WEBVTT - Your Privacy May Be at Stake as Central Banks Develop Digital Currencies 0:00:05.559 --> 0:00:08.039 Hello, and welcome to Stephanomics, the podcast that brings the 0:00:08.039 --> 0:00:12.239 global economy to you. China is about to shrink. That 0:00:12.360 --> 0:00:15.440 was the sobering message from its later census, which suggests 0:00:15.440 --> 0:00:18.320 the fertility rate has slowed even faster than the more 0:00:18.360 --> 0:00:21.959 pessimistic forecasts had suggested. If it carries on like this, 0:00:22.040 --> 0:00:27.320 the population will start to shrink in five years, earlier 0:00:27.360 --> 0:00:30.800 than previously thought, and even the mighty Chinese Communist Party 0:00:30.840 --> 0:00:34.000 seemed powerless to stop it. We're going to talk about 0:00:34.040 --> 0:00:37.000 that and the great baby battle underway in countries across 0:00:37.040 --> 0:00:41.440 Asia in a few minutes. Our reporter in Spain, Jeanette Newman, 0:00:42.080 --> 0:00:45.520 also has a story from Valencia on a radical experiment 0:00:45.560 --> 0:00:47.920 to help small businesses come through the next stage of 0:00:47.920 --> 0:00:52.120 the pandemic, which also features my favorite bicycle helmets. So 0:00:52.240 --> 0:00:56.840 we definitely have variety this week. But first, there are 0:00:56.840 --> 0:00:58.680 lots of things in our daily lives that are being 0:00:58.720 --> 0:01:03.600 transformed by new technology. But what about money? Is bitcoin 0:01:03.680 --> 0:01:07.000 the future or perhaps one of the other cryptocurrencies that 0:01:07.040 --> 0:01:11.280 have been causing such a speculative frenzy in recent months. Ah, 0:01:11.440 --> 0:01:13.240 we wake up in a few years and fine, We're 0:01:13.280 --> 0:01:16.200 still fond of old fashioned dollars and cents, and that 0:01:16.280 --> 0:01:21.440 talk of digital currencies was just a fad. Well, one 0:01:21.440 --> 0:01:23.920 person who's been thinking very hard about all of these 0:01:23.959 --> 0:01:28.120 issues is Professor prasad now Senior Professor of Trade Policy 0:01:28.120 --> 0:01:31.640 at Cornell University and a senior Fellow of Brookings, but 0:01:31.680 --> 0:01:35.039 previously a senior official at the International Monetary Fund, and 0:01:35.200 --> 0:01:38.320 most recently author of a book about to come out 0:01:38.600 --> 0:01:41.880 called The Future of Money, How the Digital Revolution is 0:01:41.920 --> 0:01:48.240 Transforming Currencies and Finance. Welcome Professor Prasadhwa, and thank you 0:01:48.280 --> 0:01:52.480 for writing this extremely useful book. Given how much has 0:01:52.520 --> 0:01:55.200 been happening, how much news we've had over the last 0:01:55.200 --> 0:01:59.240 few months about digital currencies and crypto and the like, 0:01:59.760 --> 0:02:02.080 We've got a lot to cover, but I guess we 0:02:02.080 --> 0:02:05.600 should just start with the basic assertion running through your 0:02:05.600 --> 0:02:08.680 book that this time really is different. You know, we 0:02:08.720 --> 0:02:11.799 are looking at a major disruption in how we use 0:02:11.880 --> 0:02:15.920 money and and even what money is. That's why it's Deephanie. 0:02:16.040 --> 0:02:17.840 First of all, thanks for having me on your show, 0:02:17.880 --> 0:02:20.919 and this is indeed a good time to take stock 0:02:21.000 --> 0:02:23.360 of what is happening in the worlds of money and finance. 0:02:24.160 --> 0:02:26.120 There has of course been a lot of interest in 0:02:26.240 --> 0:02:30.200 bitcoin and the cryptocurrency revolutions set off. But I think 0:02:30.240 --> 0:02:33.040 the real legacy of bitcoin is that it has come 0:02:33.080 --> 0:02:35.639 at a point in time and digital payments are becoming 0:02:36.520 --> 0:02:41.160 preponderant around the world, including in developing economies, and there 0:02:41.240 --> 0:02:44.440 is a move towards digitization, which I think is going 0:02:44.480 --> 0:02:48.040 to leave its mark on both money and finance. Very 0:02:48.080 --> 0:02:51.760 few of us use actual cash any more physical cash, 0:02:51.800 --> 0:02:54.560 that is, we tend to make payments with this wipe 0:02:54.560 --> 0:02:57.360 of a credit card or a phone for that matter, 0:02:58.280 --> 0:03:00.200 and I