Merkel: Germany won't make bailout promises it can't keep

German Chancellor Angela Merkel launched an outspoken defense of the European project on Wednesday, but warned that the bloc's richest nation would not make bailout promises to solve the eurozone crisis that it cannot keep.

Speaking at the annual World Economic Forum in the Swiss resort of Davos, Merkel said Germany is rightly seen as being relatively strong. But if her country commits to paying for a huge expansion of the eurozone's bailout funds, and even that is torpedoed by the capital markets, then there is a real problem.

Merkel told a standing room-only crowd that the "people say it has to be double, then it has to be triple, then we will believe you."

"We have said right from the start we wish to stand up for the euro, but we don't want to ... make a promise that we can't fulfil."

The eurozone set up a temporary bail-out fund -- the European Financial Stability Facility -- after Greece's first bail-out in May 2010. It initially had €250 billion ($326 billion) in lending capacity, which was later boosted to €440 billion as more eurozone countries stumbled. Read more at CNN...

The power and the glory - India has its own form of state-backed capitalism too

When people think of state capitalism, China springs to mind, with its giant and opaque government-controlled firms. But India, more cuddly and less competent, is not too dissimilar. Some 40% of the profits of its 100 biggest listed firms come from state-controlled ones. In finance, energy and natural resources, they control at least two-thirds of production. Most were partially privatised over the past two decades, letting in a small proportion of outside shareholders. The latest example was Coal India, the biggest producer of India’s main fuel. It was listed in 2010.


Over time, the zeal to sell big-enough chunks of these firms to enable them to become more independent has dissipated. But today’s halfway house is not all that bad. In aggregate, the 24 state outfits in the top 100 generated a 17% return on equity last financial year, on a par with the private sector, and profits almost doubled in the past five years. Privatisation has made some of them more efficient. Bharat Heavy Electricals, which makes kit for power stations, holds its own against Chinese competitors. And State Bank of India (SBI) is as tech-savvy as its private rivals. Read more at The Economist...

Hedge Funds Scramble to Unload Greek Debt

Hedge funds that in the last month or so have purchased an estimated 4 billion euros ($5.2 billion) of beaten down Greek bonds that mature on March 20 are now trying to unload their positions, according to brokers and traders.

That is because it is becoming clear to one and all that Greece — under pressure from its financial backers — is preparing to impose a broad-based haircut that would hit all investors with a loss of 50 percent or more, whether they agree to the deal or not.

The problem is that while buying the bonds over the last few months was easy, as many European banks were unloading their positions, getting out now is proving to be near impossible. Liquidity has dried up and investors are avoiding Greek paper as if it were the plague.

The poor outlook for early maturing Greek bonds was compounded on Wednesday when Christine Lagarde, managing director of the International Monetary Fund, said the public sector might have to participate in a restructuring deal with private sector creditors.

“There was a lot of volume going in, but not a lot going out,” said one broker, speaking on condition of anonymity. The broker said prices for March 2012 bonds had slipped to around 35 cents on the dollar from a range of 40 cents to 45 cents. Read more at NYTimes...

Volunteers wanted Greece’s creditors would all have to take a massive hit to right its finances

The International Monetary Fund’s most recent review of the Greek economy, in December, gives an indication of the scale of the pain that these creditors need to take. Even if almost all of Greece’s private creditors agreed to write off half of what they are owed, its debt would still be about 120% of GDP by 2020. More likely, participation in any write-off would be lower than that, leaving debt above 145% of GDP in 2020. That implies another debt restructuring would be needed after this one. And since Greece’s economic news has been worse than expected of late, even these numbers are optimistic.

Talks between Greece and its private creditors were still under way when The Economist went to press, but the risks of a disorderly default are mounting. Europe’s earlier refusal to countenance default gave some lucky bondholders a year in which they could get repaid in full with loans granted by official creditors. The European Central Bank (ECB) is now thought to be Greece’s biggest bondholder.

Since official creditors are excluded from PSI, the remaining private creditors must suffer ever greater losses. Fund managers involved in the talks say that the reduction in the net present value of the bonds may be much higher than that suggested by a 50% reduction in their face value: the true figure could be closer to 70%. Read more at the Economist

China's housing market is set for a hard landing

The Chinese government's announcement last week that growth for 2011 slowed only slightly to a still impressive 9.2% was greeted enthusiastically by the world's stock markets. Investors also remain buoyant on China's future. They appear to be buying the official line that the gigantic property price bubble is gradually and smoothly deflating, posing little risk to an engine that's so crucial to the future of global trade.

But the math tells a different story. The housing frenzy has driven prices so high, so fast, that a crash on the scale of the real estate collapse in Japan in the 1990s is a virtual certainty. And China's already exaggerated official growth rate could take a pounding, all the way to the zone of the unthinkable, into the low single-digits.

