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,09.08.2012

China's inflation slows to 1.8% low

Chinese inflation hit a two-and-a-half-year low in July, official data showed on Thursday, giving the government further policy leeway to boost weakening growth. The country's consumer price index (CPI) rose 1.8% year-on-year (y/y) last month, the National Bureau of Statistics said, the fourth straight month of y/y easing and the lowest level since January 2010.The slowdown potentially gives authorities more ammunition to light a fire under the world's second-largest economy, which grew 7.6% in the second quarter for its worst performance since the height of the global economic crisis in 2008-2009.Authorities this year have taken measures including the rare step of slashing interest rates twice in quick succession while also lowering requirements for how much money banks must keep in reserve.Chinese leaders, including Premier Wen Jiabao, have expressed concern over the weakness in the economy and have hinted that the government may need to take further action to bolster growth.Sun Junwei, China economist at HSBC in Beijing, said the figure was in line with expectations and confirmed that inflation overall is trending downward."In general, China's inflation will likely be moderate and controllable in the future, which offers room for China to further loosen its (monetary) policy," she said.Sun added that if other economic data due out later on Thursday comes in worse than expected there could be a further cut in interest rates or bank reserve requirement ratios in August.China is scheduled to announce July figures in industrial production, fixed asset investment and retail sales later Thursday.Helping suppress the overall consumer price index was a decline of 0.9% in prices for transportation and telecommunications, according to the data.Inflation for the first seven months of 2012, meanwhile, was 3.1%, the bureau said."Inflation continues to peel off rapidly, highlighting an output gap that the government is trying to plug with rising state investment," economists at IHS Global Insight said in a report after the release of the July data.Producer price inflation (PPI), a leading indicator, declined 2.9% in July from the same month last year for the fifth straight month of contraction.Producer prices "continue to highlight the severe deflationary pressure rippling across the country", IHS Global Insight said, noting that "deflation, not inflation, is the greatest short-term threat to the Chinese economy".

Eurozone GDP to fall by 0.3% this year

The eurozone economy will contract by 0.3% in 2012 before recovering more slowly than expected next year to expand by 0.6%, a poll conducted by the European Central Bank (ECB) revealed on Thursday. The data came from the Survey of Professional Forecasters which the ECB carries out on a quarterly basis. It was published in the Frankfurt-based bank's monthly bulletin.The previous SPF survey predicted a 0.2% contraction for eurozone gross domestic product (GDP) this year and a 1% expansion in 2013.Recession-inducing austerity measures in some euro countries and "higher uncertainty" over the resolution of the single currency's debt crisis were "the main factors behind the downward revisions," the ECB said.Forecasters also said that eurozone unemployment would stay at its current high of 11.2% throughout 2012 and increase to 11.4% in 2013. Inflation was projected to fall from 2.3% to 1.7% over the same period.The ECB said it expected "weak" economic activity both in the second and third quarter of 2012 and only a "very" gradual recovery afterwards. "Risks surrounding the economic outlook for the euro area continue to be on the downside," it noted.The European Union statistical office, Eurostat, is to publish GDP figures for the second quarter of the year on Tuesday.

India's shock fall in industrial output

India's industrial production contracted by a shock 1.8% from a year earlier in June, as manufacturing output shrank in Asia's third-largest economy, official figures showed on Thursday, The data underscored the massive job ahead for India's new pro-market finance minister, P. Chidamabaram, who pledged this week to "restart the growth engine" of India's sharply slowing economy.Manufacturing output, which accounts for three-quarters of the index of industrial production, fell 3.2% from a year earlier in June, according to the government data.Manufacturing has been undermined by high interest rates to combat stubbornly high inflation, falling business confidence and Europe's debt crisis which has hit exports.The 1.8% shrinkage in output by factories, mines and utilities in June was the third contraction in four months and followed a revised 2.5% production rise in May.The industrial output reading was far below analysts' expectations, which were for an increase of 0.80%, according to a Dow Jones Newswires poll.The weak performance is likely to pile pressure on the central bank to ease interest rates to spur growth.The bank has said it wants inflation to come down before cutting borrowing costs, but Chidambaram has already indicated he wants lower rates, saying "sometimes it is necessary to take carefully calibrated risks".The weak numbers come as the left-leaning Congress-led government is under pressure over a string of graft scandals and its attempts to liberalise the still inward-looking economy to spur growth have led to gridlock in parliament.India's once-booming economy grew just 5.3% between January and March, its slowest annual quarterly expansion in nine years.Capital goods output, an important investment indicator, slid 27.9% in June from a year earlier.Goldman Sachs economist Tushar Poddar, who recently pared his full fiscal year growth forecast to 5.7% in contrast to the central bank's expectation of 6.5% expansion, saw more tough times ahead."Weak monsoons are also likely to impact rural consumption demand and exacerbate weakness in investment demand," Poddar said ahead of the data.Citibank has said if a nationwide drought is declared, which would be the country's third in a decade, growth could be as low as 4.9% as hundreds of millions of farmers depend on the annual rains for their income.