think we're going to see a bit coin 0:03:00.360 --> 0:03:04.000 leave its legacy, even if Bitcoin does not endure in 0:03:04.080 --> 0:03:07.480 that form, that we're going to have digital forms of payment, 0:03:08.040 --> 0:03:13.279 either through central bank digital currencies with some countries are initiating, 0:03:13.880 --> 0:03:17.120 or private digital payment systems intermediated in the form of 0:03:17.160 --> 0:03:21.480 these cryptical currencies. One thing you say in the book 0:03:21.520 --> 0:03:24.680 is that in a sense, it's not bitcoin that is 0:03:24.720 --> 0:03:28.800 the transformation in itself, it's the underlying technology. So just 0:03:29.320 --> 0:03:33.720 explain that a little bit. So the technology is a marvel, 0:03:33.960 --> 0:03:36.880 and it's worth thinking about the origins of bitcoins. So 0:03:38.040 --> 0:03:41.720 the Bitcoin white Paper was released by a creator or 0:03:41.760 --> 0:03:43.960 creator as we don't know who that is to this day, 0:03:44.880 --> 0:03:48.600 right around the time of the global financial crisis is onset, 0:03:49.280 --> 0:03:52.400 So that was the time when trust in central banks 0:03:52.440 --> 0:03:57.760 and governments in traditional financial institutions was at its lowest end, 0:03:58.560 --> 0:04:02.400 and the notion of being able to undertake transactions in 0:04:02.440 --> 0:04:06.720 a somewhat anonymous way using only digital identities and without 0:04:07.280 --> 0:04:10.680 a central bank or a traditional commercial bank in being 0:04:10.720 --> 0:04:15.080 involved was very alluring, and that is the remarkable aspect 0:04:15.080 --> 0:04:17.880 of the technology. When you make a payment, either using 0:04:18.000 --> 0:04:21.039 cash or using a credit or debit card, either a 0:04:21.080 --> 0:04:25.360 central bank or a commercial bank is involved. What bitcoin 0:04:25.880 --> 0:04:29.719 turned out to do was to provide a solution whereby 0:04:29.760 --> 0:04:33.440 you could have transactions being validated through what is called 0:04:33.480 --> 0:04:38.400 a public consensus mechanism, and Bitcoin, although it is supposed 0:04:38.400 --> 0:04:44.039 to be anonymous, actually provides remarkable transparency. Every transaction is 0:04:44.120 --> 0:04:46.279 out there for the entire world to see on the 0:04:46.320 --> 0:04:51.159 bitcoin blockchain. The distributed aspect is also very important. The 0:04:51.240 --> 0:04:56.040 Bitcoin blockchain, which is a record, public ledger of all 0:04:56.120 --> 0:05:00.719 the transactions using bitcoin, is maintained on multiple puters around 0:05:00.720 --> 0:05:04.479 the world, so hacking a particular computer or even a 0:05:04.520 --> 0:05:08.320 set of computers, or having some computers go down is 0:05:08.320 --> 0:05:10.440 not going to affect the system. So in that sense, 0:05:10.760 --> 0:05:13.400 the technology is going to really set off a revolution 0:05:13.440 --> 0:05:16.360 in itself. So, just to be clear, you could have 0:05:16.400 --> 0:05:19.120 the end of cash but still not have this kind 0:05:19.160 --> 0:05:22.520 of structural change in how money works that you're talking 0:05:22.600 --> 0:05:26.400 about for bitcoin and other things. What is really crucial 0:05:26.480 --> 0:05:29.040 here is what role the government and central banks are 0:05:29.040 --> 0:05:32.799 going to have, and bitcoin provided the allere of getting 0:05:32.839 --> 0:05:37.320 away from all of that, essentially democratizing finance by making 0:05:37.360 --> 0:05:43.120 finance available to anybody with no restrictions, with no censorship, 0:05:43.200 --> 0:05:48.800 and without a trusted third party involved. That creates a 0:05:48.839 --> 0:05:52.320 lot of risks, even while it does have certain benefits. Well, 0:05:52.320 --> 0:05:54.800 it's funny you say, the allure of getting rid of 0:05:55.440 --> 0:05:57.640 the role of the central bank or this kind of 0:05:57.640 --> 0:06:00.600 central authority. Of course there will be there will be 0:06:00.640 --> 0:06:02.719 a lot of people who would consider that to be 0:06:02.760 --> 0:06:07.000 deeply attractive, that you don't have government somehow involved in 0:06:07.000 --> 0:06:09.839 inherently at the center of finance, and of course