WHEN central bankers talk about setting interest rates they are famously obscure. Not so when it comes to discussing banks. In a speech on October 25th, at The Economist’s Buttonwood gathering in New York, Mervyn King savaged the performance of Britain’s banks before the crisis and criticised the new Basel 3 proposals as too soft. Then he said what he really thought, arguing “of all the many ways of organising banking, the worst is the one we have to day.” Possible remedies included not just breaking up banks, but also “eliminating fractional reserve banking”—that is, the centuries old practice of banks taking in short term deposits and lending most of them out in riskier and longer term loans. Having left finance to its own devices for a decade the Bank of England now seems to want to redesign it.
That is, admittedly, a lot more fun than shifting interest rates by 25 basis points once in a while. But given the Bank will soon take over responsibility for regulating lenders from the Financial Services Authority (FSA) Mr King’s hardening stance is likely to become deeply controversial. Within the Bank itself, there seems to be a lack of unanimity. Mr King, alongside Andy Haldane, the author of a number of imaginative papers on finance, leans towards radicalism. Paul Tucker, a deputy governor of the Bank who was involved in drawing up the Basel 3 rules is thought to be more pragmatic, as is Adair Turner, the chairman of the FSA, who recently said the new rules struck a good balance.
Britain's government has been fairly clear that it doesn’t want to break up Britain’s largest firms—even if that is the recommendation of a committee of wise men it has asked to review banking reforms. And outside of Britain, no major regulator agrees with Mr King. This includes the Swiss authorities, who also face the problem of giant banks based in a medium sized economy, and who recently rejected structural reform of Credit Suisse and UBS in favour of a bigger layer of so called “contingent-capital” on top of the new Basel 3 regime.
That compromise—requiring Britain’s big banks to carry a further layer of convertible debt—is both sensible and still the likeliest outcome of Britain’s bout of soul searching about its banks. But Mr King seems to have backed himself into a corner. If the committee of wise men, whose judgement he has endorsed, does recommend a break-up of banks and the government rejects their conclusion, could he really remain the regulator of Britain’s banks?
For the banks, there is a looming sense of horror. Mr King’s speech was replete with academic references but, bankers argue, he shows little knowledge of or interest in what the firms say. Only one of Britain’s big banks, HBOS, made losses that would have overwhelmed the new Basel capital standards. In his speech Mr King appeared to reject this defence outright, arguing that actual losses are less relevant than theoretical losses banks would have suffered had the state not intervened in finance. Mr King rightly disdains a reliance on short term borrowing, but does not acknowledge that two of Britain’s big banks, Barclays and the rescued Royal Bank of Scotland, have already substantially cut their reliance on it and built up cash reserves, while HSBC and Standard Chartered have long had an excess of deposits over loans. As to whether it would matter if any of these big banks moved their headquarters abroad, or if their constituent bits were taken over by foreign firms, the Bank has expressed no opinion.
All of which may be dismissed as the self interested carping of Britain’s discredited fat cats. But even some foreign financiers with little business in Britain or the City of London are looking on with amazement, given it now appears that the governor of the Bank of England does not seem to want any of the large banks he is charged with regulating to exist. The central bank’s top brass, says the boss of one of the world’s largest lenders, are “behaving like a bunch of middle-class guys [or what Americans might call white-collar guys] who cannot see the bigger picture”. Mervyn King, the banker adds, had a bad crisis and now has “no idea” what he is doing. To some that kind of attack is evidence that Mr King and his colleagues are finally taking on the banking lobby; to others it is an unsettling judgment on the institution now charged with regulating the world’s biggest international banking centre.
Further listening: At the same gathering, Vikram Pandit, the chief executive of Citigroup, had a different take on Basel 3 and new bank regulation.
Source: The Economist
www.economist.com
Wednesday, October 27, 2010
Dubai World debt restructuring agreed
State-owned Dubai World has signed up the last remaining creditor to a $23bn (£15bn) debt restructuring.
The last investor - US distressed debt fund Aurelius Capital Management - sold its position to Deutsche Bank, one of the company's main creditors, according to a report in the Financial Times.
The holding company said in September that 99% of its creditors had already agreed to the new repayment terms.
It means Dubai World can now avoid a lengthy tribunal to complete the deal.
Dubai World manages investments for the Emirate of Dubai, including the Dubai ports, foreign investments, and major real estate development such as the famous palm islands.
