A bail-out by any other name

CALL it a silent bail-out. After several failed attempts, the euro zone's finance ministers finally agreed late on November 26th partly to reschedule Greece's debt, and offer several other measures to alleviate the country’s financial burden. Taken together, this action should cut Greece's debt by up to 20 percentage points of GDP by 2020—with the promise of more to come if Greece keeps to its adjustment programme.

The promise of relief—and the disbursement of a long-delayed tranche of aid worth €34.4 billion next month, subject to approval in national parliaments—does not come a moment too soon for Greece, whose economy has been in free-fall for five years. The country’s crisis has seen many false dawns, and there are several open questions even about the latest plan. But the hope is that it will help restore a degree of confidence in Greece's future and make the euro zone look less fragile. Yannis Stournaras, the Greek finance minister, said the agreement’s assumptions were so pessimistic that Greece could surprise on the upside. He even spoke of his hope of tapping the markets within the next couple of years.

Read More

France's rating downgrade a warning for banks

French banks were reminded of risks to their own growth and credit ratings when Moody's stripped France of its triple-A badge because of an uncertain fiscal and economic outlook.

"It is likely that Moody's will cut its outlook on SocGen and Credit Agricole in coming weeks," said Yannick Naud, fund manager at Glendevon King Asset Management.

Read More

The time-bomb at the heart of Europe

THE threat of the euro’s collapse has abated for the moment, but putting the single currency right will involve years of pain. The pressure for reform and budget cuts is fiercest in Greece, Portugal, Spain and Italy, which all saw mass strikes and clashes with police this week. But ahead looms a bigger problem that could dwarf any of these: France.

The country has always been at the heart of the euro, as of the European Union. President François Mitterrand argued for the single currency because he hoped to bolster French influence in an EU that would otherwise fall under the sway of a unified Germany. France has gained from the euro: it is borrowing at record low rates and has avoided the troubles of the Mediterranean. Yet even before May, when François Hollande became the country’s first Socialist president since Mitterrand, France had ceded leadership in the euro crisis to Germany. And now its economy looks increasingly vulnerable as well.

Read More

European workers stage austerity protests

Workers across the European Union are staging a series of protests and strikes against rising unemployment and austerity measures.

General strikes in Spain and Portugal have halted transport, businesses and schools. Police and protesters have clashed in Madrid.

Smaller strikes were reported in Greece, Italy and Belgium, and rallies were planned in other countries.

Hundreds of flights to and from striking nations have been cancelled.

Airlines are recommending that passengers check schedules before setting out to airports.

British Airways and Easyjet were among the UK carriers forced to cancel some of their services.

Read More

Is China Getting Desperate to Prop Up Their Economy?

China looks like it wants to get ahead of any possible economic slowdown, catapulting off of strong export numbers and granting a record foreign investment quota of $2.75 billion in October.

China’s Qualified Foreign Institutional Investor system curates all foreign investment in the country. Prior to 2002, the country’s control on capital prevented investors to trade on China’s exchanges. The introduction of the QFII system allowed qualified investors to trade on Chinese exchanges within a certain quota. The quotas granted for the last few years have been modest, usually coming in at under a billion dollars in any given quarter

Read More

G20 economic growth slows in 2012

The G20 group of leading world economies has reported slower growth in the three months ending in June.

National output as measured by GDP grew at an annual rate of 3% in the second quarter compared with 3.2% in the first quarter, official data showed.

But, economic health varied with China's output growing 7.6% and Italy's shrinking 2.6% due to recession.

Taking global population growth into account, G20 output is effectively stagnating.

Read More at BBC

Soros calls for Germany to 'lead or leave euro'

International financier George Soros has called for Germany to "lead or leave the euro" days before a crucial ruling on the eurozone's bailout fund by Germany's constitutional court.

Mr Soros argued that the eurozone should target 5% economic growth.

That would require the bloc to abandon German-backed austerity measures and accept higher inflation, he says.

He also backed a new European Fiscal Authority financed by VAT receipts to oversee eurozone government finances.

In an article published in Monday's New York Review of Books, Mr Soros said that Germany should become a more "benevolent" leading country or exit the single currency: "Either alternative would be better than to persist on the current course."

Read More at BBC

Europe’s tired engine

After a promising May and June, Steffen Knoop has seen his sales dip by 30%. His small Hamburg-based company, Wascut, sells cooling and cleaning oils for big machines, including those that make cars. “I have a pretty good window on the economy,” he says. Mr Knoop wonders whether the dip is caused by people taking extra long summer holidays or something more serious. Others with a broader and more long-term view of the economic landscape are asking the same question.

Hopes are pinned on Germany as the locomotive that will keep chugging even as large parts of the euro zone go into recession (see chart). As long as Europe’s biggest economy keeps growing, the argument goes, it can gradually pull others out of the mire. Figures released on August 14th duly showed that German GDP grew in the second quarter on the previous one, but only by 0.3%. That was better than in France (no growth at all), Spain (minus 0.4%) and Italy (minus 0.7%). Given its current weakness, can Germany continue to pull its neighbours along?

to read more.....

Shadow Banks on Trial as China’s Rich Sister Faces Death

When a Chinese court sentenced 28- year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China’s top leadership.

Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. (IHS) in Beijing. That’s the size of the 2011 U.S. government deficit.

Read More at Bloomberg

Spanish Bonds Fall Even as Rajoy Unveils More Budget Cuts

Spain’s efforts to calm investors with 10 billion euros ($13 billion) of budget cuts in education and health failed to stem concerns the nation may be the fourth euro member to need a bailout.

The yield on Spain’s 10-year benchmark bond surged 20 basis points to 5.95 percent today as Economy Minister Luis de Guindos declined to rule out a rescue for Spain and Bank of Spain Governor Miguel Angel Fernandez Ordonez said the nation’s lenders may need additional capital if the economy weakens more than expected.

