Economist 4/11/16

  1. ON MARCH 20th the European Union signed a deal with Turkey which was meant to help stem the flow of refugees making their way to Europe. The deal was made controversial by the argument that blanket returns would have violated international law. The agreement actually gets round this: each refugee is supposed to be given the right to make an individual claim of asylum. If it is determined that a claimant came via Turkey, a “safe third country” they will generally be deemed “irregular” and thus eligible to be returned. However, the idea that Turkey is actually a safe third country has upset many human-rights organizations.
  2. Demand for credit has sagged as the worst recession since the 1930s deprives Brazilian businesses of customers and workers of income or, worse, jobs.With non-performing loans (NPLs) on the rise, banks think twice before lending.But look at Brazilian banks’ bottom lines, and most, like Original, have had a remarkably good crisis so far. Out of 180-odd institutions monitored by the central bank only 25, most of them small, posted losses in 2015. In the year to September the banking sector as a whole (excluding state-owned development banks) raked in net profits of 85 billion reais, up from 66 billion reais in 2014.Return on equity averaged 15%, down from more than 20% in the mid-2000s.Part of the explanation is that lower loan volumes have been offset by higher interest margins (the difference between the rates banks pay on deposits and those they charge on loans).
  3. But Brazilian bankers have been sensible as well as lucky.Today the five biggest banks account for three-quarters of all loans. It was also more conservative, partly because banks must set aside hefty provisions for delinquent loans (at present, 180% of their value).Rather than compete on price, rivals in the private sector focused on their own asset quality. When car loans began to sour in 2011, hinting at trouble ahead, they shifted towards less risky borrowers and safer assets, such as mortgages (nearly all for first homes, with loan-to-value ratios below 60%) and payroll loans.To preserve profits, the private sector let the state-owned banks chip away at its market share, which declined from two-thirds in 2008 to just 45% last year.
  4. Meanwhile banks are putting more emphasis on less volatile, fee-based services, such as insurance and credit cards. A host of measures from voluntary redundancies to sharing ATMs has helped to contain costs. Heavy investment in technology—22 billion reais in 2014 alone—has shunted more than half of transactions online. This is reducing banks’ dependence on costly branches, which are required by law to employ at least two armed guards: last year the sector spent 9 billion reais just on physical security.Roughly 70% of loans are funded with deposits. The likelihood of a run on these is a very low: high inflation makes mattress-stuffing costly for Brazilian savers, who also cannot easily invest abroad. The system’s overall capital buffer, currently 15.8% of risk-weighted assets, is well clear of the 11% regulatory minimum.
  5. On March 30th, Fayez al-Serraj, the prime minister of a new Government of National Accord (GNA) nominated by a UN-backed negotiation process, entered Tripoli with six ministerial colleagues.Despite fears that he would be killed on the way to his office, Mr Serraj was warmly received. Within days, key institutions of the state, including the central bank and the national oil company, had pledged loyalty to the GNA.  Mr Serraj will have his work cut out if he is to have any hope of uniting this extraordinarily fractious country. Libya has been in chaos since the revolution of 2011. Things went from bad to worse in 2014, when Islamists responded to electoral defeat by seizing Tripoli and setting up a rival assembly to the internationally recognised parliament,known as the House of Representatives.For several months, the GNA struggled to get off the ground, but on March 13th it was declared the sole legitimate government of Libya by Western powers impatient to end the deadlock.Once the legitimacy of his government is established, Mr Serraj needs to tackle two urgent problems, both of which will require the help of the outside world to fix. The first is Libya’s collapsing economy.The second and connected challenge is the growing presence of Islamic State.

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