When the wolves came to Ziel Feldman’s door, it was a triplex penthouse on the Upper East Side of Manhattan. Feldman, chief executive of HFZ Capital, one of the city’s swankiest developers, was forced in December to put his own house up for sale — asking price: $39m — after creditors sued to foreclose on several of his faltering condominium projects. To many in the real estate world, that event looked like a harbinger of doom. By then, lenders had granted months of forbearance after the Covid pandemic paralysed New York City last March. The expectation in the industry was that many would call time on delinquent borrowers in the new year, touching off a great reckoning after a decade-long rally that has bequeathed plenty of questionable projects. “The non-performing loans are coming!” Laurie Golub of Square Mile Capital warned in November at the annual conference hosted by New York University’s Schack Institute of Real Estate, claiming that lenders had been “coddling” borrowers. “Don’t expect creditors to extend forbearance much longer,” another panellist agreed. One analyst likened the situation to a storm cloud on the horizon poised to burst at the first crack of lightning. But a strange thing has happened since then: creditors have broadly held fast, creating a period of leniency that is approaching a full year for some borrowers, and has persisted longer than any seasoned professionals can recall. “Maybe a single asset or borrower has gotten relief like this. But never on this scale,” says Norman Radow, who made his name in distressed real estate by cleaning up Lehman Brothers’ real estate portfolio after the 2008 crisis. His company, Radco, now owns thousands of apartment units across the country. The can is being kicked down the proverbial road on an unprecedented scale, according to Radow. “What happens when it stops rolling?” he asks. “That is the answer we all want to know.” Real Capital Analytics, a research firm, classified $146bn in commercial real estate assets as being in distress — or soon to be — by the fourth quarter last year. Two-thirds of that was accounted for by retail and hotels. The distressed debt pile bulged in the second quarter last year, but has since accumulated more gradually. Distressed sales have so far been few. The far more common approach has been for creditors to show further patience for assets they believe will have value on the other side of the pandemic. Often that means pushing for recapitalisations or refinancings in order to buy time.

Deal by deal

In late December, Ashford Hospitality Trust, which owns a portfolio of upscale hotels, warned investors it was teetering on the edge of bankruptcy. It ended up signing forbearance agreements on $1bn in loans, and secured a loan of up to $350m from Oaktree Capital that management believes will see it through to recovery. “For now, as a lender, it’s really on a deal-by-deal basis,” says Billy Meyer, of Columbia Pacific Advisors, which recently launched the Columbia Recovery Fund to provide bridge financing for Covid-stricken borrowers. “If there’s a good probability that the property recovers then lenders will try to work with borrowers.” Meyer and other real estate investors are now debating whether the great reckoning that many foresaw is still just another quarter away — or perhaps may not come at all. If so, then a property crisis that began unlike any other — precipitated by a once-in-a-century pandemic — may also have a unique aftermath. Jordan Roeschlaub, vice-chair of capital markets at Newmark Knight Frank, a commercial real estate broker, is among those who have reassessed their view of the market. “Everyone sort of anticipated towards the middle end of last year that in the beginning of Q1 there’s going to be this floodgate of credit positions sold in the secondary marketplace, and there’s going to be a lot of distress. Quite frankly, it hasn’t come,” he says. “I don’t know if it will.” Part of the reason, Roeschlaub and others agree, is the enormous amount of capital chasing real estate investments at a time when bond yields are so low. By some estimates, there is more than $300bn in “dry powder” waiting to be deployed. Those funds are helping to create a floor under property values. The speedy rollout of effective vaccines has created a sense that there is, at last, light at the end of the tunnel if borrowers can endure just a bit longer until health restrictions are lifted and full economic activity resumes. In the meantime, the Federal Reserve’s extraordinarily loose monetary policy has made it easier for many to do so, according to Fred Harmeyer, who manages the debt portfolio at Rubenstein Partners, a real estate investment firm. At the outset of the crisis, in late March, mortgage lenders sponsored by TPG and Angelo Gordon wobbled as their portfolios sank in value, forcing them to raise collateral. It appeared to be the crack of lightning. But the market has stabilised since then. “I think people expected when Covid first occurred — just as they expected during the great financial crisis — to suddenly see a disgorgement of assets, and there would be great distressed buying opportunities. With the Fed stepping in, you haven’t seen that level of instant distress,” says Harmeyer. Still, there have been some notable cases, including regional shopping malls taken over by lenders, and Harmeyer has seen assets quietly put on the market in recent months. “I think it’s likely we’ll see more of that,” he predicts. One reason that lenders are extending “forbearance upon their forbearance,” as one put it, is that they have no choice. Governments have placed restrictions on evictions and foreclosures during the pandemic. Many courts are either closed or backed up. It has also helped that banks have entered the crisis with far less leverage than they did in 2008. Pierre Debbas, a real estate lawyer in New York at Romer Debbas, says Manhattan landlords, by and large, were also in better financial shape, allowing many to muddle by with reduced cash flows from tenants. “I would project that banks will lean towards restructuring debt simultaneously with landlords restructuring a significant amount of their leases and that the city will not experience a major spike in foreclosure actions,” he adds.

Beds, sheds and meds

A less salutary reason for lenders to extend leniency is that they do not want to be saddled with undesirable assets — particularly hotels and brick-and-mortar retail. Both faced questionable prospects even before the crisis — whether because of oversupply or the rise of ecommerce. Their problems have only deepened as Covid has accelerated changes in consumer behaviour. It is difficult, for example, to say when — if ever — business travel will return to pre-pandemic levels, and therefore, what the value is of a business hotel. Developers trying to sell a glut of luxury condominiums in New York are also likely to suffer. One investor predicts “a musical chairs of capital partners and lenders slowly wiping each other out”. On the flipside, real estate categories such as industrial warehouses, which are vital nodes for ecommerce businesses, have thrived in the pandemic. So have life sciences developments, which house biotechnology companies and pharmaceutical laboratories. Housing, outside New York City and San Francisco, has also held up. “The bottom line is, you’ve got buckets of in-favour, and buckets of out-of-favour,” says Doug Harmon, chair of capital markets at Cushman & Wakefield. In the real estate services firm’s new strategy report, it is recommending “beds, sheds and meds” to investors. Somewhere in between those buckets are office buildings, the biggest chunk of the property market and one whose future has become a matter of intense debate. Even with the rise of flexible working, some see them retaining their value after the pandemic eases — albeit with capital investments to enhance their public health features and make them cherished meeting places for collaborating workers. Others, such as Michael Silver, chairman of Vestian, which advises tenants on commercial real estate, believe that is fanciful. Silver is convinced that working from home is a revolution in its early stages, and that office properties will eventually see their values shredded by 30 per cent or more. “If you listened to developers in March, they were pounding their chest and saying, ‘This is an aberration. Everything is going to come back to the way it was.’ It’s not,” Silver says.

