NEWS,10.07.2012

Russia to ratify agreement to join WTO

 

Russia's parliament is expected to ratify on Tuesday an agreement to join the World Trade Organisation (WTO) in a move that will push Moscow to open up its economy.Russia, the largest economy outside the global trade organisation, has spent 18 years trying to negotiate its entry into the body. Now that the talks are over, the Russian government, which has strongly advocated the entry, is facing criticism from many businesses and opposition politicians that the WTO membership would hurt domestic producers by flooding the market with cheaper imports.Activists including several dozen Communist Party deputies staged a protest outside the State Duma (lower house of the Russian parliament) on Tuesday morning to protest Russia's accession, which is considered a done deal since the Duma is controlled by President Vladimir Putin's party."The WTO is death to Russia!” one of the posters held by a protester.Thousands of Russian businesses are wary that the low import duties and caps on subsidies that are a condition of joining the WTO will hurt their businesses. The government, however, insists that the WTO rules will help weed out inefficient players from the market and make Russian companies and their products more competitive abroad.Russia's Economic Development Minister Andrei Belousov sought to play down those fears in a debate with lawmakers on Tuesday.He said that the government would still be able to prop up agriculture and machinery companies with subsidies and businesses would have five to seven years before Russia cuts down duties and subsidies to WTO-assigned levels."Who would want to invest in a country which wouldn't play by international rules?" Belousov said at the Duma hearing. "The WTO is a guarantee that Russian business will have the same rules to go by at home and abroad."

Eurozone offers Spain €30bn for banks

 

Eurozone finance ministers agreed on Tuesday to offer Spain €30bn this month to help its distressed banks as they raced to stay ahead of market scepticism.After nine hours of talks, Jean-Claude Juncker, the Luxembourg premier who also heads the Eurogroup, said a memorandum of understanding for Spain would be formally signed "in the second half of July," with €30bn available by the end of the month.Juncker, who has been in the job since 2005, was reappointed by the 17 ministers during talks Monday which ended well after midnight.Spain, under increasing pressure as sceptial markets pushed its borrowing costs dangerously high again, had called for up to €100bn in direct aid at a June 28-29 "breakthrough" EU summit.Aiming to keep the momentum going, ministers also agreed to extend a deadline for Spain to cut its public deficit to the EU 3.0% limit by one year to 2014 because of the difficult economic conditions Spain faces.At the same time, however, Juncker stressed that Madrid must implement measures needed to bring its public finances into line with EU norms.EU economic affairs commissioner Olli Rehn said Spain's public deficit - the shortfall of revenue to spending - was now expected at 6.3% of Gross Domestic Product this year, 4.5% in 2013 and then 2.8% in 2014.Spain in May revised its 2011 public deficit figure, saying that it stood at 8.9%, up from 8.51% reported earlier and way above the original 6.0% target for the year.Spanish Prime Minister Mariano Rajoy announced on Saturday that he would take additional steps soon to cut the public deficit and said "Europe must fulfil the accords as swiftly as possible."Juncker, widely seen as one of the founding fathers of the euro, confirmed he would stay on as head of the Eurogroup but would not serve a full two-and-a-half year term, expecting to step down early next year.In another key appointment, Germany's Klaus Regling, head of the eurozone's temporary EFSF bailout fund, was named to run its permanent successor, the European Stability Mechanism.The June summit agreed that the ESM will be able to inject funds directly into needy banks, conditional on a new European bank regulator being put in place, so as to avoid adding to the debt burden of the affected state.Asked if such a state would have to provide guarantees on such bank funding, Juncker answered with a simple "No."Rehn confirmed that position, a key issue for nervous investors, but also highlighted the importance of getting the new regulator - to be built around the European Central Bank - in place quickly.The European Financial Stability Facility (EFSF) was set up in 2010 after a first Greek bailout but it became clear after Ireland and Portugal also had to be rescued that a more powerful backstop was needed.The ESM has funds of €500bn and was supposed to be operational from this month but it has been delayed, with final ratification still pending in several member states.French Finance Minister Pierre Moscovici said the meeting had been able to make progress on several fronts and had established a heavy timetable through to the end of the year.ESM direct funding for struggling banks will "allow us to tackle the roots (of the debt crisis) by breaking the link between the banking crisis and the sovereign debt crisis," Moscovici added.The Spanish bank accord should be concluded by end-July and ultimately run up to €100bn, he said, also highlighting the need for Madrid to implement tough reforms of the sector.Juncker and Rehn said the meeting had also discussed the situation in Greece, taking note of what its newly elected government has planned, and had also reviewed the position in Cyprus, which has just asked for EU aid.Cyprus, current holder of the EU's rotating presidency, blames its problems on its banks' heavy exposure to Greece, and its aid programme is expected to be completed by September.The finance ministers' conclusions will be submitted later Tuesday to a meeting of all 27 EU finance ministers who will have initial market reaction to help focus their minds.The June summit pledges to help Spain's banks, set up a new banking regulator and ease the way for the ESM to play a greater role, were hailed as a "breakthrough" which sparked sharp market gains.But in the past week, sentiment has turned negative again, with analysts dismissive and expecting little follow-up to sustain the summit momentum.

