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BEIJING / LONDON - As the world's center of gravity shifts toward the Asia-Pacific region, concerns are growing in Europe that the former center of global geopolitics may be sidelined.
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Showing posts with label European Union. Show all posts
Showing posts with label European Union. Show all posts
Monday 5 December 2011
Saturday 29 October 2011
Eurozone seeks bailout funds from China
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Klaus Regling: ''These are regular consultations at an early stage and there will be no conclusions''
The head of the eurozone's bailout fund is beginning attempts to persuade China to invest in a scheme to help rescue member countries facing debt crises.
After meeting Chinese leaders, Klaus Regling said there were no formal negotiations and would be no deal now.
It is thought China may pay about 70bn euros ($100bn) into the fund, which is expected to be boosted to 1tn euros.
Meanwhile French President Nicolas Sarkozy said debt-ridden Greece's entry to the eurozone was a mistake.
Greece was "not ready" when it joined in 2001, he said, adding that it could be rescued thanks to a new deal on the debt crisis.
European leaders worked into the early hours of Thursday in Brussels to secure an agreement aimed at preventing the crisis from spreading to larger eurozone economies.
The deal triggered a worldwide shares rally.
'Regular buyer' Beijing has made it clear that it will demand strong guarantees on the safety of any contribution it might make.
With more than $3tn in foreign reserves there are European hopes that China could ride to the rescue.
As the EU's biggest trade partner Beijing would also be hard hit by any downturn in Europe.
But like other investors, China will want guarantees.
And Beijing may push for other concessions, such as market economy status - a move that would make it harder for European companies to press trade complaints against Chinese rivals.
Any investment will also be fraught with political risk.
China's fund managers have faced criticism after earlier overseas investments soured.
Despite being the world's second economy, more than 200m Chinese live in poverty.
China's leaders won't want to be seen giving "charity" to countries richer than their own.
Mr Regling, who is chief executive of the European Financial Stability Facility (EFSF), said he was not negotiating with China as a potential investor but holding consultations to decide the terms for raising the money.
"Don't expect any precise outcome of our talks," he said, quoted by AFP news agency.
"I cannot say today, and it's certainly far too early to say what kind of amounts might be envisaged."
He said China had been a regular buyer of EFSF bonds in the past.
He would present the fund's bonds as a potential commercial investment to China, he said, adding that Beijing regularly needed to find safe investments for its trade surpluses.
"I am optimistic that we will have a longer term relationship," he said.
Chinese Vice Finance Minister Zhu Guangyao said there was work still to be done.
"We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment," he said, quoted by AFP.
The President of the World Bank, Robert Zoellick, has said he believes China will invest in Europe only if there are incentives for it to do so.
"I don't think that China will just come in as a white knight to try to provide money just to bail out Europeans," he told the BBC.
But investor Jim Rogers said China was prepared to help.
"From China's point of view, it's cheap foreign aid. They'll buy goodwill. I guess they'll put up some money," he said on BBC Radio 4's Today programme.
The suggestion that China should use its financial clout to assist the eurozone met with mixed reactions on the streets of Beijing.
"If we have the ability to help them then we should, but there is no feeling of pride in that," said Xu Juan - a 27-year-old employee of an international trade firm.
We need to focus on doing a good job on developing our own country."
Wang Xiaodong, a 23-year-old univeristy student, said "With the global economy everybody prospers together or becomes weaker together, so we just have to endure this tough time together."
The framework for the new EFSF bailout fund is to be put in place in November.
Germany, as the largest economy in eurozone, is expected to be the largest contributor.
Asian markets rose for a second day on Friday and bank stocks in Europe continued to rally, a day after the deal was reached.
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The head of the eurozone's bailout fund is beginning attempts to persuade China to invest in a scheme to help rescue member countries facing debt crises.
After meeting Chinese leaders, Klaus Regling said there were no formal negotiations and would be no deal now.
It is thought China may pay about 70bn euros ($100bn) into the fund, which is expected to be boosted to 1tn euros.
Meanwhile French President Nicolas Sarkozy said debt-ridden Greece's entry to the eurozone was a mistake.