Patience wearing thin

One lender who has concluded that the time for patience has passed is Richard Mack, chairman of Mack Real Estate Group and a third-generation New York developer. “Unless there are extraordinary circumstances, we just can’t give people any more forbearance at this moment,” he says. In December, his firm initiated foreclosure proceedings against the developers of a condominium project in Brooklyn who had fallen behind on payments. The matter is now being fought in court. The arrival of a Covid vaccine has not persuaded Mack to shift his stance. “Just to say: ‘we have a vaccine, everything returns to normal.’ No, I don’t think that happens,” he explains. “Even with a vaccine, business travel is not coming back right away. Even with a vaccine, people are going to work from home more, which is going to impact office. Even with a vaccine, people are going to continue to expand their online shopping. All of this was true pre-Covid and it’s accelerated post-Covid.” Two reference points for real estate veterans trying to make sense of the current crisis and how its aftermath might play out are the crashes the industry suffered in the early 1990s and then following the 2008 financial crisis. In the first case, the wider economy was generally healthy but real estate was troubled, thanks to tax laws that encouraged too much building. The result was tremendous amounts of distressed properties that allowed savvy investors like Sam Zell, the self-proclaimed “grave dancer”, to amass great fortunes. In 2008, real estate was dragged down by a financial crisis. Commercial properties were again battered. But quality ones ended up bouncing back sooner than many investors expected. Mack sees features of both crises in the current one: for troubled assets — particularly retail and hotels — he predicts a more painful and prolonged early 1990s-style experience while others could rebound quickly, more akin to 2008. Rising sunbelt cities are in favour; New York City and San Francisco are out.

‘People capitulate’

One thing that has changed since 2008, and will probably influence how the next phase of this crisis plays out, is the composition of lenders. Like Mack, many developers have launched debt funds to take over the riskier forms of real estate lending that banks retreated from after the 2008 crisis. Such funds, which tend to seek higher yields to compensate their investors, only accounted for 7 per cent of the real estate lending market in 2015, according to RCA. By 2019, their share had grown to 22 per cent. “A lot of the banks ended up just kind of focusing on the most institutional clients and really holding back on leverage, de-risking their portfolios. And I think that’s what really opened the door for a lot of these private lenders to step in,” says Scott Modelski, a managing director at Blackbear Capital Partners, a commercial real estate brokerage. How those lenders will behave in their first big crisis is uncertain. One view is that they will be more nimble than banks because they are less encumbered by regulation, and therefore better able to negotiate solutions with borrowers short of foreclosure. But some of these firms — although they do not advertise it — are in the business of “loan to own”, and will look to foreclose. (Among the lenders to foreclose on Feldman and HFZ was the lending arm of another developer, CIM Group). Still others may themselves be reeling as the riskier loans they made late in the cycle are now souring. “Some of the opportunity funds that went up the scale of risk, they are going to get hurt. No question about it,” Gary Barnett, founder of Extell Development, which pioneered the supertall luxury condominiums that overlook Central Park — and is now struggling to sell them, predicted late last year. “Most of the banks will not get hurt. The banks did not, generally, go too far up. They’ll get their money back, one way or another.” In February, Barnett sold a stake in two Manhattan apartment buildings for more than $300m, helping to tide him over while his new $3bn luxury tower languishes. The buyer was Scott Rechler, the head of RXR Realty, and another New York property scion. It was the type of opportunity that Rechler believes will increasingly be on offer for developers with access to capital as others come under strain. He still anticipates properties and loans falling into outright distress — but it will take time. That is because many assets will have to be repurposed — say, converting a middling office building to apartments, or a shopping mall to an industrial warehouse. For those deals to be viable, prices will have to fall further. “You need to wait to get to the point that the lender takes over and that the lender is written off, and then it clears at a price that makes sense,” he says. “Eventually people capitulate.” How long that might take is unclear. When the real estate market began to collapse in 1990 it was not until 1993 or 1994 that Rechler’s previous firm, Reckson, began to see opportunities to buy. Rechler sold Reckson in January 2007, then raised $9bn in private equity funding and did not return to the market until August 2009. “We’re probably right now still in 2008,” he says, by way of comparison. Then again, even longtime real estate investors are hesitant to draw comparisons with a crisis like no other. “With Covid, because no one’s ever lived through a downturn that was self-inflicted by turning off the economy, no one really knows when you turn on the economy how fast it’s going to come back,” Rechler says. “So people are holding out hope.”

Dear readers, It has been a brutal 12 months for the US nursing home industry. Senior living centres have been ground zero for the coronavirus pandemic, with roughly one-third of overall deaths occurring in care homes. The headlines continue to be bleak, even as vaccinations are rolled out. This is a good moment to look at the business models behind the homes. A group of researchers from top US universities — Penn, New York and Chicago — have examined the role of private equity in patient outcomes in the nursing home industry. The conclusions of their working paper for the National Bureau of Economic Research are damning: PE management led to an increase in short-term mortality of Medicare patients by 10 per cent. This is an implied 20,000 lives over the 12-year sample period. Moreover, taxpayer spending per patient went up even as expenditures shifted away from residents towards monitoring fees, interest expense and lease payments. The study period was closed before the pandemic began. But the timing of the report’s release is noteworthy. The inequities of the US healthcare system have become painfully clear in the past year. The Financial Times reported on Tuesday that top PE bosses took home hundreds of millions of dollars in dividends and deal profits last year, making for a wrenching juxtaposition. 

