Cuaderno De Documentacion

SECRETARIA DE ESTADO DE ECONOMÍA,

MINISTERIO SECRETARÍA GENERAL DE POLÍTICA ECONÓMICA DE ECONOMÍA Y ECONOMÍA INTERNACIONAL Y HACIENDA SUBDIRECCIÓN GENERAL DE ECONOMÍA INTERNACIONAL

CUADERNO DE DOCUMENTACION

Número 91º ANEXO I

Alvaro Espina Vocal Asesor 6 de Septiembre de 2010

BACKGROUND PAPERS:

1. Decision time, Eurointelligence…7 2. Lagarde critics Berlin policy, Ft.com by Be Hall …9 3. Shrink the eurozone, or create a fiscal union by Wolfgang Munchau…11 4. GOP wants dodd to slow down on financial reform legislation, The Washington Post by Brady Dennis…13 5. Taking on China, The New York Times by Paul Krugman…14 6. Israel, China, America, The Conscience of a Liberal…15 7. Debt and transfiguration…16 8. With financial reform bill, a test for congress, The New York Times by Sewel Chan…22 9. Por qué no hay más opción que resolver la crisis griega, El País de Paul de Grauwe…25 10. Los peligros de la reducción del déficit, El País de Joseph Stiglitz…27 11. La crisis a cámara lenta de Japón, El País de Kenneth Rogoff…29 12. Reglas fiscales y mercados, El País de Rafael Doménech…31 13. El espejo irlandés, El País de Paul Krugman…32 14. Sociología, política y Economía, El País de Santiago Lago Peñas…34 15. En 2010 terminaremos con la fase de destrucción de empleo, El País de Antonio Jiménez Barca…36 16. Francia resiste, El País de A.Jiménez Barca…40 17. Europa ensaya el gobierno económico, El País de Andreu Missé/Claudi Pérez…43 18. Si Grecia fracasa, la credibilidad de la UE sufrirá un daño permanente, El País.com de Ricardo Martínez de Rituerto…44 19. Reducir el déficit es lo más importante en estos momentos, El País de JP. Velázquez-Gaztelu…46 20. Los BRIC miran hacia Africa, El País de Javier Santiso…48 21. El dinero llama al dinero, El País de Edward Hadas…50 22. Apostando en el Titanic Por, El País de Carlos Arenillas…51 23. El relevo en la CECA, en fase crítica, El País de Miguel A. Noceda…54 24. Los SIP como solución en las cajas, El País de Francisco Xavier Martínez Cobas…56 25. La autopsia de Lehan muestra que escondía deuda fuera del balance, El País de Sandro Pozzi…58 26. El gafe de los balances, El País de Nicholas Plaisner…61 27. Una autopsia complicada, El País de Antony Currie…62 28. Generación noqueada, El País de Guillermo Abril…63 29. La deuda autonómica se dispara a una velocidad inédita desde 1995, El País de Luis Doncel…69 30. González pide al Gobierno que cuida la credibilidad de España, El País de I de Barrón/A Uriona…71 31. Alemania dice que los Estados que no puedan ajustar sus cuentas deberían salir del euro, El País de Andreu Missé…72 32. Los países del euro ultiman un plan para dar soporte financiero a Grecia, El País de Andreu Missé…73 33. Los países del euro ultiman un plan para dar soporte financiero a Grecia, El País de Andreu Missé…74 34. Corbacho llama radical a la CEOE por proponer bajadas de sueldos para frenar el paro, El Pais de EFE…76 35. La CEOE pide menos salarios por persona y hora para frenar el paro, El país de Agencias…77 36. Se necesita una economía exportadora, El País de William Chislett…78 37. Reciclar espacios y ciudades es el lado positivo de la crisis, El País de M José Díaz de Tuesta…80 38. Greetings from Roubini Global Economics!, Roubini Global Economics by Arnab Das, Elisa Parisi-Capone, Natalia Gurushina, Katharina Jungen and Jennifer Kapila…81 39. German Exports declina 6.3% m/m in January: Blip or Trend?, Roubini Global Economics…84 40. €55bn for a Greek bailout, Eurointelligence…86 41. France and UK seek hedge fund deal, FT.com by FT.reporters…88

2 42. Schäuble calls for tough EMF sanctions, FT.com by Gerrit Wiesmann and Ralph Atkins…90 43. Investors warns EU on private equity rules, FT.com by Martin Arnold and Nikki Tait…91 44. Why Europe’s monetary union faces its biggest crisis, FT.com by Wolfgang Schauble…92 45. La banca urge a las fusiones de cajas para no lastrar el sistema financiero, El País de Iñigo de Barrón…95 46. Financial system reforms won’t wait, The Washington Post by David Cho and Brady Dennis…97 47. Democrats push ahead on finance bill, The New York Times by Sewell Chan …99 48. Business Economists on the CFPA, Roubini Global Economics, by James Kwak…101 49. The German Economy is essentially intact, Edward Hugh…102 50. Health reform myths, The New York Times by Paul Krugman…111 51. The coming greek debt bubble, The Baseline Scenario, by Peter Booner and Simon Johnson…112 52. Beware of Greeks Getting Gifs?, The Conscience of a Liberal…114 53. China’s Swan song, The Conscience of a Liberal…115 54. We need to recognize the difference, Economist’s view…118 55. Fifty-One Herbert Hoovers, The Conscience of a Liberal…119 56. On Asymmetry, reflexivity and sovereign default, Rajiv Sethi…120 57. Greeting from RGE, Roubini Global Economics…123 58. We might default on our governments’ debt in the future. Do you know how often we’ve done so in the past?, Roubini Global Economics by Fabius Maximus…124 59. Time to regulate derivatives (like every other financial instrument), Roubini Global Economics, Barry Ritholiz…126 60. Patchwork pension plan adds to Greek debt woes, The New York Times by Landon Thomas Jr…127 61. Report details how Lehman hid its woes as it collapsed, The New York Times by Michael J de la Merced and Andrew Ross Sorkin…130 62. The gold standard, Mises Daily by Ludwig von Mises…133 63. Consumer advisory council will meet on march 25, 2010, Board of Governors of the Federal Reserve System…137 64. Germany and France call on a ban on speculative trading in CDS, Eurointelligence…138 65. Spain has the means to avoid the fate of Greece, FT.com by Luis Garicano…140 66. The Greek crisis and the future of the Eurozone, Eurointelligence by Paul De Grauwe…141 67. Europe’s sovereign credit default flop, Ft.com …145 68. Global Insight: Common sense eludes ECB, FT.com by Gillian Tett…146 69. Geithner warns of rift over regulation, FT.com by Martin Arnold and Nikki Tait …148 70. Trichet hints at monetary fund backing, FT.com by Ralph Atkins…149 71. How to handle the sovereign debt explosion, FT.com by Mohamed El-Erian…150 72. Turner orders tougher stress testing, FT.com by Brooke Masters…152 73. Call for ban on CDS speculation, FT.com by FT.reporters…153 74. Crisis en la UE: ¿Está en Riesgo el futuro del euro?, Finanzas e In versión…156 75. It looks like they might really ban naked CDS, Eurointelligence…159 76. Germany’s eurozone crisis nightmare, FT.com by Martin Wolf…161 77. Built on a Lie, Spiegel On line…164 78. Après la Grèce, la France?, Coulisses de Bruxelles, UE by Jean Quatremer…175 79. European leaders call for crackdown on derivatives,The New York Times by Lynlley Browining and Matthew Saltmarsh…176 80. Sorry, no EMF-can’t be done, Eurointelligence…178 81. The burden of German thrift, FT.com …180 82. European Monetary Fund Q&A, FT.com by Ralph Atkins…181 83. The ECB and a new fund on the bloc?, Financial Times by Ralph Atkins…182 84. Why Europe needs its own IMF, FT.com by Giancarlo Corsetti and Harold James…183 85. Trade gap widens despite weak pound, FT.com by Daniel Pimlott…185 86. January trade gap widest since August 2008, Reuters UK …186 87. Shorting US treasuries could be a mistake, Ft.com by Dino Kos…187 88. Beijing says it will keep buying US debt, FT.com by Jamil Anderlini …189

3 89. Beijing balances, FT.com …190 90. Beijing remains divided over currency peg, Ft.com by Geoff Dyer and Jamil Anderlini…191 91. Is China the mother of all bubbles?, FT.com by Arthur Kroeber…193 92. Beijing studies severing peg to US dollar, FT.com by Geoff Dyer…194 93. Japan edges from America towards China, FT.com by Gideon Rachman…196 94. It takes two to Tango: a look at the numerator and denominator, News N Economics by Marschall Auerback…198 95. The endgame for Europe: wage cutting and the battle for exports, New N Economics…200 96. Rebecca Wilder…201 97. Obama launches attack on health insurance companies, The Washington Post by Amy Goldstein and Scott Wilson…202 98. Are unemployment benefits no longer temporary?, The Washington Post by Michael A Fletcher and Dana Hedgpeth…205 99. The price of unemployment…207 100. Francia también sucumbe al pesimismo sobre la recuperación, El País …208 101. An Irish mirror, The New York Times by Paul Krugman…209 102. Competitive deflation, The Conscience of a Liberal…210 103. Supply, demand, and unemployment, The Conscience of a Liberal…211 104. Schäuble proposes European Monetary Fund, Eurointelligence…212 105. Greek debt crisis proposal for European Monetary fund wins EU Support, Spiegel On Line…214 106. La Belgique propose la creation d’une agence européenne de la dette, Les Echos.fr…216 107. Pour une agence européenne de la dette, para Yves Leterme, Le Monde…217 108. Grèce: París et Berlin d’accord sur la lutte anti-spéculaterurs, Les Echos.fr…219 109. Volcker says euro to survive as Greek budget, Bloomberg.com by Rainer Buergin and Philipp Encz…220 110. Bond risk falls to 6-week low on Greece, Dubai: Credit Markets, Bloomberg.com by John Detrixhe and Shannon D Harrington…222 111. Trade deficits and fiat currencies, Ludwing von Mises Institute by Robert P Murphy…225 112. The global debt crisis, Ludwig von Mises Institute…228 113. First step towards more integrated eurozone, Ft.com by Quentin Peel …233 114. Eurozone eyes IMF-style fund, FT.com by Quentin Peel …234 115. La reforma de Obama languidece, El País de Sandro Pozzi…236 116. El ajuste fiscal que nos espera, El País de Angel Ubide…239 117. Se acerca la hora de la verdad, El País de Fiona Maharg-Bravo…241 118. Desempleo juvenil y formación, El País de José García Montalvo…242 119. ¿A quién sirven las limitaciones de voto?, El País de Javier García de la Enterría…245 120. Accionistas, consejeros, conflictos y limitaciones El País de Rafael Mateu de Ros…247 121. Rivero deja Gecina para volver a casa, El País de Luis Doncel…250 122. Defenders and demonizers of credit default swaps, Rajiv Sethi…253 123. Greek crisis over, our ability to delude ourselves has reached the next level, Eurointelligence…256 124. Athens dinner that led to political indigestion, FT.com by Sam Jones…258 125. Age, wage, and productivity, Vox by Jan Van Ours…261 126. Senator Bunning’s universe, The New York Times by Paul Krugman…266 127. Market defies fear of real estate bubble in China, The New York Times by David Barboza…268 128. IMF help for Greece is a risky prospect, The New York Times by Sewel Chan and Liz Alderman…271 129. Why, exactly, are big banks bad?, The New York Times by Simon Johson…273 130. For Greece, bond sale is a step back from disaster, The New York Times by Landon Thomas Jr and David Jolly…275 131. El BCE empieza a retirar las facilidades de crédito pese a la crisis griega, El País de Agencias…277