Greece was "not ready" when it joined in 2001, he said, adding that it could be rescued thanks to a new deal on the debt crisis.
European leaders worked into the early hours of Thursday in Brussels to secure an agreement aimed at preventing the crisis from spreading to larger eurozone economies.
The deal triggered a worldwide shares rally.
'Regular buyer' Beijing has made it clear that it will demand strong guarantees on the safety of any contribution it might make.
With more than $3tn in foreign reserves there are European hopes that China could ride to the rescue.
As the EU's biggest trade partner Beijing would also be hard hit by any downturn in Europe.
But like other investors, China will want guarantees.
And Beijing may push for other concessions, such as market economy status - a move that would make it harder for European companies to press trade complaints against Chinese rivals.
Any investment will also be fraught with political risk.
China's fund managers have faced criticism after earlier overseas investments soured.
Despite being the world's second economy, more than 200m Chinese live in poverty.
China's leaders won't want to be seen giving "charity" to countries richer than their own.
Mr Regling, who is chief executive of the European Financial Stability Facility (EFSF), said he was not negotiating with China as a potential investor but holding consultations to decide the terms for raising the money.
"Don't expect any precise outcome of our talks," he said, quoted by AFP news agency.
"I cannot say today, and it's certainly far too early to say what kind of amounts might be envisaged."
He said China had been a regular buyer of EFSF bonds in the past.
He would present the fund's bonds as a potential commercial investment to China, he said, adding that Beijing regularly needed to find safe investments for its trade surpluses.
"I am optimistic that we will have a longer term relationship," he said.
Chinese Vice Finance Minister Zhu Guangyao said there was work still to be done.
"We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment," he said, quoted by AFP.
“Start Quote
If we have the ability to help them then we should, but there is no feeling of pride in that”Xu Juan International trade firm employee in Beijing
- Why would China want to help Europe?
The President of the World Bank, Robert Zoellick, has said he believes China will invest in Europe only if there are incentives for it to do so.
"I don't think that China will just come in as a white knight to try to provide money just to bail out Europeans," he told the BBC.
But investor Jim Rogers said China was prepared to help.
"From China's point of view, it's cheap foreign aid. They'll buy goodwill. I guess they'll put up some money," he said on BBC Radio 4's Today programme.
The suggestion that China should use its financial clout to assist the eurozone met with mixed reactions on the streets of Beijing.
"If we have the ability to help them then we should, but there is no feeling of pride in that," said Xu Juan - a 27-year-old employee of an international trade firm.
We need to focus on doing a good job on developing our own country."
Wang Xiaodong, a 23-year-old univeristy student, said "With the global economy everybody prospers together or becomes weaker together, so we just have to endure this tough time together."
The framework for the new EFSF bailout fund is to be put in place in November.
Germany, as the largest economy in eurozone, is expected to be the largest contributor.
Asian markets rose for a second day on Friday and bank stocks in Europe continued to rally, a day after the deal was reached.
Newscribe : get free news in real time
Saturday 8 October 2011
Bleed the Foreigner!
Harold James
PRINCETON – Today, the world is threatened with a repeat of the 2008 financial meltdown – but on an even more cataclysmic scale. This time, the epicenter is in Europe, rather than the United States. And this time, the financial mechanisms involved are not highly complex structured financial products, but one of the oldest financial instruments in the world: government bonds.
While governments and central banks race frantically to find a solution, there is a profound psychological dynamic at work that stands in the way of an orderly debt workout: our aversion to recognizing obligations to strangers.
The impulse simply to cut the Gordian knot of debt by defaulting on it is much stronger when creditors are remote and unknown. In 2007-2008, it was homeowners who could not keep up with payments; now it is governments.
But, in both cases, the lender was distant and anonymous. American mortgages were no longer held at the local bank, but had been repackaged in esoteric financial instruments and sold around the world; likewise, Greek government debt is in large part owed to foreigners.
Because Spain and France defaulted so much in the early modern period, and because Greece, from the moment of its political birth in 1830, was a chronic or serial defaulter, some assume that national temperament somehow imbues countries with a proclivity to default. But that search for long historical continuity is facile, for it misses one of the key determinants of debt sustainability: the identity of the state’s creditor.