Debt for equity
Aurelius had bought the debt in the secondary market after the company defaulted on its debts last year, but missed the 9 September deadline to vote for the restructuring.
The terms of the restructuring involve converting $8.9bn of government debt into equity, and would leave Dubai World with $14.4bn of remaining debts.
The news means that a special tribunal, which had been set up to reach a settlement with any creditors that held out from the deal, will no longer be needed.
Meanwhile, there was good news for Dubai on the economic front.
A government spokesman said that he expected a growth rate this year of 2.3%, thanks in part to a 7% rise in population during the first nine months of the year as immigration picked up again.
Meanwhile, Dubai Ports World (a subsidiary of Dubai World) reported that its global container levels had returned to the pre-crisis peak levels of 2008.
Source: BBC
www.bbc.co.uk
The last investor - US distressed debt fund Aurelius Capital Management - sold its position to Deutsche Bank, one of the company's main creditors, according to a report in the Financial Times.
The holding company said in September that 99% of its creditors had already agreed to the new repayment terms.
It means Dubai World can now avoid a lengthy tribunal to complete the deal.
Dubai World manages investments for the Emirate of Dubai, including the Dubai ports, foreign investments, and major real estate development such as the famous palm islands.
Debt for equity
Aurelius had bought the debt in the secondary market after the company defaulted on its debts last year, but missed the 9 September deadline to vote for the restructuring.
The terms of the restructuring involve converting $8.9bn of government debt into equity, and would leave Dubai World with $14.4bn of remaining debts.
The news means that a special tribunal, which had been set up to reach a settlement with any creditors that held out from the deal, will no longer be needed.
Meanwhile, there was good news for Dubai on the economic front.
A government spokesman said that he expected a growth rate this year of 2.3%, thanks in part to a 7% rise in population during the first nine months of the year as immigration picked up again.
Meanwhile, Dubai Ports World (a subsidiary of Dubai World) reported that its global container levels had returned to the pre-crisis peak levels of 2008.
Source: BBC
www.bbc.co.uk
Tuesday, October 26, 2010
French unions deny defeat in pension reform protests
Trade unions in France have denied defeat over pension reform as strike action petered out and the bill moved closer to its final reading.
Trade union leaders insisted the fight to stop the minimum retirement age being raised from 60 to 62 was not ending, but "taking different forms".
Saying the action had lost its meaning, the government welcomed the protesters' "return to reason and dialogue".
Tuesday saw new protests but turnout was a fraction of that seen previously.
As students sought to keep the street campaign alive with marches in major cities, some key stoppages came to an end: strikers re-opened five of France's 12 oil refineries and rubbish collectors in Marseille resumed work after two weeks.
The upper house of parliament, the Senate, approved the final version of the pensions bill by 177 votes to 151, paving the way for the lower house, the National Assembly, to cast its vote on Wednesday.
The National Assembly is widely expected to pass the bill which President Nicolas Sarkozy argues is an inevitable measure in the face of France's rapidly ageing population and growing budget deficit.
The president's approval ratings have plummeted to a record low of 29%, according to a poll published last Sunday.
'Always perfectible'
As the country's petrol stations filled up again for business and Marseille's rubbish collectors began the massive task of shifting more than 10,000 tonnes of refuse, Prime Minister Francois Fillon called on any remaining strikers to back down.
While remaining defiant, union leaders appeared to accept that a turning-point had been reached in the dispute.
"We are in a new phase but a new phase does not mean everything is over," said CFDT leader Francois Chereque.
Bernard Thibault, head of the CGT, said the campaign was not over but would "take other forms".
"The parliamentary debate will come to an end and we'll be looking at it from another perspective, obviously," he said.
"We're not calling into question the legitimacy of parliament... but a law is always perfectible."
However, trade unions plan two more nationwide day of strikes and rallies - the first of them this Thursday, the second on 6 November - before President Sarkozy signs the new bill into law.
The National Assembly's speaker, Bernard Accoyer, said representatives of the opposition Socialist and other parties had attended a meeting of the steering committee on Tuesday for the first time since calling a boycott during the pensions debate.
Economy Minister Christine Lagarde said that despite the cost of the refinery strikes, which she put this month at 200-400m euros (£178-356m, $280-560m) a day in lost production, the government did not expect 2010 growth to be knocked off course.
She welcomed the easing of the industrial action, saying: "There's no winner and no loser in this matter.
"What's very important is that people take responsibility for their actions. It's to realise that the economy needs to turn over."