many 0:06:09.839 --> 0:06:12.800 other people who would say, hang on a minute, isn't 0:06:12.839 --> 0:06:16.680 is a rather frightening world that you have no central figure. Um, 0:06:17.000 --> 0:06:19.359 you don't have the kind of relationship of trust that 0:06:19.400 --> 0:06:22.520 you have with a central bank. So you talked about 0:06:22.560 --> 0:06:25.599 how some central banks and if Sweden is thinking about 0:06:25.720 --> 0:06:29.719 having the e Krona, have talked about having central bank 0:06:29.960 --> 0:06:35.560 digital currencies. What's what's the thinking behind that and how 0:06:35.600 --> 0:06:39.480 would that be different from what we have now. Many 0:06:39.520 --> 0:06:42.920 central banks that on the world are initiating their own 0:06:43.000 --> 0:06:47.520 digital currencies are central bank digital currencies CBDCs. That is, 0:06:48.000 --> 0:06:52.039 UM and CBDCs are being instituted in some economies because 0:06:52.080 --> 0:06:56.320 they provide easy access to households and businesses to a 0:06:56.400 --> 0:07:00.000 low cost digital payment system. In countries such as sweet 0:07:00.000 --> 0:07:03.200 even there is a concern that having the entire payment 0:07:03.279 --> 0:07:07.000 system in the hands of the private sector may be 0:07:07.160 --> 0:07:10.760 good for efficiency and bring down costs, but it could 0:07:10.840 --> 0:07:15.600 leave concerns about financial stability. At a time of financial panic, 0:07:16.000 --> 0:07:19.000 you could have the entire payment system shutting down if 0:07:19.040 --> 0:07:21.720 the government has no role in it. In a country 0:07:21.760 --> 0:07:25.239 like China, there is a concern that the major digital 0:07:25.240 --> 0:07:29.120 payment providers like Ali pay and which I Paid are 0:07:29.240 --> 0:07:33.560 dominating the payment's market and making central bank money irrelevant. 0:07:34.000 --> 0:07:38.160 So I think central banks ce UM CBDCs as a 0:07:38.240 --> 0:07:42.680 tool for promoting financial inclusion, providing a backstop to the 0:07:42.760 --> 0:07:46.720 private payment system, and creating a more level playing field 0:07:46.800 --> 0:07:50.600 for other payment innovators rather than just a major players 0:07:50.600 --> 0:07:58.880 who would also start providing efficient payment services. So what 0:07:58.920 --> 0:08:00.600 would if if you live in a country where the 0:08:00.600 --> 0:08:03.600 central bank is going down this route? What does that 0:08:03.840 --> 0:08:06.480 look like in practice? Would you you would know when 0:08:06.480 --> 0:08:08.720 you were using a central bank digital currency? I mean, 0:08:09.120 --> 0:08:12.920 how would it be different. Technology now exists for each 0:08:12.960 --> 0:08:15.920 household in an economy or each business to have an 0:08:15.960 --> 0:08:19.160 account with the central bank and use central bank money 0:08:19.320 --> 0:08:22.600 through that account. That could drive banks sort of business, 0:08:22.760 --> 0:08:24.480 and you don't want to be in a position where 0:08:24.480 --> 0:08:27.800 the central bank is now allocating credit in the economy. 0:08:28.240 --> 0:08:31.280 So countries such as China and Sweden that are experimenting 0:08:31.280 --> 0:08:34.800 with Serie dicis are going with a two tier system 0:08:34.800 --> 0:08:39.000 where the digital wallets in which the central bank digital 0:08:39.640 --> 0:08:43.480 uh dollars or you and reside are actually maintained by 0:08:43.480 --> 0:08:47.280 the commercial banks side by side with their own intersparing 0:08:47.320 --> 0:08:51.080 deposit accounts. So the CBDC is just like cash would 0:08:51.120 --> 0:08:56.280 not be interstparing instruments, but now with the central bank 0:08:56.320 --> 0:08:59.199 digital currency being in the form of token that can 0:08:59.240 --> 0:09:03.080 be used across different payment platforms. So basically you could 0:09:03.160 --> 0:09:07.280 use your central bank money across a variety of payment platforms, 0:09:07.360 --> 0:09:10.839 again with the swipe of her phone. Um, so it 0:09:10.880 --> 0:09:14.160 would be observation equivalent to using any other payment system, 0:09:14.200 --> 0:09:17.560 except you would now be using central bank money. But 