NEWS,25.09.2012

Spain prepares further austerity measures

Protesters clashed with police in Spain's capital today as the government prepares a new round of unpopular austerity measures for the 2013 budget that will be announced tomorrow. Thousands gathered in Neptune plaza where they planned to form a human chain around parliament, surrounded by barricades, police trucks and more than 1500 police in riot gear.Television images showed the police beating some protesters with truncheons, in a brief, tense stand-off one block from parliament as police trucks tried to divide the crowd in two.The protest, promoted over the Internet by different activist groups, was younger and more rowdy than recent marches called by labour unions. Protesters said they were fed up with cuts to public salaries and health and education."My annual salary has dropped by 8000 euros and if it falls much further I won't be able to make ends meet," said Luis Rodriguez, 36, a firefighter who joined the protest. He said he is considering leaving Spain to find a better quality of life.With this year's budget deficit target looking untenable, the conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions, "green taxes" on emissions or eliminating tax breaks.The 2013 budget is the second one conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. Spain must persuade its European partners that it can cut the budget shortfall by more than 60 billion euros by 2014.Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.Spain is at the centre of the euro zone debt crisis on concerns the government cannot control its finances and those of highly indebted regions, bitten by a second recession since 2009 which has put one in four workers out of a job.Running out of options Half-year deficit data indicate national accounts are already on a slope that will drive Spain into a bailout. The deficit to end-June stands at over 4.3% of gross domestic product, including transfers to bailed out banks, making meeting the 6.3 percent target by the end of the year almost impossible.Yesterday, the treasury ministry said the central government deficit to end-August had reached 4.77% of GDP, already above its year-end target of 4.5% of GDP."Its going to be difficult keeping the deficit to around 2% in the second half, when the first half was closer to 4%, especially since traditionally, the second half deficit is higher than the first," said Juan Ignacio Conde-Ruiz, economist at Madrid's Complutense University.For 2012, the measures aim to reap savings of over 13 billion euros, but economists see the deficit missing the target by almost 1 percentage points implies further saving needs of up to 10 billion euros for this year alone.Rajoy has been careful to highlight the importance of next year's deficit target of 4.5% of GDP though any shortfall this year will weigh on 2013's accounts.After slashing civil servants' wages, raising value added tax by 3 percentage points - the main VAT has gone from 16% to 21% since 2010 - and cutting health and education spending, Rajoy is running out of options.More than 60% of government spending goes to pensions, unemployment benefits and servicing debt, making further cuts on the revenue side difficult without hitting 6 million jobless people.

Spain's parliament on protest alert

Spain's parliament took on the appearance of a heavily guarded fortress on Tuesday, hours ahead of a protest against the conservative government's handling of the economic crisis.The demonstration, organised behind the slogan "Occupy Congress", is expected to draw thousands of people from around Spain and was due to start around 17:30 GMT.Madrid's regional interior ministry delegation said some 1 300 police would be deployed though protesters say they have no intention of storming the chamber, only of marching around it.They are calling for fresh elections, claiming the government's austerity measures show the ruling Popular Party misled voters to get elected last November.The protest comes as Spain struggles in its second recession in three years and with unemployment near 25%.Spain has introduced austerity measures and economic reforms in a bid to convince its euro partners and investors that it is serious about reducing its bloated deficit to 6.3% of gross domestic product in 2012 to 4.5% next year.Concerns over the country's public finances was evident earlier when the Treasury sold €3.98bn in short-term debt but at a higher cost.It sold €1.39bn in three-month bills at an average interest rate of 1.2%, up from 0.95% in the last such auction on August 28, and €2.58bn in six-month bills on a yield of 2.21%, up from 2.03%.The government is expected to present a new batch of reforms on Thursday as it unveils a draft budget for 2013. A day later the results of bank stress tests carried out by an international auditing company are to be released.Spain has already been granted a €100bn loan by its 16 partner nations using the euro currency to help bail out those of its banks worst hit by the collapse of the country's real estate sector in 2008.Spain has yet to tap the fund and initial estimates say the banks will need some €60bn.