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,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,05.07.2012

European Central Bank cuts rates to new low

 

The European Central Bank cut its key interest rate by a quarter percentage point Thursday to a record low 0.75 percent to try to help ease Europe's financial crisis and boost its sagging economy.The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money. But experts said that fear over the economy was so high in Europe that the cut might only have limited effect.In a more surprising move, the ECB cut the interest rate it pays banks on overnight deposits by a quarter percentage point to zero. This pushes banks to lend the money, rather than sock it away with the ECB.ECB President Mario Draghi said the eurozone economy would recover only gradually. Some of the risks foreseen from the debt crisis had already materialized, pushing the bank to act, he said.Analysts warned the rate cut might do little to jolt the eurozone economy back to life, however. Borrowing rates are already low, but businesses and households are not spending money because they are afraid of the economic outlook.Draghi said there is more the ECB could do to stimulate growth "we still have all our artillery ready" and that low inflation gives the bank more wiggle room. However, he suggested no further actions were imminent.Stock markets initially rose after the news, but the gains faded as investors worried about a slowdown in the global economy. Germany's DAX stock index fell 0.5 percent and the Dow 0.2 percent. The euro was down 1.1 percent at $1.2380."Today's ECB interest rate cut does little to alter the bleak economic outlook," said Jennifer McKeown, analyst at Capital Economics.She said the ECB is likely to now wait and see how the financial markets and the economy react to the rate cut and to the new emergency measures announced by European leaders last week.The leaders agreed to make it easier for troubled countries and banks to receive rescue loans from Europe's bailout fund and also signaled greater willingness to use emergency funds to purchase government bonds. The goal would be to drive down troubled countries' borrowing costs. They also agreed to create a single Europe-wide banking regulator to prevent bank bailouts from wrecking individual cuntries'government finances.Collectively, the moves sent a message to financial markets that leaders from the 17 countries that use the euro could work together to fix their problems. They also helped lower the high borrowing costs for financially stressed countries such as Italy and Spain, the euro region's third- and fourth-largest economies.Lending activity in the eurozone has remained weak because businesses are not asking for credit because of the slow economy and out of fear that the eurozone may suffer a further financial calamity. Concerns remain that bankrupt Greece could eventually leave the euro, causing more turmoil, or that Spain and Italy could need bailouts that would strain the resources of donor countries.Joerg Kraemer, chief economist at Commerzbank, said the cut wouldn't fix what was wrong. The reason the eurozone economy is weak is not because of "high ECB rates but because of uncertainty stemming from the sovereign debt crisis. This can't be cured by lower rates."The cut to the refinancing rate will give some further relief to banks by lowering the rate they pay on the €1 trillion in cheap emergency loans they took from the ECB Dec. 21 and Feb. 29, the bank's chief emergency measure. The rate on that money is the average refinancing rate over the life of the loan, which can be up to three years. Lower costs on that money means they can earn more when they use it to buy higher yielding investments such as gThe cut in the deposit rate is meant to push banks to stop using the ECB as a safe haven by parking money there overnight. Before the debt crisis exploded, banks would deposit about €50 billion with the ECB overnight. That ballooned as the crisis made banks wary of investing or lending money. On Wednesday, banks had placed €790 billion with the ECB overnight.There are other safe havens for banks to place their money government bonds of financially strong countries like Germany, for example. But a central bank is considered the ultimate safe haven since it can print money at will.The eurozone crisis has battered investor confidence for 2 ½ years. It has seen Greece, Ireland and Portugal need bailouts from the other eurozone countries and the International Monetary Fund to keep paying their debts and covering their budget deficits. Spain has asked for as much as €100 billion in rescue loans for its banks.Earlier in the day, the central banks of China and Britain took action to stimulate their economies.The Bank of England decided to purchase another 50 billion pounds in government bonds from financial institutions. The hope is that the banks will use the extra cash to lend to businesses and households.China's central bank, meanwhile, cut interest rates for the second time in a month to shore up its economy, the second-largest in the world. Interest on a one-year loan was reduced by 0.31 percentage points to 6 percent effective Friday. Chinese authorities have rolled out a series of stimulus measures since March after economic growth slowed to a nearly three-year low of 8.1 percent in the first quarter.In the U.S., weak economic indicators have raised speculation that the U.S. Federal Reserve may also have to do more to keep the U.S. economy growing. Some think the Fed might carry out a third round of bond purchases aimed at driving down interest rates on business and consumer loans.The Fed took more limited action at its meeting ending June 17, extending its so-called Operation Twist effort in which it sells short-term bonds and buys longer-dated issues to push down long term interest rates. The Fed meets next Aug. 1.