This variable makes an enormous difference in terms of whether debt will be regularly and promptly serviced. The frequent and spectacular early modern bankruptcies of the French and Spanish monarchies concerned for the most part debt owed to foreigners.
The sixteenth-century Habsburgs borrowed – at very high interest rates – from Florentine, Genovese, and Augsburg merchants. Ancien régime France developed a similar pattern, borrowing in Amsterdam or Geneva in order to fight wars against Spain in the sixteenth and seventeen centuries, and against Britain in the eighteenth.
The Netherlands and Britain, however followed a different path. They depended much less on foreign creditors than on domestic lenders. The Dutch model was exported to Britain in 1688, along with the political revolution that deposed the Catholic James II and put the Dutch Protestant William of Orange on the English throne.
Indeed, the Glorious Revolution enabled a revolution in finance. In particular, recognition of the rights of parliament – of a representative assembly – ensured that the agents of the creditor classes would have permanent control of the budgetary process.
They could thus guarantee – also on behalf of other creditors – that the state’s finances were solid, and that debts would be repaid. Constitutional monarchy limited the scope for wasteful spending on luxurious court life (as well as on military adventure) – the hallmark of early modern autocratic monarchy.
In short, the financial revolution of the modern world was built on a political order – which anteceded a full transition to universal democracy – in which the creditors formed the political class. That model was transferred to many other countries, and became the bedrock on which modern financial stability was built.
In the post-1945 period, government finance in rich industrial countries was also overwhelmingly national at first, and the assumptions of 1688 still held. Then something happened. With the liberalization of global financial markets that began in the 1970’s, foreign sources of credit became available. In the mid-1980’s, the US became a net debtor, relying increasingly on foreigners to finance its debt.
Europeans, too, followed this path. Part of the promise of the new push to European integration in the 1980’s was that it would make borrowing easier. In the 1990’s, the main attraction of monetary union for Italian and Spanish politicians was that the new currency would bring down interest rates and make foreign money available for cheap financing of government debt.
Until the late 1990’s and the advent of monetary union, most government debt in the European Union was domestically held: in 1998, foreigners held only one-fifth of sovereign debt.
That share climbed rapidly in the aftermath of the euro’s introduction. In 2008, on the eve of the financial crisis, three-quarters of Portuguese debt, half of Spanish and Greek debt, and more than 40% of Italian debt was held by foreigners.
When the foreign share of debt grows, so do the political incentives to impose the costs of that debt on foreigners. In the 1930’s, during and after the Great Depression, a strong feeling that the creditors were illegitimate and unethical bloodsuckers accompanied widespread default. Even US President Franklin Roosevelt jovially slapped his thigh when Reichsbank President Hjalmar Schacht told him that Nazi Germany would default on its external loans, including those owed to American banks, exclaiming, “Serves the Wall Street bankers right!” In Europe today, impatient Greeks have doubtless derived some encouragement from excoriations of bankers’ foolishness by German Chancellor Angela Merkel and French President Nicolas Sarkozy.
The economists’ commonplace that a monetary union demands a fiscal union is only part of a much deeper truth about debt and obligation: debt is rarely sustainable if there is not some sense of communal or collective responsibility. That is the mechanism that reduces the incentives to expropriate the creditor, and makes debt secure and cheap.
At the end of the day, a collective, burden-sharing Europe is the only way out of the current crisis. But that requires substantially greater centralization of political accountability and control than Europeans seem able to achieve today. And that is why many of them could be paying much more for credit tomorrow.
While governments and central banks race frantically to find a solution, there is a profound psychological dynamic at work that stands in the way of an orderly debt workout: our aversion to recognizing obligations to strangers.
The impulse simply to cut the Gordian knot of debt by defaulting on it is much stronger when creditors are remote and unknown. In 2007-2008, it was homeowners who could not keep up with payments; now it is governments.
But, in both cases, the lender was distant and anonymous. American mortgages were no longer held at the local bank, but had been repackaged in esoteric financial instruments and sold around the world; likewise, Greek government debt is in large part owed to foreigners.