Spain's Prime Minister Mariano Rajoy during a plenary session at the Spanish Parliament to approve the new conservative government's first batch of austerity measures, in Madrid.

Read More at Bloomberg

Greece Faces Bond-Swap Holdouts

ATHENS—The overall participation rate in an unprecedented Greek debt-restructuring deal has exceeded Greece's expectations, a senior finance ministry official said Monday, despite some holders of Greek foreign-law bonds still refusing to take part in the offer.

The official said 97% of the bonds involved in Greece's debt restructuring agreement, which cleared the way for its €130 billion ($173 billion) bailout, have been tendered in the swap, exceeding the 95% target the country was aiming for under the plan.

"We want to achieve a maximum participation from the remaining €6.4 billion still outstanding," the official said.

Read More at The Wall Street Journal

Construction Spending in U.S. Unexpectedly Drops

Construction spending in the U.S. unexpectedly fell in February, reflecting broad-based declines that indicate the building industry will take time to stabilize.

The 1.1 percent decrease, the biggest in seven months, followed a revised 0.8 percent retreat in January that was larger than previously estimated, Commerce Department figures showed today in Washington. The median estimate of 45 economists surveyed by Bloomberg News called for a 0.6 percent increase.

Read More at Bloomberg Businessweek

Stock Trading Is About to Get 5.2 Milliseconds Faster

In April the Canadian research ship Coriolis II will set out from Halifax to survey parts of the continental shelf stretching 1,000 miles off the east coast of Nova Scotia. The ship has been hired by Hibernia Atlantic, a Summit (N.J.)-based company that operates undersea telecom cables, to map out a new $300 million transatlantic fiber-optic line called Project Express. The cable will stretch 3,000 miles beneath the North Atlantic, connecting financial markets in London and New York at record transmission speeds. A small group of U.S. and European high-speed trading firms will pay steep fees to use the cable.

When it opens in 2013, Project Express will be the fastest cable across the Atlantic, reducing the time it takes data to travel round-trip between New York and London to 59.6 milliseconds from the current top speed of 64.8 milliseconds, according to Hibernia Atlantic. Those five milliseconds might not seem like a big deal, but to the handful of electronic trading firms that will have exclusive access to the cable, it will be a huge advantage. “That extra five milliseconds could be worth millions every time they hit the button,” says Joseph Hilt, senior vice president of financial services at Hibernia Atlantic.

Read More at Businessweek

Greece's Fringe Parties Surge Amid Bailout Ire

ATHENS—Weeks after agreeing to an agonizing bailout deal with Europe, Greece is splintering politically ahead of national elections, raising the risk that it won't be able to make the economic sacrifices still needed to keep it in the euro.

The election, not yet scheduled but expected in April or May, is shaping up as a public revolt against Greece's political establishment, which has backed the austerity policies that are the price of financial life support from Europe and the International Monetary Fund. Mainstream politicians are increasingly painted as leading Greece into a debt trap, then impoverishing it in trying to escape.

Weeks after agreeing to an agonizing bailout deal with Europe, Greece is splintering politically ahead of national elections. Dow Jones's Costas Paris has the details. Photo: Reuters

As a result, Greece's major parties, which have promised Europe they will enact yet another round of deep public-spending cuts by summer, are struggling for support.

Read More at The WSJ

Europe's Debt Woes Getting a Spanish Accent

Could Europe’s next debt crisis have a Spanish accent? From swelling government debt to banks burdened with bad loans, the news from the euro zone’s fourth-largest economy is getting worse by the day.

Spain is tipping into its second recession since 2009, with the economy forecast to contract 1.7 percent this year under pressure from deep austerity measures and flagging exports. Public debt has soared to 68.5 percent of gross domestic product, the highest rate in at least two decades, and the government of Prime Minister Mariano Rajoy has had to scale back plans to reduce budget deficits. “Spain seems to be the main risk in the near future for Europe,” says Stéphane Déo, chief European economist for UBS (UBS). “The market is losing patience.”

Read More at Bloomberg Businessweek

The U.S. Cruises Toward a 2013 Fiscal Cliff

At some point, the spectacle America is now calling a presidential campaign will turn away from comedy and start focusing on things that really matter—such as the "fiscal cliff" our federal government is rapidly approaching.

The what? A cliff is something from which you don't want to fall. But as I'll explain shortly, a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013—unless Congress takes action to avoid it.

Well, that gives Congress plenty of time, right? Yes. But if you're like me, the phrase "unless Congress takes action" sends a chill down your spine—especially since the cliff came about because of Congress's past inability to agree.

Read More at the Wall Street Journal

Goldman's Double Game

Goldman Sachs (GS) was once a punchline. During the Great Depression, the then-small partnership on Pine Street became a target of national ridicule because of a scandal involving the Goldman Sachs Trading Corporation, a publicly traded investment trust that blew up after the stock market crash of 1929. For years, comedian Eddie Cantor, who had lost $100,000 and sued Goldman for $100 million, made Goldman Sachs a running joke in his stand-up routines. In one of his bits, Cantor would appear onstage with a stooge who tried to squeeze juice from a dry lemon. “Who are you?” Cantor would ask. Without missing a beat, the stooge would say, “The margin clerk for Goldman Sachs.”

Ever since being subjected to Cantor’s barbs, Goldman Sachs has cultivated an image not just as Wall Street’s preeminent firm but also as a paragon of financial virtue. But Goldman’s supposedly pristine reputation has always been more invented than earned. In 2010 the Securities and Exchange Commission, Goldman’s principal regulator at the time, sued the firm for failing to make adequate disclosures regarding a synthetic collateralized debt obligation it manufactured and sold at the height of the housing bubble. Rather than fight the SEC, Goldman settled the charges for $550 million, the largest fine ever extracted from a Wall Street firm.

