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Lagarde and Draghi warn about trade war

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IMF’s Managing Director Christine Lagarde with ECB’s president Mario Draghi.

Eric Piermont | AFP | Getty Images

Two of the world’s most influential economic leaders have warned that there are troubling developments arising from increased trade barriers and tariffs.

Mario Draghi, the president of the European Central Bank (ECB) and Christine Lagarde, the managing director of the International Monetary Fund (IMF) warned that the global trade dispute between the U.S. and China as well as a threatened dispute with Europe and other industrial nations could cause headwinds for all and could get worse.

Speaking at the 8th ECB conference focused on central, eastern and south-eastern European (CESEE) countries on Wednesday, the IMF’s Lagarde said “we meet at a moment when support for global cooperation and multilateral solutions is waning.”

Global growth has been subdued for more than six years and the largest economies in the world are putting up, or threatening to put up, new trade barriers. And this might be the beginning of something else, which might affect us all in a more broad way, ” she said.

“These troubling developments will create headwinds for all, but certainly for the CESEE growth model, a model that has relied on openness and integration,” she warned.

Trade-restrictive measures

Lagarde and Draghi, who gave a welcome address at the conference, said the threat of U.S. import tariffs (on Europe) meant that some European countries that are centers of European car production — Czech Republic, Slovakia, Poland and Romania — could be particularly vulnerable.

“Global trade has faced headwinds in recent years as trade-restrictive measures have outpaced liberalising measures,” Draghi told the audience in Frankfurt.

“The central and eastern European business model has become vulnerable to shocks to international trade and financial conditions,” Draghi said, noting that in some CEESE countries vehicle exports represent nearly 30% of total manufactured exports, making them more vulnerable to U.S. President Trump’s threat to increase tariffs on European cars and car parts. Last August, Trump threatened to put a 25% tax on all EU car imports but has yet to implement the move.

“The effect of tariffs could be amplified, as a large share of goods cross borders multiple times during the production process,” he said.

“The main long-term challenge is moving towards a more balanced growth and financing model, which is more reliant on domestic innovation and on higher investment spending than it has been so far,” Draghi added.

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UK Prime Minister Johnson avoids Luxembourg press conference on Brexit

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Xavier Bettel, Luxembourg’s prime minister, stands beside the empty podium of U.K. Prime Minister Boris Johnson following their Brexit meeting in Luxembourg, on Monday, Sept. 16, 2019. Johnson held his first face-to-face talks with European Commission President Jean-Claude Juncker over a working lunch of snails, salmon and cheese in Luxembourg.

Bloomberg | Bloomberg | Getty Images

British Prime Minister Boris Johnson faced a barrage of protesters’ boos, and an exasperated message from his host, after an hour of talks with his Luxembourg counterpart in the normally quiet cobbled streets of this small European nation.

Johnson had hustled into a meeting with Xavier Bettel, the Luxembourg premier, following a nearby lunch with the European Commission’s outgoing president, Jean-Claude Juncker. On the menu at both occasions: Brexit, and the current UK government’s efforts to change elements of an existing withdrawal deal that its predecessor had agreed to almost a year ago.

The British leader subsequently left the prime minister’s residence Maison de Bourgogne in the centre of this small city-state in a hurry, ducking out of a press conference alongside his opposite number, Bettel. Moments later the latter did not hesitate to, as he put it, “mince his words.”

“It was important,” said Bettel, standing beside Johnson’s assigned but empty podium at a press conference prefaced by loud protests, to listen to British proposals “to avoid a no-deal Brexit.” But he insisted that he had seen “no concrete proposals for the moment on the table. And I won’t give an agreement to ideas.”

Away from the loud and rowdy crowd of anti-Johnson hecklers, the prime minister did provide a brief televised statement to the British media before he returned to London, and insisted both sides’ negotiators had already completed a lot of work.

Boris Johnson, U.K. prime minister, departs following a Brexit meeting with Luxembourg’s Prime Minister Xavier Bettel in Luxembourg, on Monday, Sept. 16, 2019.