Because Spain and France defaulted so much in the early modern period, and because Greece, from the moment of its political birth in 1830, was a chronic or serial defaulter, some assume that national temperament somehow imbues countries with a proclivity to default. But that search for long historical continuity is facile, for it misses one of the key determinants of debt sustainability: the identity of the state’s creditor.
This variable makes an enormous difference in terms of whether debt will be regularly and promptly serviced. The frequent and spectacular early modern bankruptcies of the French and Spanish monarchies concerned for the most part debt owed to foreigners.
The sixteenth-century Habsburgs borrowed – at very high interest rates – from Florentine, Genovese, and Augsburg merchants. Ancien régime France developed a similar pattern, borrowing in Amsterdam or Geneva in order to fight wars against Spain in the sixteenth and seventeen centuries, and against Britain in the eighteenth.
The Netherlands and Britain, however followed a different path. They depended much less on foreign creditors than on domestic lenders. The Dutch model was exported to Britain in 1688, along with the political revolution that deposed the Catholic James II and put the Dutch Protestant William of Orange on the English throne.
Indeed, the Glorious Revolution enabled a revolution in finance. In particular, recognition of the rights of parliament – of a representative assembly – ensured that the agents of the creditor classes would have permanent control of the budgetary process.
They could thus guarantee – also on behalf of other creditors – that the state’s finances were solid, and that debts would be repaid. Constitutional monarchy limited the scope for wasteful spending on luxurious court life (as well as on military adventure) – the hallmark of early modern autocratic monarchy.
In short, the financial revolution of the modern world was built on a political order – which anteceded a full transition to universal democracy – in which the creditors formed the political class. That model was transferred to many other countries, and became the bedrock on which modern financial stability was built.
In the post-1945 period, government finance in rich industrial countries was also overwhelmingly national at first, and the assumptions of 1688 still held. Then something happened. With the liberalization of global financial markets that began in the 1970’s, foreign sources of credit became available. In the mid-1980’s, the US became a net debtor, relying increasingly on foreigners to finance its debt.
Europeans, too, followed this path. Part of the promise of the new push to European integration in the 1980’s was that it would make borrowing easier. In the 1990’s, the main attraction of monetary union for Italian and Spanish politicians was that the new currency would bring down interest rates and make foreign money available for cheap financing of government debt.
Until the late 1990’s and the advent of monetary union, most government debt in the European Union was domestically held: in 1998, foreigners held only one-fifth of sovereign debt.
That share climbed rapidly in the aftermath of the euro’s introduction. In 2008, on the eve of the financial crisis, three-quarters of Portuguese debt, half of Spanish and Greek debt, and more than 40% of Italian debt was held by foreigners.
When the foreign share of debt grows, so do the political incentives to impose the costs of that debt on foreigners. In the 1930’s, during and after the Great Depression, a strong feeling that the creditors were illegitimate and unethical bloodsuckers accompanied widespread default. Even US President Franklin Roosevelt jovially slapped his thigh when Reichsbank President Hjalmar Schacht told him that Nazi Germany would default on its external loans, including those owed to American banks, exclaiming, “Serves the Wall Street bankers right!” In Europe today, impatient Greeks have doubtless derived some encouragement from excoriations of bankers’ foolishness by German Chancellor Angela Merkel and French President Nicolas Sarkozy.
The economists’ commonplace that a monetary union demands a fiscal union is only part of a much deeper truth about debt and obligation: debt is rarely sustainable if there is not some sense of communal or collective responsibility. That is the mechanism that reduces the incentives to expropriate the creditor, and makes debt secure and cheap.
At the end of the day, a collective, burden-sharing Europe is the only way out of the current crisis. But that requires substantially greater centralization of political accountability and control than Europeans seem able to achieve today. And that is why many of them could be paying much more for credit tomorrow.
Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle.
Tuesday 4 October 2011
The decline of the West
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Ceritalah by KARIM RASLAN
These worries are further fuelled by the ongoing global financial crisis and political paralysis that’s slowly undermining both the European Union and the United States.HISTORY is written by the victors. Losers rarely get much coverage let alone a mention.