4 132. White House offers bill to restrict big banks’ actions, The New York Times by Sewel Chan…279 133. Greece is now putting pressure on the eurozone – if you don’t help, we will turn to he IMF, Eurointelligence…281 134. Greece prepared to turn to IMF by Kerin Hope, Gerrit Wiesman and Nikki Tait…283 135. Let’s bring back the Robbert Baron, Real Clear Markets by Daniel Henniger…286 136. Chile’s Post-Earthquake economic strength, Forbes.com by Nouriel Roubini, Bertrand Delgado and Juan Lorenzo Maldonado…288 137. Sure sign the Greek crisis is over Commentary: first, blame all the hedge funds, Market Watch by David Callavay…291 138. Chinese can’t dump our debt too soon, IBD Editorials by Mime Cosgrove…293 139. Housing: Hope on the Horizon, BusinessWeek by Peter Coy and John Gittelsohn…295 140. Great recession did not have to be great, Forbes.com by Rich Karlgaard…298 141. How best to boost US exports, Peterson Institute for International Economics by C Fred Bergsten…300 142. Did rubin really say that?, Rejters…303 143. Do-nothing red regulator=huge bank victory, The Big Picture by Barry Ritholtz…305 144. Read it here first: St. Louis Fed Tracks nascent expansion by Invictus…306 145. Consumer Agency within fed seen as victory for banks (Update1), Bloomberg.com by Craig Torres and Yalman Onaran…307 146. Detailed Volcker rule targets all financial institutions, Market Watch by Ronald D Orol…310 147. We have to learn from Japan’s lost years, www.telegraph.co.uk by Edmund Conway…312 148. Greece sells bonds as deficit cuts fuel protest (Update1), Bloombeg.com by Caroline Hyde and Tony Czuczka…314 149. Now comes the pain, Economist.com …316 150. Swap vigilantes take heat for euro shortcomings: Mark Gilbert, Bloomberg.com by Mark Gilbert…318 151. JPMorgan tops Goldman in Investment Banking as fees swell 13%, Bloomberg.com by Yalman Onaran…320 152. Modelos europeos de reforma laboral, El País de Robert Tornabell…326 153. A new glass-steagall act?, Vox by Hans-Werner Sinn…329 154. Eurozone: Q1 2010 Outlook, Roubini Global Economics by Elisa Parisi-Capone…331 155. Greek competitiveness is not the issue, fiscal discipline is, Eurointelligence by Erik Jones…332 156. Las pensiones en una España envejecida, El País de Fernando Azpeitia y José A Hercé…334 157. La reforma laboral que viene, El País de José A Herce…336 158. New formula to give fresh look at US poverty, The Washington Post by Amy Goldstein…339 159. The danger of majority tyranny, Open Democracy by Michael Clemence…341 160. Obama tris to remain calm during political storm, The Washington Post by Eli Saslow…343 161. European Union reacts favorably to $6.5 billion austerity plan from Greece, The Washington Post by Associated Press…346 162. Traders seek out the next Greece in an Ailing Europe by Nelson D Schwartz and Graham Bowley…348 163. The Greek Job, Roubini Global Economics by Satyajit Das…350 164. ¿PIGS? ¿Quién habló de credos?, ABC.es by Tristan Garel-Jones…352 165. Hedge funds step up their bets against the euro, Eurointelligence …354 166. Europe in Dire Straits-don’t be brothers in arms, Eurointelligence by Henrik Endelein…357 167. Swap tango-a derivative regulation dance: Part 1, Eurointelligence by Satyajit Das…360 168. Swap tango-a derivative regulation dance: part 2, Eurointelligence by Satyajit Das…364 169. Senators propone consumer-protectionr egulator within Fed, The Washington Post by Binyamin Appelbaum and David Cho…370 170. Obama says home-retrofitting plan would save energy, create jobs, The Washington Post by Michael A Fletcher…372 171. Papandreou to outline the mother of all austerity programmes, Eurointelligence…374 172. Britain’s lack of credibility hurts sterling, FT.com by Willem Buiter…376

5 173. EU sets clock ticking on Greece as Merkel talks near (Update2), Bloomberg.com by Simon Kennedy and Jonathan Stearns…378 174. EU calls on Athens to control debt, FT.com by Dimitris Kontogiannis and Ralph Atkins and James Wilson…380 175. Sovereign CDS become Europe’s new bogeyman, FT.com by David Oakley, Gillian Tett and Jennifer Hughes…382 176. L’Europe au milieu du gué, Les Echos.fr by Gabriel Grésillon…386 177. Vice Chairman of Fed to Retire, letting Obama reshape board, The New York Times by Sewell Chan…388 178. For inmediate release, Federl Reserve…390 179. Greece, Europe and Alexander Hamilton, The New York Times by Roger Cohen…391 180. How should the Eurozone handle Greece?, Eurointelligence…393 181. A New index of financial conditions, Roubini Global Economics by James Hamilton…399 182. 2010: BRICs, PIIGS and the G-5 countries, Roubini Global Economics by Antonio Carlos Lemgruber…401 183. Hanging in the balance over at the ECB, Roubini Global Economics by Edward Hugh…403 184. The end game for Europe: wage cutting and the battle for exports, Roubini Global Economics by Rebecca Wilder…406 185. February payrolls: it’s the economy, not the weather, Roubini Global Economics by Arpitha Bykere and Christian Menegatti…408 186. Some reflection about the inflation process in Argentina…408 187. The Eurozone’s ‘Bay of PIIGS’, Roubini Global Economics by Arnab Das, Elisa Parisi-Capone, Natalia Gurushina, Katharina Jungen and Jennifer Kapila…411 188. Does the Obama Administration even want to win in November?, Roubini Global Economics by Simon Johnson…412 189. Stuck in neutral –what Japan’s rebalancing can teach us, Roubini Global Economics by Michal Pettis…413 190. Can Obama turn America into something like Zimbabwe?, Roubini Global Economics by Fabius maximus…416 191. Worry not about America becoming like Zimbabwe, worry about becoming like Argentina by Fabius Maximus…419 192. US growth outlook: still anemic and U-shaped but risks of a double-dip recession are rising, Roubini Global Economics by Nouriel Roubini…422 193. The Three Speed global manufacturing recovery continues in February by Edward Hugh…423 194. Too soon to cry “Victory” on Latvia by Edward Hugh…432 195. Ronald Reagan the Keynesian by Edward Harrison…436 196. Krugman: no bill is better than a weak bill by James Kwak…437 197. Keep banks out of Greek aid package by Ivo Arnold…438 198. How Reagan ruined conservatism, FT.com by Gideon Rachman…440 199. The Enthusiasm Gap by Robert Reich…442 200. A tale of two recoveries: Malaysia vs. Germany by Rebecca Wilder…443 201. The high road procurement policy by Mark Thoma…444 202. Spain: the way forward by ElisaParisi-Capone and Nouriel Roubini…445 203. Europe’s crisis of ideas by Bret Stephens…446

Período: de 23/02/2010 a 15/03/2010 en orden inverso a la fecha

15.03.2010 Decision time

The time to procrastinate is ending. Euro area finance ministers are hoping to remove the final hurdles of a package to provide contingent aid to Greece – contingent on Greece making an official request, which has not yet happened. The FT reports that the package will consist of loan guarantees. It will be so complicated and lacking in transparency, that it can be argued that neither the EU nor individual governments assume any liabilities – so that it complies with the No Bail clause. What strikes us as surprising is the continued reference to Greece not needing the money right now, as it can still refinance. Christine Lagarde, for example, is quoted as saying that Greece can still refinance at reasonable rates. (It was our impression that Greece needed lower rates to achieve sustainability, and that the Greeks themselves did not consider the rates reasonable.) Olli Rehn is quoted with the dramatic statement that a failure of Greece is a failure of the EU. "If Greece fails and we fail, this will do serious and maybe permanent damage to the credibility of the European Union... The euro is not only a monetary arrangement but a core political project of the European Union." Lagarde puts pressure on Germany over imbalances The FT has the story that Chirstine Lagarde is critical of German economic policy, especially over Berlin’s refusal to discuss Germany’s contribution to the eurozone’s internal imbalances. “I talk to Wolfgang [Schäuble] on an almost daily basis at the moment. The issue of imbalances is not one we address readily.” She says Germany did a good job controlling its labour costs, but in a monetary union, it is convergence that matters. She also reiterated her criticism of Schauble’s EMF proposal, saying that it would take too long to negotiate a new treaty. Instead, it would be preferable to work within the existing framework. Bundebank fights over gold reserves The Bundesbank responded fiercely to rumors that the finance ministry considerations to use the gold reserves for the establishment of an EMF. The Bundesbank board is to decide autonomously about their gold reserves -currently about 3t or €90bn in market value- and

