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This is an audio transcript of the FT News Briefing podcast episode: European banks set to benefit from rising interest rates

Jess Smith
Good morning from the Financial Times. Today is Monday, July 25th, and this is your FT News Briefing.

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European banks start to report earnings this week. US multinationals are feeling the pain of the strong dollar. And the FT’s Ben Hall spoke to Ukraine’s finance minister and gives us the highlights of that interview. I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

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This week, the US Federal Reserve is set to raise its benchmark policy rate by three quarters of a percentage point, just like it did last month. The Fed is struggling to cool inflation without pushing the US economy into a painful recession. These rate hikes have also helped push up the US dollar to its highest level in 20 years. And as the FT’s Kate Duguid reports, that’s wiped billions off US corporate earnings.

Kate Duguid
We’re talking about companies prima-, that have big businesses overseas. So that often includes tech companies, but it can include pharmaceuticals, right? It includes IBM, Johnson & Johnson, Netflix, Philip Morris, the cigarette maker. And what’s happening is that one, you know, there are sort of two different translation effects. One is that the strong dollar means that your international sales, which are done in the foreign currency, are worthless when you translate them back into the dollar. And then the second thing is also just that because the dollar is stronger, it means that US products are more expensive than rivals and foreign rivals. There’s also this sort of secondary effect, which is that the US has had stronger growth than a lot of these places. And so the US economy, while, you know, we are seeing it falter a little bit, is doing better than a lot of economies abroad. And so with lower GDP elsewhere, companies suffer because of lower sales. And so that is also a piece of the strong dollar story.

Jess Smith
Kate Duguid is our US capital markets correspondent.

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Rising interest rates are also affecting banks. And just how much they’ve affected European lenders is something our banking editor Stephen Morris is looking out for this week. Europe’s big banks will start coming out with earnings reports.

Stephen Morris
Remember, these institutions rely on charging interest on what they lend out in order to earn money, and they have been suffering from ultra-low or even negative interest rates now for the better part of a decade after the financial crisis. So this is really gonna make a huge difference to banks with big balance sheets and with big loan books. They are gonna see a big uptick in earnings from this, which will be good news for their shareholders. However, whenever banks’ earnings go up and the countries that they operate in are in financial dire straits, you do tend to see calls for surcharges on said profits or special levies be introduced. So there’ll be lots of focus on exactly how much money these banks are making, but also the fear, the potential that governments may choose to come and take some of these away as well. So any commentary around that will be very interesting to us.

Jess Smith
Stephen, are there any banks you’re especially eager to hear from? You know, any boardroom dramas you’re hoping to learn more about?

Stephen Morris
One of the things that we’re blessed by as journalists covering European banks is that there are always sagas and problems. The banks we’ve been focusing on most recently is Credit Suisse. I won’t go through the litany of scandals and missteps that they’ve made, but we’ll be looking to see if there’s any evidence of a recovery there. Now, the other one that’s very interesting in a geopolitical sense is HSBC, headquartered as it is in London, but making almost all of its money in Hong Kong and mainland China. Recently, its major shareholder with about 10 per cent, Chinese insurer Ping An, called for it to be broken up. Now management don’t agree with them and are strongly resisting it, but this is kind of the first time Mark Tucker, the chairman, and Noel Quinn, the CEO, will be out there facing journalists and analysts. And I expect that the majority of questions for them will actually be about what are you gonna do about your largest shareholder, linked as it is to the Chinese state, calling for you to break yourself up between eastern and western units? I mean, it’s an existential threat to the bank. And this is the first time we’re really gonna see executives address this. So that will be the, probably, most interesting bank this quarter for us.

Jess Smith
Stephen, I also want to ask about US banks. They just reported earnings. I’m wondering if the trends you saw there give you a sense of what’s to come with European banks?

Stephen Morris
One of the big stories over there was a plunge in earnings from investment banking. Earnings from, for example, helping companies list M&A deals. And in particular, there have been a number of losses on leveraged finance deals, so ie the financing behind private equity takeovers. Now we’re anticipating to see broadly similar trends at the European investment banks, we’re talking Barclays, Deutsche Bank, BNP Paribas, Credit Suisse and UBS. But also interesting that the US banks hinted that hiring is being slowed or frozen and there may be job cuts to come. And of course, the all important number for investment banks is bonuses. So we’ll be looking to see just how badly all of these, well, still, incredibly well-paid bankers are gonna be hit by the market turndown and indeed, if there are any indications of a cull of investment banking jobs.