'Sarko, you're finished'
In Paris, students, school children and workers marched under banners towards the Senate on Tuesday but their numbers appeared much smaller than at previous rallies.
Turnout in the south-western city of Toulouse, which has the biggest university campus outside Paris, was no more than 300, Reuters news agency reported.
However, up to 2,000 people on the French Indian Ocean island of La Reunion marched through the capital Saint-Denis.
A slogan reported by Reunion online newspaper Clicanoo read: "Sarko [nickname for Sarkozy], you're finished. The youth are in the streets. There is one solution - to demonstrate."
Student rallies were due to be held into the evening in cities such as Lyon and Tours, according to posts on Le Monde's website, which ran a special "student action day" live page.
However, the paper had ended its live coverage of the protests by 1727 local time (1527 GMT).
Source: BBC
www.bc.co.uk
Trade union leaders insisted the fight to stop the minimum retirement age being raised from 60 to 62 was not ending, but "taking different forms".
Saying the action had lost its meaning, the government welcomed the protesters' "return to reason and dialogue".
Tuesday saw new protests but turnout was a fraction of that seen previously.
As students sought to keep the street campaign alive with marches in major cities, some key stoppages came to an end: strikers re-opened five of France's 12 oil refineries and rubbish collectors in Marseille resumed work after two weeks.
The upper house of parliament, the Senate, approved the final version of the pensions bill by 177 votes to 151, paving the way for the lower house, the National Assembly, to cast its vote on Wednesday.
The National Assembly is widely expected to pass the bill which President Nicolas Sarkozy argues is an inevitable measure in the face of France's rapidly ageing population and growing budget deficit.
The president's approval ratings have plummeted to a record low of 29%, according to a poll published last Sunday.
'Always perfectible'
As the country's petrol stations filled up again for business and Marseille's rubbish collectors began the massive task of shifting more than 10,000 tonnes of refuse, Prime Minister Francois Fillon called on any remaining strikers to back down.
While remaining defiant, union leaders appeared to accept that a turning-point had been reached in the dispute.
"We are in a new phase but a new phase does not mean everything is over," said CFDT leader Francois Chereque.
Bernard Thibault, head of the CGT, said the campaign was not over but would "take other forms".
"The parliamentary debate will come to an end and we'll be looking at it from another perspective, obviously," he said.
"We're not calling into question the legitimacy of parliament... but a law is always perfectible."
However, trade unions plan two more nationwide day of strikes and rallies - the first of them this Thursday, the second on 6 November - before President Sarkozy signs the new bill into law.
The National Assembly's speaker, Bernard Accoyer, said representatives of the opposition Socialist and other parties had attended a meeting of the steering committee on Tuesday for the first time since calling a boycott during the pensions debate.
Economy Minister Christine Lagarde said that despite the cost of the refinery strikes, which she put this month at 200-400m euros (£178-356m, $280-560m) a day in lost production, the government did not expect 2010 growth to be knocked off course.
She welcomed the easing of the industrial action, saying: "There's no winner and no loser in this matter.
"What's very important is that people take responsibility for their actions. It's to realise that the economy needs to turn over."
'Sarko, you're finished'
In Paris, students, school children and workers marched under banners towards the Senate on Tuesday but their numbers appeared much smaller than at previous rallies.
Turnout in the south-western city of Toulouse, which has the biggest university campus outside Paris, was no more than 300, Reuters news agency reported.
However, up to 2,000 people on the French Indian Ocean island of La Reunion marched through the capital Saint-Denis.
A slogan reported by Reunion online newspaper Clicanoo read: "Sarko [nickname for Sarkozy], you're finished. The youth are in the streets. There is one solution - to demonstrate."
Student rallies were due to be held into the evening in cities such as Lyon and Tours, according to posts on Le Monde's website, which ran a special "student action day" live page.
However, the paper had ended its live coverage of the protests by 1727 local time (1527 GMT).
Source: BBC
www.bc.co.uk
Wednesday, October 13, 2010
Germany FinMin Spokesman: Schaeuble On His Way To Recovery
BERLIN (MNI) - German Finance Minister Wolfgang Schaeuble is on his way to recovery from his current health problems, a ministry spokesman said Wednesday.
"My impression is that the recovery process of the minister is proceeding," spokesman Michael Offer said at a regular government press conference here.
Last week, the Finance Ministry denied a press report that Schaeuble planned to step down if his health did not improve significantly after his current stay in the hospital.