For this analysis, I'll borrow heavily from my former professor and mentor at the University of Chicago's Booth School of Business, Robert Aliber. Affectionately known to his students by his initials "RZA," Aliber is now retired to New Hampshire, but he writes a superb newsletter for his friends and clients. He spotted the reckless credit expansion, huge trade deficits and asset bubbles that now haunt both the U.S. and European economies long before most experts.

As Aliber puts it, "In China, the housing boom is a far bigger source of growth than is widely recognized, and it's totally unsustainable." Read more at CNNMoney

Hackers-for-Hire Are Easy to Find

Sitting in his Los Angeles home, Kuwaiti billionaire Bassam Alghanim received an alarming call from a business associate: Hundreds of his personal emails were posted online for anyone to see.

Mr. Alghanim checked and found it to be true, according to a person familiar with the matter. The emails included information on his personal finances, legal affairs, even his pharmacy bills, this person said.

That led to another surprise. Mr. Alghanim discovered the person who had allegedly commissioned the hackers was his own brother, with whom he is fighting over how to divide up billions of dollars of joint assets. Mr. Alghanim's lawyers allege in court filings that the brother hired investigators to illegally access his email with the help of Chinese hackers. Cost to hire the hackers: about $400.

Read more at The Wall Street Journal

China Manufacturing Contraction Boosts Case for Easing: Economy

A Chinese purchasing managers' index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls.

The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.

International Monetary Fund Managing Director Christine Lagarde joined global officials today in warning that the world economy is decelerating and faces "significant and urgent challenges." China has allowed its five biggest banks to boost first-quarter lending and may relax capital requirements, people with knowledge of the matter said.

Read more at SFGate

Boom time for Afghanistan's people smugglers

For citizens going into battle against Afghanistan's officialdom, the warren-like building across the road from the headquarters of Kabul's police chief is a one-stop shop for every document they could need.

From their tiny cubbyhole offices, an army of typists can run up everything from marriage certificates to CVs and job application letters. Also available, for several hundred dollars more: Taliban death threats, the special chits also known as "night letters" that can be a passport to a new life in the west.

"We can write whatever you need; it depends," said one young clerk. "For example, we will mention you work in a government department, your job title and salary. It will say, 'If you don't leave your job by this date, we will come and kill you or put a bomb in your house'.

"Or we can say you are working with US forces," he added.

For a large number of Afghans such a purchase is just the first of many expensive outlays on the high-risk road to a new life in the west. Buyers hope the document will persuade immigration officers many thousands of miles away to give them asylum in Europe or Australia. The document is one part of a growing and lucrative business in smuggling a tide of mostly young, unaccompanied Afghan males overseas.

Read more at The Guardian

Citigroup Fined for Not Keeping Track of its Clients

Securities regulator Finra fined Citigroup’s capital markets unit $725,000 for failing to disclose conflicts of interest in stock-research reports and during public appearances by Citi research analysts. What happened? Well, apparently Citigroup’s computers weren’t keeping close track of the bank’s clients.

If you’ve ever read a stock-research report, you know at least half of the pages are packed with disclosures about the firm issuing the research: whether the bank has ever done investment-banking work for the company that is the subject of the report, or whether the analyst has any personal financial stake in the company. All this disclosure is intended to give investors a glimpse at whether the stock research is unbiased and independent from company being written about.

But Citigroup had a technology fail. Finra said in a news release:

FINRA found that Citigroup failed to disclose the required information because the database it used to identify and create the disclosures was inaccurate and/or incomplete due primarily to technical deficiencies. In addition, Citigroup failed to have reasonable supervisory procedures in place to ensure that the firm was populating its research reports with required disclosures.

Finra said in agreeing to a settlement, Citigroup neither admitted or denied the charges, but consented to the entry of the regulator’s findings. Read More at the WSJ Blog

World Bank warns on risk of global recession

The World Bank Wednesday slashed its 2012 growth forecasts for both emerging and developing economies from its estimates of only six months ago, and warned the world is on the cusp of a new global recession that could be as bad as the crisis four years ago.

It warned that an escalation in Europe's sovereign debt crisis, a new oil shock, or a "hard landing" in one of the larger developing economies could trigger a global economic downturn. The bank added that the risks of those events makes even the bank's lowered growth forecasts "very uncertain."

A meltdown in financial markets triggered by the sovereign debt problems in Europe poses the greatest immediate risk, according to the report.