7 neither the ECB nor the German government have access rights, quotes the Frankfurter Allgemeine. The German finance ministry responded by saying it is too early to talk about details. The EMF proposal was launched to avoid that countries in difficulties endanger the euro zone and would require a treaty change. Why the EMF is just a smokescreen In his FT column, Wolfgang Munchau says the core element of the Schauble proposal is not the EMF, but the euro area exit clause. Had it applied in the past, Greece would have headed for the exit, not for a bail out. Indeed, it is hard to conceive of a situation in which a country fulfils the criteria for support, yet requires it. Also, a legal possibility of an exit might turn into a self-fulfilling prophecy, as markets would speculate on such an event, and as politicians might come to regard it as a policy option. Munchau says the Schauble proposal stands no chance of being adopted, but is a clear indication that Germany would rather have a smaller EMU, i.e. a break up, than risk the fiscal solidity of the project. Regional elections deliver blow to Sarkozy Voters delivered a rebuke to Nicolas Sarkozy, with opposition parties winning an unprecedented share of the vote in the first round of regional elections and delivered a worst than expected result for Sarkozy’s own UMP party. According to latest polls, reported in Le Monde, Socialists gained 29.3% of the votes, UMP received 26.1% , 12.4% for Daniel Cohn Bendit’s Ecology party, and 11.7% for the far right Front National, which might even be a challenger for the second round in some regions. It is the first time in decades that parties of the left have taken a majority share in the first round, writes the FT. Also record high is the rate of abstention, 53.6%. Czech Republic could adopt euro in 2015 earliest The Czech Republic could adopt the euro in 2015 if it cuts the budget deficit limits of 3% of GDP, Bloomberg quotes the Czech finance minister Eduard Janot. For this to happen, the deficit has to fall below 3% by 2013, from a projected 5.3% of GDP this year. The government (which does not have a target date for joining the euro area) may seek entry into the SRM-II exchange-rate mechanism in 2013, Janota said in a debate on Czech Television. “Then, 2015 would be the earliest date for entering the euro zone.” Reducing the public-finance deficit will require “tough measures” from the next administration, which will replace the current interim government after the elections end of May. The end of journalism We knew that news organisations in the EU have taken less interest in the EU coverage, except when they freak out over Greece, but these numbers are quite surprising even for us. Jean Quatremer reports that the number of journalists accredited with the European Commission has fallen from over 1300 in 2005 to 752 in 2010. Since Barroso’s reappointment 200 journalists have left. This is in our experience both a reflection of the fast changing economics of the newspaper business, as well as a shift of interest within all the member states. http://www.eurointelligence.com/article.581+M5a173a0b9d9.0.html#

Lagarde criticises Berlin policy

By Ben Hall in Paris Published: March 14 2010 22:03 | Last updated: March 14 2010 22:03

Christine Lagarde: her comments break a longstanding taboo between the French and German governments about macroeconomic imbalances inside the eurozone Germany’s trade surpluses built on holding down labour costs may be unsustainable for the other countries in the eurozone, France’s finance minister said in an unusually blunt warning to Berlin. Merkel and Sarkozy pledge EU leadership - Feb-04 Wolfgang Munchau: marriage of convenience - Nov-15 Sarkozy and Merkel speak of harmony - May-02 Transcript of interview with Christine Lagarde - Mar-15 Paris and Berlin in bid for closer ties - Apr-25 Analysis: Sarkozy tests European consensus - Mar-17 Christine Lagarde said Berlin should consider boosting domestic demand to help deficit countries regain competitiveness and sort out their public finances. Her comments break a long-standing taboo between the French and German governments about macroeconomic imbalances inside the 16-country bloc which have been dramatically exposed by the Greek debt crisis. “[Could] those with surpluses do a little something? It takes two to tango,” she said in an interview with the Financial Times. “It cannot just be about enforcing deficit principles.” “Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs. When you look at unit labour costs to Germany, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.”

9 After Wolfgang Schäuble, her German counterpart, last week proposed a European Monetary Fund associated with much stiffer penalties for breaking the EU’s fiscal rules, Ms Lagarde outlined her own thinking about closer economic policy co-ordination, laying bare the different visions of “economic government” held by Paris and Berlin. While not ruling out an EMF, she said it was not a priority for the eurozone. The bloc should first focus on ensuring that debt-laden Greece followed through on promised austerity measures and then show “a bit of creativity and innovation” to find scope within the existing EU treaty for beefing up budgetary surveillance and discipline. Rather than amending a treaty to set up an EMF – “an adventure that could take us another three, four, five years” – the eurozone should adopt its own “soft laws” to strengthen discipline. Ms Lagarde said much tougher sanctions as proposed by Mr Schäuble were “worth exploring”. But she preferred faster surveillance procedures and less painful but more realistic penalties, pointing out that the existing threat of a fine under the EU’s fiscal rules “is so far away and unlikely that it is not really a deterrent”. Ms Lagarde made clear the biggest difference between Germany and France – and other eurozone members - is over whether Berlin should boost internal demand to give a lift to its partners’ export industries. It was a “very sensitive issue”, she acknowledged. “I talk to Wolfgang [Schäuble] on an almost daily basis at the moment. The issue of imbalances is not one we address readily.” The rest of the eurozone could not expect too much of Germany, Ms Lagarde said. France and other governments had to make efforts to increase the competitiveness of their economies and reform their public sectors to reduce deficits. She paid tribute to Ireland which was “driving hard”. “You can’t ask one player, as big as it is, to pull the whole group. But clearly there needs to be a sense of common destiny that we have together with our partners.” Ms Lagarde defended a proposed EU crackdown on credit default swaps on sovereign debt, which some believe has been used to manipulate the price of Greek debt. She said she had “no evidence” of price manipulation using sovereign CDS but added that the “rapidity of movements is intriguing”. There needed to be a closer watch on a “narrow and shallow market with very few players”, she added. A complete ban on “naked selling” – trading the CDS without holding the underlying asset – would be an “oversimplication”, she said. She said Greece’s debt problems underlined the need to step up efforts to overhaul the market in CDS more generally. The standardisation of contracts and the shift from over-the-counter to trades on organised exchanges – as agreed by the G20 group of leading economies – should be completed by the end of next year rather than by the end of 2012. Ben Hall Lagarde criticises Berlin policy March 14 201022:03http://www.ft.com/cms/s/0/225bbcc4- 2f82-11df-9153-00144feabdc0.html

10 Shrink the eurozone, or create a fiscal union By Wolfgang Münchau Published: March 14 2010 16:59 | Last updated: March 14 2010 16:59 I was confused when Wolfgang Schäuble, German finance minister, proposed a European Monetary Fund. I had not expected this. Was it an attempt to deflect attention from the fast- approaching bail-out of Greece, as one close observer suggested to me? It does not seem plausible. Or perhaps this marks a genuine change in the German position? Had I missed something? When I read the whole proposal in detail, the fog lifted – or maybe my confusion just reached a higher level. I realised that the EMF is just a smokescreen. The real bullet in his proposal is that countries could leave the eurozone without leaving the European Union. This is not about helping countries in trouble. This is about helping them to get out. The political message of the Schäuble plan is that Greece will be the last bail-out ever. As preparations for a bail-out reach an advanced stage, the German public reaction has become progressively more hostile. If the Schäuble plan had already been in place, Greece would already have headed to the exit. It is hard to conceive of a situation under the plan where a country simultaneously fulfils the criteria for aid, and needs it. The German position is transparent, consistent and wrong. It is reinforced in ruling after ruling by its constitutional court. The German consensus is that the single currency must rest on the twin pillars of price stability and fiscal rectitude. This logically implies that all adjustment must come via the private sector or the current account. The present global environment does not make the latter option likely. So the entire adjustment burden will fall on the private sector. If life in the eurozone becomes intolerable, exit will become the default resolution mechanism. And when you include the legal possibility of an exit, the whole political and economic dynamic changes, and the threat of an exit might turn into a self- fulfilling prophecy. This does not apply only to Greece, but to a number of countries that have lost competitiveness to Germany. I had previously assumed that Germany had a national interest in preserving the eurozone, as its exporters benefit more than anyone else from a stable exchange rate. Ergo, I thought, Germany – despite the rhetoric – would eventually do whatever it takes to prevent a breakup. It would be the rational thing to do. But I think I was wrong. Also, the Schäuble plan contains no provision that would ever be binding on Germany. It would allow Germany to press ahead, unhindered, with its unilateral economic strategy to eradicate the budget deficit by 2016. Even if southern European governments were to wake up and accept the need for deep reforms, they would have a hard time closing a competitiveness gap that is still widening in Germany’s favour. I cannot see, therefore, how the plan will ever find political acceptance. There would be no problem with an EMF as a simple insurance system, financed solely by countries with excessive deficits for their own benefit. This could be done under the enhanced co-operation procedure, which allows a subset of EU members – the eurozone in this case – to set up specific institutions. The Schäuble proposal as it stands would require a full-blown change in the European treaties – and nobody wants to go down that route right now. Some of his suggestions are unbelievably extreme, for example depriving countries with excessive deficits of their

11 democratic voting rights, or withholding payments under the EU’s cohesion fund. There will be no majority for any of this, let alone the unanimity that such a change would require. Conversely, I doubt Germany would accept the establishment of a formal bail-out mechanism without a simultaneous strengthening of the stability pact. So the likely consequence is continued gridlock. I derive two principal conclusions from this mess. The first is that a monetary union comprising 16 or more EU members will ultimately require a fully fledged fiscal union, or fail. In theory, all you would need is an authority that directs Germany and Spain to change policies. But in practice it will be impossible to force large sovereign countries to adopt policies against their will. The European Council will play a much bigger role in future policy co-ordination, but we would be naive to think European leaders will tackle the issue of internal imbalances, when they do not even acknowledge the problem. If you want to go to the extreme trouble of negotiating a new treaty, you should go for a fiscal union, rather than waste it on a souped-up monetary fund. Of course, it will not happen. The second conclusion is that a rules-based monetary union is still possible, but only among a group of similar countries – in terms of their economic development, and their fundamental political attitudes towards economic policy. Only a relatively small number of countries are capable of sustaining a monetary union with Germany politically and economically. The Schäuble proposal tells me that Germany’s conservative establishment longs for the second option. They should be careful what they wish for. One way or the other, they might eventually get it. [email protected] http://www.ft.com/cms/s/0/c53c5cc8-2f87-11df-9153-00144feabdc0.html