0:09:17.679 --> 0:09:20.160 this also creates one issue that we may need to 0:09:20.400 --> 0:09:23.920 consider the societal level. Do we really want to live 0:09:23.960 --> 0:09:27.440 in a world where anytime I buy you a cup 0:09:27.480 --> 0:09:31.640 of coffee, Stephanie, either a payment private payment provider, or 0:09:31.679 --> 0:09:34.400 the government is going to know about it. Um, that's 0:09:34.400 --> 0:09:37.120 going to be a slightly dystopian world we live in. 0:09:37.720 --> 0:09:40.520 Central banks are going to great lengths to make the 0:09:40.520 --> 0:09:43.080 case that they're going to have privacy protections in place, 0:09:43.559 --> 0:09:46.640 but in my view, ultimately anything digital is going to 0:09:46.679 --> 0:09:49.400 be traceable, and every central bank wants to make sure 0:09:49.400 --> 0:09:52.160 it's money is not used for illegal purposes, so there 0:09:52.200 --> 0:09:56.600 will be auditability and traceability. So whatever limited privacy we 0:09:56.679 --> 0:09:59.640 have at this stage might very soon vanish well. And 0:09:59.679 --> 0:10:02.800 of course that's why any self respecting criminal has always 0:10:02.880 --> 0:10:06.320 used cash, because you don't have you don't have that 0:10:06.400 --> 0:10:08.520 kind of traceability. I just want to come back to 0:10:08.559 --> 0:10:12.240 you talked about the democratization of finance or than the 0:10:12.280 --> 0:10:15.600 potential for this to do that. I mean historically, of course, 0:10:15.640 --> 0:10:20.480 we have had periods where financial innovation have has brought 0:10:20.840 --> 0:10:24.480 easier forms of financing to more and more people. We've 0:10:24.480 --> 0:10:27.120 had sort of waves of that running through societies at 0:10:27.160 --> 0:10:31.319 different times. And though it has made it possible for people, 0:10:31.520 --> 0:10:33.560 say to buy their own homes who might not otherwise 0:10:33.600 --> 0:10:35.160 have been und to do it, or have access to 0:10:35.200 --> 0:10:37.480 borrowing at all that they might not have had, it 0:10:37.559 --> 0:10:39.880 has tended to also leave a lot of those sort 0:10:39.880 --> 0:10:43.440 of newly financially enfranchised people with a lot of risk 0:10:44.360 --> 0:10:47.760 and have it blow up in a crisis of some sort. 0:10:47.880 --> 0:10:50.839 I mean, if that's a risk here, how how can 0:10:50.880 --> 0:10:54.839 we guard against that? There is a significant list. Stephanie're 0:10:54.920 --> 0:10:59.640 right that the democratization of finance, while it is very 0:10:59.720 --> 0:11:03.360 part sative sounding concept, does carry certain risks, and those 0:11:03.480 --> 0:11:07.520 risks arise for a couple of reasons. In particular, digital 0:11:07.600 --> 0:11:11.920 access is still quite unevenly distributed in many countries, and 0:11:12.000 --> 0:11:18.679 financial literacy is certainly not prevalent, especially among the economically disadvantaged, 0:11:19.040 --> 0:11:22.160 and we see that phenomenon even among people who ought 0:11:22.160 --> 0:11:27.320 to be better informed. Um, the recent saga with Game Stop, 0:11:27.360 --> 0:11:30.439 where there was a speculative frenzy that was fueled by 0:11:30.440 --> 0:11:33.520 the robin Hood trading platform, which in principle made it 0:11:33.640 --> 0:11:37.120 much easier for retail investors to be able to trade 0:11:37.800 --> 0:11:40.960 both the stock and derivatives of this game stop company. 0:11:41.400 --> 0:11:44.360 Certainly led to a speculative frenzy. And the problem in 0:11:44.440 --> 0:11:47.840 that speculative frenzy, as in most others, is that retail 0:11:47.880 --> 0:11:50.840 investors who came late to the party are the ones 0:11:50.880 --> 0:11:53.200 who got burned. And of course we know we didn't 0:11:53.200 --> 0:11:54.920 have to go far back. We only go back to 0:11:55.000 --> 0:11:58.480 two thousand and eight to find very sophisticated, often very 0:11:58.520 --> 0:12:01.600 senior members of the financial sector not understanding some of 0:12:01.640 --> 0:12:04.600 the risks they were taking. So this is something that, um, 0:12:04.640 --> 0:12:09.760 we've seen again and again. Finally, you've mentioned it a 0:12:09.760 --> 0:12:12.280 few times already in