Top 10 US PE nursing home deals

Nursing home	PE firm	Year	Number of facilities
Genesis Healthcare	Formation Capital, JER Partners	2007–15	327
Golden Living	Fillmore Capital Partners	2006	321
Kindred Healthcare	Signature Healthcare, Hillview Capital	2014	150
HCR ManorCare	Stockwell Capital, The Carlyle Group	2007–18	145
Mariner Healthcare	Fillmore Capital Partners	2004	95
Skilled Healthcare Group	Onex, Heritage Partners	2005–07	76
Trilogy Investors	Lydian Capital Partners	2007–15	65
Lavie Care Centers	Formation Capital, Senior Care Development	2011	61
Laurel Health Care Company	Formation Capital, Longwing Real Estate Ventures	2006–16	41
Harden Healthcare	NXT Capital, Oaktree Speciality Lending	2013	35
Source: NBER working paper

According to US government statistics, healthcare spending consumed 18 per cent of gross domestic product in 2019 — almost $12,000 worth of spending per person. The private sector-focused approach supposedly fosters patient choice, innovation and better outcomes. But the system is complex and burdensome for most. The authors of the report into nursing homes expressed some surprise that PE had taken such a strong interest in the sector, calling it a “puzzle” since profit margins were about 2 per cent or less. But there are many reasons why the sector would be a natural target: the US population is ageing, healthcare spending is growing faster than GDP, government programmes such as Medicare and Medicaid often pick up the tab and real estate holdings allow for high leverage.  Then there is the chance to apply the PE playbook. The authors found that PE-owned nursing homes were associated with a 50 per cent increase in the probability of taking antipsychotic medications even as “patient mobility declines and pain intensity increases post-acquisition”. Staffing declines and hours spent with patients were also observed in the study. PE tends to ascribe dollars to most operating decisions and the professors of this report do the same. In 2016, a “mortality cost” formula implied a $21bn charge to patient deaths — basically a figure that reflects the price of excess deaths. The $21bn charge, the authors noted, was more than twice the sum that facilities received in Medicare reimbursements.  Critiques of PE tend to focus on busted retailers and the resulting tens of thousands of job losses. This study extends the scrutiny to life and death. The American Investment Council, the PE industry’s advocacy group, did not respond to a request for comment. But its homepage boasts that “private equity is improving healthcare”. The hope is that when the pandemic ends, nursing homes will learn and apply best practices for the next health emergency. But the natural follow-up research question is obvious: Did PE-backed nursing homes underperform during the darkest days of 2020? Enjoy the rest of your week, Sujeet Indap US Lex editor

The writer is head of emerging markets economics at Citi How do policymakers in emerging economies decide how to run their countries? The answer has a lot to do with how policymakers in advanced economies do things. There is a copycat tendency or, put more politely, a “demonstration effect”: the policy choices of governments in developed countries create a menu of options from which governments in emerging economies make choices. That fact makes for an uncomfortable prognosis these days. Developed countries are loosening policy to an extent that, if echoed by emerging economies, could end badly for some. For most of the past few decades, the tendency among EM policymakers to take ideas from advanced economies has been remarkably helpful. One example of this is the history of trade liberalisation. In the 1960s and 1970s, the US and western European countries were busy cutting tariffs and reducing non-tariff barriers to trade. Seeing the fruits of this, developing countries followed suit in the 1980s and 1990s to boost growth rates. Another example is inflation targeting, which has now been adopted by a succession of emerging economies.   International economic integration and declining inflation have been generally good news for emerging economies. But it’s not so obvious emerging economies can follow all the latest fashions with equal success. What characterises policymaking in advanced economies these days is, on the one hand, a bias towards apparently unrestrained fiscal expansion; and, on the other, central banks that are cooperatively keeping the cost of that debt down through bond purchases. This subordination of the central bank to the finance ministry has a name: “fiscal dominance”. It was a common enough feature of policymaking in the decades after the second world war, but gradually lost its appeal when inflation started to make itself visible in the 1970s, which led to an era of “monetary dominance” as central banks were handed more and more authority to control inflation. Now we’re back in a low-inflation world, fiscal policy has the upper hand and central banks are accommodative. This arrangement seems to work fine in rich countries, where investors are still happy to hold government debt even though there’s so much more of it yielding diminishing returns. The reason these countries can get away with this is they have something that emerging economies generally lack, namely monetary credibility. And that’s painful for countries such as Brazil and South Africa. These two have exceptionally high public debt burdens: Citi estimates Brazil’s is nearly 95 per cent of gross domestic product, and South Africa’s is 75 per cent. Debt burdens this big are particularly worrying because in each of these countries the long-term inflation-adjusted interest rate is considerably higher than the rate at which these economies are likely to grow in the foreseeable future. That gap between the real interest rate and the real growth rate will cause problems over time. So why can’t Brazil or South Africa just implement copycat economics and get their central banks to buy bonds, reduce the long-term interest rate to tolerable levels, and keep on spending? The reason is that, because these countries’ lack of growth potential inhibits the credibility of their money, investors want compensation for the risk of owning Brazilian or South African debt. If yields get pushed down too low through intervention by central banks, investors will begin to feel unrewarded, and the result will be capital outflows and endlessly weakening currencies. In the end, the only response to this might have to be stopping money leaving the country by imposing capital controls. There’s no easy way around this: copycat economics seems to have found its limit. Or has it? Last month India’s government, already sitting on a debt stock worth some 90 per cent of GDP, announced its intention to run large budget deficits for years, while the Reserve Bank of India has launched a bond-buying effort designed to put a ceiling on Indian bond yields at 6 per cent in nominal terms. So far the market’s reaction has been forgiving. India’s monetary credibility is intact, for now, largely thanks to the market’s confidence that the country can grow fast in the future. Good luck to India, and to Brazil and South Africa should they follow. For investors looking at EMs, finding places where copycat economics still works may become a valuable skill.

Cruise ship owners owe a debt to makers of Covid-19 vaccines. Companies such as US-listed Royal Caribbean Group, which launched a $1.5bn equity offer on Monday, know all about having dues to pay. Cruise companies have sold more than $12bn in debt since the pandemic began, 39 per cent more than their issuance in the previous 10 years, according to Dealogic. Yet strong bookings should mean a decent reception for Royal Caribbean’s shares. Cruise lines claim bookings are up sharply this year. They need to be. Royal Caribbean has lost money in the past four quarters. Its net debt to estimated 2022 ebitda ratio is a scary 6 times, above Carnival Corporation’s near-5 times. But it is not alone in issuing healthy shipping forecasts. Saga, the UK travel group targeting older customers, already claims 70 per cent occupancy from June for its two cruise liners. Repeat customers, the key to about 80 per cent of the North American market, should fill vacant cabins. Still, full berths are only half the picture. Costs will be higher as a result of extra medical staff on board and limited port availability. Few places boast the UK’s high rate of vaccination, at about 30 per cent for at least one dose. Never mind the two jabs demanded of Saga passengers. Ship owners talk of “bubble ” excursions when visiting foreign shores. Note that Tui has continued to run its cruise trips in the Baltics and Canary Islands, though admittedly at half capacity. Undeterred by the state of their balance sheet risks, some investors have marched up the gangplank. Share prices have jumped in the past six months, led by Norwegian Cruise Lines’ 80 per cent increase. But it remains almost half of its pre-pandemic level. Last spring, investors correctly priced cruise companies at half their book value. On average, shareholder equity per share subsequently halved. Heed the foghorn warnings. Ship values themselves look unlikely to climb much. Cruise ship supply, given the delivery schedule, should cap prices. Cruise liners offer a leveraged bet on travel recovery but it is better to stay on the dock and wave them off.