Read More at Bloomberg Businessweek

A Political Shocker in China Has Implications for the Economy

In a terse announcement, China’s official Xinhua News Agency announced March 15 that the charismatic Chongqing party leader and princeling, Bo Xilai, has been replaced. It is the biggest setback for a senior Chinese Communist Party leader since at least the sacking of former Shanghai party secretary Chen Liangyu in a corruption scandal in 2006. “Bo will no longer serve as secretary, standing committee member, or member of the CPC Chongqing municipal committee,” according to the Xinhua announcement.

While Bo is still listed on a government website as one of the 25 members of China’s ruling Politburo, it is unclear whether he will also have to step down from that body. Even if he doesn’t, Bo’s political future seems finished, and his once-likely appointment to the nine-member Standing Committee of the Politburo—with seven positions up for grabs this fall in a major leadership transition—is finished.

Read More at Bloomberg Businessweek

U.S. hedge fund wins claim against Dubai's Drydocks

Monarch Alternative Capital said in an emailed statement that Drydocks, a unit of Dubai World DBWLD.UL, has been ordered to pay the entirety of the sum of $45.5 million claimed plus Monarch's legal costs.

Monarch sued Drydocks last year in the High Court of London casting a blow to the restructuring talks.

A week ago, Drydocks proposed repaying creditors in five years and said it was seeking more working capital as it tried to restructure a $2.2 bln loan facility, ending lengthy and complex debt talks.

The restructuring had been scheduled to be completed by April 2011, but it was slowed by a lack of government support and opposition from hedge fund creditors, including Monarch.
When asked how the judgment would affect its restructuring Khamis Juma Buamim, Drydocks World chairman, said:

"As made clear at all lender meetings, the company is confident that it can still implement its restructuring if it transpires that Monarch do not accept the terms on offer."
"But I would very much hope that notwithstanding their legal action Monarch will accept the very reasonable restructuring proposal." Read more at Reuters...

South Korea embraces free trade as US deal kicks in

South Korea's free trade agreement (FTA) with the US has been a long time coming.

First signed by both countries in 2007, it was renegotiated in 2010, and only ratified by the South Korean parliament at the end of last year.

Under the deal, tariffs on 80% products traded between the two countries will disappear immediately, with 95% of trade being covered within five years.

Breathless reports in newspapers on both sides of the Pacific have salivated or sniffed at the opening of US law offices in Seoul, or the shipping of extra Korean cars.

Iconic Harley-Davidson motorcycles have already had their prices clipped at their Seoul showroom this week in anticipation of their 8% tariff being cut to zero.

But on the streets of Myeongdong, the afternoon shoppers were less convinced about the benefits of the deal. Read more at BBC...

Gas Prices Too High. Blame India?

Who's to blame for gas prices now hovering near a national average of $3.80 a gallon? Take your pick: Iran, market speculators, oil companies, India.

India? Really?

Yes. Already the fourth largest energy consumer in the world, India's demand for oil looks set to rise inexorably as more of its people buy cars and take to the road. Ditto for China and other emerging markets. Their rising demand is pushing up prices for everyone.
This consumer competition is usually subtle. For decades, Americans were king of the road. When they put the pedal to the metal, the world rushed to produce the oil and gasoline to fuel the ride. (The exceptions, from OPEC nations, were temporary.)
Now, however, world producers of oil and gas are not going to jump quite so fast. There are other, more dynamic markets to serve than the United States. Read more at CNBC...

Is Warm Weather Putting a False Shine on the Economy?

Stocks jumped on Tuesday off news that February retail sales rose 1.1 percent from January, the best monthly gain since September 2011. The Standard & Poor’s 500-stock index closed up 1.8 percent, and the Dow Jones industrial average breached the 13,000 mark again with a 217-point gain. Outside of gas stations, which grew sales by 3.3 percent in February on the back of higher gasoline prices, consumers increased spending the most on cars and clothes. Auto sales were up 1.6 percent in February compared with a month earlier, and were 6.9 percent higher than a year earlier. Consumers are now buying cars at the fastest pace in four years. Shares of General Motors (GM) rose 2.68 percent on Tuesday. Consumers drove retail clothing sales up 1.8 percent for the month, adding steam to shares of Gap (GPS) and Target (TGT).

Coupled with last week’s strong jobs report, the retail numbers seem to add further fuel to the view that the recovery is becoming stronger by the day. But have you looked outside lately? Chances are it’s unusually warm where you live. This is causing some analysts, even bullish ones, to start casting a more skeptical eye on all this sunny economic data. They say the unseasonably warm weather we’ve had this winter is making the numbers look better than they are, and is actually stealing economic activity from the spring. Read more at the Bloomberg Weekly...

Why I Am Leaving Goldman Sachs

Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief. Read more at NY Times

Not Retired: Will Older Baby Boomers Find Jobs?

Maybe the recession really is over. Yes, the economic mandarins at the National Bureau of Economic Research—the official date-keepers of America’s booms and busts—declared the downturn finished in June 2009. Not many people bought into their judgment considering the unemployment rate was 9.5 percent at the time. The latest figures show that nonfarm payrolls rose in February, with the unemployment rate at 8.3 percent.

Sticking with jobs, downturns quicken the pace of economic change. Case in point: the older worker. Think tanks, blue chip commissions, and scholars have issued thousands upon thousands of reports calling for an aging baby boom generation to work well into the traditional retirement years. The downturn forced many boomers to get the message. They had borrowed too much, saved too little, and had the bad luck to watch their homes and 401(k)s plunge in value in recent years. The labor force participation rate for those aged 55 and older is higher than its level before the economic downturn. Among those 65 and over, it rose from 16.3 percent when the recession started in December 2007 to 18 percent in January 2012.