Bloomberg | Bloomberg | Getty Images

But he acknowledged the only obvious area of common ground to emerge from his first face-to-face meetings with Juncker and Europe’s chief Brexit negotiator Michel Barnier, was that talks should continue, more extensively and more frequently.

“Papers have been shared, but we are now at the stage where we really have to start accelerating the work,” he said, “and that was the agreement today.”

“I can see the shape of it, everybody can see roughly what could be done, but it will require movement.”

EU waits on UK proposal

Both critics and allies have described Monday’s meetings as political theater, and Johnson once more in Luxembourg reiterated that if a fresh agreement cannot be reached by late October, then his government would ensure the UK can exit the EU “on the 31st of October, deal or no deal.”

The encounter with Juncker was scheduled exactly one week after the Parliament in Westminster passed into law a measure designed to block the possibility of an abrupt and economically disruptive departure on October 31. 

And after their lunchtime sit-down at a local restaurant, Juncker and Johnson emerged to boos from protesters and were forced to negotiate a scrum of reporters and photographers.

Within minutes, the European Commission issued a press release which said the head of the EU’s executive branch had reminded the UK prime minister that it was now up to the British government to “come forward with legally operational solutions that are compatible with the Withdrawal Agreement.”

“President Juncker underlined the Commission’s continued willingness and openness to examine whether such proposals meet the objectives of the backstop. Such proposals have not yet been made,” it added, in a point soon echoed by Bettel.

Sterling weakened sharply to $1.24 after Johnson failed to appear at the press conference, after having trended downwards during much of the day’s trading.

The currency had enjoyed a strong rally against the U.S. dollar last week, since the passage of parliamentary legislation last Monday that was designed to rule out a no-deal exit in October.

Political allies of the prime minister continued to indicate over the weekend that Johnson may try to circumvent that new legislation, and might defy a parliamentary majority that wants him to request a Brexit deadline extension if he is unable to win significant concessions from Brussels in the coming weeks.

As a consequence the ostensible reason for Monday’s working lunch with Juncker had prompted some skepticism.

“He clocks up the miles/meetings and can argue he tried,” said Robert Hayward, a legislator belonging to Johnson’s Conservative Party, of the Luxembourg trip. In a message to CNBC, Hayward said that the Luxembourg trip will allow the prime minister to later argue, “it’s not his fault” if a new deal is not reached.

Anand Menon, a director at the think tank The U.K. in a Changing Europe, also posited it was about “giving the impression of having tried once he’s failed,” as Johnson seeks to change key clauses in the existing Withdrawal Agreement that three times failed to win parliamentary approval back in London.

Solving the backstop

The chief obstacle remains the complex question of how goods and services will be traded between the British nation of Northern Ireland and the separate Republic of Ireland. The border between the two countries could soon become the U.K.’s only post-Brexit land frontier with Europe, but one that must remain open under the terms of a 1998 peace deal signed by the British and Irish governments and known as the Good Friday Agreement.

Since then, Johnson and some of his senior government ministers have begun to outline how they hoped to solve the nine-month negotiating deadlock between the U.K. and the EU, by suggesting that European regulations might apply differently in Northern Ireland and the rest of the U.K.

This was an option that Theresa May repeatedly and categorically rejected last year, during a period when her government held on to its parliamentary majority thanks to support from a small political party in Northern Ireland (the Democratic Unionist Party or DUP) that remains adamantly opposed to any new divergence between the territory and the rest of the U.K.

The U.K.’s Brexit Secretary Stephen Barclay addressed the matter in an interview with Sky News over the weekend, when he said it was important that the U.K. “leave as a whole,” but mentioned there was already in place the potential for some divergence between Northern Ireland and the rest of the U.K. “We can get into those details as part of the talks,” he added.

The DUP no longer provides the Conservative-led government with that key parliamentary majority, after Conservative lawmakers defected or were stripped of their party affiliation for opposing the government’s position during recent legislative tussles.