Can the copper bull run continue?

If, as the commodity market adage goes, the cure for high prices is high prices, where does that leave copper? The world’s most important industrial metal, used in everything from electric vehicles to power cables, has risen more than 100 per cent from its pandemic lows in March last year. Last week it hit a 10-year high above $9,500 a tonne before falling back as speculators piled in and a Chinese brokerage amassed a $1bn long position on the Shanghai Futures Exchange.  A growing number of banks and brokers believe the bull run will continue and copper will go on to surpass its all-time high of $10,190 reached in February 2011.  Citi and Goldman Sachs are both predicting big supply deficits for 2021 that would further drain already-low stockpiles of the metal, citing strong demand from China but also the rest of the world as the economic strain from the coronavirus pandemic eases.  Unlike previous cycles, a dearth of “shovel-ready” copper projects means a flood of supply is not going to hit the market and send prices tumbling. If anything, even higher prices might be needed to spur production of low-grade ores in far-flung parts of the world where it is difficult to build a mine. “It takes 15 years from discovery to navigating approvals to ultimately getting a development up and running in our industry,” Anglo American chief executive Mark Cutifani said. “So you can’t just wiggle your nose. It does need high prices, but it also needs time.” Neil Hume

Did US hiring accelerate in February?

US hiring picked up markedly in February from the previous month, economists have forecast ahead of the monthly employment report that is due to be released on Friday. After the country lost 227,000 jobs in December, hiring rebounded in January — albeit with a modest gain of 49,000 jobs — as the rise in coronavirus infections abated and vaccinations accelerated. Economists polled by Bloomberg anticipate that the US will add 145,000 jobs in February, pushing the unemployment rate 1 percentage point to 5.3 per cent. If that forecast holds, it would mark the strongest pace of hiring since November. The prospect of a resurgence was bolstered by data released last Thursday showing that filings for first-time jobless benefits fell to a three-month low in the week ending February 20. The labour market stumbled in the final stretch of 2020 under the weight of the pandemic’s upswing in the autumn, which prompted tighter restrictions on businesses and social activity across the US. The leisure and hospitality sector alone shed 597,000 jobs in December and January, according to labour department figures, whereas the January payroll gains were concentrated in government employment and professional and business services. However, the outlook is brighter for the coming months, particularly with the expected passing of the Biden administration’s $1.9tn stimulus plan, which last week won the support of a large group of senior Wall Street executives, and further vaccination progress. “US households appeared quite febrile at the end of 2020 as the cocktail of a worsening health situation, weakening employment and expiring fiscal aid weighed on private sector confidence and restrained mobility,” analysts at Oxford Economics said. “Fortunately, we see hope on all three fronts.” Matthew Rocco

Will eurozone inflation continue to rise?

Eurozone inflation hit its highest level since the start of the coronavirus pandemic in January, after five months of falling prices. On Tuesday the bloc’s statistics body will publish a preliminary estimate of February’s level, which is expected to continue the upward trend. Many economists are predicting a steady rise over the spring on the back of higher energy costs, continuing supply chain disruptions that have raised costs for retailers and manufacturers, and the reversal of a VAT tax cut in Germany. “For eurozone inflation, the only way is up,” said Carsten Brzeski, economist at ING, who forecast that headline consumer price inflation in the bloc would reach 1.3 per cent in February, from an 11-month high of 0.9 per cent in January. Claus Vistesen, chief economist at Pantheon Macroeconomics, said a further increase in the price of oil — international benchmark Brent crude is up more than 30 per cent this year — could be the biggest driver of inflation in coming months. A change in the inflation basket of goods and services is also at play. The 2021 basket reflects that people are consuming more food, where prices are rising, and less recreation activity, where prices are generally falling. The European Central Bank has forecast that price growth will rise to 1.5 per cent in the fourth quarter this year before dipping to 1.2 per cent a year later — still under its target of below but close to 2 per cent. “The ECB will not contemplate raising its policy rates until eurozone inflation expectations and wage inflation have increased substantially and persistently,” said Andrew Kenningham, economist at Capital Economics. “That is probably several years away.” Valentina Romei

Rishi Sunak’s Budget on March 3 will be drenched in red ink. The UK chancellor has already spent about £280bn on helping the economy through the Covid-19 pandemic and the bill will keep rising next week; Britain is not scheduled to fully reopen until June 21. Sunak — like finance ministers around the world — is throwing money at fighting coronavirus, scrapping fiscal rules and seizing at the lifeline of historically low interest rates. Like Janet Yellen, US Treasury secretary, Boris Johnson’s government is “acting big” in the crisis. But in an era when economic orthodoxy has been put on hold — governments from the left and right alike are spending on a massive level to avert catastrophe — Sunak will use his Budget to signal that the borrowing binge cannot last forever. Fiscal discipline is about to become, yet again, a defining battle in British politics. While economists around the world argue that with historically low interest rates borrowing is not a big concern and vast stimulus packages are the order of the day, Sunak is expected to signal future tax rises — notably a rise in corporation tax — to show that he is serious about closing Britain’s structural deficit. The policy is controversial with many Conservative MPs, who think businesses have suffered enough. “No tax rises,” said John Redwood, a former Thatcherite cabinet minister. “You can only have a chance of fiscal discipline if you rebuild the economy first.” Johnson is instinctively nervous of tax rises and tensions with his chancellor could lie ahead. But those close to the Budget process say Sunak could signal an increase in corporation tax from 19p to a rate in the mid-20s over the parliament — still one of the lowest headline rates of any major economy — with warnings of more tough choices to come. In anticipation of possible trouble, Mark Spencer, government chief whip, has warned Tory MPs that if they vote against any of Sunak’s Budget measures it will be treated as a vote of no confidence in the government: a serious disciplinary offence. Meanwhile, the chancellor has been preparing the ground for a two-pronged strategy, combining high spending now with a plan to stabilise debt in the medium term. According to one Tory MP briefed by Sunak ahead of the Budget who declined to be named, the chancellor says: “The one common theme that has seen us win four elections in a row is fiscal credibility. If we lose that, people won’t believe us on other things.” One ally of Sunak says: “Rishi believes there’s not much point to the Conservative party if we don’t want to put the public finances back on a sound footing.”