China and Japan (and U.S.) Island Dispute: It's All About Oil

The dispute over the territory known as the Senkaku Islands in Japan (and the U.S.) and as the Diaoyu Islands in China has all the makings of a Tom Clancy thriller. The 73-year-old Japanese Finance Minister, Tadahiro Matsushita was found hanged  not death by seppuku  in his home on suicide prevention day. The newly appointed Ambassador to China for Japan was found dead on a street in Japan at age 60 before he could take up his duties in China. The wife of Bo Xilai, a top contender for the top seat in the Chinese Politboro, is in prison facing a death sentence for the murder of a British businessman. The murder was revealed when one of his top aides, now sentenced to 15 years in prison, tried to defect to the United States and revealed his role in the cover-up. Governor of Tokyo, Shintaro Ishihara (79) and author of the controversial late 1980s book The Japan That Can Say No: Why Japan Will Be the First Among Equals (irreverently known as "get lost America, we can covertly rearm, develop nuclear capabilities, close U.S. bases, and handle our own defense") inflamed relations between China and Japan by engineering the government's purchase of the Senkaku Islands from a private Japanese citizen. Isihara's son Nobuteru (55) is the one of the candidates for leadership of Japan's Liberal Democratic Party, and if the party wins the election, he could possibly become Prime Minister of Japan if he can win out over Ishiba and Abe, the former Prime Minister of Japan.The car of the U.S. Ambassador to China was swarmed by protesters, and the melee was quickly broken up by Chinese security forces.U.S. Presidential candidates are silent on Asian tensions, seemingly engrossed in an adolescent battle of embarrassing sound bites.Riots have broken out in China over the disputed Islands, even though the islands were never under Chinese rule. The Japanese believe the islands belong to Japan. The Japanese Defense Minister takes comfort from U.S. Assistant Secretary of State Kurt Campbell's acknowledgement that the islands fall under the umbrella of the U.S.'s security pact with Japan.All this is happening when there's a power vacuum in China (between elections), a power vacuum in Japan (same reason), and a power vacuum in the U.S. (our elections are in November).Oil Islands As it happens, it appears that the dispute is really all about the right to explore for potential oil reserves around the islands' waters. The Japanese Finance Minister had prostate cancer and was investigating insider trading. He may or may not have had a say in whether the government should buy the islands. But his alleged suicide seemed to stem from an extra-marital affair he had with a 70 year-old Ginza bar hostess. She was retired, asked him for money, and when he refused, she sold her story to the tabloids.The death of the newly appointed ambassador to China for Japan appears for now to be just a sad coincidence of timing.China's Bo Xilai scandal is a tawdry story of corruption and greed.Sentiment within Japan's business community seems to be (based on my limited and unscientific sampling) that provoking war with China is insane, and the purchase of the islands was an unnecessary irritant. Yet the Japanese government provoked tensions with the purchase of the Islands, and the political spin in China is that this is about national integrity rather than oil exploration rights. If the Chinese invade the islands, Japan will likely fight for them, and the U.S. would be dragged into the conflict.If there is a conflict, it won't matter whether you call them the Senkaku Islands or the Diaoyo Islands. The important thing to remember is that everyone hopes they are the Oil islands.

NEWS,25.07.2012

Low Interest Rates Are Not Enough

 

Welcome to what could be called "GGIRC," the great global interest rate convergence -- whereby interest rates steadily converge to zero in many countries around the world, both advanced (other than the crisis European economies) and emerging (other than the persistent financial basket cases). In theory this is a good thing for a global economy.After all, major economic areas, particularly Europe and to a lesser extent the United States, are challenged by too little growth, too much debt and too high a joblessness rate (especially among the young and the long-term unemployed).Even more dynamic economies, from Brazil to China, are slowing.According to textbook economics, lower interest rates have beneficial flow and stock effects.They make it cheaper to fund investment and consumption; and they make it easier for companies, governments and individuals to carry a given stock of already-accumulated debt.In practice, however, the situation is much more complicated and not so benign. GGIRC is not happening for good reasons.As such, the effects are slow to materialize. And, unless quickly accompanied by other policy initiatives, the consequences will be at best mixed and, probably, net negative.Three major factors are behind GGIRC.First and foremost, hyper activist central banks that are using traditional (price) and unconventional (quantity) measures to force interest rates down.Just look at the series of actions by America's Federal Reserve -- from flooring policy rates at almost zero for an exceptionally long time (and also pre-committing to keeping them there until the end of December 2014) to purchasing an enormous amount of U.S. Treasury and mortgage securities in a further attempt to drive borrowing costs down.Second, individuals and institutions are piling into government securities to protect against principal loss in an increasingly uncertain and worrisome global economy and an ever-deepening European crisis.This is most pronounced for Germany, Switzerland and the United States, where inflows of capital have led to negative nominal rates for short-dated securities (i.e., investors willingly accepting marginally less money on maturity than they invest).Third, global investors are spreading GGIRC through "the global carry trade." This search for relatively safe yield is driving the flow of money into the local bond markets of countries such as Brazil, Mexico and South Africa.Yet GGIRC is not fueling an economic boom driven by labor hiring and investment in plant and equipment. Simply put, lower borrowing costs are not enough to convince companies to expand given the list of domestic, regional and global uncertainties; indeed, many of these companies are far from credit rationed as they sit on huge cash balances.And they only help at the margin the highly-indebted consumers.This limited scope for benefits comes with the growing reality of collateral damage and unintended consequences.Today's market-based economies, and the accompanying institutional setup, do not function well at such artificially repressed interest rates.Certain segments, from pension funds and life insurance companies to money market funds, are particularly challenged.They have no choice but to shrink the scale and scope of financial services they offer to individuals and institutions.Then there are some emerging countries that could well be de-stabilized by some of the activities encouraged by artificially-repressed interest rates.It is only a matter of time until they are challenged by asset market bubbles (including in housing) and irresponsible lending by institutions subject to weak market and regulatory supervision.This is not to say that GGIRC is a bad thing. It need not be.But it will be if not quickly accompanied by major policy actions that address the causes of today's global economic malaise.What the world economy needs today is a coordinated set of measures to promote growth, allocate financial losses, match healthy balance sheet with those that are challenged and reforming, and improve the functioning of the labor and housing markets.For this to materialize, highly polarized and dysfunctional politics needs to give way to more strategic and constructive interactions across party lines and social segments.There is little to suggest that this will happen any time soon absent yet another major financial crisis.In the meantime, GGIRC may well morph from being seen as part of the solution to inadvertently becoming part of the problem.