In Malaysia, unlike in Indonesia, the forces of political conservatism ultimately won power from our former colonial masters.
As such, the “left” – as PAS deputy president Mat Sabu discovered – has been forgotten, if not vilified outright.
However, interpretations of history change from decade to decade. Indeed, there is no one “history”.
Instead, there are many and generally, it’s the powerful that get to determine whose version of events should dominate.
What happens though when a once all-powerful nation begins to falter? How does it write or rewrite its history?
Such a shift can be seen in the recent explosion of writing on the supposed decline of Western – particularly American – power.
Historian Niall Ferguson has charted the process in Civilisation: The West and the Rest. Ferguson argues that the “West” (particularly Britain and America) was able to surpass others (such as the Chinese and Ottoman Empires) due to six “killer applications”: competition, science, property rights, medicine, the consumer society and work ethic.
Ferguson argues that the West perfected all six simultaneously, whereas “the Rest” developed only a handful or else let their comparative advantages in these fields stagnate.
His main thrust, however, is that the West’s current weakness stems from a loss of faith in its own civilisational values. In short, the West has failed to renew its commitment to its “killer apps”.
The West, therefore, ought to “recognise the superiority” of its own civilisation because it offers societies “the best available set of economic, social and political institutions”.
One may of course disagree with Ferguson’s thesis but his arguments are compelling.
His contention that the Islamic world declined because it closed its minds and borders is certainly persuasive, if unoriginal.
At the same time, Ferguson’s tome is a clear sign that there’s a growing trend amongst writers discussing (if not agonising) over the West’s “decline”.
These worries are further fuelled by the ongoing global financial crisis and political paralysis that’s slowly undermining both the European Union and the United States.
Indeed, the latest issue of the literary journal New Yorker includes a superb essay by Adam Gopnick, which claims that “declinism” has now morphed into a veritable literary genre – a pet topic for academics and pundits alike.
But is this really something new? “Cassandras” (named after the Trojan princess who foresaw her own city’s destruction at the hands of the Greeks) – the harbingers of doom and decline – have long been with us, even in times of great prosperity.
Indeed, according to Gopnick, the phrase “decline of the West” was used as early as 1918 by the German historian Oswald Spengler.
Nor were such fears of decay exclusively Western: writers and historians such as Ibn Khaldun, Tun Sri Lanang and Sima Qian have dwelt on similar themes as they charted the rise and fall of civilisations.
Moreover, the mere fact that these books are available across the globe suggests the depth and breadth of such concerns.
At the same time they also reveal a passionate commitment to the idea of renewal and reform. Ferguson is clearly a believer in the West’s capacity to re-invent and re-energise itself.
For us in Malaysia, these books – and there are countless others in airport bookshops – reinforce the sense of a world shifting on its axis, of a power alignment that prioritises China and India over Europe and the United States.
We are faced with the challenge of adapting to these newly (re-)emerging powers whilst not forgetting the strengths (or “killer apps”) that made the Western nations great such as the emancipation of women, democracy and religious tolerance.
And it is in this realm that we need writers and historians such as Ferguson and Gopnik – figures who’ll both commend and condemn with equal weight, stepping aside from mere politics.
The new geo-political landscape will demand prodigious powers of concentration and leadership. Mere rhetoric will be useless.
Malay ultras and/or an obsession with bangsawan politics won’t help us in coping with either China and/or India.
History requires candour and honesty. It also demands a degree of openness.
We need to be willing to accept the idea that there are many versions of the truth.
Our narrow-minded views on history hamper us as we chart our way forward.
You need to know yourself in order to plan for the future. Self-knowledge is critical.
I would argue that it’s only when we as Malaysians can start to engage about our collective history with the same vigour and honesty as our counterparts in the West then we’ll be ready to deal with the challenges outlined by these writers.
History – our many histories, Malay, Chinese, Indian, Dayak and so forth – requires objectivity and honesty. If we can’t deal with the past, how can we face the future?