Jess Smith
Stephen Morris is the FT’s banking editor.

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Russia’s invasion of Ukraine has wrecked Ukraine’s economy and its government finances. Last week, Kyiv took the dramatic step of asking international creditors for a pause in its debt repayments. The Ukrainian official in charge of this and all aspects of the country’s finances is Sergii Marchenko. He’s the country’s finance minister. The FT’s Europe editor Ben Hall just spoke to him. Ben joins me now to talk about their conversation. Hi, Ben.

Ben Hall
Hi.

Jess Smith
Ben, can you first give me an update on the war itself? Does either side have the upper hand?

Ben Hall
Well, I think it would probably be fair to say that Russia has the momentum in the war in the two provinces, Donetsk and Luhansk, that make up the Donbas region of eastern Ukraine, which Vladimir Putin has said he wants to liberate from Ukrainian control. The Russian army is grinding on. It took pretty much the whole of Luhansk province a few weeks ago and is now grinding on. But it’s very, very slow going. They’re relying hugely on artillery to do a lot of the heavy lifting. And in the meantime, Ukraine has got some new long-range rocket systems from the US, and that’s actually slowing down a little bit, the Russian artillery machine. So the war is not stalemated. It’s definitely moving. And Russia is moving towards its target, but it’s taking a very long time.

Jess Smith
I wanna ask how Ukraine is managing its finances as Russia continues with its invasion. As I mentioned earlier, you sat down recently with the country’s finance minister, Sergii Marchenko. What did he tell you about the challenges he faces and how is he addressing them?

Ben Hall
So he, Marchenko has been grappling with a massive deficit, $5bn a month because of the collapse in the Ukrainian economy and therefore a collapse in its tax revenues. And he had been counting on western capitals to provide it, but they haven’t been providing it in full. So he’s had to rely on the central bank printing money. And he’s also had to rely on the central bank selling its foreign reserves in order to prop up the hryvnia. They’ve kind of fixed the exchange rate to try and control inflation. And I think in the interview, he kind of acknowledged that this was unsustainable and the government had to take action.

Sergii Marchenko
It’s natural to have some tools which help us to cover our gaps using internal borrowing through printing money by National Bank of Ukraine. Of course it’s risky if it will be very low, loans under control, but if it’s not control situation, it will create some inflation spiral.

Jess Smith
So Ben, Marchenko says he’s worried about an inflation spiral. What are some of the things he and his colleagues are doing?

Ben Hall
So they have decided to reschedule their debts to save about $3bn on interest payments and redemptions. They’ve devalued the currency to reduce the amount of kind of foreign exchange that they’re having to burn to prop up the currency. And he also talked about, they are eventually gonna have to come up with some kind of spending cuts as well in order to rein back the deficit.

Jess Smith
You mentioned Kyiv’s decision to pause or ask for a pause on paying its foreign debt obligations. That was a U-turn for Ukraine. How significant was this?

Ben Hall
I think it was pretty significant precisely as you say, because this was quite a sharp about turn by the Zelenskyy government. They had wanted to honour all of their obligations because they felt that it was important to maintain market access and maintain the confidence in international, of international investors. And I think also there was a sort of stigma that they wanted to avoid. I think they wanted to avoid being able to sort of allow the Russians to claim that somehow, oh, look, Ukraine is defaulting. Ukraine is a failed state. So they were very reluctant to go down this route, but they need to save all the money they can save at the moment. And by delaying interest payments and redemptions, if this is finally agreed by all creditors, official and private, should save them about $3bn I think this year, which is quite a lot of money when they only have foreign reserves of about $22bn. And they’re going, and those reserves are going down very, very sharply. And they need to keep them because they have some potentially, some big expenses coming up.

Jess Smith
Ben Hall is the FT’s Europe editor. Thanks, Ben.

Ben Hall
Thank you.

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Jess Smith
You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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