Contagion

A newsletter from POLITICO that unpacks essential global news, trends and decisions.

Mar 13, 2023 View in browser   By Ryan Heath and Adam Behsudi Follow Ryan on Twitter | Send tips and insights to rheath@politico.com Remember how all anyone could talk about in recent weeks was the rise of AI? Chat GPT4 launches this week, but the string of bank closures in recent days has reminded us that there’s a lot more to worry about in the world than chatbots. START-UP STAY OF EXECUTION: Silicon Valley Bank, the collapsed bank where thousands of start-up companies held their cash, isn’t getting a taxpayer bailout, but U.S. government agencies will help depositors walk away from the bank’s collapse with their money. POLITICO examines the political fallout, including Washington lawmakers and regulators bracing for more bank closures. The global financial fallout includes HSBC picking up the U.K. wing of SVB for $1 dollar, though European and Asian regulators say they do not see a risk of financial contagion — banks collapsing in their own markets, driven by the same fears that caused SVB’s depositors to rush for the exit. Reality check: Regulators globally also did not forecast contagion when Bear Stearns collapsed this week 15 years ago. That view held for six months … until Lehman Brothers’ failure sparked a global financial crisis. Even then, European regulators spent months simply blaming American sub-prime lending practices and downplaying contagion risk: until they too were bailing out one bank a day in 2009. Who’s next this time round? Signature Bank — a leading bank for cryptocurrency companies — was closed by New York’s regulator Sunday, the third bank after Silvergate and SVB to close in four days. Many feared that First Republic Bank would be next — maybe even today. But the California-based bank has a stay of execution in the form of emergency liquidity (more than $70 billion) from JP Morgan and the federal government’s new Bank Term Funding Program. REALITY CHECKS — WHAT HAPPENS NEXT We know more about systemic risk now, but …  While there are better systems in place to avoid contagion in our interconnected capital markets than in 2008, you can’t actually eliminate risk in effective capital markets. Otherwise, you’d just have a state-controlled economy and the ineffective and limited capital markets that go with that. Moral hazard versus government hazard: What’s the point of a cap on federal deposit insurance coverage (at $250,000 per depositor) if the government is just going to blow through it and save depositors all the time? We aren’t going to get the answer to that today, but the question is coming into the political frame. For example: How would a potential demand for a round of massive bank bailouts fit into the federal debt ceiling debate? Will we end up with a universal deposit insurance scheme? Companies and individuals that load up on cheap money at some point need to be reminded that lunch isn’t supposed to be free. But since the Federal Reserve enabled all those free lunches with its years-long run of free money, it doesn’t occupy the same moral high ground it did in 2008. And it may end up cast as the villian if it overcorrects by continuing to raise interest rates on regular homeowners while crypto and tech banks get bailouts. Wall Street will discover start-ups: Wall Street vultures will certainly be circling today, looking to rescue at least some Silicon Valley Bank customers. That could be a good thing if it changes how financiers outside the Valley look at who they will fund. The reason Silicon Valley Bank had a profitable niche until Friday was that it specialized in the sorts of risky ventures that most banks won’t touch. It was deeply meshed with the VC world, and that dynamic explains how Bay Area venture capitalists came to play such a vampire squid role in what innovation gets to occur in the global economy. They’re often the only ones who will back risky tech and they have favored people who look like them and who have ideas that can scale globally and rapidly — never mind whether those ideas solve the world’s knottiest challenges.   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.     INTERVIEW — GABRIELIUS LANDSBERGIS, LITHUANIAN FOREIGN MINISTER Lithuania released a new national threat assessment March 9, providing “consolidated, unclassified assessment of threats and risks to national security.” Global Insider sat down with Landsbergis to discuss these threats and the NATO landscape ahead of an upcoming summit in Vilnius in July. The interview has been edited for length and clarity. What was your top takeaway from NATO summit planning with Secretary Blinken on March 6?  There are very high expectations by many member states and Ukraine, and others who want lower expectations. We would like more reassurances, more troops on the ground, more air defense and more NATO visibility in Baltic states. What about Ukraine’s NATO membership application?  There is no consensus as to how to proceed with it. But we believe that there has to be a political path for Ukraine [into NATO]. How will the question of Sweden joining be handled – given Turkey’s disruption to the process? We have to admit that the situation in Turkey is quite difficult because of the earthquake and elections. But this is about NATO: We cannot just leave it on a bilateral track. In the beginning it was thought it should be handled bilaterally, between Sweden and Turkey. But now, we've seen that it actually affects everybody. It affects the alliance itself. You will see way more active comments from Stoltenberg and also here in Washington. Who will lead NATO next, after Jens Stoltenberg?  There are those who say let's stick with Jens because he's doing a great job. We know everybody trusts him. But we are a democratic institution that follows democratic rules. There has to be an election, and I honestly don’t know how that will go. Lithuania has a possible candidate: our own Prime Minister Ingrida Šimonytė. There are others in the region too. [Estonian Prime Minister Kaja Kallas is regularly suggested as a contender]. Lithuania has been on the receiving end of tough treatment from Beijing, for sticking up for Taiwan. How is that going?  We have historical experience of being a close neighbor to an authoritarian country that uses the economy as a tool of coercion. So it's easy for us to see similarities with other similar countries. Lithuania’s example shows that it is possible [to push back] with help and assistance from Washington and other European countries. It took a lot for Germany to reassess its relationship to Russia. Can it reassess China?  