Eurozone in freefall?

Signs are growing that Europe's economic and monetary union may be fragmenting faster than policymakers can repair it. Eurozone leaders agreed in principle on June 29 to establish a joint banking supervisor for the 17-nation single currency area, based on the European Central Bank (ECB), although most of the crucial details remain to be worked out. The proposal was a tentative first step towards a European banking union that could eventually feature a joint deposit guarantee and a bank resolution fund, to prevent bank runs or collapses sending shock waves around the continent. The leaders agreed that the eurozone's permanent bailout fund, the €500bn European Stability Mechanism, would be able to inject capital directly into banks on strict conditions once the joint supervisor is established. But the rush to put first elements of such a system in place by next year may come too late. Deposit flight from Spanish banks has been gaining pace and it is not clear a eurozone agreement to lend Madrid up to €100bns in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout. Many banks are reorganising, or being forced to reorganise, along national lines, accentuating a deepening north-south divide within the currency bloc. An invisible financial wall, potentially as dangerous as the Iron Curtain that once divided eastern and western Europe, is slowly going up inside the euro area. The interest rate gap between north European creditor countries such as Germany and the Netherlands, whose borrowing costs are at an all-time low, and southern debtor countries like Spain and Italy, where bond yields have risen to near pre-euro levels, threatens to entrench a lasting divergence. Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers. The longer that situation goes on, the less chance there is of a recovery in southern Europe and the bigger will grow the wealth gap between north and south. With ever-higher unemployment and poverty levels in southern countries, a political backlash, already fierce in Greece and seething in Spain and Italy, seems inexorable. ECB president Mario Draghi acknowledged as he cut interest rates last week that the north-south disconnect was making it more difficult to un a single monetary policy. Two huge injections of cheap three-year loans into the eurozone banking system this year, amounting to €1 trillion, bought only a few months' respite. "It is not clear that there are measures that can be effective in a highly fragmented area," Draghi told journalists. Conservative German economists led by Hans-Werner Sinn, head of the Ifo institute, are warning of dire consequences for Germany from ballooning claims via the ECB's system for settling payments among national central banks, known as TARGET2. If a southern country were to default or leave the euro, they contend, Germany would be left with an astronomical bill, far beyond its theoretical limit of €211bn liability for eurozone bailout funds. As long as European monetary union is permanent and irreversible, such cross-border claims and capital flows within the currency area should not matter any more than money moving between Texas and California does. But even the faintest prospect of a Day of Reckoning changes that calculus radically. In that case, money would flood into German assets considered "safe" and out of securities and deposits in countries seen as at risk of leaving the monetary union. Some pessimists reckon we are already witnessing the early signs of such a process. Any event that makes a euro exit by Greece - the most heavily indebted member state, which is off track on its second bailout programme and in the fifth year of a recession - look more likely seems bound to accelerate those flows, despite repeated statements by EU leaders that Greece is a unique case. "If it does occur, a crisis will propagate itself through the TARGET payments system of the European System of Central Banks," US economist Peter Garber, now a global strategist with Deutsche Bank, wrote in a prophetic 1999 research paper. Either member governments would always be willing to let their national central banks give unlimited credit to each other, in which case a collapse would beimpossible, or they might be unwilling to provide boundless credit, "and this will set the parameters for the dynamics of collapse", Garber warned. "The problem is that at the time of a sovereign debt crisis, large portions of a national balance sheet may suddenly flee to the ECB's books, possibly overwhelming the capacity of a bailout fund to absorb the entire hit," he wrote in 2010, after the start of the Greek crisis, in a report for Deutsche Bank. European officials tend to roll their eyes at such theories, insisting the euro is forever, so the issue does not arise. In practice, national regulators in some EU countries are moving quietly to try to reduce their home banks' exposure to such an eventuality. The ECB itself last week set a limit on the amount of state-backed bank bonds that banks could use as collateral in its lending operations. In one high-profile case, Germany's financial regulator Bafin ordered HypoVereinsbank (HVB), the German subsidiary of UniCredit, to curb transfers to its parent bank in Italy last year, people familiar with the case said. Such restrictions are legal, since bank supervision is at national level, but they run counter to the principle of the free movement of capital in the EU's single market and to an integrated currency union. Whether a single eurozone banking supervisor would be able to overrule those curbs is one of the many uncertainties left by the summit deal. In any case, common supervision without joint deposit insurance may be insufficient to reverse capital flight. German Chancellor Angela Merkel, keen to shield her grumpy taxpayers, has so far rejected any sharing of liability for guaranteeing bank deposits or winding up failed banks. Veteran EU watchers say political determination to make the single currency irreversible will drive eurozone leaders to give birth to a full banking union, and the decision to create a joint supervisor effectively got them pregnant. But for now, Europe's financial disintegration seems to be moving faster than the forces of financial integration.