NEWS,25.11.2012

Thousands of Italians rally against austerity

Tens of thousands of students and workers rallied across Italy today, to protest against austerity measures imposed by Prime Minister Mario Monti's technocrat government.Appointed a year ago when Italy came close to a Greek-style debt crisis, Monti has pushed through painful tax increases and spending cuts to try to rein in public finances at a time when schools and universities say they desperately need more support."We need to fight for our rights. This government doesn't represent us and these austerity measures and all the cuts they've introduced are totally anti-democratic," said student protester Tommaso Bernardi, attending a rally in Rome.Far-right group Casapound marched through the capital Rome later on Saturday, chanting "Monti, go away!". Anti-fascists staged a counter-demonstration in another part of town."This government is making the nation starve and is destroying the social welfare system," said Casapound president Gianluca Iannone. "The weakest are hit hardest - the disabled, students and single-income families."Police organised different routes and times for the rallies to reduce the risk of violence after scuffles broke out between police and demonstrators during protests on November 14 that saw the police criticised for heavy-handed tactics.Several thousand students and workers also rallied in other cities including Naples, Florence and Catania.No clashes were reported but the widespread protests highlighted the scale of discontent in the recession-hit country ahead of parliamentary elections next year."We need to change this country, starting from investments in schools, universities and culture," said Michele Orezzi, a university union coordinator, adding that Italy's education system was "crumbling into pieces".With youth unemployment at about 35%, more than three times the national average, and Monti's austerity policies biting into education spending, school pupils and university students have taken an active role in anti-government protests.Much anger is focused on an education reform bill going through parliament that would give schools more autonomy and allow them to accept other sources of funding than the state. Protesters believe this is intended to encourage privatisation.Students have occupied schools around Rome in recent weeks to express their anger and frustration at repeated funding cuts, chaining gates shut and camping inside classrooms.Monti has defended his austerity plan, saying he believes his technocrat government will be remembered for having helped Italy pull itself out of a deep economic crisis without needing to resort to external aid.Italy has been the European Union's most sluggish economy for more than a decade, fuelling investor concerns about its ability to bring down public debt of around 126% of output.

World Week Ahead: Deal or no deal for Greece?

Two deals might help extend last week's momentum on equity markets in the US and Europe -one that helps the US avoid its fiscal cliff and a second that would end the immediate threat of Greece defaulting on its debt.Optimism was fuelled on both fronts last week, though the timing for an agreement by US lawmakers on preventing automatic tax increases and spending cuts worth about US$607 billion set to kick in on January 1 remains more open-ended. Officials from the White House and Congress will resume negotiations this week.US President Barack Obama said on November 18 he was "confident" a new US budget deal would be reached. Meanwhile, EU commissioner Olli Rehn on Thursday said he saw no reason a deal on Greece could not be concluded tomorrow when euro-zone finance ministers, the International Monetary Fund and the European Central Bank meet again.Greek Finance Minister Yannis Stournaras expressed confidence that the IMF would ease earlier deficit targets imposed on the debt-stricken nation, thus opening the door to the transfer of more funds."It's a done deal," Stournaras told reporters in Brussels on Friday after meeting with EU officials and IMF Managing Director Christine Lagarde, Bloomberg reported.Commitment to resolving budgetary and debt issues that risk hampering both US and European economies bolstered stocks last week.In the Thanksgiving holiday shortened week in the US, the Dow Jones Industrial Average gained 3.3%, the Standard & Poor's 500 advanced 3.6% and the Nasdaq Composite climbed 4%.In the past five days, the benchmark Stoxx Europe 600 Index jumped 4%. It is the first time the gauge has gained every day of the week since July 1, 2011, according to Bloomberg.The advance in European stock prices came even though EU leaders struggled to see eye to eye in talks about the next seven-year budget for the region and a two-day meeting late last week ended in failure.European Council President Herman Van Rompuy said they decided to abandon the special summit on the 2014-2020 EU budget, worth about 1 trillion euros, and would try to reach a compromise early next year, according to Reuters.On the US economic front in the days ahead, investors will eye the latest reports on durable goods orders and consumer confidence on Tuesday, weekly jobless claims on Thursday, the Chicago Purchasing Managers Index and personal income and outlays on Friday. The Federal Reserve's beige book is due on Wednesday.Also, three reports on the housing market might confirm the recent data indicating strength and optimism in this industry's pace of recovery.The S&P/Case-Shiller home price index for September, due Tuesday, is expected to show the eighth straight month of increases, while new home sales for October, due Wednesday, and October pending home sales data, due Thursday, are also expected to show a stronger housing market.The US Treasury is set to auction US$35 billion of two-year notes on Tuesday, US$35 billion of five-year securities Wednesday and US$29 billion of seven-year debt on Thursday.The first clues on how retailers fared on Black Friday, the day after Thanksgiving, will also provide a helpful indicator on the state of the American consumer. The National Retail Federation predicts sales during the holiday season to increase 4.1% this year, down from last year's 5.6% growth.On Friday, Europe offered some surprisingly good economic news. The Ifo institute's business climate index unexpectedly rose, climbing to 101.4 in November from 100 in October, the first increase in eight months.That helped the euro finish what had already been a good week on an even more positive note, rising 1.8% against the greenback and climbing 3.2% against the Japanese yen in the past five days."Certainly sentiment towards euro has changed," Camilla Sutton, chief currency strategist in Toronto at Bank of Nova Scotia, told Bloomberg News. The euro "rallied slightly again after we got German confidence numbers, which highlighted better-than-expected business sentiment."