GOP wants Dodd to slow down on financial reform legislation By Brady Dennis Washington Post Staff Writer Sunday, March 14, 2010; A03 Republicans on the Senate banking committee said they remain open to finding a bipartisan agreement on legislation to overhaul financial regulation, but they warned the chairman, Sen. Christopher J. Dodd (D-Conn.), against trying to push a bill through too quickly. "While we remain open to finding commonground and to working diligently toward passage of bipartisan legislation, we believe a markup scheduled in haste would certainly prevent us from achieving that goal," said a letter, signed by all 10 Republican committee members and obtained by The Washington Post. Dodd, who has been in close negotiations for several weeks with freshman Sen. Bob Corker (R- Tenn.), announced Thursday that he would move forward with an updated version of a bill on Monday without Republican support. He also said he plans to start hashing out details of the bill in his committee the week of March 22, ahead of the legislative recess. In their three-paragraph letter to Dodd, Republicans balked at such an ambitious timetable. "Given the sheer magnitude and complexity of the financial reform package you intend to introduce, this legislation will inevitably have a substantial impact on our financial system and overall economy," they wrote. "Accordingly, we urge you to allow for sufficient time to review the language." The letter is from the ranking Republican, Sen. Richard C. Shelby (Ala.), and has been signed by every other GOP member of the committee, including Corker. Dodd introduced his first set of proposals in November. He spent months in unsuccessful negotiations with Shelby before switching course and trying to hammer out a bill with Corker. "We've been considering this bill for over a year," Kirstin Brost, a spokeswoman for Dodd, said Saturday. "The public wants Wall Street reform yesterday." After weeks of discussions, the two sides said they were close to an agreement but had not finalized the details on key issues, including the enforcement powers of a consumer watchdog, the scope of the Federal Reserve's regulation over banks, and the financing of a new authority that would allow the government to wind down large, distressed financial firms. The enforcement powers of the consumer watchdog, which is expected to be housed at the Federal Reserve in the forthcoming bill, has been one of the key sticking points between Dodd and Corker. Republicans want an elaborate appeals process to resolve conflicts between the consumer agency and regulators charged with keeping banks in good health. Corker said last week that he thought the two sides had found consensus on the matter. Other government sources said Dodd had expressed openness to the idea but had not agreed to it. Among other issues, oversight of derivatives and reform of corporate governance rules remain unresolved. Congressional aides have said those elements, however, were not expected to be significant roadblocks to a deal. If senators reach consensus on them, amendments could be added later, the aides said. Democratic staff members have been scrambling this weekend to try to shape a bill by Monday that will garner support from fellow Democrats while preserving the progress that Dodd has made with Republicans. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/13/AR2010031302136.html?wpisrc=nl_headline

13 Opinion

March 15, 2010 OP-ED COLUMNIST Taking On China By PAUL KRUGMAN Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion. Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed. And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset. So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating. Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious. Will the next report, due April 15, continue this tradition? Stay tuned. If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets. What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market

14 expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds. It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around. So we have no reason to fear China. But what should we do? Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.” But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent. I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand. http://www.nytimes.com/2010/03/15/opinion/15krugman.html?th&emc=th

March 14, 2010, 7:54 am Israel, China, America In debates over what to do about China’s currency manipulation, one constantly hears the refrain that we don’t dare alienate the Chinese, because they own so much of our debt. What would happen if they took their dollar holdings, equal to around 10% of US GDP, and switched them into other currencies? Well, we don’t have to speculate. Consider the case of Israel, which in the face of the economic crisis engaged in massive foreign currency intervention to weaken the shekel. What happens in a foreign currency intervention is that the central bank buys foreign securities while selling domestic securities — that is, the Bank of Israel was doing, as a deliberate policy, exactly what we’re supposed to fear the Chinese doing. How big was the intervention? More than 10% of GDP:OECD And by all accounts, this was helpful to Israel’s economy. Right now, China’s dollar holdings don’t give it any leverage over the United States. On the contrary, by dumping dollars China would be doing us a favor.

15 March 12, 2010, 8:44 am Debt And Transfiguration

Carmen Reinhart has a new working paper out http://www.nber.org/papers/w15815 (subs. req.) that’s an extremely valuable resource: more than 100 pages of charts showing the history of debt and banking crises in many countries; sample above. I’ll be keeping this one ready to hand for years to come. I’ve been going through this chartbook somewhat in tandem with rereading the recent Reinhart-Rogoff paper on debt and growth (subs. req.) — the one that’s being widely cited as evidence that bad things happen when debt goes above 90 percent of GDP. I sort of wondered about that result, given the ability — documented in the new Reinhart paper — of some advanced countries to manage debt burdens as high as 250 percent of GDP. What I think I’m seeing, although I haven’t tested this carefully, is that the causal relationship largely runs from growth to debt rather than the other way around. That is, it’s not so much that bad things happen to growth when debt is high, it’s that bad things happen to debt when growth is low. This is definitely the case for the United States: the only period when debt was over 90 percent of GDP was in the early postwar years, when real GDP was falling, not because of debt problems, but because wartime mobilization was winding down and Rosie the Riveter was becoming a suburban housewife. It’s also clearly true for Japan, where debt rose after growth slowed sharply in the 1990s. And European debt levels didn’t get high until after Eurosclerosis set in. I’m not denying that high debt can be a problem; but I think we need to be careful in assessing simple correlations.Anyway, this is a wonderful resource. http://krugman.blogs.nytimes.com/2010/03/12/debt-and-transfiguration/

21 Business

March 14, 2010 With Financial Reform Bill, a Test for Congress By SEWELL CHAN WASHINGTON — Senate Democrats will press forward this week on legislation to overhaul the nation’s financial system in a critical test of whether Washington can pass reform. The bill that Christopher J. Dodd, chairman of the Senate Banking Committee, will introduce on Monday appears written with the goal of forging a consensus that can overcome partisan division, with provisions that incorporate ideas from both Democrats and Republicans. Among the most recent provisions in the bill to emerge, according to people who have been briefed on the draft, is one that would curb Wall Street’s influence over the Federal Reserve Bank of New York. Its president would be appointed by the president of the United States, not by a board that includes representatives of member banks. Another rule would ban bank officers from sitting on the New York Fed’s board, meaning that Jamie Dimon, chief executive of JPMorgan Chase, would probably have to leave the board. The legislation would create a consumer protection agency within the Federal Reserve to write rules governing mortgages, credit cards and other financial products, said the people, who insisted on anonymity because the details were still in flux. In a concession to liberals, states’ attorneys general could sue violators of those rules, and the agency would have enforcement powers over large banks, mortgage originators and servicers, and other large lenders. But in a nod to Republicans, the bill would allow a council of regulators, led by the Treasury, to overturn proposed consumer rules by a two-thirds vote. And although the consumer protection agency would have a director appointed by the president, it would be housed within the Fed, an anathema for consumer advocates. The bill would also reshape the regulatory role of the Fed. It would be entrusted for the first time with oversight of all of the largest and most interconnected financial companies, even if they are not banks. And it would continue to oversee the largest bank holding companies, those with $50 billion or more in assets — about 35 companies, including Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley. But even as the details were being hammered out Sunday evening, questions remained: can Democrats tap into the vein of populist anger over the excesses of Wall Street and shepherd the bill through, 18 months after the near-collapse of the banking system almost wrecked the economy? And can they avoid getting caught up in the partisan struggle that has held back health-care reform? For now, after months of stop-and-start bipartisan talks, the Democrats are going it alone on one of the Obama administration’s top priorities. “This is certainly the farthest thing from ‘take it or leave it,’ ” said Senator Jack Reed, a Rhode Island Democrat. “This has been going on for months.”

22 He said of Republicans: “I’ve just got to ask the question of whether they want to have agreement, and whether they want to have the legislation go forward. I think we do. I know the American public does.” Republicans have been pushing back, but without trying to seem like allies of big banks or opponents of reform. After Mr. Dodd announced on Tuesday that he planned for a committee vote before Congress recesses on March 26, Republicans lashed out over the timetable. In a letter last Friday to Mr. Dodd, the 10 Republicans on the Banking Committee said they remained “open to finding common ground” but added that “a markup scheduled in haste would certainly prevent” a bipartisan consensus. Senator Bob Corker of Tennessee, who had spearheaded Republican talks on the bill, said last week: “If the senators can pass a bill of this substance out of committee in a week — a 1,200- page bill full of substance, that has a real effect on the financial industry — then the states who elect them might as well send robots to the Senate.” Republicans have also said that the poisonous atmosphere over health care had spread. “Never did I realize that health care would affect financial regulation,” Mr. Corker said. Senator Jeff Merkley, an Oregon Democrat who is ideologically an opposite to Mr. Corker in many respects, agreed that the debate had gotten bogged down. “Health care has delayed it,” he said. “I’m not happy. I think we should have gotten this done earlier, and it’s why Dodd is right to keep taking this forward. We can’t sit around. It has been too long.” The bill would also empower the government to seize a company that poses a systemic risk to the financial system; create a Treasury-led council to watch for such risk; create safeguards against excessive risk-taking of the kind that caused the housing crisis; establish an agency to crack down on abusive lending; and revamp the supervision of banks, the governance of corporations and the trading of derivatives. Perhaps the most hotly debated feature in the legislation has been the new consumer protection agency, and its placement within the Fed is certain to disappoint those angry at the Fed for long failing to protect consumers. “If indeed it’s going to be an independent operation and it’s simply ‘renting space’ from the Fed, the question is, ‘Why the Fed?’ ” said Senator Merkley, who has been an advocate, along with Mr. Reed, on consumer issues. The bill would revamp governance of public companies, empowering shareholders to have advisory votes on executive pay and to nominate directors through company-issued proxy ballots. Corporations have lobbied vigorously against those provisions, fearing that shareholder activism could spill over from annual meetings into boardrooms. Senator Charles E. Schumer, a New York Democrat who has advocated more rights for shareholders, said that the provisions were modest and that corporations opposing them risked being viewed as obstructionist. “Many of them think that if they push back hard enough, there will be no reform in this area,” he said. J. Alfred Broaddus Jr., a former president of the Federal Reserve Bank of Richmond, called the proposal “a mixed bag” for the Fed. He applauded the new role for the Fed in overseeing the largest and most complex financial institutions, saying, “That mandate has not been clear in the past.” But he said it would be a mistake to strip Fed oversight of smaller banks that would be under the Office of the Comptroller of the Currency or the Federal Deposit Insurance Corporation.