this interview and in the book. 0:12:12.360 --> 0:12:16.400 You keep coming back to trust as the basic glue 0:12:16.480 --> 0:12:19.520 of the financial system and something that has also traditionally 0:12:20.240 --> 0:12:26.000 supported any effective currency. Um, what's the future of of 0:12:26.000 --> 0:12:28.960 of trust in this world and in this in this 0:12:29.040 --> 0:12:32.320 new world that you paint m Are we going to 0:12:33.559 --> 0:12:36.840 put the same kind of trust into these digital platforms 0:12:36.880 --> 0:12:40.319 that we used to put into central banks, or are 0:12:40.360 --> 0:12:44.640 we going to potentially end up with government actually more 0:12:44.760 --> 0:12:47.679 involved in our lives, as you said, and more aware 0:12:47.720 --> 0:12:50.880 of what we're doing. The great promise of bitcoin was 0:12:50.960 --> 0:12:55.439 that it would replace trust in government institutions and traditional 0:12:55.600 --> 0:13:01.080 financial institutions by essentially creating a public and census mechanism. 0:13:01.120 --> 0:13:03.640 I think what we have seen in the last few 0:13:03.679 --> 0:13:06.240 years is that ultimately the government is still going to 0:13:06.280 --> 0:13:11.760 have a crucial role. Cryptocurrencies and even stable coins, which 0:13:11.800 --> 0:13:16.320 have their values linked to existing fear currencies, all actually 0:13:16.360 --> 0:13:18.840 seemed to do a lot better when they get the 0:13:18.880 --> 0:13:21.640 im perimeter of the government in some implicit form or 0:13:21.679 --> 0:13:26.120 the other. Bitcoin actually did a lot better once um 0:13:26.240 --> 0:13:29.319 the US Internal Revenue Service actually recognized it as a 0:13:29.400 --> 0:13:33.280 financial asset that could be taxed. Bitcoin earners, we're not 0:13:33.320 --> 0:13:36.839 happy about the taxes, but certainly were very happy that 0:13:36.920 --> 0:13:43.000 this implicit government recognition actually helped the bitcoin community flower. 0:13:43.440 --> 0:13:47.320 And ultimately you're going to need regulations for investor protection, 0:13:47.360 --> 0:13:51.200 but also for these markets to move forward in a 0:13:51.240 --> 0:13:54.800 stable way. Moreover, if you think about the promise of 0:13:54.840 --> 0:13:59.920 decent allized finance and the ability to conduct transactions just electronically, still, 0:14:00.360 --> 0:14:04.240 where the digital world meets the real world, you still 0:14:04.280 --> 0:14:07.839 need the government to enforce property and contractual rights. Now, 0:14:07.840 --> 0:14:10.000 the risk, of course, is that bitcoin may have set 0:14:10.080 --> 0:14:13.240 up a set off a revolution which ends up, as 0:14:13.240 --> 0:14:17.560 you suggested, Stephanie, with the government playing even more intrusive 0:14:17.640 --> 0:14:20.320 roles in our lives. If central bank digital currencies do 0:14:20.480 --> 0:14:24.480 take hold, we could lose any last vestige of privacy 0:14:24.480 --> 0:14:27.400 to the government, and that would be a certainly a 0:14:27.480 --> 0:14:30.360 dystopian future um and one that we should be very 0:14:30.360 --> 0:14:34.160 concerned about. It's not obvious that private payment systems and 0:14:34.200 --> 0:14:37.240 providers will be displaced by the government, but certainly one 0:14:37.280 --> 0:14:39.480 can see this happening in a society, and we should 0:14:39.520 --> 0:14:42.640 guard against that. This is such a I mean, it 0:14:42.760 --> 0:14:46.840 is such a complicated and fast moving area, and you 0:14:46.920 --> 0:14:51.080 have been such a calm and lucid guide to it. 0:14:51.160 --> 0:14:55.240 Thank you very much, issue a product. It's been my pleasure, Stephanie. 