Interests vs. Values Is the Wrong Prism for Viewing the Reset with Russia

 

With their chilly meeting in sunny Los Cabos during the G20 summit fading into memory, the fate of the "reset" in U.S.-Russian relations is for the moment out of the hands of Presidents Putin and Obama. The future of the relationship is being fought on Capitol Hill over whether to extend Permanent Normal Trade Relations (PNTR) to Russia. Doing so would require removing the application of Cold War-era legislation called Jackson-Vanik from Russia, a law that was crafted to pressure the Soviet Union by linking free trade to the freedom of emigration.Jackson-Vanik has been an irritant for Russia for two decades, but the issue is pressing our Congress now because with Putin signing Russia's WTO ratification protocols on July 21, the clock is ticking down to Russia's entry to the WTO in August. Without PNTR in place before Congress goes into recess, American businesses will lose out on the various trade concessions fought for over the years by U.S. negotiators, giving our competitors an inside track to the world's 9th largest economy. PNTR for Russia was once perceived by Congress as a "gift" to Russians; now it is a necessity for American business and workers.At the same time, the issue of human rights has not disappeared as an area of serious concern for Russia, or as a core American value. Many in Congress want to replace Jackson-Vanik with the "Sergei Magnitsky Rule of Law and Accountability Act," which targets Russian officials implicated in the death in pretrial detention of a Russian lawyer and whistleblower. The House and Senate have different versions that have cleared committee--the House bill focuses on Russian officials, whereas the Senate bill would apply to violators from any country. As negotiators hammer out the differences in the two bills, they should keep in mind that the Jackson-Vanik legislation addressed a human rights principle and did not once mention the Soviet Union.The Obama administration prefers a clean extension of PNTR to Russia, arguing they have already taken steps against the Russian officials in question. The Russian government is threatening reprisals if the Magnitsky Act should come into force. But the overall impact of the Magnitsky Act, either in terms of provoking or constraining the Russians, is overestimated.The greatest constraint on Russian violations of human rights, and the greatest pressure towards liberalizing Russian society, has ultimately come from the Russians themselves as they seek to engage in regional and global institutions. Such accessions and agreements clearly have not prevented multiple Russian abuses and outrages against the human rights of its own people; but they have set Russian society on a path towards adopting certain core values on its own terms.In 1975, the year Jackson-Vanik went into force, Moscow signed the Helsinki Accords. Leaders in the Kremlin celebrated the cementing of post-war borders; but also committed the Soviet Union to certain human rights guarantees. It led to the formation of the Moscow Helsinki Group, which remains influential to this day, and, according to Cold War historian John Lewis Gaddis, gradually became a manifesto of the dissident and liberal movement. The contradictions between Soviet practice and the human rights values they pledged to protect played a key role in the erosion of the Soviet government's legitimacy with its own people.In the 1990s, a newly independent Russia pursued and gained entry into the Council of Europe. Russia wanted acceptance on the world stage as a European power. As a condition for membership, Russia also ratified the European Convention on Human Rights in 1998, subjecting itself to the jurisdiction of the European Court of Human Rights. Today, Russia holds the dubious distinction as the origin of over 35 thousand cases (about 24 percent) now pending before the Court - by far the most. Its track record with the court is mixed. Russian government lawyers dutifully participate in contesting the various cases, and Russia reliably pays the (usually nominal) judgments rendered against it. Critics rightly point out that the government rarely implements the underlying principles of the judgments, especially with regards to abuses in Chechnya. However, in other regions, a growing number of district courts are accepting the provisions of the Convention as a part of Russian law.In December 2011, Russia finally secured an invitation to join the WTO after 18 years of on-again, off-again negotiations. While industries and businesses around the world will welcome the various reductions in tariffs that accession will bring this summer, it is Russia's agreement to be bound by the stringent rules and dispute resolution mechanisms that will be the real game-changer over time. Corruption and the prevalence of political insiders at the helm of Russia's leading state enterprises will not end anytime soon, but international (and, with the passage of PNTR, American) companies will have unprecedented rights and remedies at their disposal. More importantly, in terms of Russia's development, new Russian companies and sectors, headed by Russia's emerging professional class, will greatly benefit from the expanding culture of commercial law and greater access to world markets.Russia is not the Soviet Union. Nor is it the liberal democracy many hoped to see emerge during the 1990s. It is a nation still in search of its own identity, wrestling with the historical legacy of Soviet power/terror and the more recent pain of devastating economic collapse in the 1990s. It is also a nation looking to engage with the global political and economic institutions of the world in order to help set the rules as well as follow them. Yet the more Russia opens itself this way, the less satisfied the Russian people become with the closed system of the power vertical.The United States has long taken an interest in how Russia conducts its internal affairs -- an interest that is not matched towards other nations, it must be noted. Today's debate over PNTR and the Magnitsky Act are simply the latest manifestation of that concern. But the community of policymakers, legislators, activists, and businesses who are interested in the fate of Russia's people should keep one idea in mind: No matter what gets signed in Washington, it is what Moscow signs on to that will ultimately shape the future for Russia and its people.

NEWS,24.07.2012

Germany's credit rating downgraded

Germany's Aaa credit rating outlook has been lowered to negative by Moody's.The rating agency cited "rising uncertainty" about Europe's debt crisis.Risks that Greece may leave the euro and the "increasing likelihood" of help for Spain and Italy also caused the downgrade."Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form," Moody's said. Germany's vulnerable banking system, which Moody's deems exposed to the most stressed euro countries, could leave them open to further deepening of the crisis.However, it will retain its Aaa rating because of the country's "advanced and diversified economy" with high productivity and strong demand for German products.Finland held on to its top ranking, getting a stable outlook from Moody's.