International arbitration for tax disputes

The United States is undefeated in the nearly two years since it began settling corporate tax disputes with Canada through a winner-takes-all process popularly known as baseball arbitration.Tax lawyers and accountants in both countries said the US Internal Revenue Service had won three of the binding decisions and Canada none. They said the IRS had collected a significant sum of money, possibly in excess of $100m.Launched in December 2010, the arbitrations follow the rules for resolving salary disputes between Major League Baseball players and their teams. In the tax game, however, the companies forced to pay and the payments remain confidential. The United States has had similar agreements with France since 2004 and Belgium and Germany from 2006, but no cases involving them have gone to baseball arbitration, the tax experts said.Baseball arbitration plans are in pending tax treaties with Hungary, Luxembourg and Switzerland. Future treaties with the United Kingdom and Japan may have the same provisions, tax experts said.The arbitration process arises often in tax questions involving a multinational company's transfer pricing taxes, where two countries disagree over which of them should collect corporate taxes. The winning country gets the tax revenue. The loser goes home empty-handed. Companies like the baseball arbitration provision because it lends certainty to their tax bills. Companies can request that countries go to arbitration if revenue agents cannot settle their tax disputes in two years.Aiming too high?The arbitration panels are made up of three experts, one chosen by each country and the third by the other two experts. Revenue agents from each country submit a tax bill number to the panel. The panel picks the number it thinks is closest to the right answer. Tax experts on both sides said Canada had lost all three disputes because it was trying to hit home runs  seeking too much in taxes during arbitration."Canada has lost three in a row," said Dale Hill, a former manager of Canada's cross-border tax negotiations with the United States and a partner with Gowling Lafleur Henderson LLP in Ottawa. "Maybe Canada has been more aggressive," Hill said.David Rosenbloom, a Washington, DC-based US tax lawyer at Caplin & Drysdale, said: "The Canadian Revenue Agency has developed over the years a habit of taking really extreme and unwarranted positions. It's almost as though they're unaware arbitration is in the treaty." Richard McAlonan, who directs the IRS negotiating program,his month that the agency had resolved a "handful" of the cases. He declined further comment. The Canadian Revenue Agency said in a statement that it prefers to resolve its tax disputes with the United States "at the negotiating table". Going to arbitration "would be the last resort", the CRA said. It declined to comment on the cases, citing confidentiality rules in the treaty. Canada's losses may mean its revenue agents will be more cautious in tax negotiations with the United States. The countries negotiate 75 to 100 cases a year, Hill said. "It's going to get tougher for Canada to negotiate," he said. Treaties pending The tax treaties with Hungary, Luxembourg and Switzerland passed the US Senate Foreign Relations Committee in 2011. But Republican Senator Rand Paul has so far prevented all three treaties from going before the full Senate.A spokesperson for Paul could not be reached for comment. Paul has previously objected to the treaties' provisions that require more sharing of US taxpayer information. New treaty arbitration provisions with Switzerland and the UK would especially benefit the pharmaceutical industry, while auto companies would appreciate the provision in a Japanese treaty, said Lorraine Eden, a professor at Texas A&M University.Companies in both sectors have a lot of transfer pricing tax uncertainty and can face double taxation if unable to force countries into binding arbitration, she said.UK-based GlaxoSmithKline reached a $3.4bn transfer pricing settlement with t he IRS in 2006. But the UK did not accept the US settlement, and Glaxo faced UK taxes on the same profits, Eden said."Would they like the opportunity to go to binding arbitration and settle this? Absolutely," Eden said.

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.