At the end of last week, Schaeuble started four weeks of treatment for pressure sores related to his confinement to a wheel chair. The 68-year old minister had already spent several weeks in the hospital last week because of the same problems.
Source: imarketnews.com
"My impression is that the recovery process of the minister is proceeding," spokesman Michael Offer said at a regular government press conference here.
Last week, the Finance Ministry denied a press report that Schaeuble planned to step down if his health did not improve significantly after his current stay in the hospital.
At the end of last week, Schaeuble started four weeks of treatment for pressure sores related to his confinement to a wheel chair. The 68-year old minister had already spent several weeks in the hospital last week because of the same problems.
Source: imarketnews.com
Sunday, October 10, 2010
The Evolving Nature of Corporate Mergers and Acquisitions in the Wake of the Global Economic Crisis
WASHINGTON (Marketwire) - In an article in Global Finance Magazine Dr. Alexander Mirtchev, economics expert and president of Washington-based Krull Corp., a consultancy with a focus on new economic trends and emerging policy challenges expounds on the signs of revitalization in the international mergers and acquisitions market. He assesses the implications of the resurgence of investment activity and the potential repercussions of the growing trend of investors' "clubbing together" for major acquisition and investment deals.
After the international M&A activities "cratered" in the midst of a global recession, there are finally indications that corporate tie-ups and "teaming-ups" are once again becoming an attractive form of prioritizing investment activity. According to Alexander Mirtchev, "looking towards recovery, joining forces allows investors to achieve better terms and access 'tailor-made' financing tools. This has led to intensifying interest in mergers and acquisitions of a size that until recently appeared unviable due to the impact of the global economic crisis." Despite the fact that global economic recovery is "moderately-paced and uneven," he added, "M&A activity has picked up noticeably, perhaps even beyond the level that is perceived to correspond to the actual state of the global economy."
The rationale for the recent resurgence can be seen not only in efforts to tackle the effects of the crisis, but represent also the "long view" of recovery in the post-crisis period. From Mirtchev's perspective, mergers and acquisitions are not simply driven by the growing perception that asset prices have dropped to a level that makes them attractive. "Rather, a number of major corporate alliances and acquisitions reflect the drive to develop synergies beyond the immediate," he indicates. "Merger and acquisition activity is being driven not just by the growing perception of attractive asset values in the wake of the crisis. Stronger investment interest is also due to the momentum of private equity firms, investment companies and sovereign wealth funds "teaming up" in order to achieve shortcuts to improved market knowledge, better trading terms and increased opportunities for investment with a realistic medium to long-term significance."
According to Mirtchev, "there is, in addition, a view among major investors that combining forces brings new resources to bear to a particular project, as well as enhancing the level of expertise brought to the table. The primary advantage of forming clubs is to spread the risk while increasing potential profits. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking." Skeptics would suggest that, given uncertain demand, M&A recovery reflects the desire by CEOs to use cash to eliminate their weakened competitors rather that invest in organic growth and innovation. From Mirtchev's vantage point, this is a sign of maturity by investment companies and funds, which are now interested not only in short-term gains or in "glamour investments", but are more focused on the results in the long-run.
Moreover, a number of investors are showing greater willingness to join forces, in order to pool their exposure to risk, generate additional opportunities and multiply the effect of their resources. "The increased willingness of investors to share the benefits from an acquisition in order to introduce elements of comparatively independent supplementary financing mechanisms in their transactions is another sign of their growing acumen," posits Dr. Mirtchev. "These signs of maturity reinforce the legitimacy of mergers and acquisitions, and provide an added level of liquidity to a system that is still struggling to cope with the effects of the global financial and economic crisis."
About Krull Corporation
Washington, D.C.-based Krull Corp. was founded in 1992 with a mission to address new economic trends, relevant business strategies, and economic and political risk mitigation.
FOR FURTHER INFORMATION PLEASE CONTACT:
Krull Corp.
+1 202 416 1646
+1 202 833 3843
mail@krullcorp.com
After the international M&A activities "cratered" in the midst of a global recession, there are finally indications that corporate tie-ups and "teaming-ups" are once again becoming an attractive form of prioritizing investment activity. According to Alexander Mirtchev, "looking towards recovery, joining forces allows investors to achieve better terms and access 'tailor-made' financing tools. This has led to intensifying interest in mergers and acquisitions of a size that until recently appeared unviable due to the impact of the global economic crisis." Despite the fact that global economic recovery is "moderately-paced and uneven," he added, "M&A activity has picked up noticeably, perhaps even beyond the level that is perceived to correspond to the actual state of the global economy."