23 “Those banks are an important link between the Fed and Main Street,” he said. The bill would also reform the sprawling market for over-the-counter derivatives, making derivatives transactions more transparent. But many companies that use derivatives to hedge, or manage, commercial risk would be exempt, a source of consternation for reformers. The bill would allow regulators, after a study, to implement elements of a proposal President Obama put forward in January. Named for Paul A. Volcker, the former Federal Reserve chairman, it would prohibit deposit-taking banks from investing in or owning hedge funds or private equity funds, and from making trades unrelated to their clients’ interest, a practice known as proprietary trading. http://www.nytimes.com/2010/03/15/business/15regulate.html?th&emc=th

24 PAUL DE GRAUWE

Por qué no hay más opción que resolver la crisis griega PAUL DE GRAUWE 14/03/2010 La principal responsabilidad de la crisis griega recae en Grecia, pero las autoridades de la zona euro también tienen parte de culpa. Han permitido que un problema local degenere en una crisis sistémica de toda la zona. Los gobiernos no han indicado claramente que estén dispuestos a ayudar a Grecia. El Banco Central Europeo, a su vez, ha generado dudas sobre la idoneidad de la deuda del Gobierno griego como aval para la provisión de liquidez. Cuando la clasificación de la deuda soberana griega quedó rebajada a BBB+, las instituciones financieras se deshicieron de los bonos del Estado griegos, lo cual precipitó la crisis. Incertidumbres similares penden como una espada de Damocles sobre los mercados de bonos del Estado de los países más débiles de la zona euro. A largo plazo, es posible que la zona euro necesite crear un Fondo Monetario Europeo. A corto plazo, es imprescindible que se ponga fin a la crisis de la deuda del Gobierno griego, por tres motivos. Primero, si se permite que la crisis griega desemboque en una situación de impago, se corre el riesgo de generar una epidemia que afectaría a otros mercados de bonos del Estado de la zona euro. Segundo, la epidemia contagiaría al sector bancario de la zona euro. Muchos bancos han empezado a recuperarse de la crisis bancaria solicitando préstamos a corto plazo e invirtiendo en bonos del Estado. Una crisis de los bonos del Estado provocaría grandes pérdidas, y posiblemente otra crisis bancaria. Tercero, la consecuencia podría ser una fuerte subida de la rentabilidad de los bonos del Estado en varios países. Esto obligaría a los gobiernos a recortar las políticas fiscales, lo que tendría un efecto deflacionario y se correría el peligro de sumir las economías de la zona euro en una recesión aún más profunda después de una ligera recuperación. Las autoridades de la zona euro se enfrentan ahora a una elección entre dos males. El primero se deriva del riesgo moral. El segundo mal surge a raíz de los efectos contagiosos que tendría el permitir que Grecia incumpla los pagos relacionados con el sistema bancario y las políticas macroeconómicas de la zona euro. Las autoridades tienen que elegir el mal menor, que en este caso es el segundo. Aunque no cabe duda de que la crisis debe atajarse cuanto antes mejor, se ha cuestionado la legalidad y la capacidad financiera de la Unión para organizar un rescate económico. La cláusula antirescate es mucho menos restrictiva de lo que suele afirmarse. Y Grecia es relativamente pequeña comparada con la zona euro en conjunto. Otro elemento que falta es una posible declaración del BCE acerca de su política de garantías. Se mantiene la incertidumbre sobre lo que hará el BCE en los próximos meses con la deuda pública griega. El BCE debería indicar claramente que seguirá aceptando la deuda del Gobierno griego como garantía, independientemente de las clasificaciones elaboradas por los organismos pertinentes. La experiencia que ahora tenemos con la política del BCE respecto a la idoneidad de los bonos del Estado como aval para las inyecciones de liquidez nos lleva a la conclusión de que hay una necesidad urgente de que el BCE cambie de política. Más concretamente, el BCE

25 debería interrumpir su política de encargar los análisis del riesgo de los países a organismos de clasificación estadounidenses. Estos últimos tienen un historial pésimo. Depender de dichos organismos es simplemente inaceptable. Contribuye a desestabilizar los mercados financieros en general y la zona euro en particular. Está claro que el BCE no debería ser una fuente primaria de inestabilidad financiera en la zona euro. El BCE está más preparado que los organismos de clasificación para la labor de analizar la solvencia de los Estados miembros de la zona euro. Cuenta con un conjunto de analistas altamente capacitados que son igual de competentes o más que los que trabajan para los organismos de clasificación. A la larga, se necesita una reforma mucho más profunda que deje claro que los miembros de la zona euro se toman en serio su deseo de preservarla. De lo contrario, pocas dudas puede haber de que la eurozona no tiene futuro. http://www.elpais.com/articulo/economia/hay/opcion/resolver/crisis/griega/elpepieco/201003 14elpepieco_2/Tes

26 TRIBUNA: Laboratorio de ideas JOSEPH E. STIGLITZ Los peligros de la reducción del déficit

Por el momento, la economía es clara: no vale la pena correr el riesgo de reducir el gasto público JOSEPH E. STIGLITZ 14/03/2010 Una ola de austeridad fiscal se precipita sobre Europa y Estados Unidos. La magnitud del déficit presupuestario -como la de la recesión- ha tomado a todos por sorpresa. Pero, pese a las protestas de los antes defensores de la desregulación, que quisieran que el Gobierno siguiera siendo pasivo, la mayoría de los economistas creen que el gasto público ha tenido un impacto positivo que ha ayudado a evitar otra Gran Depresión. La mayoría de los economistas también coinciden en que es un error mirar solamente un lado de la hoja de balance (ya sea en el sector público o privado). Uno debe evitar fijarse solamente en las deudas de una empresa; también hay que ver sus activos. Esto debería servir para responder a los halcones del sector financiero, quienes están dando la alarma sobre el gasto público. Después de todo, incluso los halcones del déficit reconocen que deberíamos concentrarnos en la deuda nacional de largo plazo y no en el déficit actual. El gasto, especialmente en inversión educativa, tecnológica y en infraestructura, puede realmente conducir a la disminución del déficit a largo plazo. La visión miope de los bancos contribuyó a crear la crisis; no podemos dejar que la visión miope del Gobierno - empujado por el sector financiero- la prolongue. Un crecimiento más acelerado y los rendimientos de la inversión pública producen mayores ingresos fiscales, y un rendimiento de entre el 5% y el 6% es más que suficiente para compensar los incrementos temporales de la deuda nacional. Un análisis de costo- beneficio (que tome en consideración otros impactos, además de los del presupuesto) hace que esos gastos, incluso financiados con deuda, sean todavía más atractivos. Finalmente, la mayoría de los economistas están de acuerdo en que, aparte de estas consideraciones, el tamaño adecuado del déficit depende en parte del estado de la economía. Una economía con poco dinamismo requiere de un déficit mayor, y el tamaño apropiado del déficit frente a la recesión depende de circunstancias precisas. Es aquí donde difieren los economistas. Las previsiones son siempre difíciles, pero en especial en tiempos tan complicados. Lo que ha sucedido no es (por suerte) algo que ocurra todos los días; sería una tontería mirar las pesadas recuperaciones para predecir la actual. En Estados Unidos, por ejemplo, la morosidad y las ejecuciones hipotecarias están en niveles no vistos en tres cuartos de siglo; la disminución de crédito en 2009 fue la mayor desde 1942. Las comparaciones con la Gran Depresión también son engañosas porque hoy la economía es muy diferente en muchos sentidos. Y casi todos los llamados expertos han probado ser altamente falibles -muestra de ello son las sombrías previsiones que hizo la Reserva Federal de Estados Unidos antes de que estallara la crisis-. No obstante, incluso con déficit importantes, el crecimiento económico en Estados Unidos y Europa es anémico, y las previsiones de crecimiento del sector privado indican que, en ausencia de un apoyo continuo del Gobierno, existe el riesgo de un estancamiento

27 sostenido -que el crecimiento sea demasiado débil para que el empleo vuelva a sus niveles normales pronto-. Los riesgos son asimétricos: si estas previsiones son equivocadas y se da una recuperación más sólida, entonces, por supuesto, se pueden reducir los gastos y/o aumentar los impuestos. Pero si son correctas, entonces una salida prematura del gasto deficitario podría conducir nuevamente a la economía a la recesión. Ésta es una de las lecciones que aprendimos de la experiencia de Estados Unidos durante la Gran Depresión. También es una de las lecciones de la experiencia de Japón a finales de los noventa. Estos puntos son particularmente pertinentes para las economías más afectadas. Por ejemplo, Reino Unido ha tenido más problemas que otros países por una razón obvia: tuvo una burbuja inmobiliaria [aunque menos grave que la de España] y las finanzas, que estuvieron en el epicentro de la crisis, desempeñaron un papel más importante en su economía que en la de otros países. El hecho de que el Reino Unido haya tenido resultados más débiles no es resultado de políticas peores; en efecto, en comparación con Estados Unidos, sus rescates bancarios y políticas para el mercado laboral fueron mucho mejores en varios sentidos. Evitó el enorme desperdicio de recursos humanos que acompaña al alto índice de desempleo en Estados Unidos, donde casi una de cada cinco personas que buscan un empleo a tiempo completo no lo encuentran. A medida que la economía global vuelva a crecer, los Gobiernos deberán preparar, evidentemente, planes para elevar los impuestos y recortar el gasto. Inevitablemente, el equilibrio adecuado será tema de controversia. Principios como el de que "es mejor gravar cosas malas que buenas" podrían sugerir el establecimiento de impuestos medioambientales. El sector financiero ha impuesto enormes externalidades sobre el resto de la sociedad. La industria financiera estadounidense contaminó al mundo con hipotecas tóxicas, y en consonancia con el principio "el que contamina, paga", se les deberían cobrar los impuestos. Además, los impuestos bien diseñados sobre el sector financiero podrían ayudar a aliviar los problemas causados por un excesivo apalancamiento y los bancos, que son demasiado grandes para fracasar. Los impuestos sobre las actividades especulativas podrían alentar a los bancos a poner más atención en su desempeño social primordial como institución de crédito. En el largo plazo, la mayoría de los economistas coinciden en que los Gobiernos, especialmente los de los países industrializados avanzados con poblaciones que envejecen, deberían estar preocupados por la creación de políticas sostenibles. Sin embargo, debemos estar atentos al fetichismo del déficit. El déficit para financiar la guerra o para ayudar gratuitamente al sector financiero (como ocurrió en una escala masiva en Estados Unidos) generó pasivos sin contar con los activos que los respaldaran, imponiendo una carga para las generaciones futuras. No obstante, las inversiones públicas de altos rendimientos que se pagan por sí solas pueden mejorar realmente el bienestar de dichas generaciones, y sería una tontería doble dejarles la carga de deudas correspondientes a gastos improductivos y después recortar las inversiones productivas.Estas son preguntas para más adelante -al menos, en muchos países, las perspectivas de una recuperación sólida son, en el mejor de los casos, para uno o dos años. Por el momento, la economía es clara: reducir el gasto público no es un riesgo que valga la pena tomar. http://www.elpais.com/articulo/primer/plano/peligros/reduccion/deficit/elpepueconeg/20100314elpneglse_4/Tes