Read More at Bloomberg Businessweek

Apple Woulda-Coulda Had the Dow at 15,290

Back in the lapsarian fog of June 2009, the keepers of the Dow Jones Industrial Average finally got around to tapping Cisco (CSCO), networking stalwart, to replace the bankrupt General Motors (GM). Cisco, remarked a managing Dow Joneser, was added because its products are “vital to an economy and culture still adapting to the Information Age—just as automobiles were essential to America in the 20th century.” Prescient catch: In the nearly two decades between its debut and Dow induction, a period that saw a router in every American garage, Cisco’s stock had already returned north of 22,000 percent.

So how did that 2009 decision turn out for the Dow? Depending on how you analyze it, either unfortunate or atrocious. Since its induction into the blue-chip average, Cisco has inched up 1.3 percent, substantially underperforming the Dow’s 48 percent rise.

Read More at Bloomberg Businessweek

The Economic Fallout From Bombing Iran

“Nobody’s announced a war, young lady,” President Barack Obama said in New York on March 2, wagging his finger at an audience member who decried the possibility of U.S. military action against Iran. “But we appreciate your sentiment.” The crowd cheered, and a smile crossed the president’s face.

It’s too soon to say when, or whether, the long-simmering dispute over Iran’s nuclear program will erupt in armed conflict. “There is still a window that allows for a diplomatic resolution,” Obama said before meeting with Israeli Prime Minister Benjamin Netanyahu on March 5. A raft of Western economic sanctions against Tehran, including a looming embargo on Iranian oil exports to the European Union, has made the country’s rulers more willing to “recommence negotiations without preconditions, which isn’t something they were amenable to last year,” according to Karim Sadjadpour, an Iran analyst at the Carnegie Endowment for International Peace. War with Iran in 2012 “is plausible but not probable,” he says.

Read More at Bloomberg Businessweek

Goldman’s Secret Greece Loan Reveals Sinners

Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Read More at Bloomberg

Angry About High Gas Prices? Blame Shuttered Oil Refineries

The average price of gas is up more than 10 percent since the start of the year, a point repeatedly made during Wednesday’s Republican Presidential debate. Predictably, the four GOP candidates blamed President Barack Obama for the steep increase.

Actually, the President doesn’t have that kind of pricing power. The more likely reason behind the price increase, though certainly less compelling as a political argument, is the recent spate of refinery closures in the U.S. Over the past year, refineries have faced a classic margin squeeze. Prices for Brent crude have gone up, but demand for gasoline in the U.S. is at a 15-year low. That means refineries haven’t been able to pass on the higher prices to their customers.

As a result, companies have chosen to shut down a handful of large refineries rather than continue to lose money on them. Since December, the U.S. has lost about 4 percent of its refining capacity, says Fadel Gheit, a senior oil and gas analyst for Oppenheimer. That month, two large refineries outside Philadelphia shut down: Sunoco’s plant in Marcus Hook, Pa., and a ConocoPhillips plant in nearby Trainer, Pa. Together they accounted for about 20 percent of all gasoline produced in the Northeast.

Read More at Businessweek

India: Miracle, Interrupted

Indian scholars and authors like to write about something they call the “idea of India,” a loosely defined concept of national identity. It’s an attempt to impose a measure of coherence on the messiness of a country of 1.2 billion people. That messiness, however, is real. From the ground, it’s hard to imagine how a single idea could ever capture India’s reality.

Perhaps that’s why observers of the subcontinent (both domestic and foreign) tend to retreat to easy generalizations and simplistic narratives. For much of India’s post-independence history, the country was an economic basket case—a textbook example of financial mismanagement, wasted potential, and stunted growth. Then, in the 1990s, after India embarked on market reforms and began opening its closed, semi-socialist economy, the narrative changed. As native companies aggressively acquired international brands, and as growth rates approached double digits, the media was full of triumphalist rhetoric about impending “economic superpowerhood.”

Over the last few months the narrative appears to have shifted again. Growth has slowed from more than 10 percent in 2010 to around 7 percent today. Inflation is persistently high, agricultural productivity has declined, and foreign investment and the stock market are down. Social unrest and deteriorating law and order in many parts of the country have potential investors spooked. Corruption is estimated to cost India at least $18.4 billion a year.

Read More at Businessweek

Dan Zwirn, the Man Who Fell to Earth

On the lengthy list of things Dan Zwirn has lost, a few items jump out. There’s the $17 million condo on Central Park South, the summer place in Quogue, N.Y., and the $18 million Gulfstream IV jet. Then there’s D.B. Zwirn & Co., the hedge fund that once managed $12 billion in assets, employed 275 people in 14 global offices, and created the roughly $700 million in personal wealth that made so many of Zwirn’s spectacular purchases possible. Zwirn, 40, misses his money and the things it afforded him. But what he misses most, he says, is his “beautiful machine.”

That’s Zwirn’s term of endearment for his now-defunct hedge fund. The beautiful thing about it was its discipline. D.B. Zwirn abstained from the directional or leveraged bets that other hedge funds make. Instead the firm provided capital to about a thousand companies with few other financing options—companies such as a small New York-based Spanish-language radio group and a company that leased slot machines to casinos on Indian reservations. The one and only strategy was to learn everything about the prospective borrowers, figure their odds of repayment, crank up the interest rate to the proper pain point, and grind out 1 percent a month in profits.

For 49 straight months, Zwirn, who aspired to be the hedge fund world’s scrappy singles hitter, got paid like a home run champ. The D.B. Zwirn Special Opportunities Fund had gross returns of 21.8 percent in 2003, 21.6 percent in 2004, 18.9 percent in 2005, 24 percent in 2006, and 16 percent in 2007. As machines go, Zwirn’s was a Ferrari.

Read More at Bloomberg Businessweek

Europe Gets Ready for Round 2 of Bank Loans

European commercial banks were unable to raise money to lend to customers. Borrowing costs for Spain, Italy and Portugal were threatening to spin out of control, and Greece’s had risen to levels that would make a loan shark blush. Analysts were issuing reports predicting that Greece would leave the euro zone — if the currency union was lucky. The worst case was that the euro would disintegrate.