"An escalation of the crisis would spare no one," said Andrew Burns, manager of global macroeconomics and lead author of the report. "Developed and developing country growth rates could fall by as much or more than in 2008 and 2009." Read more at CNNMoney

France goes soft-core

FRIDAY, January 13th, proved unlucky for nine euro-zone countries: they had their credit ratings cut by Standard and Poor’s (S&P) soon after the American markets closed for the week. France and Austria were stripped of their triple-A credit rating. Three smaller euro-zone countries (Malta, Slovenia and Slovakia) also suffered a one-notch downgrade. Italy and Spain had their ratings knocked down by two notches (to BBB+ and A respectively), as did Portugal and Cyprus, whose debts are now considered junk by S&P.

Though grim, the news was not the blanket downgrade feared by eurocrats. In December S&P had given a warning of a possible downgrade to all euro-zone countries, bar Greece (which could fall no further) and Cyprus (which was already on the hit-list)—just days before leaders of the European Union met in Brussels to tackle the euro-zone crisis once and for all. S&P argues that their fire-fighting efforts have fallen short of what is needed, hence the downgrades. The December summit had "not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems,” the ratings agency said in a statement.

Read More at The Economist

Europe Crisis Rescue Begins With MIT Men as a Matter of Trust

As financial turmoil in Europe threatened to overwhelm the region’s banks last November, Bank of England Governor Mervyn King arranged conference calls with the world’s top central bankers to decide what steps to take.

The result: Six leading monetary authorities agreed to make it cheaper for financial institutions outside the U.S. to borrow dollars in emergencies. The funding squeeze on European banks eased and stocks worldwide rallied.
The Nov. 30 plan could be created and announced quickly because “we trust each other,” King told reporters the following day in his role as chairman of the bankers’ group.

For some, that trust has a common source: three of the six banks are led by economists who studied or taught at the Massachusetts Institute of Technology in the late 1970s and early 1980s. Then, as now, the emphasis was on what former MIT professor and now Bank of Israel Governor Stanley Fischer describes as “economics about the real world.”

Read More at Bloomberg

Bank of America Ponders Retreat

Bank of America Corp. has told U.S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen, according to people familiar with the situation.

Executives at the Charlotte, N.C., financial giant put the potential move on a list of emergency scenarios submitted to the Federal Reserve last year, these people said. While people close to Bank of America insist that no retreat is imminent, even the possibility of selling branches and losing customers it spent huge sums to lure underscores the depth of its problems.

Read More at The Wall Street Journal

Hedge Funds Try to Profit on Greece Debt Swap

Hedge funds in New York and London are trying to profit from trading Greek government bonds as European banks brace for losses from a debt swap.

Saba Capital Management LP, founded by former Deutsche Bank AG (DBK) credit trader Boaz Weinstein, York Capital Management LP, the $14 billion fund started by Jamie Dinan, and London-based CapeView Capital LLP are among managers that now hold Greek bonds, according to people with knowledge of the transactions who declined to be identified because they weren’t authorized to speak publicly about the trades. Officials at the three firms declined to comment.

They’ve amassed the stakes as the government lobbies investors to accept a swap that would cause losses of more than 50 percent for bondholders. For the deal to avoid triggering credit-default swaps that could cause losses for more of the region’s banks, the agreement has to be voluntary. Hedge funds may not agree to the deal.

Read More at Bloomberg

Powder Keg in East Asia

President Obama’s high-profile release of America’s big new strategic defense review has made it official: The brave new world of the War on Terror is a thing of the past, and the bad old world of global great-power politics is back. A new Great Game is afoot. In response to China’s debut of its first aircraft carrier, its more muscular attitude toward the smaller powers surrounding the South China Sea, and similar developments, the United States has begun a courtship of Myanmar, announced a permanent installation of 2,500 Marines in Australia, and crystallized the vision behind it all in a few key pages of the review document. Gone is the military emphasis on open-ended, resource-intensive counterinsurgency operations—with all its murky questions about the future of sovereignty and the transformation of war. In its place, the new strategic review elevates the "Asia Pacific"—thinly veiled code for China and anywhere near it—to a place of unprecedented prominence.

The President’s overt and deliberate strategic shift exhibits the classic response of a status quo power to the problems posed by a new power rising even marginally closer to parity. Among analysts, the move has ushered in visions of the Western world’s prickly state of affairs a hundred years ago, with today’s China playing the role of a 21st-century German Empire. For writers across the conceptual spectrum, from The Diplomat to LewRockwell.com, the evocative comparison is as natural as it is worrisome. For the White House, however, the catastrophic run-up to the First World War would seem to make for a teachable moment. As Walter Russell Mead has argued, the Administration’s broader policy for the region promises to bring great flourishing to both sides of the Pacific, so long as China understands there will be real downsides to refusing to play by the so-called rules of the road. Instead of a tit-for-tat race to the belligerent bottom, perhaps the Obama strategy augurs the dawn of a true sphere of mutual prosperity for East Asia.