 

Deutsche Bank's Internal Libor Investigation Finds Deutsche Bank Mostly Innocent

 

Great news, you guys. We can go ahead and scratch at least one bank off the list of egregious interest-rate manipulators. That's because this bank has heroically determined that it is totally innocent. Almost totally, anyway.Deutsche Bank, the biggest German bank, has carefully investigated its own role in the habitual, fraudulent, global rigging of Libor, the most important interest rate in the world. And you might want to sit down for this, but Deutsche Bank has determined, to what we can only imagine is its own profound relief, that Deutsche Bank was only barely involved in the scandal. Hardly any involvement, really. If you blur your eyes a bit, it even kind of looks like Deutsche Bank wasn't involved at all. Certainly not in its top executive ranks. That's the way Deutsche Bank would like you to see it, anyway.Hmm, one small problem, though: Handelsblatt is reporting that Deutsche Bank is bracing for "a huge fine" in the Libor scandal, setting aside between $300 million and $1 billion -- the middle point of which would be higher than the $450 million Barclays paid. Does that sound like a bank that really expects to get out of this without any mud getting splashed on the C-suite?Anyway, we can only imagine that if Deutsche Bank is indeed planning on paying such a huge fine, then it is only doing so out of the goodness of its heart, a sense of civic duty really. Because it turns out, according to Deutsche Bank's investigation, that every bit of Deutsche Bank's involvement in the constant, gleeful rigging of Libor for years came down to just two very bad Deutsche Apples, who were fired last year. Both of those, let's call them, slimeballs apparently were part of the global Libor-rigging cartel that involved nearly every large bank in the world. But they're gone now, and we can only imagine that their desks have been taken out back and chopped into dust, that their pictures have been photoshopped out of all the company's birthday-party photos, and that their names are no longer spoken around Deutsche Bank's offices in any tones other than scorn or maybe shame.A Deutsche Bank internal probe has found that two of its former traders may have been involved in colluding to manipulate global benchmark interest rates but there was no indication of failure at the top of the organization, three people close to the investigation said.No indication of failure at the top of the organization! This will be a tremendous relief to spanking-new Deutsche Bank chief Anshu Jain, who is already on thin ice with the Germans because he came up from the bank's investment-banking arm. Germans don't much like investment bankers. To make matters worse, it was Jain's investment-banking arm that happened to be in charge of these bad-apple traders that were fiendishly rigging Libor. A major scandal that originated in Mr. Jain's area of the bank could damage his chances to continue on as sole CEO of the bank after co-head Jürgen Fitschen's contract expires in three years.Thank goodness for Jain that such a risk is apparently all gone now, according to Deutsche Bank's unflinching review of its own leadership. In fact, Reuters seems to imply that Deutsche Bank will likely avoid the sort of unpleasantness that beset Barclays, where the chairman, CEO and chief operating officer all walked the plank as a result of that bank's admitted Libor manipulation. And we can only imagine that the ongoing investigations by "regulators and governmental entities" in the U.S. and Europe, including German markets regulator BaFin, are now a mere formality. All that's needed now is to bring those two pesky scapegoats to justice, and Deutsche Bank can get back to doing the Lord's work.

Italy pushes for Sicilian recovery plan

Italian Prime Minister Mario Monti imposed a compulsory plan to restore financial stability to the cash-strapped Sicily region and overhaul its bloated public administration, a government statement said today.The statement, issued after a meeting between Monti and regional governor Raffaele Lombardo, said the leaders had agreed "a plan for financial recovery and reorganisation of the region's public administration, with a binding timeframe and objectives".The statement stopped short of saying that Sicily would be placed under special administration but made it clear that the programme would be monitored from Rome and that it would insist on cuts to the region's notoriously swollen payroll."The programme is to be finalised in the coming weeks and will be formally signed by the regional and national governments," the statement said.Sicily, which accounts for about 5.5% of Italy's gross domestic product, has been at the centre of growing concerns over the financial stability of Italy's regional and city governments after Monti said last week there were serious concerns about the possibility that it could default.The autonomous island region has some 5.3 billion euros in debt, a long history of waste and mismanagement and an outsized public sector payroll that critics say has been used by successive governments to buy votes.Officials have since played down fears of an immediate crisis with Interior Minister Annamario Cancellieri saying on Monday that there was no risk either of default or of a special government administrator being appointed.Worries about Sicily come as Italy itself moves to the forefront of concerns in the euro zone crisis, with the cost of servicing huge debts jumping on contagion fears for the bloc's third biggest economy linked to the worsening plight of Spain.Following the meeting, Lombardo repeated his own insistence that Sicily had sound and sustainable finances and dismissed talk of default as "rubbish" but confirmed he would resign by the end of the month as previously agreed.He also said the government had released 240 million euros to help cover funding gaps in the health system, one of the regional administration's key responsibilities.While the plight of Italy's regional and municipal authorities has not reached the levels seen in Spain, where several regions have been reported to be close to asking for state aid, there have been growing signs of strain from successive cuts to government transfers.On Tuesday, mayors from around Italy held a demonstration outside the Senate to protest against the cuts which they say will force them to curtail vital local services.The Corte dei Conti, Italy's top public finance watchdog, has made a damning series of criticisms of the regional administration in Sicily, which has overseen a steady deterioration in the island's finances over the past decade.With an unemployment rate of 19.5%, almost twice the national average, Sicily is among the regions hardest hit by the recession but its public sector payroll has been constantly increased, particularly in the health sector.