The rationale for the recent resurgence can be seen not only in efforts to tackle the effects of the crisis, but represent also the "long view" of recovery in the post-crisis period. From Mirtchev's perspective, mergers and acquisitions are not simply driven by the growing perception that asset prices have dropped to a level that makes them attractive. "Rather, a number of major corporate alliances and acquisitions reflect the drive to develop synergies beyond the immediate," he indicates. "Merger and acquisition activity is being driven not just by the growing perception of attractive asset values in the wake of the crisis. Stronger investment interest is also due to the momentum of private equity firms, investment companies and sovereign wealth funds "teaming up" in order to achieve shortcuts to improved market knowledge, better trading terms and increased opportunities for investment with a realistic medium to long-term significance."
According to Mirtchev, "there is, in addition, a view among major investors that combining forces brings new resources to bear to a particular project, as well as enhancing the level of expertise brought to the table. The primary advantage of forming clubs is to spread the risk while increasing potential profits. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking." Skeptics would suggest that, given uncertain demand, M&A recovery reflects the desire by CEOs to use cash to eliminate their weakened competitors rather that invest in organic growth and innovation. From Mirtchev's vantage point, this is a sign of maturity by investment companies and funds, which are now interested not only in short-term gains or in "glamour investments", but are more focused on the results in the long-run.
Moreover, a number of investors are showing greater willingness to join forces, in order to pool their exposure to risk, generate additional opportunities and multiply the effect of their resources. "The increased willingness of investors to share the benefits from an acquisition in order to introduce elements of comparatively independent supplementary financing mechanisms in their transactions is another sign of their growing acumen," posits Dr. Mirtchev. "These signs of maturity reinforce the legitimacy of mergers and acquisitions, and provide an added level of liquidity to a system that is still struggling to cope with the effects of the global financial and economic crisis."
About Krull Corporation
Washington, D.C.-based Krull Corp. was founded in 1992 with a mission to address new economic trends, relevant business strategies, and economic and political risk mitigation.
FOR FURTHER INFORMATION PLEASE CONTACT:
Krull Corp.
+1 202 416 1646
+1 202 833 3843
mail@krullcorp.com
Saturday, October 9, 2010
Ministers seek way to strengthen economic recovery
By HARRY DUNPHY and MARTIN CRUTSINGER (AP)
WASHINGTON — Global finance ministers are looking for ways to strengthen a fragile recovery and ease friction over currencies.
They also want to preserve the close international coordination that brought them together in 2008 to prevent the looming threat of the worst recession since the end of World War II, and to avert a return to narrow domestic-oriented policies.
Ministers headed Saturday into steering committee sessions for the 187-nation International Monetary Fund and its sister lending institution, the World Bank.
The Group of Seven major industrialized countries and rising powerhouses in the G-20, such as India, China and Brazil, held informal sideline meetings over the weekend in the run-up to a G-20 summit in South Korea. At the meeting in Seoul, leaders are expected to try to resolve many of the issues that the finance ministers are grappling with.
"We are gathering at a pivotal moment facing a very uncertain future," the head of the IMF, Dominique Strauss-Kahn told delegates. "Growth is coming back but we all know it is fragile and uneven."
He said the ministers promised their constituents a lot but "we didn't deliver enough. So we need to go for growth, we need to go for jobs but we also need to go for change" in the international financial system.
Addressing an issue that formed the backdrop for three days of meetings, Strauss-Kahn said a particular threat to the recovery came from talk of currency wars. He urged ministers to stop trying to manipulate their currencies and to abandon "this idea that currencies can be used as a weapon."
He said it was understandable some countries wanted to resist the volatility and instability that come with huge capital inflows by revaluing their currencies to protect their exports "but it cannot be a long-lasting solution."
Canadian Finance Minister James Flaherty told reporters that the global economy would be the loser if nations followed "beggar-thy-neighbor" currency policies that invite retaliation by other nations.
"There are consequences that are bad for a world economic recovery that is fragile by ... countries maintaining relative inflexibility in their currencies," Flaherty said .
Strauss-Kahn and several of the delegates have suggested that more cooperation among nations is needed to improve the international monetary system instead of governments turning inward and focusing on domestic problems.
The global economy is still struggling to emerge from the worst recession since the end of World War II, said Strauss-Kahn. Unless the pace of job growth quickens, he said, "we really face the risk of a lost generation" of young people unable to get work.