0:14:55.280 --> 0:15:04.680 Thank you so much for having me on. Well, that 0:15:04.760 --> 0:15:07.200 was all very interesting, but many businesses in the US 0:15:07.280 --> 0:15:09.600 and Europe haven't had the luxury of thinking about the 0:15:09.640 --> 0:15:12.480 future over the past year and a half. They've been 0:15:12.480 --> 0:15:15.400 mainly focused on surviving the week, and the threat of 0:15:15.440 --> 0:15:19.200 bankruptcy still hangs over hundreds of thousands of small businesses 0:15:19.240 --> 0:15:23.440 in Europe, though some bold experiments underwear in Spain and 0:15:23.480 --> 0:15:27.520 France might make all the difference. Our Spain economy reporter 0:15:27.600 --> 0:15:31.000 Jeanette Newman went to Valencia to eat payola and find 0:15:31.000 --> 0:15:49.080 out more. M that's the sound of a chef turning 0:15:49.120 --> 0:15:52.560 some brath rice and sat front into a Spanish culinary 0:15:52.600 --> 0:15:56.640 treat pa. I'm in La Pepica, a restaurant that has 0:15:56.680 --> 0:15:59.080 been serving pa in the city of Valencia for more 0:15:59.120 --> 0:16:03.240 than a century. The recipes are traditional rice with vegetables, 0:16:03.440 --> 0:16:06.760 rabbit and chicken. Peppe Ballagher is the third generation to 0:16:06.840 --> 0:16:09.440 run this family restaurant. When he was a boy in 0:16:09.440 --> 0:16:12.520 the nineteen fifties, he remembers Ernest Hemingway coming to dine 0:16:12.560 --> 0:16:15.680 after bullfights. Hemingway would walk into the kitchen to taste 0:16:15.680 --> 0:16:21.720 the paia or make himself as angria, and I've always 0:16:21.720 --> 0:16:24.160 had the memory of this person who talked to everyone 0:16:24.320 --> 0:16:30.360 and was really engaging. Lapapka has thrived as a temple 0:16:30.400 --> 0:16:33.440 to tradition in Valencia, but some of those old ways 0:16:33.640 --> 0:16:37.080 are threatening the survival of small European companies as they 0:16:37.120 --> 0:16:43.160 emerge from the pandemic. I went to Valencia to learn 0:16:43.160 --> 0:16:46.480 more about one of those problematic old habits companies over 0:16:46.560 --> 0:16:50.800 reliance on banks for financing. That compares to the much 0:16:50.840 --> 0:16:53.440 wider range of options open to businesses that are recovering 0:16:53.480 --> 0:16:57.480 from the pandemic in the US, and financing is so 0:16:57.560 --> 0:17:02.280 much more common, especially in continental of UM than than 0:17:02.440 --> 0:17:05.920 cabin markets and markets financing, so that's a huge difference. 0:17:06.440 --> 0:17:10.840 That's Katia langen Booker. She's a law professor at Frankfort University. 0:17:11.560 --> 0:17:14.240 There's no reason to say bank financing is bad in 0:17:14.280 --> 0:17:16.679 any way. It's just as always the combination of the 0:17:16.720 --> 0:17:20.359 two is where we would like to go. Selling stock, 0:17:20.600 --> 0:17:24.120 issuing debt to investors, and other financing options known broadly 0:17:24.160 --> 0:17:27.119 as capital markets. These tools aren't as widespread on the 0:17:27.119 --> 0:17:30.080 continent as they are in the US. That's a problem 0:17:30.160 --> 0:17:32.720 is Europe's small firms emerged from the pandemic and need 0:17:32.760 --> 0:17:36.879 to invest and restructure their debts. European Union leaders have 0:17:36.960 --> 0:17:39.840 talked for years about the need for deeper capital markets, 0:17:39.880 --> 0:17:43.360 particularly in the South and in smaller countries. They've also 0:17:43.400 --> 0:17:45.320 talked for years about the need to join up those 0:17:45.359 --> 0:17:49.080 disparate markets into a capital markets union, but they've never 0:17:49.119 --> 0:17:55.640 got very far. Why one hurdle is that small businesses 0:17:55.680 --> 0:17:59.159 themselves are sometimes reluctant to let go of tradition. They 0:17:59.160 --> 0:18:03.119 don't like the idea outside investors. They feel all letting 0:18:03.119 --> 0:18:05.840 an outsider in and I don't really want that, and 0:18:05.920 --> 0:18:08.600 it's better, you know, I know my banker, I've been 0:18:08.640 --> 0:18:13.240 you know, doing business with them forever. Another hurdle is 0:18:13.280 --> 0:18:16.119 the supply of funds. One issues that banks in Europe 0:18:16.119 --> 0:18:17.960 have a lot of power to turn on and off 0:18:18.000 --> 0:18:20.960 the financing tab I spoke to all funds, so are 0:18:21.040 --> 0:18:24.439 hard from investment from Okendo Capital I Madrid. The banks 0:18:24.800 --> 0:18:27.840 in the US. Everything is really specialized. Here are banks 0:18:27.880 --> 0:18:31.880 big of credit cards. They do uh capital h leases, 0:18:32.359 --> 0:18:36.440 they do working capital financing, they will finance your exports, 0:18:36.840 --> 0:18:40.600 they will manage your