NEWS,22.07.2012

Spaniards protest as crisis outlook darkens

Thousands of jobless Spaniards marched through Madrid Saturday in the latest angry demonstrations against economic crisis cuts, as fears rose for the country's financial stability.Young people thrown out of work by the recession converged on the capital, many of them having hiked hundreds of miles from around Spain, and walked through the city's central avenues, waving banners and whistling."Hands up, this is a robbery!" they yelled, their regular refrain over recent days of protests."Everyone get up and fight!"It was the latest in a string of protests that have erupted since Prime Minister Mariano Rajoy announced 65 billion euros ($80 billion) in fresh austerity measures on July 11, including cuts to pay and unemployment benefits."I am very disappointed and angry," said Alba Sanchez, 25, who had come by car from the northeastern region of Catalonia to join the demonstration."People cannot allow all these cuts by this government that hates us."The crowd marched peacefully to the sound of drums and trumpets and stopped at the Puerta del Sol square, the symbolic hub of numerous social protests, where demonstrators sat down and held a popular assembly.On Thursday hundreds of thousands of demonstrators massed there after a mostly peaceful protest march that ended with police firing rubber bullets to disperse small groups of protestors.Protestors say the efforts to cut Spain's deficit target the poor unfairly and will depress the recession-hit economy further."They pee on us and tell us it's raining," read one yellow sign waved by the jobless protestors on Saturday."I can't tighten my belt and drop my trousers at the same time," read another.Rajoy's measures raise sales tax (VAT) and cut benefits for the newly unemployed after six months from 70 percent of basic salary to 50 percent. Previously, the reduction had been to 60 percent."That's the final blow. They're cutting benefits to those who aren't working and raising VAT, which affects people who work," said protestor Rafel Ledo, who had walked 500 kilometres (310 miles) from the northern Asturias region.Saturday's protests came as Spain's economic and financial outlook darkened. The government cut its economic growth forecast for 2013 from 0.2 percent growth to a contraction of 0.5 percent.Stricken by the bursting of a construction bubble in 2008, Spain is struggling in its second recession in four years. Unemployment is running at more than 24 percent.Also on Friday Valencia, one of Spain's indebted regional authorities, reached out for emergency aid from a fund of 18 billion euros set up by the central government for struggling regions.In response, the Madrid stock exchange plunged by 5.8 percent.A eurozone rescue deal for Spanish banks finalised by finance ministers on Friday provided no relief.The return on Spanish 10-year bonds jumped above the 7.0 percent danger level and another key measure, the difference between the yields on Spanish and safe haven German bonds, moved dangerously high, topping 600 points.The indicators revived warnings that the banking bailout may not be enough to stabilise Spain's finances, a key concern for the future of the eurozone.

 

Ministers: Bank to pump €1.4bn into Greece

The European Investment Bank will pump around €1.4bn ($1.7bn) by 2015 to fund infrastructure projects in crisis-hit Greece, the ministers of finance and development said on Saturday."I believe the accords will be signed in the coming days. We aim to restart, to re-activate the EIB in the private sector as soon as possible," said Finance Minister Yannis Stournaras after talks with EIB chairman Werner Hoyer.Greece's private sector has been starved of funds as the country grinds through a five-year recession that has cut off bank loans and even state contract payments.EIB loans this year had been limited to just 10 million euros, Stournaras said, as Greece plunged into political uncertainty in May, requiring two elections before a coalition government could be formed to continue EU and IMF-mandated reforms."The agreement is a vote of confidence in Greece. Besides infrastructure projects and support for small and medium companies, the cooperation will be expanded to facilitate foreign investment and privatisation," said Development Minister Costis Hatzidakis, according to the state-run Athens News Agency.There was speculation in April that the EIB would seek to insert drachma clauses into its contracts with Greek firms to ward against a possible Greek euro exit.But Stournaras insisted on Saturday that repayment will be in euros.

European Central Bank's Head: Euro 'Absolutely Not' In Danger

 

Worries about the 17-nation eurozone's future health have been fueled lately by Greece's persistent troubles and by the financial woes of Spain, the bloc's fourth-biggest economy. European ministers this week signed a rescue package worth up to (EURO)100 billion ($122 billion) for its ailing banks, but concern flared about Spain's prolonged recession and the debts of its regions, and the country's borrowing costs rose.Asked in an interview with French daily Le Monde whether the euro is in danger, ECB President Mario Draghi replied: "No, absolutely not."When outside analysts draw up scenarios for an "explosion" of the eurozone, "that underestimates the political capital that our leaders have invested in this union, as well as the support of European citizens," Draghi said in the interview, which was posted on the ECB's website."The euro is irrevocable," he added.The ECB this month cut its benchmark interest rate to a record-low 0.75 percent but gave little sign of further action soon to ease the crisis. It already has made two rounds of three-year emergency loans to banks, but has shown little appetite to reactivate its government bond-buying program."Our mandate is not to resolve the financial problems of countries, but to ensure price stability and to contribute to the stability of the financial system in full independence," Draghi said in the interview with Le Monde, conducted Wednesday  emphasizing the ECB's primary task of fighting inflation.Asked whether the ECB should do more to ease the economy, Draghi replied: "We are very open. We do not have any taboos."He said the ECB decided to cut interest rates in July because it forecast that inflation would be at its target level – close to or below 2 percent – at the start of 2013."It now seems likely that it will fall sooner than expected, at the end of 2012," he said. "Our mandate is to maintain price stability in order to prevent both higher inflation and a generalized, broadly based fall in prices. If we see such risks of deflation, we will act."As for the eurozone economy, Draghi said that the situation "has gradually worsened, but not to the point of plunging the whole of the monetary union into recession.""We still expect a very gradual improvement in the situation by the end of this year or the beginning of next year," he said.