NEWS, 13.06.2012.

Cyprus may ask for bailout before Greek elections

 

Cyprus' Finance Minister warned Wednesday that the eurozone country could seek a European Union bailout to help recapitalize its banking sector before crucial elections in Greece this Sunday.Vassos Shiarly said that the Greek elections — seen as a vote on whether the debt-wracked country stays or leaves the eurozone — are a key factor to Cyprus' decision whether to become the fifth eurozone member to ask for EU bailout money."The chosen time (to seek a bailout) will be decided in cooperation with all European Union partners, either within the eurozone or the Union as a whole," Shiarly told a business forum in the capital, Nicosia."We also know that the deadline by which the recapitalization of banks has to be completed is very, very close ... But because the problem that may arise from the (Greek) elections this coming Sunday is perhaps of the highest importance, this is also taken into account in our overall assessment."Shiarly cited the example of Spain, which last weekend asked for a loan lifeline of up to (EURO)100 billion ($125 billion) from the 17 countries that use the euro to shore up Spanish banks."In most cases action is taken and the appropriate moment, meaning when the markets are closed," he said.Unable to borrow from international markets because of its junk credit rating, Cyprus has until June 30th to come up with (EURO)1.8 billion ($22.5 billion) — a tenth of its budget — to support Cyprus Popular Bank, its second largest lender which is most exposed to Greek debt and is unlikely to raise the money on its own.Shiarly and other Cypriot officials have said that the money could either come from the EU bailout fund, or through a loan from another country.Either way, time is running out for the tiny country of 850,000 people with strong cultural and business ties to Greece as the possibility over an anti-bailout party victory in Sunday's vote could further harm Cyprus' economy.Greece is holding the June 17 repeat election following an inconclusive May 6 ballot in which voters turned to smaller, mainly anti-bailout groups that have promised to renege on Greece's austerity commitments that were made in exchange for international bailout money.France's new President Francois Hollande on Wednesday warned that the election outcome could see them pushed out of the eurozone if anti-bailout parties emerge victorious.Fitch ratings agency on Wednesday warned that Cypriot banks would suffer most from a Greek euro exit given their direct exposure to Greek loans and the country's economy through their large branch networks there.Cyprus has vowed to stick to a 2012 deficit target of 2.5 percent of gross domestic product and is drafting additional spending cuts and tax rises to fix a 1 percent deviation. More importantly, Cyprus wants to be seen by its EU partners as living up to its promises in the hope of clinching favorable terms on a possible EU bailout, such as protecting its low 10 percent corporate tax — a key selling point for its large services sector.Cyprus President Dimitris Christofias repeated Wednesday that the measures won't come at the expense of wage earners or pensioners.