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Monday 3 October 2011
Euro fallout is bad news for world economy
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Global Trends By Martin Khor
The IMF-World Bank meetings last week confirmed the global economy has entered the ‘danger zone’ of a new downturn and possibly recession. This time it could be more serious and prolonged than the 2008-2009 recession.
THE last two weeks have seen a clear downward shift in expectations on the global economy. The dominant view now is that the world has slipped into stagnation that may well become a recession.
Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.
Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-09 recession.
If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.
The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.
As the domino effect of contagion hit one European country after another (rather like how Asian countries were affected in 1998-99), European leaders have scrambled for a solution.
But none has worked so far.
In the Greek debt tragedy, the government has had to announce one painful austerity measure after another, but its economic condition continues to worsen and the social protests and strikes indicate the approach of the political breaking point.
The costs of austerity are already being seen (by the public at least) to outweigh the benefits.
Several British newspapers last week reported a set of big measures to tackle the European crisis was reportedly being worked on by unnamed European officials.
The centrepiece is a Greek debt default with creditors repaid only 50%, and two measures to cushion that shock – an injection of fresh capital into European banks that would suffer big losses from the default, and the boosting of the European bailout fund from 400-plus billion euros to almost two trillion euros to enable hundreds of billions of euros in new credit to countries like Italy and Spain to prevent them from becoming new debt-crisis economies.
However, this leaked news of a big Plan B was not confirmed by any policy maker, so its status or even existence is unknown.
Instead, the news out of Washington last week was of continued paralysis in European policy.
Greece this week is facing a new crunch time – waiting to see if the European institutions and IMF will approve the next bailout instalment of US$8 billion to service loans that are coming due, and what would happen if they do not. Would it be time then to declare a default?
Meanwhile, the US has its own budget deficit tug-of-war between the President and Congress and between Republicans and Democrats.
What this means is that Europe and the US are not able to make use of the policies (massive increases in government spending, interest rate cuts and pumping of money into the economy) that pulled them quickly out from the last recession.
Moreover, the coordination of policy actions among developed countries (and several developing countries as well, that also undertook fiscal stimulus policies) that fought the last recession no longer seems to exist, at least for now.
Thus the new global slowdown or recession is likely to last longer than the short 2008-09 recession.
The developing countries should thus prepare to face serious problems that will soon land on them.
We can expect a sharp fall in their exports as demand declines in the major economies.
Commodity prices are expected to climb down; they have already started to do so.
There may be a reversal of capital flows, as foreign funds return to their countries of origin.
The currencies of several developing countries are already declining and it may be the start of sharper falls.
It’s beginning to look like 2008 all over again.
But this time the developing countries are starting this downturn in a weaker state than in 2008, since they have not yet fully recovered from the last shock.
And as the downturn proceeds, there will be fewer cushions to blunt the effects or to enable a rapid recovery.
It is also clear that there is an absence of a global economic governance system, in which the developing countries can also participate in.
All countries are affected when the global economy goes into a tail spin.
Once again, the developing countries are not responsible for the new downturn, but they will have to absorb the ill effects.
Yet there is no forum in which they can put forward their views on how to lessen the effects of the crisis on them and what the developed countries should do.
As the new crisis unfolds, there will be renewed calls for reforms to the international financial and economic system.
This time there should be a more serious reform process, otherwise more crises can only be expected in the future.
THE last two weeks have seen a clear downward shift in expectations on the global economy. The dominant view now is that the world has slipped into stagnation that may well become a recession.
Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.
Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-09 recession.
If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.
The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.
As the domino effect of contagion hit one European country after another (rather like how Asian countries were affected in 1998-99), European leaders have scrambled for a solution.
But none has worked so far.
In the Greek debt tragedy, the government has had to announce one painful austerity measure after another, but its economic condition continues to worsen and the social protests and strikes indicate the approach of the political breaking point.
The costs of austerity are already being seen (by the public at least) to outweigh the benefits.
Several British newspapers last week reported a set of big measures to tackle the European crisis was reportedly being worked on by unnamed European officials.