NEWS,21.07.2012

Spain's economy wobbles amid bailout

Concerns about Spain's crippling financial problems flared again Friday as even news that the country had been given the final go-ahead for a bank bailout loan of up to $122.9 billion failed to take the sting out of a further round of bad economic news.Earlier Friday, finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spain's banks, which have been struggling under the weight of toxic loans and assets from the collapse of the country's property market. Investors have been shying away from Spain for months, worried that the country could not keep control of its deficit during a recession while supporting its stricken financial sector.Spain is the 17-country eurozone's fourth-biggest economy, and many market watchers fear that if it asked for a bailout, the rest of the region could not afford to foot the bill. The country and its banks were also locked in a vicious debt spiral, where the shaky banking system has been propped up by the indebted government so that the banks could buy more government debt. The loan facility agreed to on Friday was designed to break that spiral.The bank agreement came as Spain cut its growth forecast and the heavily indebted Valencia region asked for financial help. The news sent the country's borrowing costs soaring and its stock prices plummeting. In afternoon trading, Spain's main IBEX index was down almost 6 percent, while the interest rate on the country's 10-year bond - an indicator of investor confidence in a country's ability to manage its debt - was at 7.2 percent. This is a rate that many market watchers consider too high a price for a country to pay in the long term.Treasury Minister Cristobal Montoro on Friday forecast Spain's recession will drag on into 2013.Unemployment, now at 24.4 percent, will remain about the same next year, Montoro said.Meanwhile, the economy will shrink 1.5 percent this year, a slight improvement from the 1.7 percent drop previously predicted, he added.The government this week passed painful austerity measures - tax increases and cuts to benefits, salaries and pensions - to reduce state debt and strengthen confidence in its finances.Spaniards staged huge anti-austerity protests in 80 cities and towns across the country Thursday.

After PFGBest, 'Crisis' In Commodities Trading Could Impact Everyday Consumers

Experts warn of a crisis in the commodities trade that could impact everyday consumers. First, there was a banking crisis. Now, after the collapse of Peregrine Financial Group, commodities markets may be on the brink of their own emergency, which could reach consumers at the gas pump or the grocery store.The high-profile failure of two commodities brokerage firms in less than a year led to a crisis of confidence among traders of commodity futures agreements to buy and sell basic goods like corn, wheat and oil. If this market stops functioning properly, experts warn, consumer prices could fluctuate wildly.“The futures industry had long been considered a very strong place to put your money,” said John Lothian, a registered futures adviser who runs an industry news and analysis service. The collapse of Peregrine, which does business as PFGBest, has “absolutely caused a crisis,” he said. “It’s going to take a while for the industry to restore its own confidence.”The crisis took root last October with the well-publicized collapse of commodities brokerage MF Global, which lost $1.6 billion in customer funds. That was followed, earlier this month, with the failure of Peregrine, which imploded just before the firm’s founder, Russell Wasendorf, admitted to taking more than $100 million in customer cash over two decades.The failures have caused some traders to lose faith in both of the industry’s regulatory bodies -- the Commodity Futures Trading Commission and the National Futures Association -- and the brokerage firms themselves. “I don’t know where to put my money to trade,” George Papagiannis, a lawyer and futures trader who lost money with Peregrine and MF Global, told The Huffington Post shortly after the PFG collapse. “I love to trade, but I don’t trust any broker now. So I’m not going to until I’m sure there’s good oversight."This sentiment could be bad news for regular consumers of basic commodities like oil and corn. Brokerages like Peregrine provide a platform for trading futures contracts, agreements to buy or sell a commodity like oil or corn at a set price in the future. Often farmers will trade futures to protect crop prices from unforeseeable fluctuations for example, a glut of commodities that causes prices to fall.“A collapse of a firm means that those commercial market participants who have to intelligently hedge their purchases have less and less faith in [the firms] with whom they’re investing,” said Gene Guilford, president of the Independent Connecticut Petroleum Association, a nonprofit association of gas and fuel oil dealers. “What ends up happening with a lack of faith is retailers end up hedging less of their purchases and leaving them open to the vicissitudes of the marketplace.”If farmers or oil dealers pull out of the markets, then there’s nothing to buffer commodity prices against unexpected fluctuations, meaning the everyday price of oil or corn could dip or spike wildly for average consumers, according to Guilford. Futures-trading volume in the first half of 2012 was down nearly 10 percent from the same period last year, according to data from the Futures Industry Association, the industry’s main lobbying group. In June trading volume was down more than 15 percent from June 2011. “We’re not on the cusp of a problem, we’re in a problem,” said Michael Greenberger, former director of trading and markets at the CFTC and current professor at the University of Maryland School of Law. “Nobody wants to trade.”Since the Peregrine collapse, blame also also fallen on regulators for failing to spot that fraud, despite years of audits and the collapse of MF Global only months before. On Wednesday, CFTC chair Gary Gensler told the Senate Agriculture Committee that "the system failed to protect the customers of Peregrine," only days after the CFTC rushed approval of new rules designed to protect brokerage customers. Those rules include a requirement that brokers file daily reports on the state of segregated customer accounts.But the reforms might not address the root of the problem. According to Greenberger, federal regulators simply don’t have the resources to keep up with the brokerage firms, leaving the door wide open to fraud. “The system is weak because it’s not adequately supervised by the CFTC,” he said, adding that the CFTC is being “starved” for cash. In June, congressional Republicans voted to slash the CFTC budget by about 12 percent, or $25 million. Experts warn that without proper regulatory oversight, there’s little chance that confidence will return to the commodities markets. “It would be one thing if it were just one firm, MF Global," said Lynn Turner, former chief accountant at the Securities and Exchange Commission, now managing director at consulting firm LitiNomics. “Now we've had a couple [of brokerage failures], and I can't help but feel there are others out there. But for the grace of God, this could happen again.”