payments. To ensure those powerful banks 0:18:40.600 --> 0:18:44.119 didn't cut off funding during this crisis, European government's launched 0:18:44.160 --> 0:18:47.199 loan guarantee programs. The power and reach of banks has 0:18:47.240 --> 0:18:50.320 been an asset, channeling cheap loans backed by the state 0:18:50.440 --> 0:18:53.920 to companies in need. The programs ensured that many companies 0:18:53.960 --> 0:18:57.159 got the funds they needed to cover basic expenses, but 0:18:57.240 --> 0:19:00.080 in the end it's still dead. People are starting a 0:19:00.119 --> 0:19:03.320 worry that some bankruptcies have just been delayed. What if 0:19:03.320 --> 0:19:06.160 banks are willing to restructure some loans or don't lend 0:19:06.280 --> 0:19:09.080 some firms that need to invest to bounce back. Banks, 0:19:09.240 --> 0:19:11.640 after all, have their own balance sheets to focus on. 0:19:12.520 --> 0:19:15.000 I spoke to Carlos Ferrando and Valencia to learn what 0:19:15.040 --> 0:19:18.120 the lack of financing options means for companies emerging from 0:19:18.119 --> 0:19:20.880 the pandemic. He runs close to the startup that makes 0:19:20.880 --> 0:19:24.840 water bottles and patented a collapsible helmet. You can reduce 0:19:24.960 --> 0:19:28.040 the volume of the helmet like more than in less 0:19:28.040 --> 0:19:32.520 than one second. No, he's collapsed. No, it's about hamlet. 0:19:32.800 --> 0:19:35.560 When Carlos started his company several years ago, you've got 0:19:35.560 --> 0:19:37.800 a taste for how hard it can be to get financing. 0:19:38.320 --> 0:19:40.479 He says. It's tough for banks to understand the startup 0:19:40.480 --> 0:19:45.240 business model. The risk team from the balance is the 0:19:45.320 --> 0:19:48.240 same if the sp we the startup none with a restaurant. 0:19:49.320 --> 0:19:52.040 It this is my This is a reality that is 0:19:52.080 --> 0:19:55.320 happening here in his pain today. So turtles end up 0:19:55.320 --> 0:19:58.600 stopping many startups from growing. You cannot go to other countries. 0:19:58.720 --> 0:20:03.359 You cannot increase your your your your sales team, or 0:20:03.359 --> 0:20:07.199 your marketing or your digital marketing. No, and then you 0:20:07.280 --> 0:20:10.000 start to get smaller and this is a black hole. 0:20:11.040 --> 0:20:13.800 Carlos was lucky and eventually got funding from Spanish venture 0:20:13.880 --> 0:20:16.439 capital firms and a bank. He sells his helmets at 0:20:16.440 --> 0:20:19.400 the Museum of Modern Arts design store. He sold close 0:20:19.440 --> 0:20:23.360 to bottles to major companies, including Google. Then the pandemic 0:20:23.440 --> 0:20:26.439 hit and funding dried up. Closker tried to pivot and 0:20:26.480 --> 0:20:29.560 sell face masks. It didn't go well. He tapped some 0:20:29.640 --> 0:20:33.160 stay back loans. It wasn't enough. In mind, with such 0:20:33.200 --> 0:20:37.359 a good broad with such a good producde, we were 0:20:37.560 --> 0:20:41.520 a thread to lose the company. Valencia's regional financing agency 0:20:41.600 --> 0:20:44.040 came to the rescue. It gave close to a type 0:20:44.040 --> 0:20:46.680 of equity loan that isn't considered debt and bolsters the 0:20:46.720 --> 0:20:50.760 firm's balance sheet that's encouraged banks to keep lending. Carlos 0:20:50.760 --> 0:20:53.320 says he considered leaving Valencia until the agency helped him 0:20:53.320 --> 0:20:57.600 restructure his balance sheet. I know because the support of government. 0:20:58.200 --> 0:21:00.440 I would love to to to pay in the present 0:21:00.440 --> 0:21:04.280 of the Texas Here in the future. The man behind 0:21:04.280 --> 0:21:07.280 these clever solutions for thousands of small companies like Kloska 0:21:07.440 --> 0:21:10.760 and La Pepica is Manuel Uwica. He's the head of 0:21:10.800 --> 0:21:14.760 Valencia's finance agency. Before Manuel joined the agency, he was 0:21:14.760 --> 0:21:18.760 a finance professor. Now he's putting years of academic expertise 0:21:18.800 --> 0:21:21.920 to work to ensure that viable firms survived the pandemic. 