Why Sunak wants to do it

Sunak’s Budget will therefore be a mixture of huge extra spending in the short term — policies like the furlough job support scheme will be extended into the summer — coupled with a clear warning that a reckoning lies ahead, when the long-term damage to the public finances caused by Covid-19 will have to be repaired. At the age of just 40, and a little over a year into his job at the Treasury, Sunak is confident that he is making the right call, economically and politically. One business leader with close Treasury connections says: “At a time when everyone else in the world is saying ‘how big is your stimulus?’ he is striking a different note. I think it’s personal — it’s who he is.” Sunak’s allies say he is not relaxed about the prospect of interest rates staying close to zero. While he is willing to borrow cheaply over the long term to cover Britain’s Covid debts — Tory MPs call them “war bonds” — Sunak wants to bring borrowing under control once the crisis has passed. The Treasury fears that “scarring” caused by the pandemic could leave the economy permanently smaller and create a £40bn hole in the public finances, exacerbating a debt servicing problem if rates start to rise. “I want to make sure that one day, when the next shock comes along, we can respond comprehensively and generously again,” he said this month. “That will require sustainable public finances in the future and I’ll always be open and honest with people about exactly what that means.” Sunak also believes this is the right time politically to start talking about fiscal discipline, even if tax rises may not start to bite until later in a parliament which could run until 2024 — hopefully once the pandemic is firmly in the rear-view mirror. “Our polling shows clearly that people accept that there is a bill to be paid for all of this spending,” says one Conservative strategist. Sunak wants the Tories to fight the next election on a platform of fiscal credibility — putting Labour on the other side of the dividing line. “We have to start now,” said one colleague of the chancellor. “We can’t start talking about it in three years’ time.”

The economics

Sunak has long insisted that his coronavirus spending spree, protecting jobs and livelihoods during the pandemic, was the “fiscally responsible” thing to do, but as virus cases decline, “we should look to return the public finances to a more sustainable footing”. But with borrowing likely to be about £350bn in 2020-21 and Covid-19 support measures likely to extend into the next financial year, the chances are slim of sticking to the government’s manifesto target of only borrowing to invest in three years’ time, which would imply bringing the overall deficit down below £60bn a year.  In the unlikely event he chose to stick to the timetable outlined in the manifesto, Sunak would be sailing against a strong tide of international opinion, which says that countries should seek to recover fully from the pandemic before addressing their public finances. The IMF, World Bank and OECD have all forcefully altered their recommendations for countries, such as the UK, which have few immediate constraints from financial markets in borrowing, arguing that borrowing is not a huge concern when interest rates are at historically low levels. In its first assessment of the $1.9tn American stimulus plan, worth 9 per cent of gross domestic product, the IMF concluded that it would raise the performance of the US economy without generating inflationary pressures. Predicting that President Joe Biden’s stimulus would raise inflation only to 2.25 per cent in 2022, Gita Gopinath, the IMF chief economist, said this was “nothing to be concerned about”. The sanguine stance taken by international bodies that have traditionally been fiscal hawks stemmed, Gopinath said, from globalisation, automation and the credibility central banks have built up in inflation control.  Sunak shares the view that the recovery must be entrenched before tax rises kick in — one minister says “there’s a difference between when you signal things and when you do things” — but the chancellor knows that the latest economic fashions do not protect him from government departments always wanting to spend more and longer-term fiscal concerns. Torsten Bell, director of the Resolution Foundation and a former Treasury official, says he might be “unfashionable” in understanding the chancellor’s concerns, especially when there will be difficulties reining in health budgets after the pandemic.  The most likely fiscal target will not be a near-term ambition for the deficit, but one that seeks to stabilise debt in the medium term. But even that will involve tough decisions soon unless it is far into the future, Bell says. 

Problems ahead

Talking tough on tackling the deficit is one thing: Sunak’s problem could be getting tough measures past Tory MPs and his neighbour in Downing Street, Johnson. “It’s pretty clear that Rishi Sunak’s instincts are those of a fiscal conservative and he wants to take action sooner rather than later,” says David Gauke, former Treasury minister. “You also have a prime minister who’s very reluctant to take any difficult decisions before he really has to. That makes it more challenging.” Johnson has ruled out a return to the public spending austerity programme of David Cameron’s governments from 2010-16 and he has also tied Sunak’s hands when it comes to putting up taxes. “Boris is certainly sceptical on fiscal discipline,” says one Treasury official. Although both sides insist chancellor and prime minister are working together well on the Budget for now, tensions will rise ahead of a second autumn Budget when the tough decisions start to be taken. Johnson’s penchant for grand projects is well known; his plan for a bridge or tunnel between Scotland and Northern Ireland is viewed in the Treasury as a monumental white elephant. He has also told Sunak he must honour the Tory manifesto commitment not to raise rates of income tax, value added tax or national insurance — the three biggest revenue-raisers for the exchequer. So far Johnson has sanctioned “difficult choices” by Sunak that — in reality — have been relatively straightforward to deliver, including last November’s £4bn cut to Britain’s overseas aid budget and pay freeze for some public sector workers. A rise in corporation tax is unpopular with Tory MPs but would still leave Britain competitive internationally. The next round of possible options to deliver Sunak’s fiscal discipline could be much harder for the prime minister to swallow. Freezing income tax allowances — drawing more people into higher tax bands — will concern key Tory voters, as would any rise in fuel duty. Reforms to capital gains tax, property taxes or pensions tax relief would hit traditional Tory voters hard, particularly those in the wealthy south. One veteran of the Treasury during the post-financial crash austerity era claims Sunak and Johnson will ultimately duck those tough choices: “Sunak will continue to imply that fiscal tightening is around the corner but it will always be pain deferred. Generally, when governments give up on fiscal rectitude, it’s a market crisis that makes them see the error of their ways.” But Sunak, who represents a northern constituency, insists he can put together a strategy which will help the Conservatives to hold on to the working class former Labour voters who switched to the Tories in large numbers at the 2019 election. It is the battle that could determine the outcome of the next election.