28 TRIBUNA: ECONOMÍA GLOBAL KENNETH ROGOFF La crisis a cámara lenta de Japón KENNETH ROGOFF 14/03/2010 Si usted escucha a los líderes estadounidenses, europeos o incluso a los chinos, Japón es el futuro económico que nadie quiere. Al vender paquetes de estímulo masivos y rescates bancarios, los líderes occidentales dijeron a sus pueblos: "Tenemos que hacer esto o acabaremos como Japón, atascado en una recesión y deflación durante una década o más". A los líderes chinos les encanta señalar a Japón como la razón principal para no permitir una apreciación significativa de su moneda, notablemente subvaluada. "Los líderes occidentales obligaron a Japón a permitir que su moneda subiera en la segunda mitad de los años ochenta, y miren el desastre que siguió". Sí, nadie quiere ser Japón, el ángel caído que pasó de ser una de las economías de más rápido crecimiento en el mundo durante más de tres décadas a una que ha avanzado muy lentamente durante los últimos 18 meses. Nadie quiere vivir con el trauma de una deflación (caída de los precios) como la que Japón ha experimentado repetidamente. Nadie quiere navegar en la precaria dinámica de deuda gubernamental a que se enfrenta Japón, con niveles de endeudamiento muy superiores al ciento por ciento del PIB (incluso si uno toma en cuenta las vastas participaciones de reservas de divisas del Gobierno japonés). Nadie quiere pasar de ser un actor mundial prominente a un ejemplo típico de estancamiento económico. Y, sin embargo, los que hoy visitan Tokio ven la prosperidad en todos lados. Las tiendas y edificios de oficinas bullen de actividad. Los restaurantes están repletos, las personas están mejor vestidas de lo que uno ve típicamente en Nueva York o París. Después de todo, incluso después de casi dos décadas de recesión, la renta per cápita en Japón es de más de 40.000 dólares (al tipo de cambio del mercado). Japón sigue siendo la tercera economía mundial, después de Estados Unidos y China. Su tasa de desempleo se mantuvo baja durante gran parte de su década perdida y aunque recientemente se ha disparado, todavía es de apenas un 5%. Entonces ¿qué pasa? Primero, las cosas se ven mucho más sombrías cuando uno pasa dos horas fuera de Tokio, en lugares como Hokkaido. Estas regiones periféricas más pobres son enormemente dependientes de los proyectos de obras públicas para el empleo. Como la posición fiscal del Gobierno se ha debilitado continuamente, los empleos se han hecho mucho más escasos. Es cierto, hay caminos bellamente pavimentados por todas partes, pero no conducen a ningún lado. Las personas mayores se han retirado a los pueblos en donde muchos cultivan sus propios alimentos; sus hijos los dejaron desde hace mucho tiempo para ir a las ciudades. Incluso en Tokio, el aire de normalidad es engañoso. Hace dos décadas, los trabajadores japoneses podían recibir bonos anuales enormes que típicamente representaban un tercio de su salario o más. Ahora, éstos se han reducido gradualmente a cero. Cierto, debido a la caída de los precios, el poder adquisitivo del ingreso restante de los trabajadores se ha mantenido, pero sigue estando un 10% por debajo. Hay mucha más inseguridad laboral que nunca debido a que las empresas ofrecen cada vez más empleos temporales en lugar del entrañable empleo vitalicio de antes.

29 Aunque no propiamente en crisis (todavía), la situación fiscal de Japón se agrava cada día. Hasta ahora, el Gobierno ha podido financiar sus grandes deudas locales, a pesar de pagar mal las tasas de interés incluso sobre los préstamos de largo plazo. Sorprendentemente, los ahorradores japoneses absorben el 95% de la deuda de su Gobierno. Tal vez, consumidos por la manera en que se colapsaron los precios de las acciones y de los bienes inmobiliarios con el estallido de la burbuja de los años ochenta, los ahorradores prefieren irse por lo que consideran bonos seguros, especialmente debido a que la suave caída de los precios hace que los rendimientos sean mayores de lo que serían en un ambiente de inflación normal. Por desgracia, por muy bien que Japón esté resistiendo hasta ahora, todavía se enfrenta a grandes desafíos. Primero y más importante, su oferta laboral está en disminución constante debido a las extraordinariamente bajas tasas de natalidad y a la fuerte resistencia a la inmigración extranjera. El país también necesita encontrar maneras de aumentar la productividad de los trabajadores que todavía tiene. Es legendaria la ineficiencia en la agricultura, en el comercio minorista y en el Gobierno. Incluso en las firmas japonesas de exportación con fuerte presencia mundial la renuencia a confrontar los arraigados intereses de los viejos grupos ha hecho más difícil eliminar las líneas de productos menos rentables -y a los trabajadores que los fabrican-. A medida que la población envejece y disminuye, más personas se jubilarán y empezarán a vender los bonos gubernamentales que ahora están acaparando con entusiasmo. En algún momento, Japón se enfrentará a su propia tragedia griega a medida que el mercado imponga tasas de interés considerablemente más altas. El Gobierno se verá obligado a considerar un fuerte aumento de sus ingresos. La mejor conjetura es que Japón subirá el impuesto al valor agregado, ahora tan sólo del 5%, muy por debajo de los niveles europeos. No obstante ¿es plausible subir los impuestos frente a tal crecimiento bajo sostenido? Los inversores que en el pasado apostaron contra Japón han tenido graves pérdidas, ya que subestimaron muy equivocadamente la extraordinaria flexibilidad y resistencia del pueblo japonés. Pero el camino por delante en cuestiones fiscales se ve cada vez más arriesgado dado el fuerte desgaste del consenso político de años recientes. Al final, ¿hacen bien los líderes extranjeros en atemorizar a sus pueblos con historias sobre Japón? Ciertamente la hipérbola es exagerada; en particular, ya quisieran los chinos que fuera así. Sin embargo, los apologistas del déficit tampoco deberían señalar a Japón como razón para tener calma respecto de los paquetes de estímulo gigantescos. La habilidad de Japón para continuar ante una gran adversidad es admirable, pero los riesgos de crisis por delante son sin duda mayores de lo que parecen reconocer los mercados de bonos. http://www.elpais.com/articulo/economia/global/crisis/camara/lenta/Japon/elpepueconeg/201 00314elpnegeco_2/Tes

TRIBUNA: RAFAEL DOMÉNECH Reglas fiscales y mercados RAFAEL DOMÉNECH 14/03/2010 Las últimas semanas los mercados financieros han vivido sobresaltados por las noticias sobre el ajuste fiscal en Grecia y la respuesta de la Comisión Europea, el Banco Central Europeo (BCE) y otros organismos internacionales a las medidas adoptadas por el Gobierno griego y a sus continuas llamadas de ayuda. Analizando la situación desde una perspectiva más amplia, el problema griego no es más que una manifestación de que los mercados financieros han puesto en duda la sostenibilidad fiscal de algunos países. En 2007, a pesar de las importantes diferencias existentes entre países en sus niveles de deuda pública sobre PIB, se observaba una elevada homogeneidad en sus spreads soberanos. Al igual que ocurría con el sector privado, los mercados financieros infravaloraban el riesgo implícito de deudas públicas muy diferentes. Por el contrario, en la primavera de 2009, cuando los mercados empezaron a darse cuenta del extraordinario deterioro en el crecimiento y en el déficit público, se pasó bruscamente a una situación de mucha heterogeneidad en los spreads. Tras un periodo de relativa tranquilidad en el otoño de 2009, las tensiones volvieron a intensificarse a partir de diciembre, aunque de nuevo con notables diferencias entre países. Esta evidencia permite extraer varias conclusiones. Primero, que la sostenibilidad fiscal es una restricción de una importancia máxima: los gobiernos que la ignoran terminan siendo penalizados por los mercados. Segundo, que como consecuencia de esta disciplina impuesta por los mercados financieros, las estrategias de salida de la política fiscal van a tener distintas velocidades según países: algunos se pueden permitir una salida lenta mientras que, a otros, los mercados les obligan a retirar ya los estímulos fiscales cuando la recuperación todavía no se ha consolidado1. Tercero, que la reacción de los mercados no siempre es lineal2, en periodos de crecimiento tienden a infravalorar el riesgo e imponen una escasa disciplina a las autoridades fiscales, mientras que en los periodos de elevada incertidumbre pueden llegar incluso a reaccionar con exceso. Cuarto, como la disciplina de los mercados en algunos momentos no es suficiente, se necesitan reglas fiscales que, como el Pacto de Estabilidad y Crecimiento (PEC), hagan lo posible por asegurar la sostenibilidad de las cuentas públicas a lo largo del ciclo económico. Aunque la historia reciente muestra que el PEC no ha sido suficiente y que su aplicación puede mejorarse, sí que ha sido útil para que muchos países europeos se enfrentaran a la crisis actual con un margen de maniobra mucho más amplio que en crisis anteriores. Por lo tanto, una de las lecciones que podemos extraer de esta crisis es que en el futuro será necesario mejorar las reglas fiscales para avanzar en la sostenibilidad de las cuentas públicas a largo plazo, sobre todo en momentos de bonanza económica en los que la disciplina de los mercados pueda ser insuficiente. http://www.elpais.com/articulo/economia/global/Reglas/fiscales/mercados/elpepueconeg/201 00314elpnegeco_3/Tes

1 Solo si no se actúa a escalas europea aprovechando el potencial conjunto de salida y capacidad de financiación. 2 O sea, simétrica.

ANÁLISIS: Economía global El espejo irlandés PAUL KRUGMAN 14/03/2010 Todo el mundo tiene una teoría sobre la crisis financiera. Estas teorías oscilan entre lo absurdo y lo verosímil: desde las afirmaciones que señalan que unos demócratas liberales obligaron de algún modo a los bancos a prestar dinero a pobres que no se lo merecían (pese a que los republicanos controlaban el Congreso) hasta la opinión de que unos instrumentos financieros exóticos fomentaron la confusión y el fraude. Pero ¿qué es lo que de verdad sabemos? Bien, en cierto modo la mera magnitud de la crisis -la manera en que ha afectado a gran parte del mundo, aunque no a su totalidad- resulta de ayuda, aunque sólo sea para investigar. Podemos fijarnos en los países que se han librado de lo peor, como Canadá, y preguntarnos qué han hecho bien: por ejemplo, limitar el endeudamiento, proteger a los consumidores y, por encima de todo, evitar dejarse enredar por una ideología que niega que haya necesidad alguna de regulación. También podemos fijarnos en países cuyas instituciones y políticas financieras parecían ser muy diferentes de las de Estados Unidos, pero que han caído con la misma fuerza, e intentar encontrar causas comunes. De modo que, hablemos de Irlanda. Como bien señala un nuevo informe de investigación de los economistas irlandeses Gregory Connor, Thomas Flavin y Brian O'Kelly, "casi todos los factores causales aparentes de la crisis de Estados Unidos están ausentes en el caso irlandés", y viceversa. Sin embargo, la forma de la crisis de Irlanda ha sido muy similar: una enorme burbuja inmobiliaria (los precios subieron más en Dublín que en Los Ángeles o Miami), seguida de una fuerte crisis bancaria que sólo se ha podido mantener a raya mediante un caro programa de rescate. Irlanda no tenía ninguno de los villanos favoritos de la derecha estadounidense: no había Ley de Reinversión en la Comunidad, ni Fannie Mae ni Freddie Mac. Lo que quizá resulte más sorprendente es la poca importancia de las finanzas exóticas: la quiebra de Irlanda no ha sido una historia de obligaciones de deuda garantizadas y canjes de créditos impagados, sino que se trató de un caso de exceso puro y duro a la vieja usanza, en el que los bancos concedieron grandes préstamos a prestatarios dudosos y al final los contribuyentes tuvieron que cargar con el muerto. Entonces, ¿qué teníamos en común? Los autores del nuevo estudio señalan cuatro "factores causales profundos". En primer lugar, hubo una exuberancia irracional: en ambos países los compradores y entidades crediticias se convencieron de que los precios inmobiliarios, aunque estaban por las nubes según parámetros históricos, seguirían subiendo. En segundo lugar, se produjo una entrada enorme de dinero barato. En el caso de Estados Unidos, gran parte de ese dinero barato provino de China; en el de Irlanda, procedía principalmente del resto de la zona euro, donde Alemania se convirtió en un gigantesco exportador de capital. En tercer lugar, los grandes actores tenían un incentivo para correr grandes riesgos, porque si salía cara ellos ganaban, y si salía cruz otros perdían. En Irlanda, este peligro moral era en gran medida personal: "Los jefes de los bancos díscolos se jubilaron con sus grandes fortunas