Bim Afolami, a loyal Conservative lawmaker in Westminster’s lower chamber, the House of Commons, acknowledged ahead of the meetings that the prime minister might not be hoping to achieve a “huge amount” in Luxembourg. He instead echoed a common view that Johnson and his cabinet are “betting the house on getting something sorted at the European Council” in mid-October.

The Conservative Party Chairman James Cleverly, writing in the British newspaper The Sun, acknowledged it as a “crucial EU summit” where Johnson would “strive to get an agreement in the national interest.”

The almost bi-monthly council summits in Brussels have often served as political pressure-cookers, with late-night, caffeine-fueled deal-making between EU leaders on issues including the European debt crisis, Greece’s bailout or Brexit deadline extensions.

Barclay joined his boss in Luxembourg, as did his opposite number at the European Commission, Barnier, who told members of the European Parliament last week that his team had not yet received any backstop alternatives “in writing that are legally operational.”

He had told a group of senior lawmakers he was unable to say “objectively” if talks with Johnson’s government had so far indicated whether or not a new agreement might be reached before the October summit. But he nonetheless played down the possibility last week: “We don’t have any reasons to be optimistic.”

Bettel: ‘This is a nightmare’

And Bettel, the Luxembourg prime minister, said Monday he was not prepared to offer a further Brexit delay unless “it serves a purpose.”

And in response to a question about the possible extension of a separate transition period after Brexit, during which the UK’s trading relationship with the EU would remain unchanged while both sides continue negotiations over the future status of the Irish border, Bettel was blunt.

“This is a nightmare,” he told CNBC. “We should stop to think whether people would like to have a longer period of transition. People would love to have clarity, what is going to happen in London and what is going to happen in the EU, and what will be their position.”

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Findings show Iran arms used

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The Saudi-led military coalition battling Yemen’s Houthi movement said on Monday that the attack on Saudi Arabian oil plants was carried out with Iranian weapons and was not launched from Yemen according to preliminary findings.

Coalition spokesman Colonel Turki al-Malki said that an investigation into Saturday’s strikes, which had been claimed by the Iran-aligned Houthi group, was still going on to determine the launch location.

“The preliminary results show that the weapons are Iranian and we are currently working to determine the location … The terrorist attack did not originate from Yemen as the Houthi militia claimed,” Malki told a press conference in Riyadh.

He said authorities would reveal the location from where drones were launched at a future press briefing.

Iran has dismissed as “unacceptable” U.S. accusations that Tehran was responsible for the assault on Saudi oil facilities that cut almost half of the kingdom’s production, or 5% of global oil supply.

Malki said the Gulf Arab state, the world’s top oil exporter, was capable of protecting vital energy and economic sites. “This cowardly act largely targets the global economy and not Saudi Arabia.”

The Western-backed, Sunni Muslim alliance intervened in Yemen in March 2015 to try to restore the internationally recognised government ousted from power in the capital Sanaa in late 2014 by the Houthis.

The movement has stepped up drone and missile attacks on Saudi cities this year. The conflict is largely seen in the region as a proxy war between Saudi Arabia and Iran.

WATCH: Rick Perry says he expects a coalition effort to stop Iran’s activities

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New security fears jeopardize Saudi Aramco’s IPO following attack

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An Aramco employee walks near an oil tank at Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia.

Ahmed Jadallah | Reuters

An attack that knocked out half of Saudi Arabia’s oil production capacity has cast a shadow over the kingdom’s state oil giant Aramco and its long-awaited initial public offering, poised to be the largest in history.

Saudi Aramco CEO Amin Nasser told media just last week that the mammoth company would list on the Riyadh stock exchange “very soon” as bankers from JP Morgan, Goldman Sachs, Credit Suisse and Citigroup met in Dubai to kickstart work on the gigantic offering.