The centrepiece is a Greek debt default with creditors repaid only 50%, and two measures to cushion that shock – an injection of fresh capital into European banks that would suffer big losses from the default, and the boosting of the European bailout fund from 400-plus billion euros to almost two trillion euros to enable hundreds of billions of euros in new credit to countries like Italy and Spain to prevent them from becoming new debt-crisis economies.
However, this leaked news of a big Plan B was not confirmed by any policy maker, so its status or even existence is unknown.
Instead, the news out of Washington last week was of continued paralysis in European policy.
Greece this week is facing a new crunch time – waiting to see if the European institutions and IMF will approve the next bailout instalment of US$8 billion to service loans that are coming due, and what would happen if they do not. Would it be time then to declare a default?
Meanwhile, the US has its own budget deficit tug-of-war between the President and Congress and between Republicans and Democrats.
What this means is that Europe and the US are not able to make use of the policies (massive increases in government spending, interest rate cuts and pumping of money into the economy) that pulled them quickly out from the last recession.
Moreover, the coordination of policy actions among developed countries (and several developing countries as well, that also undertook fiscal stimulus policies) that fought the last recession no longer seems to exist, at least for now.
Thus the new global slowdown or recession is likely to last longer than the short 2008-09 recession.
The developing countries should thus prepare to face serious problems that will soon land on them.
We can expect a sharp fall in their exports as demand declines in the major economies.
Commodity prices are expected to climb down; they have already started to do so.
There may be a reversal of capital flows, as foreign funds return to their countries of origin.
The currencies of several developing countries are already declining and it may be the start of sharper falls.
It’s beginning to look like 2008 all over again.
But this time the developing countries are starting this downturn in a weaker state than in 2008, since they have not yet fully recovered from the last shock.
And as the downturn proceeds, there will be fewer cushions to blunt the effects or to enable a rapid recovery.
It is also clear that there is an absence of a global economic governance system, in which the developing countries can also participate in.
All countries are affected when the global economy goes into a tail spin.
Once again, the developing countries are not responsible for the new downturn, but they will have to absorb the ill effects.
Yet there is no forum in which they can put forward their views on how to lessen the effects of the crisis on them and what the developed countries should do.
As the new crisis unfolds, there will be renewed calls for reforms to the international financial and economic system.
This time there should be a more serious reform process, otherwise more crises can only be expected in the future.
Thursday 29 September 2011
Big Four auditors under pressure
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Big Four auditors under legal, EU pressure
Authorities considering rules to break them up!
The European Commission, according to a draft law seen by Reuters on Tuesday, is proposing that auditors be banned from providing consulting services to companies they audit, or even be banned altogether from consulting, a fast-growing business.
EU Internal Market Commissioner Michel Barnier is due to publish the draft in November, targeting what he sees as a conflict of interest when auditors check the books of the same companies from which they reap lucrative consultancy fees.
Leading potentially to break-ups, a ban on consulting would be the most punitive measure yet taken by regulators against the world's largest auditors -- Deloitte DLTE.UL, PwC PWC.UL, Ernst & Young ERNY.UL and KPMG KPMG.UL.
On another front, Deloitte was sued on Monday by a trust overseeing the bankruptcy of Taylor, Bean & Whitaker Mortgage Corp and one of its units claiming a combined $7.6 billion in damages. It is one of the largest lawsuits stemming from the 2007-2009 credit crisis.
Though auditors have been successful at winning dismissals of several crisis-related lawsuits, legal experts said some legal defences used by auditors in the past may have some holes when applied to the Deloitte case.
Deloitte has said the legal claims are "utterly without merit."
The Big Four review the financial books and records of most of the world's large corporations. The firms dodged a bullet during the era of the Enron and WorldCom frauds when U.S. regulators stopped short of an outright ban on consulting.
The 2002 Sarbanes-Oxley audit industry reform laws limited the types of consulting services that auditors can provide to companies they audit, but the post-Enron laws left auditors free to pursue one another's clients for consulting work.
STRICTER MEASURES
The EU has been considering stricter measures since auditors gave clean bills of health to many banks that suffered debilitating losses during the credit crunch.
Auditors, which are privately held, do not disclose their insurance coverage or reserves held for legal awards, though most have been able so far to absorb the legal penalties stemming from the financial crisis.
