to be 2.3 per cent this year as the sort of consensus among Wall Street economists. That’s quite a lot more than people were expecting even six months ago. The main reason was a very good harvest in the first quarter of the year has really pushed up growth in Brazil and meant the economy’s held up surprisingly well, even though interest rates have been incredibly high. Chile is not quite as good, so the economy there is going quite a bit slower. But then Chile had a problem with a very, very sort of aggressive boom unleashed with Covid spending. It had one of the world’s highest Covid spends, and that was cut right back. So the effect of withdrawing that on Chile was to crimp growth quite strongly. There’s also been some concerns there, political concerns about a new constitution which have weighed on growth.

Marc Filippino
Michael Stott is the FT’s Latin America editor. Thanks, Michael.

Michael Stott
Thank you.

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Marc Filippino
You can read more on all of the 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.

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