Scrambled politics

Sunak tells Conservative MPs that his party cannot win a straight race with Labour on who can spend the most money — and that is a view shared by many Tories representing northern seats. Richard Holden, MP for North West Durham since 2019, says his dream election message would be: “Economic credibility, promises delivered, more to come in the future.” Holden says the government must show that its investments in schools, hospitals, police and infrastructure are being delivered and that they can be maintained because the public finances are under control. “Labour didn’t lose the last election because people didn’t like their spending plans,” he says. “They didn’t trust them to deliver them.” Sunak’s strategy is to try to outflank Labour leader Keir Starmer on both sides: offering high levels of spending, including infrastructure investment funded by long-term borrowing, with a pledge to keep a tight grip on day-to-day spending. Tax rises, if Tory MPs allow them, would largely hit better off voters or businesses. Starmer is trying to work out how to respond in a transformed political environment, where he could face a party of the right at the next election preaching fiscal discipline having just run up a £350bn deficit after a huge state intervention against coronavirus. The opposition Labour leader acknowledged the fight ahead in his first big economy speech last week. “I know the value of people’s hard-earned money — I take that incredibly seriously,” he said. “To invest wisely and not to spend money we can’t afford — those are my guiding principles.” That speech built on the recent annual Mais lecture by Anneliese Dodds, shadow chancellor, which used the word “responsible” 23 times as she pledged a “responsible economic, fiscal and monetary policy.” Starmer knows he has to establish that credibility — badly tarnished during the leadership of the leftwing Jeremy Corbyn — before he can get a hearing for the kind of spending programmes he has in mind, such as improved housing, social care and action to tackle climate change. Starmer has sought to make the case that governments should be judged on how they spend money — a jibe at Johnson’s wasteful spending during the Covid crisis on items such as protective equipment and a test and trace system — rather than how much they spend. Leftwing Labour MPs would prefer Starmer just promised to outspend the Tories. Stewart Wood, once an adviser to former Labour prime minister Gordon Brown, predicts a battle for control of the political narrative in the coming months. Lord Wood says that 10 years ago the former Tory leadership under Cameron and George Osborne ruthlessly engineered a narrative that the economic crash was the result of Labour’s overspending. “I suspect that is what Keir’s team want to do, they want to say that of course Boris isn’t responsible for the deaths per se but that years of austerity left the health service in a position where it couldn’t cope with the Covid catastrophe,” he says. Starmer’s problem is that by the time of a general election in 2024, Cameron and Osborne may feel like ancient history. Johnson, with his enthusiasm for extravagant projects, does not seem like a politician itching to return to austerity, or the “A-word” as he puts it. At next week’s Budget, Sunak will set the parameters for the next general election, suggesting that voters, particularly in northern marginal seats, can vote for Labour-style spending with Tory-style fiscal discipline. It is a strategy heavy with political risk — neither Conservative MPs nor Johnson are likely to be comfortable with the some of the tax rises Sunak has in mind — but gradually the contours of post-pandemic British politics are becoming clearer.

A crashing economy is bad news for creditors. But one running too hot may not be great news either. Despite a deep recession in 2020, monetary and fiscal stimulus proved the perfect antidote for most lenders, bondholders and debt issuers. Falling yields and spreads meant fixed income securities soared. No surprise that companies issued trillions in bonds and loans across credit ratings.  But fixed income instruments by definition do not cope well with the threat of inflation. Ten-year US Treasuries now yield 1.4 per cent. Low historically, though still up from 0.9 per cent in just two months. The year-to-date return on the Bloomberg Barclays US bond index is already minus 0.72 per cent after surging 7.5 per cent last year. More interesting is the knock-on effect upon equity valuations. A healthier US economy should enhance corporate profits. But higher interest rates also threaten the value of future, uncertain profits. In the past five days, the tech-heavy Nasdaq index has fallen more than 2 per cent as peak valuations are re-evaluated. Wall Street, presciently, took full advantage of easy conditions until the end. In January $52bn of junk bonds was issued in the US, the third-highest monthly volume ever recorded. Average junk bond yields had cratered to about 4 per cent with even highly indebted issuers such as cruise operator, Carnival, able to tap the markets at coupons below 6 per cent. Most ominously, perhaps, leveraged loan issuance used to pay for dividends to private equity partners had swollen to $7bn through early February, according to S&P LCD, the second-highest total recorded since 2010.   The full consequences of quickly rising rates are tricky to predict given years of low borrowing costs. Absolute rates will remain low by historical measures but, as the taper tantrum of 2013 showed, capital markets can overreact to sudden shifts in borrowing costs. Wall Street should recognise the bigger picture. An easing pandemic, after a long hibernation, should lead to some rapid economic growth initially. That is no bad thing. Our popular newsletter for premium subscribers Best of Lex is published twice-weekly. Please sign up here

Dear readers, In 2020, the fun-loving cavalier turned into a Christmas-cancelling puritan. But this year UK prime minister Boris Johnson looks set to relax again, presiding over ever-loosening restrictions. On Monday he promised a “one-way road to freedom” as he unveiled a strategy for return to normality by June 21 — midsummer’s day. That’s too slow for some. One MP described the announcement as a “hammer blow”. Some overstretched pubs are still fearful they will have to call time for good. But the timetable is in line with Lex’s prediction back in December. A note titled “Midsummer Gladness” argued that would be the point when vaccination would allow a return to semi-normality. The news certainly provided a boost for the travel sector. Thomas Cook, the online travel company, reported a 60 per cent leap in traffic on its website following the prime minister’s announcement. Europe’s largest tour operator Tui reported a 500 per cent week-on-week rise in bookings for holidays in Greece, Spain and Turkey from July onwards.  Britain was on the cusp of becoming the first country in the world to safely resume international travel and trade at scale, said Heathrow’s chief executive John Holland-Kaye on Wednesday. Understandably he sounds hopeful. The airport, taken private by a consortium led by Ferrovial in a highly leveraged takeover in 2006, made a £2bn loss last year, pushing net debt up almost 6 per cent to £13.1bn. Though it has enough liquidity to last until 2023, it needs passenger numbers to bounce back. Last year, they fell to levels not seen since the 1970s. Anglo-Spanish airline group IAG is similarly in dire need of a recovery in air traffic. Its British Airways subsidiary on Monday announced the deferral of £450m of pension contributions. With its fleet largely grounded, it needs to conserve all the cash it can. But travel to countries that have not got Covid-19 under control will be constrained. Rating agency Moody’s expressed caution, saying the timeline for easing lockdown restrictions could still be derailed by concerns over new Covid-19 variants. Trade body Iata this month warned that travel demand might recover only 13 per cent compared with last year’s very low level. If that happened, airlines would go on burning cash throughout the year.  On a more general point, there is agreement though. There is plenty of pent-up demand. Household bank deposits were up 10 per cent at the end of December compared with a year earlier. This is not evenly spread. More people report that their savings have fallen than risen. Richer households tend not to spend their wealth. Even so, the huge build-up of cash savings — the most liquid subset of household wealth — means the hospitality sector stands to benefit. Many economists expect a Roaring Twenties-style splurge.  Underpinning the optimism is more evidence of vaccine success. New data from Scotland this week showed a very substantial fall in hospital admissions after the rollout of vaccines. The results in older age groups were “very encouraging”. That is significant because several countries including Germany have so far opted only to use the Oxford/AstraZeneca vaccine for younger age groups.  The benefits of vaccination are also not evenly spread. It particularly helps face-to-face services worst hit by Covid-19 social-distancing requirements. Vaccination will make less difference to trade-dependent sectors grappling with the complexities of Brexit, the other big drag on the UK’s economic performance. Here, too, a positive story can be told. After four years when many global investors shied away from UK equities exposure, the recent trade deal, however limited, provides some reassurance. Funds are now flowing into domestic stocks. They are seen as relatively cheap and beneficiaries of a tilt towards value stocks. Sterling has rallied sharply this year. Having the fastest vaccine rollout of any large country has given the UK an unusual first-mover advantage, analysts say. Should that continue, expect a degree of exuberance to return. Enjoy the rest of the week, Vanessa Houlder Lex writer