In recent days, the Obama administration has increased pressure on China to allow its currency to rise in value against the dollar as a way to boost U.S. exports.
Various other nations, including Japan, Brazil and South Korea, also have taken steps to keep their currencies weaker in an effort to increase their exports.
Treasury Secretary Timothy Geithner said that China's resistance to a faster appreciation of the yuan imperils progress in combatting the global recession.
"Our initial achievements are at risk of being undermined" by countries that are relying on exports for growth instead of building up their domestic demand, Geithner said.
Geithner called on the IMF to play a larger role in monitoring economic actions in its member countries, saying such surveillance could be critical in preventing the next crisis.
But Chinese officials continued to insist that their gentle efforts to revalue their currency was the best approach to take.
"China will move the exchange rate gradually," Zhou Xiaochuan, head of China's central bank, said during a panel discussion Friday. "We will do it in a gradual way rather than shock therapy."
WASHINGTON — Global finance ministers are looking for ways to strengthen a fragile recovery and ease friction over currencies.
They also want to preserve the close international coordination that brought them together in 2008 to prevent the looming threat of the worst recession since the end of World War II, and to avert a return to narrow domestic-oriented policies.
Ministers headed Saturday into steering committee sessions for the 187-nation International Monetary Fund and its sister lending institution, the World Bank.
The Group of Seven major industrialized countries and rising powerhouses in the G-20, such as India, China and Brazil, held informal sideline meetings over the weekend in the run-up to a G-20 summit in South Korea. At the meeting in Seoul, leaders are expected to try to resolve many of the issues that the finance ministers are grappling with.
"We are gathering at a pivotal moment facing a very uncertain future," the head of the IMF, Dominique Strauss-Kahn told delegates. "Growth is coming back but we all know it is fragile and uneven."
He said the ministers promised their constituents a lot but "we didn't deliver enough. So we need to go for growth, we need to go for jobs but we also need to go for change" in the international financial system.
Addressing an issue that formed the backdrop for three days of meetings, Strauss-Kahn said a particular threat to the recovery came from talk of currency wars. He urged ministers to stop trying to manipulate their currencies and to abandon "this idea that currencies can be used as a weapon."
He said it was understandable some countries wanted to resist the volatility and instability that come with huge capital inflows by revaluing their currencies to protect their exports "but it cannot be a long-lasting solution."
Canadian Finance Minister James Flaherty told reporters that the global economy would be the loser if nations followed "beggar-thy-neighbor" currency policies that invite retaliation by other nations.
"There are consequences that are bad for a world economic recovery that is fragile by ... countries maintaining relative inflexibility in their currencies," Flaherty said .
Strauss-Kahn and several of the delegates have suggested that more cooperation among nations is needed to improve the international monetary system instead of governments turning inward and focusing on domestic problems.
The global economy is still struggling to emerge from the worst recession since the end of World War II, said Strauss-Kahn. Unless the pace of job growth quickens, he said, "we really face the risk of a lost generation" of young people unable to get work.
In recent days, the Obama administration has increased pressure on China to allow its currency to rise in value against the dollar as a way to boost U.S. exports.
Various other nations, including Japan, Brazil and South Korea, also have taken steps to keep their currencies weaker in an effort to increase their exports.
Treasury Secretary Timothy Geithner said that China's resistance to a faster appreciation of the yuan imperils progress in combatting the global recession.
"Our initial achievements are at risk of being undermined" by countries that are relying on exports for growth instead of building up their domestic demand, Geithner said.
Geithner called on the IMF to play a larger role in monitoring economic actions in its member countries, saying such surveillance could be critical in preventing the next crisis.
But Chinese officials continued to insist that their gentle efforts to revalue their currency was the best approach to take.
"China will move the exchange rate gradually," Zhou Xiaochuan, head of China's central bank, said during a panel discussion Friday. "We will do it in a gradual way rather than shock therapy."
Friday, October 8, 2010
Can America Export Its Way to Recovery?
I've had my eye on export and manufacturing numbers the last few months. Why on earth? you ask. We're coming out of a balance-sheet recession, which means that families and companies are using new money to pay back old debts. In a balance sheet recession, fiscal stimulus (eg government spending) gets mopped up by states and households, while monetary stimulus (eg low interest rates) gets ignored by banks.