0:21:23.840 --> 0:21:25.880 I mean we need to do it otherwise I mean 0:21:25.920 --> 0:21:30.800 the this, this company is gonna be bankrupt. Manuell's agency 0:21:30.840 --> 0:21:33.960 has also contributed millions of euros to restructuring fund that 0:21:34.040 --> 0:21:36.919 will be run by Okendo, the investment firm. We heard 0:21:36.960 --> 0:21:39.720 all phones of talk about banks earlier. They're all putting 0:21:39.760 --> 0:21:41.680 money on the on the big companies, on the best 0:21:41.680 --> 0:21:45.800 performing company. So the good businesses which are struggling uh nobody, 0:21:45.840 --> 0:21:48.640 Nobody looks after them. And and Manuela has been quick 0:21:48.680 --> 0:21:52.640 to support that. There are people like us UH that 0:21:52.880 --> 0:21:55.320 invest in in those types of instruments and those type 0:21:55.320 --> 0:22:01.280 of situation. There's an important of happening in France too, 0:22:01.640 --> 0:22:04.840 on a greater scale. Frances in the process of rolling 0:22:04.840 --> 0:22:07.960 out a twenty billion euro fund to provide financing too 0:22:08.000 --> 0:22:11.800 small and medium sized companies. Banks will issue equity loans 0:22:11.920 --> 0:22:15.200 to around twelve thousand French companies. The banks will keep 0:22:15.240 --> 0:22:17.480 some of those loans on their balance sheet and spin 0:22:17.520 --> 0:22:20.320 off the rest into a fund. That fund is partially 0:22:20.320 --> 0:22:23.119 guaranteed by the French state, that makes it less risky 0:22:23.160 --> 0:22:27.560 for investors. Alberto nvo Potro founded in Boni's a credit 0:22:27.640 --> 0:22:30.680 rating firm for smaller businesses. His company will analyze the 0:22:30.720 --> 0:22:34.040 default risk of some of those French companies. This program 0:22:34.160 --> 0:22:40.720 alone twice the size of the private marketing fronts and 0:22:40.720 --> 0:22:44.960 and twelve thousand companies is four time more than the 0:22:44.960 --> 0:22:49.280 companies that have today in France access to some sort 0:22:49.320 --> 0:22:52.159 of private debt private equity. The fund is expected to 0:22:52.240 --> 0:22:55.359 draw new types of investors, such as insurance companies and 0:22:55.400 --> 0:22:59.200 investment firms based outside France. In the past, they haven't 0:22:59.200 --> 0:23:01.119 been able to easily beat on the prospects of so 0:23:01.160 --> 0:23:05.280 many small French companies. These are players that didn't used 0:23:05.359 --> 0:23:09.000 to play in this market, so they're bringing insurance companies 0:23:09.160 --> 0:23:12.159 directly into this market and this is new. In the 0:23:12.200 --> 0:23:15.280 short term, this fund should help provide financing the companies 0:23:15.520 --> 0:23:18.240 so that they recovered from the pandemic and invest. The 0:23:18.359 --> 0:23:22.160 longer term play is to shape a copy side market 0:23:22.200 --> 0:23:25.600 for these compex Many hurdles remain to develop a deep 0:23:25.640 --> 0:23:28.879 capital market in Europe. The pandemic, though, has triggered a 0:23:28.920 --> 0:23:32.439 shift in places like Valencia and France. New tools are 0:23:32.480 --> 0:23:35.720 important so that European startups like Closca can get off 0:23:35.720 --> 0:23:39.480 the ground and so traditional firms like Lapepka can last 0:23:39.480 --> 0:24:01.159 another one years. Jeanette Newman, Bloomberg News m H and 0:24:01.160 --> 0:24:04.760 those conhapsible bicycle hermits really are very good. My sister 0:24:04.800 --> 0:24:09.600 gave me one for my birthday. Best present ever. Now. 0:24:09.640 --> 0:24:13.480 It's often said that demography is destiny. How quickly your 0:24:13.520 --> 0:24:16.240 population is growing and how old it is can have 0:24:16.240 --> 0:24:19.160 an enormous impact on what kind of country you live 0:24:19.200 --> 0:24:22.520 in and how fast you grow. The US and much 0:24:22.560 --> 0:24:25.280 of Europe has been grappling with the consequences of people 0:24:25.280 --> 0:24:28.880 living longer for some time, but probably no country has 0:24:28.880 --> 0:24:32.879 seen such a dramatic shift in its demographic fortunes in 0:24:32.880 --> 0:24:37.200 the last few years as China. The latest Chinese censors 0:24:37.400 --> 0:24:39.280 brought this out very clearly, and I thought it was 0:24:39.320 --> 0:24:42.119 a good opportunity to get more from our chief Asia 0:24:42.160 --> 0:24:45.800