Ukraine is poised to start vaccinating its citizens after it received the first batch of Oxford/AstraZeneca doses produced by India’s Serum Institute through licence agreements. “First 500,000 vaccines against Covid-19 [have] arrived," President Volodymyr Zelensky tweeted on Tuesday. "We will start vaccination ASAP.” The delivery of the jabs under the CoviShield brand follows delays that the country of 41m, like many other developing economies, has experienced in securing supplies. Health minister Maksym Stepanov flew to India on Thursday in an attempt to speed up the delivery of 12m doses of Oxford/AstraZeneca and US-developed Novavax vaccines, which were secured this month through UK-headquartered Crown Agents. He said on Monday that while there he negotiated the supply of an additional 5m Novavax doses. He expects a total of 15m of those vaccines for Ukraine. It was not immediately clear how many Oxford/Zeneca shots Ukraine will receive through the agreements. Officials said on Monday that the delivery of 117,000 Pfizer-BioNTech vaccines expected this month under the World Health Organization co-led Covax programme had been delayed until March. Covax is to supply Ukraine with as many as 3.7m Oxford/AstraZeneca doses in the first half of this year, officials said on Tuesday. Kyiv has ruled out purchasing vaccines from Russia, which in 2014 occupied Ukraine's Crimean peninsula and fomented a proxy war in far eastern regions that has claimed nearly 14,000 lives. Deep lockdowns imposed last spring helped Ukraine avoid a first large wave of infections but cases have mounted after restrictions were eased over the summer. The country has registered 1,311,844 cases, including 134,758 active ones and 25,309 deaths.

Shares in UK-listed travel companies rallied strongly on Tuesday as government plans to lift coronavirus restrictions spurred hopes that bookings across the industry may finally pick up after a miserable year. The biggest advance was in easyJet, which rallied more than 8 per cent after the low-cost carrier said bookings for flights from the UK had more than quadrupled week on week. On a second day of gains for the sector, British Airways owner IAG and holiday company Tui were each up more than 6 per cent. The market gains came a day after prime minister Boris Johnson set out plans for an easing of lockdown. Non-essential international travel will be subject to review, yet restrictions could be lifted as soon as early summer. "Things are looking brighter due to the efficacy of vaccines and growing support for digital health passes," analysts at Jefferies said in a note, adding they expected domestic travel to be the first to recover. Intercontinental Hotel Group, owner of the Holiday Inn and Crowne Plaza chain, was also up 3.5 per cent as traders looked beyond a $280m annual pre-tax loss to focus on the prospects for a recovery later in the year. Even after the recovery, however, the stocks remain at depressed levels. IAG and easyJet are down about 56 per cent and 29 per cent, respectively, since the start of 2020. "The global airline industry must still rebuild its balance sheet," the Jefferies analysts added.

Macau gaming stocks soared on the day after the former Portuguese colony lifted all quarantine restrictions for mainland Chinese visitors. Galaxy Entertainment shares closed 8.9 per cent higher while SJM Holdings climbed 7.9 per cent. Sands China gained 7.5 per cent, Melco International went up 6.3 per cent, while MGM China and Wynn Macau each rose about 5 per cent. The territory has opened up to mainland Chinese travellers and analysts have predicted a strong performance during the lunar new year holiday period. “Macau GGR increased significantly during the third week of February,” estimated analysts Vitaly Umansky and Tianjiao Yu from Sanford Bernstein in a note on Monday. “Macau will continue to experience headwinds during the first half of 2021, but we see a strong improvement beginning in the second half as Covid-related travel constraints begin to fall away.”

EasyJet has seen a surge in bookings since Boris Johnson unveiled his "roadmap" out of lockdown that included rebooting international travel later this year. Bookings for flights from the UK have more than quadrupled week on week, the low-cost carrier said, while its package holiday unit has experienced a more than seven-fold jump in bookings. A UK government taskforce will explore how to safely remove restrictions on mass travel as part of the path out of lockdown announced on Monday, although this is not expected until mid-May at the earliest. The travel industry was shaken by warnings not to book holidays earlier this year, and has broadly welcome the UK government’s plan. "The prime minister’s address has provided a much-needed boost in confidence for so many of our customers in the UK," said easyJet’s chief executive Johan Lundgren.

Nigeria's Covid-19 case count could be in the millions rather than the official tally that puts it in the tens of thousands, a survey by a national public health institute has found. The seroprevalance of 10,000 people in four states found that one in five of those tested have been infected. For Lagos, Nigeria's biggest city, the findings from the Nigerian Centre for Disease Control suggest as many as 4m people have contracted the virus, compared with an official tally of just 54,000. The survey indicates that the "majority of sampled population are susceptible to the virus infection, which highlights [the] need for vaccines”, the NCDC director Chikwe Ihekweazu tweeted late on Monday. Nigeria has recorded roughly 1,800 coronavirus-related deaths. Nigeria's drugs regulator recently approved the Oxford/AstraZeneca vaccine and the country has secured millions of doses through the African Union and the World Health Organization-backed Covax facility. But, as in much of sub-Saharan Africa, the first deliveries have yet to arrive.