“The situation was deteriorating,” recalled one policy maker, who did not want to be named because internal central bank discussions are confidential. “Something had to be done.”

In the weeks that followed, the central bank’s governing council and its new president, Mario Draghi, succeeded in defusing the tension with a monetary policy tool that they will deploy again this week: unlimited three-year loans to commercial banks at the rock-bottom interest rate of 1 percent. Read more at the NYTimes...

A Call for Beijing to Loosen Its Grip on the Economic Reins

A new study by theWorld Bank and a Chinese government research organization warns that the country’s economic growth is likely to diminish over the next few decades unless China alters its development model and rethinks the role of government in managing the economy.

The report, called “China 2030,” and produced by the bank and the Development Research Center, the government research organization, calls on Beijing to complete the transition to a market economy, scale back the power of state-owned companies, encourage private enterprise and confront rising inequality and environmental degradation.

As remarkable as China’s growth has been over the last three decades, the study suggests that the country’s development pattern has been uneven and is unsustainable. The government, it says, should make significant changes.

“The case for reform is compelling because China has now reached a turning point in its development path,” Robert B. Zoellick, president of the World Bank, said in a speech in Beijing on Monday, when the report was released. “Managing the transition from a middle-income to a high-income country will prove challenging; add to this a global environment that will likely remain uncertain and volatile for the foreseeable future, and the need for change assumes even greater importance.” Read more at NYTimes...

Now Italy's Monti Wants to Save Europe

In November, Mario Monti, the former European Union official and academic, was tapped by Italy’s President to form a government after Silvio Berlusconi’s regime crumbled. At the time, heavily indebted Italy looked like the next domino to fall.

Under Monti as Prime Minister, Italy has done the unthinkable: regained investor confidence. His government has pushed through €20 billion ($26 billion) in austerity measures, and moved to deregulate services and reduce red tape. He’s pursuing plans to simplify the tax code and overhaul rigid labor rules. Helped by the European Central Bank’s liquidity injections into the euro area’s banks, Italy now enjoys lower borrowing costs: The yield on a 10-year bond has fallen by about 1.5 percentage points since Monti took office, easing fears the nation would struggle to pay its $2.5 trillion debt. Monti “has been a game-changer,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

Italy is hardly solved: Left-wing unions bitterly oppose Monti’s push to change labor laws, growth is almost nonexistent, and that debt isn’t going anywhere. Yet Monti is launching a new crusade: He wants Europe to stop focusing exclusively on austerity and cultivate growth as well. He’s not talking about growth inflated by stimulus packages and more borrowing, rather a program of deregulation that would unleash growth in Europe.

Read More at Bloomberg Businessweek

US turns up heat on China solar subsidies

t the heart of the dispute is the claim that China pays unfair subsidies to its solar companies.
Gordon Brinser of Solarworld Industries America, has called upon President Barack Obama to impose a tariff barrier on the imports of Chinese solar products.

"The incentives that are provided to the Chinese industry are clearly meant for the export of product into foreign industries to basically take over those markets," he says.

But the head of the Chinese company Suntech, the world's largest producer of solar panels, says Chinese firms are not the only ones in the industry which receive government subsidies.

Shi Zhengrong admits he gets research and development grants from the government, but points out that German companies also get subsidised investment from their own government.
"This is a very young industry which requires government support," he says. Read more at BBC News

Shanghai Eases Home Purchase Restrictions

Shanghai eased home purchase restrictions to allow a broader pool of buyers to purchase a second property in China’s financial center, Shanghai Securities News reported today.

The city loosened its definition of locals to let residence permit holders who have lived in the city for at least three years to buy a second home, the official newspaper affiliated with state-run Xinhua news agency said, citing an unidentified official of the city’s housing regulator. It previously limited the second-home option to locals, or those born in the city or who worked for an extended period of time and were officially recognized as locals, without specifying guidelines for non-locals.

“This is certainly a measure of easing,” said Jack Gong, a Hong Kong-based analyst at Jefferies Group Inc. “But the easing by the local government doesn’t mean the central government will loosen its property controls.”

Read More at Bloomberg

Investors Should Cut Risk as Global Woes Add Up: El-Erian

Investors are justified for viewing the Greek debt deal with skepticism and should reduce their risk allocation accordingly, Pimco's Mohamed El-Erian said.

Problems in Greece are just the highest-profile set of geopolitical risks with which the market must deal — the others being Iran and Syria — which could cause disruptions sharply and quickly, said the co-CEO of the world's largest bond fund manager.

"The market is being very rational in saying it's a step but it's not a big enough step yet," El-Erian said of the Greek debt deal announced earlier in the week. "Fundamentally, Greece is going to have to find a way to restore growth and restore competitiveness. If it doesn't do that, private capital isn't going to come in and if private capital doesn't come in you don't get the oxygen that an economy needs."

In addition, the deal, which likely will see bondholders lose more than 70 percent of the principal plus reductions in coupon payments for the Greek notes, faces "implementation risk." The deal still must be approved by components of the Troika — the European Central Bank, the International Monetary Fund and the European Commission — that negotiated the pact. Read more at CNBC

Greek Rescue Leaves Europe Default Risk Alive

Europe is still struggling to avoid the threat of default as investors warned Greece will soon risk violating the terms of its second bailout in three years.

Seven months of negotiations ended in the pre-dawn hours in Brussels with Greece winning 130 billion euros ($172 billion) in aid it needs to avoid a March bankruptcy. Any respite may prove temporary after it signed up to a program of austerity and economic reform aimed at slashing debt to 120.5 percent of gross domestic product by 2020 from about 160 percent last year.

Even with investors and central bankers chipping in to relieve the debt burden, economists from Citigroup Inc. to Commerzbank AG concluded Greece may again fail to deliver amid a fifth year of recession, looming elections and social unrest. The upshot could be the removal of aid and renewed debate over the merits of fresh assistance before year-end as policy makers shift toward doing more to inoculate the rest of Europe.