The quickest way out of a balance-sheet recession, the story goes, is exports: fresh money in exchange for goods. If a country wants its goods to be competitive, it need the good to be either unique or cheap. The United States had better hope for unique, because we have a hard time making our goods cheap. We have high wages, and high living standards, and safety and environmental regulations, and tax benefits for multinational companies to build stuff and sell it abroad. That's one reason why even export-minded companies choose to make so much of their products overseas.
The other reason that receives a lot of attention is China. There is a lot of demagoguing around the issue of China's currency, the renminbi, which the government keeps artificially low to preserve its trade advantage. But this struck me as a smart, clean and sober analysis of the Chinese currency controversy, so I thought I'd pass it along. The writer is Willem Thorbecke of the Asian Development Bank Institute, via Economix:
The Chinese exchange rate has also been kept low relative to the dollar. This has further reduced the dollar costs of processed goods produced in China for export to the United States. It has also caused other Asian countries that compete with China in third markets to intervene and keep their exchange rates low relative to the dollar. This reduces the dollar cost of parts and components that are produced in other Asian countries and shipped to China for assembly and re-export to the United States. These low exchange rates thus reduce the dollar prices of processed exports and allow China to sell more to the United States.
As many Chinese economists have noted, artificially low wage rates and interest rates and inadequate enforcement of environmental regulations imply a huge transfer of wealth from Chinese households to businesses. Artificially low exchange rates also represent a transfer from consumers to producers because weaker exchange rates limit the amount of imports that Asian consumers can purchase from the rest of the world.
China runs enormous surpluses with the United States largely because consumers in China provide subsidies to producers. These subsidies cause consumption in China to equal only 35 percent of gross domestic product., a very low level for a country at China's level of development. The Chinese government is committed to adopting more consumer-friendly policies in the medium run. As it does, China's surplus with the United States should decrease also.
If you care about the future of American exports, you have to care about the state of American manufacturing. As another great Economix post points out, the manufacturing rally from early this year has not only stalled, but also reversed:
Manufacturing shed 6,000 jobs in September, and the rate has been flat since May. The industry added 134,000 jobs in the first five months of the year. In some respects, this should not come as a surprise. For months, economic analysts such as David A. Rosenberg at Gluskin Sheff have warned that companies had finished their sparse inventory building. The second-quarter figure for gross domestic product showed a big jump in imports and a drop in exports.
Why else does the United States have such a problem with exports? One pat answer is: We're very rich, but we act even richer. High wages and regulations make it more expensive to build and do stuff here than, say, Mexico. And even higher spending (for a long time, the average American spent more than he earned) means we buy a lot of stuff from the world, and from ourselves. If you're a producer in Germany or northern China, you almost have to look across country lines to find a decent consumer base. If you're a producer in Iowa, the world's most ravenous consumer lives inside your national boundary.
Our export challenge is a tapestry of things we want to change and can, like prohibitive corporate tax rates, things we want to change but can't, like China's currency peg, and things we don't want to change at all, like America's high wages and living standards. There's a lot to think through here, but consider this a start.
Source: www.theatlantic.com
The quickest way out of a balance-sheet recession, the story goes, is exports: fresh money in exchange for goods. If a country wants its goods to be competitive, it need the good to be either unique or cheap. The United States had better hope for unique, because we have a hard time making our goods cheap. We have high wages, and high living standards, and safety and environmental regulations, and tax benefits for multinational companies to build stuff and sell it abroad. That's one reason why even export-minded companies choose to make so much of their products overseas.
The other reason that receives a lot of attention is China. There is a lot of demagoguing around the issue of China's currency, the renminbi, which the government keeps artificially low to preserve its trade advantage. But this struck me as a smart, clean and sober analysis of the Chinese currency controversy, so I thought I'd pass it along. The writer is Willem Thorbecke of the Asian Development Bank Institute, via Economix:
The Chinese exchange rate has also been kept low relative to the dollar. This has further reduced the dollar costs of processed goods produced in China for export to the United States. It has also caused other Asian countries that compete with China in third markets to intervene and keep their exchange rates low relative to the dollar. This reduces the dollar cost of parts and components that are produced in other Asian countries and shipped to China for assembly and re-export to the United States. These low exchange rates thus reduce the dollar prices of processed exports and allow China to sell more to the United States.
As many Chinese economists have noted, artificially low wage rates and interest rates and inadequate enforcement of environmental regulations imply a huge transfer of wealth from Chinese households to businesses. Artificially low exchange rates also represent a transfer from consumers to producers because weaker exchange rates limit the amount of imports that Asian consumers can purchase from the rest of the world.