32 intactas". También hubo mucho de esto en Estados Unidos: como señalan Lucian Bebchuk, de Harvard, y otros, los altos ejecutivos de empresas financieras estadounidenses en bancarrota recibieron miles de millones en pagos "vinculados a su rendimiento" antes de que sus firmas se fueran a pique. Pero la similitud más llamativa entre Irlanda y Estados Unidos fue la "imprudencia regulatoria": la gente encargada de mantener los bancos a salvo no hizo su trabajo. En Irlanda, las autoridades reguladoras miraron para otro lado en parte debido a que el país estaba intentando atraer inversiones extranjeras, y en parte por favoritismo: los banqueros y promotores inmobiliarios tenían estrechos vínculos con el partido en el Gobierno. En Estados Unidos también hubo bastante de esto, pero el mayor problema fue la ideología. De hecho, los autores del informe irlandés se equivocan al subrayar el modo en que los políticos estadounidenses entronizaban el ideal de la titularidad de una vivienda; sí, dieron discursos a ese respecto, pero no surtieron mucho efecto en los incentivos de las entidades crediticias. Lo verdaderamente importante fue el fundamentalismo de libre mercado. Esto es lo que llevó a Ronald Reagan a declarar que la liberalización resolvería los problemas de las cajas de ahorros (el verdadero resultado fue unas pérdidas enormes, seguidas por un gigantesco rescate financiado por los contribuyentes) y a Alan Greenspan a insistir en que la proliferación de instrumentos derivados había fortalecido de hecho al sistema financiero. Esta ideología fue en gran medida la causante de que los reguladores ignoraran los riesgos cada vez mayores. De modo que, ¿qué podemos aprender del hecho de que Irlanda haya tenido una crisis financiera de tipo estadounidense cuando sus instituciones son tan diferentes a las del otro país? Principalmente, que tenemos que centrarnos en los reguladores tanto como en las regulaciones. Adelante, limitemos el endeudamiento y el uso que se hace de la titularización, que son algunas de las cosas que Canadá ha hecho bien. Aunque esas medidas darán igual a no ser que la gente que considera que su deber es decir no a los banqueros poderosos obligue a respetarlas. Por eso necesitamos un organismo independiente que proteja a los consumidores financieros (algo que Canadá también ha hecho bien) en lugar de dejar esa tarea en manos de instituciones que tienen otras prioridades. Y más allá de eso, necesitamos un cambio radical de actitud, y reconocer que dejar que los banqueros hagan lo que quieran tiene todos los ingredientes para llevar a un desastre. De no ser así, no habremos aprendido de nuestra historia reciente, y estaremos condenados a repetirla. - http://www.elpais.com/articulo/economia/global/espejo/irlandes/elpepueconeg/20100314elpn egeco_4/Tes

CRÍTICA: Carreras & capital humano - textos y documentos Sociología, política y Economía Aportación de las ciencias sociales a las políticas macro y micro SANTIAGO LAGO PEÑAS 14/03/2010 En los últimos años se están produciendo avances convergentes en las ciencias sociales. La ciencia económica es cada día más consciente de que sus análisis y explicaciones mejoran cuando se introducen en ellas los marcos institucionales, lógicas colectivas y comportamientos políticos, o se utilizan modelos más realistas (y complejos) de la racionalidad humana. La concesión del Nobel de Economía en la última década a investigadores como North, Williamson, Ostrom, Schelling, Aunman, Kahneman o Ackerlof son buena muestra de ello. Del otro lado, sociólogos y politólogos se aproximan a la forma de entender la investigación de los economistas. No sólo en lo que atañe al uso de técnicas estadísticas y herramientas formalizadas, sino, y sobre todo, en hacer pivotar sus explicaciones en mecanismos sociales similares a los que la ciencia económica asumió como suyos casi desde su origen, lo que conlleva evitar las "cajas negras" y las "explicaciones holistas". El mejor ejemplo de esto en España lo tenemos en la labor del Centro de Estudios Avanzados de Ciencias Sociales de la Fundación March, institución por la que han pasado y se han moldeado buena parte de los mejores politólogos y sociólogos españoles de menos de 40 años. Los autores de este libro responden a este perfil. Con estos mimbres, los profesores Fernández-Albertos y Manzano muestran el potencial que genera la combinación de diferentes disciplinas y sus correspondientes literaturas a la hora de entender el funcionamiento de la economía en un mundo político y social como el que vivimos, en el que existen grupos de presión, se producen de forma continua conflictos distributivos, las instituciones moldean la forma en la que se resuelven los problemas económicos, y el bienestar individual depende también del ejercicio de derechos políticos. El resultado es un texto universitario destinado a introducir las principales preocupaciones, métodos y resultados de la economía política, lo que supone ofrecer algo diferente que la mayoría de los manuales introductorios a la micro y la macroeconomía. Algo que más allá del valor instrumental del libro en función del contenido puede servir para motivar al lector a contemplar la economía ya desde un principio con un enfoque abierto y multidisciplinar. El libro se articula en cuatro grandes bloques rotulados como: la economía política del desarrollo, instituciones y macroeconomía, conflicto de intereses y redistribución y economía política internacional. En el primero se examinan los determinantes de las diferencias en los niveles de rentas entre países y de su evolución en el tiempo. Para ello se combinan las teorías del crecimiento económico con la evidencia empírica disponible y el análisis desde el institucionalismo; y se presta atención especial a la relación entre democracia y crecimiento económico. En el segundo bloque se aborda el análisis de la política monetaria y la delegación de poderes en bancos centrales independientes y funcionamiento del mercado de trabajo. El tercero se enfoca hacia las dimensiones distributivas, poniendo en relación desigualdad, redistribución y crecimiento, con énfasis en la intervención pública destinada a mejorar el bienestar social. El último bloque se dedica a comercio y finanzas internacionales.

34 Temas relevantes cuya inclusión es difícilmente discutible. Sin duda, en el deseo de acotar la extensión del texto se halle la explicación a orillar otros tópicos importantes para los recientes desarrollos de la economía política. Entre otros, la organización multinivel del Gobierno (descentralización e impulso a organismos supranacionales), la tributación y los actuales procesos de reforma fiscal, y la interrelación entre economía y voto (voto económico, ciclos presupuestarios y macroeconómicos relacionados con los ciclos electorales...). Quizá los veamos tratados en una segunda y ampliada edición del libro. En resumen, una obra novedosa en el panorama bibliográfico español y que debería convertirse en referencia básica de muchos programas docentes de nuestras facultades de Ciencias Sociales. http://www.elpais.com/articulo/carreras/capital/humano/Sociologia/politica/Economia/elpepu econeg/20100314elpnegser_4/Tes

ENTREVISTA: CHRISTINE LAGARDE Ministra de Economía, Finanzas y Empleo de Francia "En 2010 terminaremos con la fase de destrucción de empleo"

ANTONIO JIMÉNEZ BARCA 14/03/2010 En una pared de su despacho con enormes vistas al Sena tiene colgadas decenas de caricaturas de periódico enmarcadas que se refieren a ella, de chistes publicados en Le Monde o Le Parisien en los que sale mejor o peor parada. "Es una buena manera de ver tu evolución como personaje político", explica, mientras posa para el fotógrafo tranquila y sonriente. Christine Lagarde, ministra de Economía, Finanzas y Empleo de Francia, ocupa el puesto 14º de las mujeres más poderosas del mundo, según la revista Forbes. En noviembre fue elegida mejor ministra del ramo de Europa por el periódico británico Financial Times (Elena Salgado quedó en el puesto 16º de 19) y es la cara visible de cierto milagro francés: el de resistir mejor que otros la crisis y el de, aparentemente, salir antes que nadie de ella. Lagarde nació en París en 1956, estudió Derecho en Francia y fue becaria en el Capitolio de Washington como asistente de un congresista. Años después ingresó en la importante firma de abogados estadounidense Baker & Mckenzie, donde llegó a ocupar un puesto directivo. En la conversación suele deslizar expresiones económicas en inglés que delatan su formación anglosajona y una querencia irrefrenable por lo estadounidense. De ello da fe la única fotografía que tiene colgada junto a la colección de caricaturas: la de Barack Obama posando junto a ella. Fue nombrada ministra de Economía el 19 de junio de 2007. Muy criticada al principio, se ha vuelto insustituible para el presidente Nicolas Sarkozy. De hecho, es la persona que más tiempo lleva en ese cargo en los últimos 10 años. Pregunta. ¿Cuándo se dio cuenta de la gravedad de la crisis, de que era una crisis de una profundidad temible? Respuesta. En cuanto a su aspecto financiero, nos dimos cuenta de la amplitud enseguida. En el mes de octubre de 2008 sabíamos que el Estado debía actuar porque los bancos comenzaban a no poder financiarse. Una de las razones por las que creo que supimos diagnosticar rápidamente lo que se avecinaba fue que estuvimos en contacto permanente con los protagonistas del mundo financiero y económico. Cada mañana manteníamos una reunión aquí en mi despacho el director del Tesoro, los miembros de mi gabinete y yo con todos los responsables de los grandes bancos y de las grandes aseguradoras, que se ponían en contacto con nosotros por teléfono. Así sabíamos si el dinero iba, volvía, si se bloqueaba, etcétera. Y una vez por semana me entrevistaba con los directores de las grandes empresas para saber cómo reaccionaba el mercado. Así, hubo una gran concertación y una gran rapidez de ejecución. P. ¿Por qué Francia parece resistir mejor la crisis que otros países? R. En primer lugar, porque teníamos una situación financiera sólida, equilibrada y bien gestionada. En segundo, porque reaccionamos rápidamente y de manera, si se me permite la