Few countries that can decouple as Lithuania did. That is understandable. But lower the dependency? Yeah, it is doable, it’s possible. Is lowering dependency on China a Europe-wide responsibility?  Yeah, it's a responsibility. For decades the only thing that was done was to fuel this integration, between the West and China. Now we are building up a handbook of what we did, and how we cooperated globally; what worked, what didn't work. It is clear that sticking together assisting each other in times of economic coercion helps out. GLOBAL RISKS AND TRENDS CHINA CORNER CHINA’S NEW GLOBAL ROLE — CHINA PLANS NEW MIDDLE EAST SUMMIT: The Wall Street Journal reported on the latest foray into Chinese convening of regional groups (Beijing has previously targeted Europe and Eurasia). RED ALERT: AUSTRALIA SHOULD BE READY FOR WAR WITH CHINA IN THREE YEARS: That’s the conclusion of a group of defense specialists convened by the Sydney Morning Herald in a series of special reports published over the past week. The reports were deliberately designed to raise alarm among what the paper considers to be a complacent defense and political establishment. The first 72 hours of a Chinese attack on Taiwan would likely include a cyberwar that finally breaks Australia’s notion that its distance from the rest of the world is its guarantee of safety. Then we could see attacks on American bases, joint bases, weapons stores and ships — as far north as Guam and as south as Australia. “Like most other Western militaries, we believe in the cult of the offensive, so we have underinvested in defensive capabilities,” retired Army major general Mick Ryan told the paper. “Our bases are absolutely undefended,” by which he also meant American-operated bases in the country. COULD WE END EXTREME POVERTY BY 2050? That’s the bold claim in a new report by Charles Kenny and Zack Gehan for the Center for Global Development: “Scenarios for Future Global Growth to 2050.” The authors argue, however, that we’ll have more resources to respond to global challenges meaning the worst aspects can be eliminated. GLOBETROTTERS WORLD BANK — WILL BIDEN NOMINEE AJAY BANGA MAKE THE CUT? The most likely answer is yes. The United States’ pick to lead the World Bank, former Mastercard CEO Ajay Banga, is currently on a world tour to build support for his bid. He’s in Brussels this week after stops in the United Kingdom, Kenya and Ivory Coast. His itinerary includes stops in Latin America and Asia, including China. He’s already clinched formal endorsements from a range of countries like the U.K., Kenya and Bangladesh. India has also expressed support. A who’s who of economists, environmentalists and development leaders recently said he’s the man for the job. The same as it ever was: Since the bank’s creation after World War II, the United States, the institution’s largest shareholder, has historically reserved the right to handpick the person for the top job. A “gentlemen’s agreement” between the U.S. and European allies gave Washington authority over the World Bank president selection and Europe the power to select the head of the International Monetary Fund. “By putting forth a candidate right out of the gate, the Biden administration dampened any hopes for a global merit-based competition for a new World Bank president,” said Kevin Gallagher, director of Boston University’s Global Development Policy Center. “It remains to be seen if developing countries put up a symbolic candidate, but the writing is on the wall.” The Russia Factor: While Banga is the clear frontrunner, don’t count on an uncontested race. Other countries have until March 29 to put forward alternative candidates. Russia has said it is discussing with “friendly countries” the nomination of an alternative to Banga to avoid a U.S. monopoly on the position. Russia’s representative to the World Bank’s board, Roman Marshavin, told Russian state-media outlet TASS that possible candidates include “authoritative Russian financiers and world-famous foreign economists” Majority rules: If Russia does put forward a candidate they still need to win over the World Bank’s executive board and the U.S. and allies easily have enough shares to block that, including because smaller countries are grouped in constituencies represented by a single person on the board. The executive director representing these groups can vote one way even if some of their constituent nations disagree. Checking all the boxes: Banga’s selection does appear to be an effort by the U.S. to address the critics. Although he is a U.S. citizen, Banga was born and raised in India, a fact that could help him understand the needs of emerging markets and developing countries where the bank operates most. His professional career has given him deep ties with Wall Street. Supporters say that puts him in a good position to leverage the immense private capital the bank needs to pursue new priorities such as climate finance. More insights into Banga: “I’ve seen him lay out all the business cards he collected that day and then send a one-line thank you email to each of those people as he unwound in the hotel lobby,” Puru Trivedi, now with the Meridian International diplomacy center, told Global Insider. “It’s that attention to detail that will help him in this job. He started his career selling Nescafe machines in small Indian cities. He’s a salesman, and diplomacy is sales.” MOVES U.S. President Joe Biden’s top adviser on the trilateral AUKUS military alliance, James Miller, will leave the National Security Council, Jack Detsch and Robbie Gramer reported. BRAIN FOOD EXPLAINER: The debt-limit time machine: What the last 10 big fights tell us about this one, by POLITICO’s Jennifer Scholtes and Caitlin Emma. PERSPECTIVE - How the Global South imagines ending Russia's war on Ukraine, by International Crisis Group’s Richard Gowan. SHORT READ: A Revolution Is Coming for China’s Families, AEI expert Nicholas Eberstadt writes in Wall Street Journal, because by 2050 there will be more parents than children living with middle-aged Chinese families. ONE FUN THING VIDEO — AFN COMMERCIALS FROM THE 1980s: The American Forces Network delivered American pop culture and news to military families before global cable and internet networks did the job. In place for commercial ads, were these messages. h/t Shaila Manyam. Thanks to editor Heidi Vogt and producer Sophie Gardner SUBSCRIBE to the POLITICO newsletter family: D.C. Playbook | Brussels Playbook | London Playbook | Paris Playbook| Ottawa Playbook| EU Confidential | | Digital Bridge | China Watcher| China Direct | Berlin Bulletin | D.C. 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