According to Audit Analytics, the Big Four auditors have been named as defendants in at least two dozen class action cases stemming from the credit crisis through July 2011.
"There is a point at which the reputational damage combined with large judgments can do significant damage to their operations," said Andrea Kim, partner at Diamond McCarthy law firm in Houston.
It is unlikely, however, that any of the Big Four firms would be allowed to fail, given their role in auditing most of the largest companies in key markets, she said.
MONEY-MAKING ENTERPRISE
"You can safely assume that before we reach that level, what you're more likely to see is some legislative action," she said.
Sarbanes-Oxley was enacted after the disastrous meltdown of Enron auditor Arthur Andersen, which had been the fifth of the Big Five audit firms. Sarbanes-Oxley actually helped the remaining four firms by creating more rigid requirements and auditing work for them.
"The biggest beneficiary of Sarbanes-Oxley was the Big Four," Kim said. "It's just a giant money-making enterprise."
The measure being considered in the European Union would be far more stringent. In addition to potentially forcing auditors to split off their consulting businesses, it might include a requirement that auditors be "rotated," or changed, every nine years, forcing them to give up some of their best clients.
Another element of the draft includes the introduction of "joint audits," so the Big Four would share auditing work with smaller rivals.
A ban on consulting would be especially damaging now, as the auditors have been furiously expanding their consulting business to offset slower growth in their core audit area.
"Breaking up the Big Four audit firms would make them more susceptible to be taken over by emerging Chinese firms," a UK audit official said on Tuesday on condition of anonymity due to the sensitivities involved.
Barnier's spokeswoman said he had made it clear that the audit sector displayed clear failings during the crisis, giving banks a clean bill of health just before they were rescued.
Monday 5 September 2011
Europe puts its head in sand over growth crisis
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LONDON | Mon Sep 5, 2011 By Alan Wheatley, Global Economics Correspondent
(Reuters) - Japanization is shorthand for slouching toward that country's noxious mix of low growth and high debt. Euro zone governments will find it tough to keep the ugly new word out of their lexicon.Concern is mounting over a deterioration in Europe's long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.
The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organization for Economic Cooperation and Development in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.
"A lot of countries are going to take a permanent hit to their trend rate of growth. This is not an ordinary recession and so we're not going to see countries bouncing back to pre-crisis rates of growth," said Philip Whyte, a senior research fellow at the Center for European Reform, a London think-tank.
As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.
And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods -- a danger stressed by Federal Reserve Chairman Ben Bernanke at the U.S. central bank's Jackson Hole symposium last month.
Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to gross domestic product ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.
Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy -- policies such as making it easier to hire and fire, promoting greater competition and investing more in training.
Far from it. Pier Carlo Padoan, the OECD's chief economist, says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.
"I see that measures are being announced. I would like to see them being implemented," Padoan said.
With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change. "This is a luxury that many countries cannot afford any more. The situation does not allow it."
SOUTHERN DISCOMFORT
The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the euro zone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.
"They're going through some truly horrible times. I'm very worried about the whole southern European fringe, not just on an 18-month to 2-year view but looking out a decade or longer," said Whyte with the Center for European Reform.
Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.
"The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms," Jean-Claude Trichet, president of the European Central Bank, said approvingly in Jackson Hole.
How much are countries missing out by not pressing the reform button?
Padoan says Europe's trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation euro zone could almost double that rate with a supply-side jolt.
Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.
POOR ADVERT FOR FREE MARKETS
Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.
These policy prescriptions are well worn. Leaders of the European Union enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.
"The Great Financial Crisis hasn't been a great advert for free-market capitalism," said Whyte. His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. But in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.
Europe is not doomed to go down Japan's path of economic stagnation. Its potential growth rate is low but stronger than Japan's -- estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.
But the specter of a renewed recession is a reminder for governments that, even if they can spirit away the euro zone's currency and debt woes, they have still to find the elixir for growth.
"I'm not saying politicians will implement reform, but they should," Padoan said. "Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high."
(Reporting by Alan Wheatley; Editing by Ruth Pitchford)
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