Read More at Bloomberg

The Story Behind the Olympus Scandal

The constable behind the counter at the Belgravia Police Station in central London raised his eyebrows in bemusement at the well-spoken middle-aged Englishman, wearing a suit and tie and overcoat, standing before him on a mid-October afternoon. The gentleman had short, receding black hair, close-set eyes, and a generous round chin. He mumbled darkly about Japanese organized crime—the Yakuza—and a corporate scandal he had uncovered in Tokyo. He claimed he had been the president and chief executive officer of a global corporation, had discovered that a fortune had gone missing, and then had been fired. He now had reason to believe, based on what he’d heard from journalists and fellow businessmen, that he might be killed.

The constable nodded, tried not to smile, and thought: This gent may be the biggest nutter we see all day. Most of those who showed up on the other side of the Plexiglas in the public room of the station and claimed to be targets of murder plots tended to be either deranged or exaggerating a petty money squabble. Still, the Metropolitan Police officers are trained to take seriously all such claims, and so the gentleman was shown into a private interview room, an 8-by-6-foot chamber with a desk and two chairs. He sat down across from the constable.

http://www.businessweek.com/magazine/the-story-behind-the-olympus-scandal-02162012.html

5 ways to transform Greece's economy now

Greece's principal problem is that it's been depending for years on selling more and more home-grown goods and services that don't face international competition -- houses, haircuts, insurance policies -- to its own people. That model appeared to work when Greeks experienced a consumer credit boom from 2001 to 2008. But the explosion in domestic demand meant that wages soared, making Greece's exports too pricey on international markets. At the same time, its domestically produced appliances and electronics couldn't compete with cheaper imports from Germany or the Netherlands. Greece also did nothing to overhaul the monopolistic practices in tourism and trucking that further curbed exports.

As a member of the eurozone, Greece can't devalue its currency to restore its competitiveness and boost exports. To grow again, Greece needs to both lower wages dramatically and enhance productivity by de-regulating markets at a wrenching pace.

It's a grinding, politically treacherous task. Still, the number and scope of reforms that Greece has either passed, or promises to pass, in the last few months is indeed impressive.

Let's examine five new measures that would totally transform the Greek economy. Read more at CNNMoney...

Euro Zone Economy Shrank in Fourth Quarter of 2011

Five members of the euro zone, including Italy, fell into recession in the final quarter of 2011, official data showed Wednesday, as the sovereign debt crisis and the imposition of austerity measures discouraged consumers from spending and businesses from investing. But the zone’s two largest economies, France and Germany, held up better than expected.

The 17-nation euro zone contracted by 0.3 percent from the third quarter of the year, Eurostat, the European statistics agency said — the first such decline since the second quarter of 2009. That contraction was smaller than the 0.4 percent economists had expected, but the pain was nonetheless acute among smaller countries and in Southern Europe — ground zero of the debt crisis.

German output fell 0.2 percent in the quarter, less than expected, while France surprised economists with 0.2 percent growth, defying expectations of a decline as exports of Airbus planes bolstered exports and business investment increased. Read more at the NYTimes

Euro-Area Economy Shrinks

Europe’s economy shrank less than economists forecast in the fourth quarter as a better-than- predicted performance in Germany and France helped mitigate the region’s first contraction since 2009.

Gross domestic product in the 17-nation euro area fell 0.3 percent from the prior three months, the first drop since the second quarter of 2009, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 0.4 percent, the median of 42 estimates in a Bloomberg News survey shows. In Germany, Europe’s largest economy, GDP dropped less than economists projected in the fourth quarter, while France’s economy unexpectedly expanded in that period.

German companies have boosted output and spending over the past year to meet export demand, helping soften the impact of tougher budget cuts from Spain to Ireland. While Moody’s Investors Service cut the ratings of six of the region’s member states on Feb. 13, saying policy makers haven’t done enough to restore investor confidence, the economy is showing some signs of stabilization. Euro-region economic sentiment improved in January and services output expanded.

Read More at Bloomberg

Spending Won’t Fix What Ails U.S. Infrastructure

President Barack Obama’s announcement yesterday of a six-year, $476 billion surface transportation reauthorization bill, as part of his 2013 budget, is the latest demonstration of a longstanding presidential propensity for transportation projects.

The U.S. owes its emergence as a great power to magnificent investments in infrastructure. The emerging giant of today, China (TBBLCHNA), is following that example. Many imagine that we must again build big to stay on top. But success in middle-age -- for people and nations -- requires wisdom and cunning more than pumped-up brawn. America’s infrastructure needs intelligent reform, not floods of extra financing or quixotic dreams of new moon adventures or high-speed railways to nowhere.

When the U.S. was new, it had a hinterland with seemingly unlimited natural resources that was virtually inaccessible to the population centers of the East and the markets of the Old World. It cost as much to move goods 30 miles over land as to ship them across the Atlantic. Our first leaders dreamed of building waterways that would open the West; George Washington founded the Potomac Canal Company before he became president. The Erie Canal was a wonder of the age, running 363 miles and paying for itself within a decade.

Read More at Bloomberg

Multifamily Units to Lead U.S. Construction Gains

Construction of multifamily units will lead the U.S. building industry again this year, allowing housing to contribute to growth for the first time in seven years, according to economists Michelle Meyer and Celia Chen.

Work will begin on about 260,000 apartment buildings and townhouse developments in 2012, up 45 percent from last year and the most since 2008, according to Meyer, a senior economist at Bank of America Corp. in New York. Chen, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, is even more optimistic, projecting a record 74 percent jump to 310,000.

Home ownership rates, which have declined to the lowest levels since 1998, may keep dropping as the foreclosure crisis turns more Americans into renters. In addition, household formation will probably accelerate as an improving economy and growing employment embolden more people to stop sharing residences and strike out on their own.