ITALIAN FEARS OVER SPAIN CONTAGION

 

Italian premier Mario Monti has seen nearly seven months of confidence-building efforts by his government wiped out as a debt auction revealed that the country's borrowing rates are back near levels last seen in December.A sale of 12-month bonds, a warm-up for Thursday's weightier long-term debt auction, demonstrated the speed with which market jitters spread from Spain following Madrid's weekend concession that its banks need a bailout.Italy paid an interest rate of 3.972% - up from 2.34% in a similar auction last month - to borrow 6.5 billion euro (£5.23 billion) in 12-month money from bond markets. Though demand was strong, the high rate suggests investors worry Italy may need a rescue of its own if Spain takes one.
"Contagion is back with a vengeance, and Italy is bearing the brunt of the fallout from Spain's request for external assistance," said sovereign debt expert Nicholas Spiro. Markets, he noted, are no longer differentiating fiscally-stronger Italy from Spain, "which is a sign that panic has set in".Just before the sale, Mr Monti urged politicians to speed the pace of reforms in a bid to persuade sceptical investors - whom he referred to as "observers that don't nurture an innate sympathy for our country"- that Italy was willing to make the necessary sacrifices to escape the debt crisis.Although Italy's deficit is relatively low, at 3.6% of GDP compared with Spain's 8.5%, the economy is not growing and overall debt is huge, at 1.9 trillion euro (£1.5 trillion). To lower that debt, the economy needs to become more competitive.That has been Mr Monti's task since taking office in November. His technocratic government passed a package of tax rises and spending cuts in December, and has been moving ahead with structural reforms but has found resistance from both lobbies and politicians alike.
The premier also made it clear that a broad European action plan is needed to avoid a spread of market panic from Spain to other countries like Italy, calling for concrete measures to be agreed at a June 28 EU summit.Mr Monti backed measures such as eurobonds, jointly issued European debt that would spread risk across countries, but which Germany has firmly opposed.He said they would not need to be introduced this year, but plans should be put in place.

NEWS, 03.06.2012.

Greece leftist party's debt-free vision

 

 

No debt repayments, higher salaries and freedom from EU-IMF tutelage: Greece under the radical leftists, who are poised to win a June 17 election, seems a world removed from its current recession nightmare.The Syriza party has pledged to tear up Greece's loan agreement with the EU and the IMF, which is currently keeping the country on its feet but at the cost of an unprecedented wave of austerity cuts and structural reforms.If implemented, such a programme, which would also mean the nationalisation of banks and a halt to privatisation, could well mean Greece's ejection from the eurozone, potentially sending shockwaves through the global economy.Fed up with two years of salary and pension cuts, Greek voters on May 6 punished larger parties associated with the bailout and catapulted Syriza to second place, within striking distance of the top.Opinion polls show that the radical leftists, only the fifth party in 2009, could even emerge as the victors in this month's repeat ballot.The condensed programme of the loosely-knit coalition of moderate Communists, Trotskyists, ecologists and other leftist groups was announced on June 1.In it, the party's leading minds set out their vision for a more equitable Greece, liberated from the excesses of capitalism, heavy industry and political corruption.Under Syriza's blueprint, state loan repayments to service a debt of over €350bn are to be frozen to free funds for social support programmes.The privatisation of major public companies - a key condition of the EU-IMF bailout deal - is to be suspended as well.Greek banks that draw on European support funds to recapitalise themselves after a landmark state debt cut brokered by the previous government in March will be "nationalised and socialised."And the EU-IMF bailout deal, dubbed here the "memorandum," which the leftists say has brought only recession and misery to Greece, is to be rejected and redrawn from scratch."The first act of the government of the Left will be to annul the memorandum and its application laws," Syriza's 37-year-old leader Alexis Tsipras said on Friday."We will seek a new renegotiation of the debt at European level, aiming to drastically reduce it, or a debt moratorium and a suspension of interest payments until conditions for the stabilisation and recovery of the economy are created," Tsipras said during a presentation of the party's revised programme.A previous version of Syriza's platform, drawn up in April, had pledged to outlaw offshore company dealings and shut down NATO bases in Greece.The revised version released on Friday plans a withdrawal from NATO operations, starting from Greece's mission to Afghanistan, and a future "disengagement" from the military alliance altogether."At a time when the international balance shifts and US hegemony increasingly comes into question, the policy of Euro-Atlanticism and complying with NATO war plans has no future," said senior party member Thodoris Dritsas.The older parties Syriza decimated on May 6, the socialist Pasok and the New Democracy conservatives, have dismissed its programme as unrealistic and Tsipras as an arrogant demagogue still wet behind the ears."Those who speak of a one-sided rejection of the bailout are like children playing with matches inside an armoury," New Democracy leader Antonis Samaras said during a presentation of his party's own programme on May 31.Syriza's leading economist Yiannis Dragasakis, a former junior finance minister in 1990, believes Greece could take a political decision to reject the loan agreement and dump unwanted labour reforms yet still retain vital EU-IMF loans."Some elements of the bailout deal can be rejected unilaterally. Others require cooperation to do so," he said in a recent televised interview.Even European MP Daniel Cohn-Bendit - a left-wing icon and staunch critic of Greece's bailout terms - recently dismissed Syriza's plans to reverse wage cuts as "idiotic"."Europe will give no more money, Greek coffers are empty," he told a Greens news conference on May 23, after Tsipras had visited Paris and Berlin."It's like asking someone 'how would you like to commit suicide, with a gun or an axe?'" he said.In March, Syriza sued Germany's Bild newspaper for a million euros ($1.26m) after it allegedly portrayed Tsipras as a "half-criminal" who "openly supports violent anarchists.""Will these radicals soon be governing Greece?," the tabloid asked its readers.

