May 18, 2023

The US debt ceiling standoff continues to make headlines, perhaps bringing more fear than is actually warranted, as we explore in this week’s first entry. In other financial market news, we take a look at the concept of a digital euro which the ECB hopes can promote the euro globally but may create more problems than good. This week, we also look more specifically at AI and the way it is reshaping the pharmaceutical sector. Finally, for our geopolitical look, we assess the case of Georgia and its implications for European security.

Debt Ceiling Standoff

America is hurt by its debt ceiling theatre of the absurd

Martin Wolf, Financial Times

Stock Traders Stay Calm About US Being on Cusp of Default

Elena Popina, Jess Mention, & Alexandra Semenova, Bloomberg

The US debt ceiling clash is a “known unknown” with the potential for financial catastrophe on the level of the Covid pandemic or the 2007-2009 financial crash, yet its implications cannot be understood fully unless a default takes place. The debt ceiling, which is an oddity of US budgetary authorization stemming from a 1917 law, has been used in recent years by Republicans seeking to impose spending cuts by playing chicken with the financial standing of the US government. The same theatrics in 2011, in fact, caused a credit downgrade, even though the debt ceiling increase was ultimately passed. The result of a true default triggered by an impasse over the debt ceiling would shatter faith in the US financial system, especially among the many people, institutions, and governments that hold treasuries and engage in capital markets. And repeated political gamesmanship over the debt ceiling issue increases the likelihood that, unlike in 2011, no deal is passed, the debt ceiling is not lifted, and a default takes place. Still, to date, stock traders have yet to show signs of panic over the standoff, with very little hedging taking place. It remains to be seen whether this trend is a calm before the storm or a true expectation that when all is said and done, the debt ceiling will be lifted.

The digital euro: a solution seeking a problem?

Martin Arnold & Sam Fleming, Financial Times

Read the full article here



The European Central Bank’s (ECB) plan to launch a digital euro has raised questions of if Europe even needs a digital currency. Supports of the scheme argue that it would modernize European payments by giving access to electronic cash alternatives that are both riskless and universally accepted. A digital euro would also make the ECB one of the first central banks in the West to experiment with the idea, as, so far, China has been leading the pack. Critics have raised major concerns about the scheme, some asking if it’s even needed now that cryptocurrency is no longer a threat to cash. Others argue that the ECB would add inefficiency in markets by creating duplicate payment systems that would only use the digital euro. Bankers worry about building the infrastructure to support the project, as the ECB recommended that basic payments with the digital euro should be free. Additionally, private-sector payment companies are already widely used, making it difficult for citizens to understand what advantages a digital currency would bring. The ECB plows ahead, investigating any avenue that would help promote the euro globally over the Chinese renminbi or the dollar, which have both gained ground over the euro. 

2023’s AI-led Tech Sector

BofA Strategists See Recession Spoiling the Tech-Stocks Party

Farah Elbahrway, Bloomberg



AI Drug Discovery Is a $50 Billion Opportunity for Big Pharma

Kanoko Matsuyama, Bloomberg

Artificial Intelligence (AI), as applied in biomedical Research & Development (R&D), has seen a boom recently, as AI proves useful in developing novel therapies at a faster rate than was possible prior to its application. For instance, Pfizer employed AI in developing its Covid-19 vaccine, which allowed the therapy to enter the market much faster than would have been the case a decade earlier. Takeda Pharmaceutical Co. likewise used AI to great effect when it bought an experimental psoriasis treatment from a Boston startup for $4 billion, enabling it to develop a novel therapy that is currently progressing to the final stage of clinical trials and is expected to bring in $3.7 billion annually if brought to market. As such, there is widespread expectation that AI will be structurally embedded within the industry within the next 5 years, with estimates as high as $50 billion value added as a result.

Still, there is cause for concern when looking at the market broadly. While investors are pouring money into the tech sector under the expectation that the Fed will pivot, Michael Hartnett of Bank of America has warned that such expectations are premature and that a Fed pivot is unlikely right now. As such, there exists the potential for a tech bubble to build and burst, especially in the worst case as rate hikes induce a prolonged period of economic decline. The net result would be significant turmoil among tech stocks. In the long term, then, a bet on biopharma may pay off as AI becomes embedded in the industry and produces value through its application. In the short term, those stocks may, too, see a decline if the US enters a recession in 2023.

Georgia: The West’s failure to counter Putin’s malign influence

In Tbilisi

Andrew Cockburn, London Review of Books

Batu Kutelia: Lessons from Georgia of geopolitical procrastination

Batu Kutelia, Kyiv Independent

Georgia’s post-independence troubles illustrate how the West’s procrastination leads to tragedy in the long run. The country’s independence followed a track shared by other post-Soviet states; it was ravaged by insurrection and breakaway provinces, and each administration has been accused of widespread corruption. After attempting to leave Russia’s sphere of influence, Moscow retaliated by invading and occupying approximately 20% of the country in 2008, just as NATO failed to provide Georgia or Ukraine a path to membership. The current government is lead not by a politician, but by an oligarch: Bidzina Ivanishvili, a short-term prime minister between 2012 and 2013 and the richest man in Georgia. While holding no official power, he wields enormous influence through his friends and connections in office. The government, part of the anti-West Georgian Dream movement, recently tried to pass a law that would require organizations that received a certain amount of foreign funding to register as foreign agents, a law similar to one passed in Russia that led to the widespread destruction of civil society. Mass protests in Tbilisi forced the government to withdraw its plans.



Western inaction allowed Putin to realize his revanchist aims in Georgia, where Moscow has undermined civil society, corrupted the government, and nearly captured the state. Russia attempted to take similar action in Ukraine before Ukrainians overthrew their pro-Kremlin oligarch, which led to the invasion in February 2022. Any weakness or concession from the West to Russia’s malign influence in the post-Soviet space only results in disaster later down the road, such as the one playing out across Ukraine. Only by being proactive and bringing Georgia (and other ex-Soviet states) closer to the West can Europe’s security be guaranteed for the long term.