Read More at Bloomberg

Economists Warn of Long-Term Perils in Rescue of Europe’s Banks

Few would begrudge Mario Draghi his boast last week that he and the European Central Bank had prevented a disastrous credit crisis by showering banks with cheap loans in December.

But beneath the gratitude toward Mr. Draghi, the president of the central bank, lurks a fear that the easy money could simply be creating the conditions for another banking crisis several years from now.

Because of the central bank’s cheap financing, some economists warn, sick banks now face less pressure to confront their problems — to clean out bad loans and other impaired assets, or even wind down operations if there is no hope of a turnaround. The European Central Bank, they say, could inadvertently spawn a cohort of “zombie banks,” burdened by nonperforming loans and assets that remain on the books, like the ones that helped make the 1990s a lost decade for Japan.

“It’s a huge bet,” said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva. “If the crisis ends up well, the E.C.B. will have pulled off a miracle. If things go wrong, then commercial banks will be in a much worse situation than they were before.”

Professor Wyplosz said the central bank might be making the banking system more fragile by encouraging institutions to load up on risky assets, especially government bonds from troubled euro zone countries like Spain or Italy. Banks can use those assets as collateral for more loans from the central bank. Read more at the NY Times

Two twists in the dragon’s tail

China still runs a sizeable trade surplus. But its net exports fell in 2011 (in absolute terms) for only the third time since 2000, subtracting 0.5 percentage points from its growth. Thanks to home-grown spending, China’s economy still managed to expand by 9.2% in 2011, remaining surprisingly strong even in the fourth quarter. This growth owed an unusual amount to consumption (both public and private), which contributed over half for the first time since 2001. As a consequence, the share of consumption in China’s GDP edged up in 2011 after falling for ten years in a row.

The mainstay of China’s growth remains investment, on which its economy remains worryingly dependent. Indeed, when China’s critics are not bashing it for overexporting, they bash it for overinvestment in property. Its housing boom is, however, slowing markedly. China this week reported that the price of new homes fell in 52 out of 70 cities across the country in December, compared with the month before. Households are struggling to obtain mortgages; developers are finding it almost impossible to obtain a loan. The drying up of foreign funds is particularly dramatic, points out North Square Blue Oak, a research firm based in London and Beijing. Foreign capital fell by 65% in December, compared with a year earlier. Read more at The Economist...

As ‘Yuck Factor’ Subsides, Treated Wastewater Flows From Taps

SAN DIEGO — Almost hidden in the northern hills, the pilot water treatment plant here does not seem a harbinger of revolution. It cost $13 million, uses long-established technologies and produces a million gallons a day.

But the plant’s very existence is a triumph over one of the most stubborn problems facing the nation’s water managers: if they make clean drinking water from wastewater, will the yuck factor keep people from accepting it?

With climate change threatening to diminish water supplies in the fast-growing Southwest, more cities are considering the potential of reclaimed water. A new report from the National Academy of Sciences said that if coastal communities used advanced treatment procedures on the effluent that is now sent out to sea, it could increase the amount of municipal water available by as much as 27 percent.

San Diego’s success, 12 years after its City Council recoiled from the toilet-to-tap concept, offers a blueprint for other districts considering wastewater reuse.

For most of the four decades beginning in 1970, the arid West was the fastest-growing region in the country; the population of Nevada quintupled in that period while Arizona’s nearly quadrupled. Continued population growth, unmatched by growth in water storage capacity, makes this a “new era in water management in the United States,” the science group’s report said.

Read More at The New York Times

China's urban explosion: A 21st century challenge

At the end of 2011, China counted over 690 million urban dwellers -- or 51.27% of the country's 1.347 billion people -- according to a report this week from the National Bureau of Statistics. That marks an increase of 21 million from the previous year.

During the same period the rural population dropped by over 14 million to 656 million.

So for the first time, China's urban population now outnumbers the rural population.

"This is one of history's most important population shifts," said Aprodicio Laquian, population expert and professor emeritus at the University of British Columbia in Vancouver.

"It resembles the 19th century Industrial Revolution in Europe, except that in China it's compacted into only a few decades."

Most Chinese traditionally made a living from subsistence farming.

While many still do, their ranks have significantly shrunk.

China's rapid economic growth over the past three decades has expanded the size of China's cities and towns. There are now over 160 cities in China with a population of over 1 million, according to China Today. Read More at CNN.com

Preet Bharara’s toothless bite of Wall Street

Two intriguing magazine cover stories are on the stands this week, on more or less the same topic. New York magazine shows a man clutching between his knees, with the headline: “The Emasculation of Wall Street.” Time’s cover has the impassive puss of Preet Bharara, the U.S. attorney in Manhattan, and “This Man Is Busting Wall St.”

Seeing these two covers side by side, you’d think that Bharara was Wall Street’s Great Emasculator. The Time article is subtitled “Prosecutor Preet Bharara collars the masters of the meltdown,” while the New York piece describes how the Street is reeling from “a crisis that would not be flip to call existential.” Yet nowhere in Gabriel Sherman’s well-researched piece in New York is there even one mention of Preet Bharara.

There’s a simple reason for that:  Preet Bharara is not busting Wall Street. He’s not collaring the masters of the meltdown. He’s done nothing to even slightly discomfit Wall Street’s still-ferocious money machine, or has yet to bring to justice the architects, enablers and continuers of the 2008 financial crisis — the bankers who got us into that mess, and the ones who are continuing to extract pain from foreclosed homeowners, in the New York area and beyond.

Read More at Salon

As Growth Slows, India Awakens to Need for Foreign Investment

When India’s finance minister, Pranab Mukherjee, flew to Chicago recently to address a group of American executives, it was to deliver an urgent message: India is still open for business.