NEWS,07.07.2012

From Ireland to Greece: Tragedy and Renewal in the Eurozone Crisis

The past several years, I have engaged intensively in research on post-Celtic Tiger Ireland. One thing I frequently hear in Dublin is "well, at least we're not Greece." So, after three trips to Ireland in the last half year, I jumped at a chance to visit Greece after the recent elections. What I found is that the two nations have more in common than either would like to admit. In terms of data (via Eurostat), Ireland is marginally better off illustrated by some minor but important recent steps towards market financing of its debt and an increase in American investment over the last year. Yet both are not near the bottoming out of their crisis. Greece, for example, owed at the end of 2011 approximately 165 percent debt relative to its gross domestic product Ireland was at about 108 percent. This is better for Ireland, but if Greece were not in the Eurozone, Ireland would only be surpassed by Italy as Europe's worst. In terms of annual deficit, Ireland entered 2012 worse than Greece with about an annual deficit of about 13 percent of gross domestic product and Greece at about 9 percent. Greece, on the other hand is deeply mired in depression with gross domestic projected to decline by at least 5 percent and projected Irish growth just under 1 percent positive for 2012. In Ireland, however, one has to discount for multinational corporations which pay insufficient tax into the economy and produce few new jobs to sufficiently affect indigenous economic growth. Greece's unemployment is over 20 percent -- while Ireland's has now hit 15 percent. Ireland's would be higher were it not bleeding its talent via emigration. This is particularly evident in youth unemployment (under age 25) which in Greece is over 50 percent, but in Ireland around 30 percent. Ireland and Greece are mired in the midst of major international bailouts of their economies which are based on unsustainable economic and political assumptions. In both countries, if you are a public sector employee you are being paid with money borrowed from other countries mainly Germany. Both countries are caught in enforced austerity via these bailouts. On the other hand, both would have to make massive public sector cuts anyway as their finances had run far behind their social ambitions.Neither have realistic alternatives. Ireland and Greece have gone through recent national votes and reaffirmed their commitment to the Eurozone while revealing significant political shifts. Ireland voted to approve its ability to draw on future European stability mechanism capital a clear reflection that the people there understand that a second bailout is likely after 2013. The Greek vote also was an investment in stability and achieved a new centrist coalition government. But neither could be read as an affirmation of support for the status quo. In Ireland, the second most popular party in the country is nationalist Sinn Féin and in Greece a new grouping of leftist parties called Syriza nearly won. Both parties are drawing support in a growing anti-European Union and anti-austerity mood though few people in either country want to bolt the Eurozone. Neither party has a realistic plan for governance, but in opposition, they need only to play off people's emotions and fears for political advantage. Had Ireland and Greece voted differently, both countries would have confronted likely bank runs, capital flight, foreign direct investment concerns, and even shortages of basic supplies likely leading to a deep decline far beyond that experienced to date. Ireland might have fared better given their capacity to export and their proximity to the British Pound, but it would have been a catastrophic outcome regardless. Tragically, the main purpose of the bailouts has not been to save these economies, but rather contain them from spreading further economic chaos. Once the Eurozone crisis hit Italy in fall 2011, both Ireland and Greece lost their remaining leverage to drive a hard bargain on better bailout terms now both must wait to see if comprehensive European solutions will work. What struck me most in talking to people in Athens and other parts of Greece was how common the refrains were from my visits to Ireland. People in both countries want the world to know the pain they are feeling. They want the world to know that they understand that they have to pay for years of excess but they desperately need relief and a sense of a future. Neither country, in particular, has a sustained sense of advocacy for the youth among the political class which risks the good faith of generations with nothing to do with the crisis but who are suffering the most from it. Sitting at café's in the Plaka in Athens it was hard not to notice the lack of tourists and the steady flow of local Greeks, out for a stroll, but not spending money. This I frequently see in Ireland as well though tourism has rebounded there while it is down by about 15 percent in Greece. In either case, tourism will not offset the fact that consumer spending in both countries has fallen dramatically. Only indigenous growth will solve the economic crises. Both Ireland and Greece offer the world extraordinary human capital, which is being wasted via austerity without simultaneous targeted investments for the future. No doubt, too, both countries face even harder choices in the coming months. In Ireland, another round of deep budget cuts will force a re-examination of a compact on public sector employment and benefits and put major strains on the governing coalition with a large junior partner Labour Party. In Greece, the government must make massive cuts in the public sector to qualify for further bailout payments - including shedding an additional 150,000 people from the public sector workforce by 2015. Without those bailouts, the government will run out of money and the threat of chaos would return. The people of Ireland and Greece, who did not cause these situations, need relief. Germany and other lender states will only get paid back if these economies have room for growth. This means they need to be able to use the bailout funds flexibly and they need major infrastructure projects that put people to work and stimulate future business investment. Most importantly, they need more time a lot more time to meet the terms of the bailouts regarding both cuts and interest rates. While I cannot say what that would mean for Greece, in the case of Ireland it means they need their bailout terms to extend over 30 years and likely at a 2 percent interest rate.At the end of the day, what the people of Ireland and Greece deserve is a sense of dignity and respect for each nation's contribution to the world history, culture, tradition, innovation, and a deep commitment to democracy. The people in both countries understand they will not see prosperity for generations. Instead they are relearning that pure materialism does not necessarily bring real wealth and that growth is vital, but sustained growth is more important than the quick win or fudged balance sheets. Hopefully, Germany will realize that it cannot, having achieved positive vote outcomes in Ireland and Greece, now put these countries to the back burner. Finally, now is the time to visit Ireland and Greece! The deals are great, the people extremely welcoming. I had multiple hotel managers say to me in Greece that people had cancelled reservations in advance of their vote last month for fear of riots. This is absurd. Go to Ireland and see the origins of the great literature and music of the world and the most beautiful scenery you will ever see. Go to Greece and see the Acropolis, Delphi, or take in an island and swim the Mediterranean Sea. You will be greeted with open arms and you will experience real riches offered by two of the great civilizations the world has known. Hopefully, as more people do that, the world will also realize that it is time to rethink the balance of austerity to include investment in the rich tapestry of people that Ireland and Greece have to offer.