News of the weekend attack sent money streaming into safe haven assets Monday morning, and industry experts questioned the security of Aramco’s assets and the confidence of its future shareholders.

“Saturday’s attacks raise the fear of future attacks in a very real way for equities investors,” Ellen Wald, president of Transversal Consulting and author of the book “Saudi, Inc.” told CNBC via email on Sunday.

“Those familiar with the company know that Aramco has been prepared for this for a very long time, but it likely is not something already priced into the opinions of the typical fund.”

Riyadh has not offered a timeline for the recovery of all of Aramco’s production capacity, a central factor to the direction of oil prices. Sources close to the firm say it could take anywhere from days or weeks to months. The strikes, which have been claimed by Yemen’s Houthi rebels, but which some U.S. officials blame on Iran, took out roughly 5.7 million barrels per day of Saudi oil production — equivalent to 5% of global daily crude output.

Saturday’s incidents exposed an Achilles Heel in the ability to defend a very important segment of oil infrastructure.

Samir Madani

Co-founder, Tankertrackers.org

A key question for investors is whether the schedule for the IPO will go ahead as planned, which according to some reports had put the Riyadh listing date as early as November.

“We will have to see if the Saudi monarchy chooses to delay the IPO as it focuses on this attack and the aftermath,” Wald said. Saudi Aramco has not spoken on the matter and did not reply to CNBC requests for comment. Neither did Moelis & Co., the firm hired to advise it.

Like its energy infrastructure, the kingdom’s markets are far from immune — Riyadh’s stock exchange, the Tadawul, suffered a 2.3% drop as it opened on Sunday morning.

“Saudi Arabia should carefully consider what impact a future attack on a publicly listed Aramco could have on its stock exchange,” Wald warned.

Pushing ahead?

Ayham Kamel, Middle East practice head at risk consultancy Eurasia Group, doesn’t foresee alterations ahead in the leadership’s plans.

“Crown Prince Mohammed bin Salman will push the company to demonstrate that it can effectively tackle terrorism or war challenges,” Kamel wrote in a client note Sunday, while noting that geopolitical risks have not been adequately priced into valuation estimates for the company and its assets.

The attack on Aramco’s installations in Abqaiq and Khurais “will have only a limited impact on interest in Aramco shares as the first stage of the IPO will be local,” Kamel said. However, he added, “the international component of the sale would be more sensitive to geopolitical risks.”

Saudi Arabia’s ‘Achilles heel’

Reuters reported last week that the kingdom plans to list 1% of Aramco on its local stock exchange before the end of this year and another 1% in 2020, as first steps ahead of a public sale of roughly 5% of the company.

The oil giant has delayed its IPO, originally scheduled for 2018, reportedly over Saudi concerns about public scrutiny over its finances and because of the complexity of its corporate structure. Prince Mohammed has touted a valuation of as high as $2 trillion, while a number of bankers recommend a figure closer to $1.5 trillion. The oil price will be key to this.

“Saturday’s incidents exposed an Achilles Heel in the ability to defend a very important segment of oil infrastructure,” Samir Madani, co-founder of data firm Tankertrackers.org, said Sunday.

Fires burn in the distance after a drone strike by Yemen’s Iran-aligned Houthi group on Saudi company Aramco’s oil processing facilities, in Buqayq, Saudi Arabia September 14, 2019 in this still image taken from a social media video obtained by REUTERS

“If customers aren’t duly addressed with the volumes they ordered, it will reflect poorly for a company that is lining itself up for a gigantic IPO. Shareholders want to see volumes regardless of price. Shipments will naturally be addressed by storage draws, but the question is for how long given the variety of oil grades that need to be exported.”

While markets await word from the Saudis, investors are likely asking themselves how the kingdom could have left itself so vulnerable, and what that means for the future.

“Saudi Arabia has always said their oil installations are safe. Suddenly that’s no longer the case,” Amrita Sen, chief oil analyst at Energy Aspects, told CNBC on Monday. “Some production could come back quickly, some could take months.”

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