Usually a cautious speaker who offers only vague promises, Mr. Mukherjee eagerly promoted specific new deals from New Delhi, where the national government has become alarmed by the sudden slowdown of India’s economy.

He listed pro-business policies his government recently approved or soon would: foreign individuals could invest directly in the Indian stock market; overseas specialty retailers like Gap could open wholly owned stores in the country, and bigger retailers like Walmart would soon be admitted. And though Mr. Mukherjee did not cite it, he could just as easily have mentioned a proposal the cabinet is considering to let foreign airlines buy as much as a 49 percent stake in India’s airlines.

“I urge you to seize this moment and contribute to our collective prosperity in the times to come,” Mr. Mukherjee told his audience, the World Affairs Council of Chicago.

The flurry of activity by the Indian government has helped push Indian stock indexes up by 15 percent this year, and the rupee has climbed 8 percent against the dollar. Read more at NYTimes

IMF Urges Beijing to Prepare Stimulus

China should be prepared to sharply stimulate its economy if Europe's growth falls more than anticipated, the International Monetary Fund said, adding to expectations that Beijing could turn to spending if conditions significantly worsen.

In its China economic outlook report released on Monday, the IMF urged China to run a deficit of 2% of GDP rather than looking to reduce the country's deficit as planned, given the uncertainty in the global economy.

If Europe's problems turned out to be worse than expected, China should hit the fiscal gas pedal harder. In that case, "China should respond with a significant fiscal package" of about 3% of GDP, the IMF said, including reductions in consumption taxes and new subsidies for consumer-goods purchases and for corporate investments in pollution-control equipment.

However, the IMF warned that Beijing should execute any fresh stimulus through its budget rather than the banking system. China used a four trillion yuan, or about $635 billion, stimulus package in 2008 to help blunt the impact of the financial crisis, in large part through bank lending. Economists now worry China's response to new economic threats could be hobbled if a significant slowdown in growth leads to bad debt on the balance sheets of China's major state-controlled banks.

Read More at The Wall Street Journal

The next special case?

SINCE the start of the euro crisis, a hope has been that a way could be found to support governments that were temporarily short of cash (because of skittish bond investors) but that had public finances that were otherwise sound. The €489 billion ($643 billion) of cheap cash that the European Central Bank lent in December to banks for three years may prove such a scheme. With the promise of more long-term ECB loans to come, borrowing costs for euro-zone governments have fallen sharply, in part because banks have put some of the money to work by buying high-yielding bonds.

It is damning, in such propitious circumstances, that Portugal has not shared in the rush. Even as yields in other trouble spots, such as Ireland, Italy and Spain, have plunged since the start of the year, Portugal’s have risen. In part this is because its bonds were downgraded to junk status on January 13th by Standard & Poor’s, a ratings agency, forcing funds that can only hold investment-grade bonds to sell. The surge in yields on two-year Portuguese bonds is a sign that bondholders fear they will have to accept the kind of losses that Greece is still negotiating with its private-sector investors. When bond prices fall in anticipation of uniform losses, the implied yields on short-dated bonds rise by more than those of longer-dated ones.

Read More at The Economist

An American History Lesson for Europe

In 1789, the political price for our federal constitution included a bailout of the 13 indebted states. But it was by refusing to bail out the states a second time in the 1840s that the United States preserved its federal system, with substantial fiscal independence for state governments. Facing a similar moment, Europe might learn from our experience.

The 1789 bailout was part of a grand bargain designed by Alexander Hamilton to convert the creditors of the 13 states into advocates of a stronger federal government—one having the ability to raise all revenues required to service the large debts that the Continental Congress and the 13 states had both accumulated to finance that "Glorious Cause," our war of independence.

Hamilton and George Washington wanted those debts to be paid. They had to engineer institutional changes to achieve that goal. Under our first constitution, the Articles of Confederation, the continental government had virtually no power to tax. For revenues it depended on voluntary contributions from the 13 states.

Read More at The Wall Street Journal

Man-made and visible from space

“PM2.5” seems an odd and wonky term for the blogosphere to take up, but that is precisely what has happened in China in recent weeks. It refers to the smallest solid particles in the atmosphere—those less than 2.5 microns across. Such dust can get deep into people’s lungs; far deeper than that rated as PM10. Yet until recently China’s authorities have revealed measurements only for PM10. When people realised this, an online revolt broke out. Such was the public pressure that authorities caved in, and PM2.5 data are now being published for Beijing and a handful of other cities.

What of the rest of China? At the moment, only PM10 data are available. But the government’s hand may soon be forced here, too. Though pollution data are best collected near the ground, a plausible estimate may be made from the vantage-point of a satellite by measuring how much light is blocked by particles, and estimating from those particles’ chemical composition the likely distribution of their sizes. And a report prepared for The Economist by a team led by Angel Hsu of Yale University does just that, drawing on data from American satellites to map out PM2.5 pollution across the entire country.

Read More at The Economist

Perverse austerity

THE International Monetary Fund sharply lowered its global economic outlook today and warned that an intensified euro crisis could tip the world back into recession. Its latest forecast is for the world to grow 3.3% this year and the advanced countries 1.2%, sharply lower than it saw just four months ago. Those numbers, it warns, are predicated on a comprehensive solution to Europe’s crisis.

More interesting, and disturbing, are some findings in the IMF's accompanying Fiscal Monitor. Last year was one for fiscal hawks to celebrate as fiscal consolidation proceeded apace. Throughout the advanced economies, budget deficits fell by about 1% of GDP. Only a little of that was due to the cyclical economic improvement. Most was structural, i.e. through discretionary spending cuts or tax increases. That should continue this year, led by America where, even if the payroll tax cut is extended, the structural deficit will decline by 1.4 percentage points.

In the euro zone, Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year. But this is not the good news it seems. Austerity, the IMF has found, could be making Europe’s crisis worse, rather than better. Read more on The Economist...