Read More at The American Interest

While Merkel and Sarkozy Talk, Traders Act

Chancellor Angela Merkel of Germany and PresidentNicolas Sarkozy of France met Monday to discuss their next steps in combating the sovereign debt crisis that has destabilized Europe.

Even as the leaders promised quick action to stem the crisis, investors signaled the depth of their concern when they bought German debt at a negative interest rate for the first time ever.

Germany joined the Netherlands and Switzerland on Monday as perceived havens where customers of short-term debt are willing to lose money in return for shelter from upheaval and from the possibility of even greater losses. In an auction of six-month bills, investors agreed to take less money back half a year from now, or a negative yield for German debt.

Speaking at a news conference after the two leaders met at the Chancellery in Berlin, Mr. Sarkozy acknowledged the uncertainty in the markets, saying, “The situation is very tense, very tense.” Read more at NYTimes

Europe's debt crisis: 'No clear end in sight'

 Last year was supposed to be the make or break year for Europe's debt crisis. Neither happened.

That means the chronic uncertainty that investors grappled with for most of 2011 is likely to continue, if not intensify, in the first half of this year.

"There are a myriad of factors, both political and economic, that could hit confidence," said Grant Lewis, head of research at Daiwa Capital Markets in London. "Given this backdrop, continued uncertainty is inevitable."

Despite an explosion of political summits last year, there is still no definitive solution to the crisis, which has become the single biggest threat to the global economy and the bane of financial markets around the world.

While a break-up of the euro currency union still seems unlikely, investors are not willing to rule out the nightmare scenario completely.

"The chances of break-up remain low, but non-negligible for sure," said Lewis. "That is not something that we would have said 12 months ago."

Eurozone leaders have taken steps toward a more binding fix for thepolitical and economic problems at the root of the crisis. But they have yet to put the measures into practice, something that has proven difficult because of competing national interests. Read more at CNN Money...

Romney at Bain: Big Gains, Some Busts

Mitt Romney's political foes are stepping up attacks based on his time running investment firm Bain Capital, tagging him with making a fortune from the rougher side of American capitalism—even as Mr. Romney says his Bain tenure shows he knows how to build businesses.

Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.

Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

Read More at The Wall Street Journal

Asia's seemingly relentless economic rise is still not inevitable

Like most of the 30 years that preceded it, 2012 will be punctuated by statistical evidence of Asia’s growing share of the global economy, and by symbols of relative Western decline. The financial crisis of 2008, followed by the various excitements of 2011—the American debt-ceiling fiasco, the euro zone’s interminable wrangling, riots on the streets of Western capitals—seemed to mark a tipping-point. Asia’s rise looked faster than anyone had expected.

In Asia there is some understandable Schadenfreude. After all, just over a decade ago, the region had to endure Western lectures on the failings of Asian crony capitalism. And the harsh remedies imposed on the errant Asian economies in the late 1990s now seem medicine too drastic for America and Europe. Sober Asian policy­makers, however, worry. In the short term, they know that the region would be badly hit by another severe downturn in the West. In the longer term, they wonder whether developing Asian economies will get stuck in a “middle-income trap”.

Read More in The Economist

Fragments of a Defunct State

How to characterise the Putin regime, a now shaken and besieged ruling group sometimes said to be the richest in the history of the world? ‘Soft authoritarianism’, ‘hybrid regime’, ‘managed democracy’: the labels reveal less about Russia than about the inability of commentators to loosen the Cold War’s lingering hold on their thinking.

Luke Harding was the Guardian correspondent in Russia between 2007 and 2011 who last February was turned back at Domodedovo Airport and told that his presence in the country was no longer welcome. An editorial in the Guardian described it as ‘the first removal of a British staff journalist from the country since the end of the Cold War’. Harding himself sees his account of Putin’s Russia as a kind of codicil to Malcolm Muggeridge’s denunciation of the Soviet Union when he was the Manchester Guardian’s correspondent in 1932-33. ‘Eight decades on,’ Harding writes, ‘not much has changed’: ‘Kremlinology is back’; Russia ‘has become the world’s foremost spy-state’; ‘KGB habits of secrecy’ have returned; ‘Russia’s state media are still stuck in Cold War battle mode.’ And so on. Harding is not alone in this view. But it’s wrong. Putin doesn’t represent a return to Soviet ways; it’s something very different and more anarchic.

Read More at the London Review of Books

Billions needed to upgrade America’s leaky water infrastructure

At first glance, the pizza-size hole that popped open when a heavy truck passed over a freshly paved District street seemed fairly minor.

Then city inspectors got on their bellies with a flashlight to peer into it. What they discovered has become far too common. A massive 19th-century brick sewer had silently eroded away, leaving a cavern beneath a street in Adams Morgan that could have swallowed most of a Metro bus.

It took three weeks and about a million dollars to repair the sewer, which was built in 1889.