China runs enormous surpluses with the United States largely because consumers in China provide subsidies to producers. These subsidies cause consumption in China to equal only 35 percent of gross domestic product., a very low level for a country at China's level of development. The Chinese government is committed to adopting more consumer-friendly policies in the medium run. As it does, China's surplus with the United States should decrease also.
If you care about the future of American exports, you have to care about the state of American manufacturing. As another great Economix post points out, the manufacturing rally from early this year has not only stalled, but also reversed:
Manufacturing shed 6,000 jobs in September, and the rate has been flat since May. The industry added 134,000 jobs in the first five months of the year. In some respects, this should not come as a surprise. For months, economic analysts such as David A. Rosenberg at Gluskin Sheff have warned that companies had finished their sparse inventory building. The second-quarter figure for gross domestic product showed a big jump in imports and a drop in exports.
Why else does the United States have such a problem with exports? One pat answer is: We're very rich, but we act even richer. High wages and regulations make it more expensive to build and do stuff here than, say, Mexico. And even higher spending (for a long time, the average American spent more than he earned) means we buy a lot of stuff from the world, and from ourselves. If you're a producer in Germany or northern China, you almost have to look across country lines to find a decent consumer base. If you're a producer in Iowa, the world's most ravenous consumer lives inside your national boundary.
Our export challenge is a tapestry of things we want to change and can, like prohibitive corporate tax rates, things we want to change but can't, like China's currency peg, and things we don't want to change at all, like America's high wages and living standards. There's a lot to think through here, but consider this a start.
Source: www.theatlantic.com
Thursday, October 7, 2010
Greece announces new austerity measures
The Greek government has announced new, tougher, austerity measures in its 2011 draft budget.
The government said it would reduce the budget deficit below the target set by the International Monetary Fund (IMF) and eurozone countries earlier this year when they bailed Greece out.
The new target will require new taxes and a higher rate of VAT, going beyond the cuts already announced this year.
The aim is to convince investors that Greece's finances are under control.
New austerity measures will affect profitable businesses as well as consumers through new property and gambling taxes.
The budget also plans to raise 1bn euros of additional revenue in VAT, but it does not specify which products or services will be taxed at higher rates.
Earlier this year, austerity measures brought in by the government led to violent protests on the streets of Athens.
Restoring confidence
Greece is trying to reduce its heavy debt burden, expected to be the highest in the eurozone this year at 133% of gross domestic product, in order to convince investors that its debt crisis is over.
The government plans to reduce its budget deficit to 7% of GDP by the end of 2011, below the 7.6% target set by eurozone countries and the IMF in their bail-out package of the country in May this year.
Since investors lost confidence in the country, prohibitive borrowing costs have kept Greece away from issuing bonds but the country aims to return to the capital markets for funding sometime next year.
On Saturday, Chinese Premier Wen Jiabao said China would buy an unspecified amount of Greek government bonds when Athens resumes long-term debt issuance.
So far there are signs that investor confidence has started to return, with Greek borrowing costs down by over 10% in the last month.
The government said it would reduce the budget deficit below the target set by the International Monetary Fund (IMF) and eurozone countries earlier this year when they bailed Greece out.
The new target will require new taxes and a higher rate of VAT, going beyond the cuts already announced this year.
The aim is to convince investors that Greece's finances are under control.
New austerity measures will affect profitable businesses as well as consumers through new property and gambling taxes.
The budget also plans to raise 1bn euros of additional revenue in VAT, but it does not specify which products or services will be taxed at higher rates.
Earlier this year, austerity measures brought in by the government led to violent protests on the streets of Athens.
Restoring confidence
Greece is trying to reduce its heavy debt burden, expected to be the highest in the eurozone this year at 133% of gross domestic product, in order to convince investors that its debt crisis is over.
The government plans to reduce its budget deficit to 7% of GDP by the end of 2011, below the 7.6% target set by eurozone countries and the IMF in their bail-out package of the country in May this year.
Since investors lost confidence in the country, prohibitive borrowing costs have kept Greece away from issuing bonds but the country aims to return to the capital markets for funding sometime next year.
On Saturday, Chinese Premier Wen Jiabao said China would buy an unspecified amount of Greek government bonds when Athens resumes long-term debt issuance.
So far there are signs that investor confidence has started to return, with Greek borrowing costs down by over 10% in the last month.
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