The UK labour market was all but frozen at the end of the year, with unemployment edging up and a previous pick-up in hiring stalling as the surge in Covid-19 infections put reopening on hold. The jobless rate rose to 5.1 per cent in the three months to December, a rise of 0.4 percentage points from the previous quarter and in line with expectations, official statistics showed on Tuesday. The employment rate of 75 per cent was 1.5 percentage points lower than a year earlier, with 541,000 fewer people in employment. The figures suggest that the extension of the government’s furlough scheme has helped to limit redundancies and stabilise the labour market, while keeping it in a state of suspension. They will reinforce calls from business and unions for support to be extended well after the reopening of the economy begins to lessen the risk of a further surge in job losses. “The government will need to provide ongoing help,” said Tej Parikh, chief economist at the Institute of Directors. "The Budget next week needs to provide a bridge for businesses to begin the process of rescaling and rehiring." The headline unemployment rate does not reflect the true extent of slack in the labour market. Real-time payroll data collected by HM Revenue & Customs suggest that despite small increases over the last two months, there are 726,000 fewer employee jobs in the UK than there were last February before the pandemic hit, a fall of 2.5 per cent. The biggest drop in payrolled employees has been among 18-24 year olds

Frasers Group has put investors in the UK retailer on notice over a potential impairment charge of more than £100m as lockdown restrictions on high streets drag on. The group behind Sports Direct and Evans Cycles, as well as the eponymous department store chain, said it anticipated taking a “material” non-cash accounting hit on the value of freehold properties and other assets. It comes a day after the UK government laid down plans for a “cautious” approach to easing lockdown, under which non-essential shops in England will not reopen until April 12 at the earliest. The company, run by billionaire Mike Ashley, cited “the length of the current lockdown, potential systemic changes to consumer behaviour and the risk of further restrictions in future”.

The UK health secretary insisted the government’s path out of lockdown is “irreversible” and added that if everybody pulled together England could emerge from the latest restrictions as swiftly as possible. “We are absolutely determined to come out of this as safely and as fast as possible,” Matt Hancock said, “but no faster.” He was speaking the day after prime minister Boris Johnson laid out his four-step plan out of the latest restriction measures that have closed hairdressers, bars, non-essential businesses and schools. The government stands ready to do “whatever it takes” to protect livelihoods and businesses, Hancock told Sky News on Tuesday. The UK prime minister said on Monday the “end really is in sight” as he outlined his plans to end all Covid-19 restrictions by mid-June. Chancellor Rishi Sunak, meanwhile, is preparing in his Budget next week to extend emergency support measures until the summer. He is expected to include measures to protect jobs and help businesses through weeks or even months of further disruption. “It’s very, very important that we can see the impact of one step before taking the next,” Hancock said on Tuesday, adding that it is a “judgment of how much of what we can lift and at what moment”. “If everybody responds and pulls together,” he added, “we can see the light at the end of the tunnel. The best way to get there is to keep abiding by the rules.”

Indian bond yields have jumped higher as investors fret over the government’s borrowing plans aimed at supporting an economic recovery from the pandemic. The yield on the 10-year Indian government bond rose to a six month high this week, touching 6.2 per cent. India has substantially increased its borrowing plans in order to help revive its economy from a steep coronavirus-induced slump. The government said it will borrow Rs12tn ($165.8bn) in the financial year starting April. The move in Indian bond yields has mirrored a rise in US Treasury yields, but analysts say it has been pushed higher by uncertainty over whether the government will be able to manage its ambitious borrowing targets for the coming year. “The market is not convinced,” said Suman Chowdhury, an analyst at Acuité Ratings. The government’s targets “will be difficult to absorb”, he added. The increase contributed to a 2 per cent fall in the benchmark Sensex equities index on Monday, although it drifted higher on Tuesday. The government is also budgeting a fiscal deficit of 6.8 per cent of GDP for the coming year. The government said however that it has laid out a “fiscal glide path” that will see the deficit cut to about 4.5 per cent by the 2025-26 financial year. Chowdhury said that investors were sceptical. “They believe the fiscal deficit may also be higher than what the government is talking about,” he said.

Intercontinental Hotel Group, owner of Holiday Inn and Crowne Plaza hotels, has warned that the difficulties of the “most challenging year” in its history have stretched into 2021 as new strains of coronavirus force countries to close borders and limit travel. Results on Tuesday showed revenues across the FTSE 100 group fell 48 per cent to $2.4bn in the year to the end of December 2020 while its earnings per share more than halved from 210 cents to 143 cents. It swung from a pre-tax profit of $542m to a loss of $280m. Revenue per available room - the hotel industry’s preferred performance metric - was still far below historic levels in the fourth quarter, it said. China, where a hard suppression of the virus has allowed greater easing of restrictions, had the best performance but the so-called revpar was still 18.2 per cent below 2019 levels. Europe, which has been hard hit by a third wave of the virus, performed worst of all the group’s regions with revpar 70 per cent lower year-on-year in the final three months of 2020. IHG said its economy brands had performed best and that its strength in that segment of the industry made it more resilient than rivals. Many economy hotels have been able to stay open to host essential business travellers such as those working in manufacturing and healthcare. “2020 was clearly the most challenging year in our history, with Covid-19 heavily impacting demand across our industry. 2021 has begun with many of these challenges still in place, with more meaningful progress towards recovery for the industry unlikely until later in the year,” Keith Barr, IHG’s chief executive said. The battered hotel group said that it had available liquidity of $2.1bn excluding the repayment of a £600m UK government loan due in March. It is targeting a reduction in costs of $75m this year, while still aiming to invest in the business for growth once borders reopen, it said.

HSBC will resume paying a dividend despite announcing a 34 per cent drop in annual profits after its global business was hit hard by the coronavirus pandemic. Europe’s largest bank performed slightly above analysts’ expectations in 2020 although it was weighed down by loan losses, reporting profit before tax of $8.8bn, down from $13.4bn the previous year. In the fourth quarter, adjusted profit slid 50 per cent year on year to $2.2bn, just above the $1.8bn estimated by analysts. The bank said on Tuesday that it would start paying a dividend of $0.15 a share after a Bank of England ban on shareholder payouts was partially lifted late last year. “We have had a good start to 2021, and I am cautiously optimistic for the year ahead,” Noel Quinn, HSBC chief executive, said in a statement. Read more here

India is facing a wave of domestic travel restrictions as the number of new coronavirus infections begins to climb after several months of decline. The western state of Gujarat has set up border check posts to screen travellers coming by road from neighbouring states, including Maharashtra, and will check arriving passengers at railways stations on inbound trains. The southern state of Karnataka has also sealed many roads and demanded travellers produce negative Covid-19 test results to continue their journeys. Tamil Nadu has also requested negative tests for incoming air passengers from certain states. The patchwork of abrupt restrictions and test requirements highlighted the likelihood of further disruptions in India from the pandemic, as cases have begun to increase after five months of steady decline. The seven-day moving average of India’s daily cases fell to a low of 11,000 on February 12 but has since risen to 12,900, a 16 per cent increase, raising fears that some areas of the country could be poised for surges. Of India’s most recent 1m cases, 34 per cent came from Maharashtra, home to Mumbai, while 22 per cent came from the southern state of Kerala. India has dramatically relaxed controls on most economic activities except for education, which has yet to resume. Most of India’s young school children have not set foot in a classroom since last March.