ECB rate cut eyed as euro crisis bites

 

The European Central Bank may cut interest rates again soon as the eurozone debt crisis deepens, but it will continue to insist that it is up to governments to find a lasting solution, analysts say.ECB watchers predict the central bank - which will hold its regular policy-setting meeting next week on Wednesday instead of Thursday owing to a public holiday - will not alter borrowing costs just yet this month.But it could act in July as deepening fears about Greece and possible contagion to other countries push the 17 countries that share the euro back into recession, the analysts predicted. "The further escalation of the eurozone crisis has intensified the pressure on the ECB to take further remedial action," said Capital Economics' chief European economist Jonathan Loynes."But while president (Mario) Draghi may hold open the prospect of further support of the region's banks after the meeting on June 6, he is likely to insist again that it is up to national policymakers to address their broader economic and fiscal problems," Loynes said. The ECB has never hesitated to act from the very beginning of the crisis.It quickly reversed last year's rate hikes to bring eurozone borrowing costs back down to an all-time low of 1.0% and embarked on a hotly contested programme of indirectly buying up the bonds of debt-mired countries.Most recently, in two so-called long-term refinancing operations (LTROs) in December and February, it pumped more than €1.0 trillion into the banking system to avert a dangerous credit squeeze in the euro area.Nevertheless, ECB officials have all along insisted that such measures cannot cure the root cause of the crisis - profligate spending by governments."Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no," Draghi said again during a hearing at the European parliament last week.The ECB argues that its overriding priority, even in times of crisis, is to keep a lid on inflation in the single currency area.The latest data indicate that price pressures are indeed under control - area-wide inflation slowed to 2.4% in May from 2.6% in April and in Germany, the bloc's biggest economy, inflation slowed to 1.9%, its lowest level in 17 months.Further up the inflation pipeline, too, the money supply expanded by just 2.5% in April, a sharp slowdown compared with the previous month, despite the huge amounts of liquidity pumped into the system via the ECB's anti-crisis measures."With the inflation threat receding, the ECB has more scope to stimulate the economy," argued Berenberg Bank chief economist Holger Schmieding.The ECB will also publish its latest quarterly staff projections on inflation and economic growth on Wednesday.They are likely to be revised downwards, "leaving the door open for further policy accommodation," said Newedge Strategy analyst Annalisa Piazza.She saw a "60% chance" that the ECB would trim its rates by a quarter of a percentage point to 0.75% as early as this month.Nevertheless, "the timing of a rate cut is highly uncertain," the analyst cautioned.While the "weaker fundamentals and increasing stress in financial markets fully justify a quarter-point cut this week, the ECB might decide a later cut is the best tactical option" as borrowing costs are already at record lows and the full effects of the anti-crisis measures have yet to unfold, she argued.Berenberg Bank's Schmieding, too, saw a "good case" for a quarter-point rate cut.But the bank would probably wait until July by which time the outcome of the Greek parliamentary elections on June 17 will be known, the economist argued.Greece is heading to the polls for a second time in six weeks after an inconclusive vote on May 6. And with the radical leftist Syriza party, chief opponent of a massive EU-IMF bailout accord, tipped to win this time, the election could lead to Greece quitting the single currency. Commerzbank economist Michael Schubert also predicted the ECB would hold rates steady again this week, "not least because it wants to maintain the pressure on politicians."Nevertheless, ECB chief Draghi would "leave the door wide open for further action," Schubert said.