NEWS,28.6.2012

Europe's greatest threat

Financial markets slide towards disaster, scarcely pausing to celebrate the "success" of the Greek election or the deal to recapitalise Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank (ECB) – has been vetoed by Germany, and this pattern looks likely to be repeated next week. Nobody should be surprised that Germany has become the greatest threat to Europe. After all, this has happened twice before since 1914. To state this unmentionable fact is not to impugn Germans with original sin, but merely to note Germany's unusual geopolitical situation. Germany is too big and powerful to coexist comfortably with its European neighbours in any political structure ruled purely by national interests. Yet it isn't big and powerful enough to dominate its neighbours decisively, as the US dominates North America or China will dominate the Far East. Wise German politicians recognised this inherent instability after 1945 and abandoned the realpolitik of national interest in favour of the idealism of European unification. Instead of trying to create a "German Europe" the new national goal was to build a "European Germany". Unfortunately, this lesson seems to have been forgotten by Angela Merkel. Whatever the intellectual arguments for or against German-imposed austerity or the German-designed fiscal compact, there can be no dispute about their political import. Merkel's stated goal is now to create a "German Europe", with every nation living, working and running its government according to German rules. Merkel doubtless believes that she is helping Europe when she maternally instructs the Greeks, Italians and Spaniards to "do their homework" and so become good little Germans. But like its less benign predecessors, this effort to impose German hegemony is guaranteed to fail. Europe's leaders must therefore sart considering a previously unmentionable question, perhaps as soon as the current summit, if the euro crisis intensifies. This question is not whether Europe will agree to live under German leadership, but whether Germany will agree to live under EU leadership – or whether the other nations must form a united front against Germany to prevent the destruction of Europe, as they have repeatedly in the past. To be specific, the euro's only chance of survival now depends on a decisive move towards political and fiscal union. Angela Merkel plays lip service to such political union, even claiming that democratic accountability is her main condition for financial rescues; but what she means is accountability to German voters, German newspapers and German constitutional judges. She promises to "do whatever it takes to save the euro" but vetoes anything that might actually work, claiming deference to German public opinion or national interests. Europe must now call this bluff. At the summit, France, Italy and Spain can turn the tables on Merkel by presenting her with an ultimatum. Led by President Hollande, who has abandoned president Sarkozy's Gaullist pretensions of parity with Germany, the big three Mediterranean countries could agree on a programme that really might save the euro: a banking union, followed by jointly issued eurobonds and backed by ECB quantitative easing. If Merkel tried to block these policies, the others could politely invite her to leave the euro, since Germany's political pressures evidently made membership impossible on terms its partners could accept – essentially the proposition Merkel put last month to Greece. Without Germany, the eurozone would have much smaller internal imbalances and much more political coherence, with a much weaker currency and higher inflation, both of which would make debts easier to resolve. Merkel would probably insist on Germany's legal right to remain within the euro, ironically echoing the Greek position. At this point the other nations could play their trump card: to reduce interest rates and make their economies more competitive by weakening the euro, the debtor nations could vote for unlimited bond purchases by the ECB. The Germans on the ECB council would doubtless oppose this, but even with support from Finland, Slovakia, and perhaps Austria and Holland, Germany could command no more than seven votes out of 23. Germany would then face the very same existential choice about its relations with Europe that Merkel has inflicted on Greece and other debtor nations. Germans will almost certainly support the political concessions that might give the euro a chance of survival, including fiscal transfers and some mutualisation of debts, once they realise that their only alternative is isolation from the rest of Europe. But before they agree to a European Germany, voters may need to be reminded that trying to create a German Europe always leads to disaster.