36 expresión, creativa. Hemos inventado nuevos elementos y nuevos métodos para atajarla. Le daré un ejemplo de la rapidez a la que me refiero. Toda la operación que se puso en marcha para refinanciar la economía y salir en ayuda de los bancos franceses fue concebida, dirigida, consultada y votada por las dos Cámaras del Parlamento en una semana. Esto era algo que nunca había pasado en la República Francesa. Todos los participantes tomaron conciencia del problema y eso aceleró el proceso, todos los procesos. Así, el Plan de Reactivación Económica se proyectó en 2008, y en enero de 2009 ya estaba funcionando. Es decir, ya funcionaban las ayudas a las empresas y las subvenciones, por ejemplo, a la compra de automóviles. Todo fue instantáneo. También se aceleró la devolución del dinero que el Estado debía a las empresas; del IVA, por ejemplo. Todo se comprimió en el tiempo y se pagó en 2009. P. ¿A qué se refiere con una gestión creativa? R. Vimos que había que apoyar la inversión privada y decidimos exonerar a las empresas que invirtieran en 2009 de la Tasa Profesional [que cobran los ayuntamientos y grava las nuevas inversiones de las empresas]. Comprendimos rápidamente que el dinero se había ido, que los bancos se replegaban en sí mismos, remisos a dar créditos, a correr riesgos. Así que creamos lo más velozmente que pudimos la figura del Mediador del Crédito, una figura nacional cuya misión es la de interceder entre los bancos y las pequeñas y medianas empresas, de manera que cuando estas empresas ven señales de alarma puedan acudir a los bancos con más garantías de recibir dinero. P. Una de las claves de la recuperación francesa y de que su economía no haya caído más es el mantenimiento del consumo ¿A qué se debe? R. Se debe a la estructura del crecimiento francés, que se alimenta de tres motores: el consumo, que siempre ha sido fuerte pero no dominante, la inversión privada y las exportaciones. ¿Qué pasó durante la crisis? La inversión privada se hundió y la inversión pública tuvo que tomar el relevo. Y el consumo aguantó, no tuvo un porcentaje negativo en ningún trimestre. Esto quiere decir que los franceses nunca perdieron la confianza en el sistema y no se pusieron a ahorrar precisamente en ese momento. Los franceses son ahorradores tradicionales, de siempre. En Europa son de los que más ahorran. Así que no sintieron la necesidad de seguir ahorrando mucho más. Además, hay que tener en cuenta las medidas de estímulo de la economía adoptadas por el Gobierno, destinadas a sostener, por un lado, el sector industrial, y por otro, a incentivar el consumo, como el descuento citado de 1.000 euros por la compra de un coche si se abandonaba el viejo. P. El consumo aguanta, Francia crece, pero el paro sigue subiendo y llega casi al 10%. R. El paro comenzará a bajar cuando la economía se estabilice basándose en dos condiciones: que el crecimiento sea sostenido, sin picos, ni caídas ni montañas rusas, y que sea lo suficientemente elevado. Nuestra previsión de crecimiento para este año es del 1,4%. Esto quiere decir que durante 2010 va a aumentar el paro, pero muchísimo menos que antes. El choque brutal fue al final de 2008 y durante el principio de 2009, y a partir de ahí es como si bajáramos despacio una escalera. Si nuestra previsión de crecimiento se mantiene a lo largo de este año, en 2010 terminaremos con la fase de destrucción de empleo. P. Otros de los problemas de Francia son su enorme deuda pública y el déficit. ¿No teme que ambos acaben estrangulando la economía? R. En 2009 tuvimos que combatir el fuego con fuego. Ahora necesitaremos ir levantando el pie del acelerador del gasto, pero despacio, no bruscamente, y al mismo tiempo apretar el freno del gasto público; es decir, empezar a retirar el plan de reactivación económica. Pero hay que ir haciéndolo en el momento justo y en su justa medida, porque si lo hacemos

37 demasiado rápido es contraproducente. Ya tenemos experiencia. El sector del automóvil es muy importante para nosotros. En los años noventa subvencionamos ya dos veces la compra de automóviles, como ahora, con el Gobierno de Alain Juppé y el de Edouard Balladur. Y las dos veces lo suprimimos bruscamente. Y eso acarreó un descenso de golpe de matriculaciones en torno al 40%. Ahora lo vamos a ir quitando de forma progresiva. Durante 2009 dimos 1.000 euros. A partir de enero damos 750. En julio, 500. Así haremos también con los bancos: vamos a pedirles que refuercen su capital propio, pero sin que dejen de financiar la economía. El año 2009 fue el año del impacto de la brutalidad de la crisis y el del impacto de la brutalidad de los estímulos fiscales. El 2010 será el año de la sutileza. P. ¿Y cómo se logra esa sutileza? ¿Cómo se sabe en qué momento se está? R. Yo utilizo varios indicadores para leer el momento. Como, por ejemplo, los de publicidad. Cuando una empresa invierte en publicidad quiere decir que ya avizora el porvenir, que ya está de nuevo en condiciones de ir tomando posiciones en el mercado. También el del transporte de contenedores, porque me informa de la demanda exterior hacia Francia. Hemos tenido un año, 2009, muy malo, como el resto de países. Ahora ya estamos empezando a salir. P. ¿Es necesario retrasar la edad de jubilación en Francia, que ahora se sitúa en los 60 años? R. Es uno de los parámetros que debemos estudiar en la reforma de las pensiones que tenemos pensado acometer. Pero sólo uno. Hay que estudiar todos los demás. Lo único que se puede asegurar que no se va a cambiar es el montante de la jubilación. Eso lo ha asegurado el presidente Sarkozy. Todo lo demás puede cambiar. La reforma es necesaria. Hoy ya sabemos que la caja de gestión de las pensiones presentará un déficit cercano a los 30.000 millones de euros. Así que hay que encontrar imperativamente una solución rápida. Jugamos con una ventaja: la demografía nos beneficia. La relación entre personas jubiladas y personas activas nos es menos desfavorable que en Alemania, Italia o España. P. ¿La situación económica de España es comparable a la de Grecia? R. En Francia tenemos un dicho: el que compara, falla. La comparación entre Grecia y España fue precipitada. Las estructuras de las respectivas deudas son diferentes. La deuda y el déficit españoles estuvieron bien controlados por mi ex colega Pedro. Después ha habido un brutal deterioro a causa de la crisis porque el modelo estaba basado sobre todo en la construcción, las obras públicas y el turismo. Ahora tienen que repensar esa manera de funcionar. Pero no es para nada el mismo sistema financiero el griego y el español. Y sabemos que el presidente Zapatero y la ministra Elena Salgado están afrontando los problemas a base de una política económica valiente. De manera que la comparación era injustificada. P. Nicolas Sarkozy aseguró al principio de la crisis que había que moralizar el capitalismo. ¿Qué han hecho ustedes para moralizarlo? R. El primer frente en el que nos batimos fue el de los paraísos fiscales. En los últimos 15 meses ya hay 150 acuerdos firmados con países que han prometido más transparencia. Eso no se va a quedar ahí, va a seguir. También nos hemos dado cuenta de que nuestro sistema de supervisión de las instituciones financieras no funcionó, ya que los supervisores no advirtieron la crisis. Así, en Europa hemos aprobado, bajo la presidencia sueca, y a pesar de las reticencias inglesas, un nuevo modelo de supervisión, con un control del Banco Central Europeo, que aún debe ir al Parlamento Europeo, que servirá para dar la señal de alarma si detecta riesgos y burbujas especulativas. En Francia hemos incluido en nuestro sistema jurídico los acuerdos del G-20 en cuanto a remuneración de los banqueros. Por último, en 2010, los bancos deberán pagar un impuesto del 50% sobre los bonus que hayan pagado a sus agentes de Bolsa por el año 2009, siempre que sean superiores a 250.000 euros.

38 P. ¿Hay que hacer más cosas a este respecto? R. Sí. Hay que regular de manera más seria, disciplinada y restrictiva los productos derivados financieros. Es necesario que esas transacciones se lleven a cabo en mercados que puedan ser examinados y vigilados. Actualmente, muchas de esas operaciones no son transparentes, sino opacas. Y hay que saber qué pasa. Si no, tendremos de nuevo burbujas que no advertiremos a tiempo por no haber tenido acceso a esas transacciones. P. ¿Cuándo saldremos de la crisis? R. Saldremos cuando se termine la reforma del sistema financiero y se consolide la confianza entre los diversos operadores de este mismo mundo financiero. Cuando el sistema permita dos cosas: que continúen desarrollándose los países emergentes y que los países desarrollados como Francia y España encuentren maneras de crecer y de crear empleo. No será fácil porque estamos en un momento de grandes transformaciones en el mundo. Los grandes países emergentes están tomando su parte de mercado. Así que vamos a tener que encontrar un equilibrio entre todos que, además, deberá ser sostenible y acorde con el futuro del planeta. Aún hay trabajo por hacer. P. ¿Y en ese nuevo mundo desconocido no hay riesgo de volver a caer? R. Hay que mirar el mundo con confianza. El hombre es capaz de todo, incluso de lo mejor. http://www.elpais.com/articulo/primer/plano/2010/terminaremos/fase/destruccion/emple o/elpepueconeg/20100314elpneglse_3/Tes

REPORTAJE: Primer plano Francia resiste La economía gala lidera una recuperación amenazada por el paro y la deuda A. JIMÉNEZ BARCA / I. RUIZ 14/03/2010 A mediados de enero, la oficina estadística de Eurostat lo aseguraba: Francia no sólo aguanta mejor el apretón de la crisis, sino que comienza a levantarse más rápido que los demás. O menos lentamente, para ser exactos. A mediados de enero, la oficina estadística de Eurostat lo aseguraba: Francia no sólo aguanta mejor el apretón de la crisis, sino que comienza a levantarse más rápido que los demás. O menos lentamente, para ser exactos. En el cuarto trimestre de 2009, la economía francesa crecía un 0,6% y se certificaba que, aunque en cifras minúsculas, llevaba creciendo nueve meses seguidos (un 0,3% en el segundo trimestre y un 0,2% en el tercero). Tras mirar de reojo la estadística alemana, el viejo competidor y el espejo económico en el que se compara siempre Francia, y comprobar que aquélla cerraba el año en tablas (con un redondo cero), el Ministerio de Economía galo sacó pecho: "Dijimos que saldríamos antes que Alemania y ahí están los datos", comentó al periódico económico Les Echos un alto funcionario. Además, aunque el PIB francés cayó un 2,2% en 2009 y eso supuso su mayor descenso desde la posguerra, esa cifra es la que muestra mayor resistencia a la crisis entre las grandes economías desarrolladas. Más de uno se extrañó del repunte francés, de su sorprendente capacidad para sacar la cabeza cuando más frío hace fuera; sobre todo porque el país llevaba muchos años acusando un crecimiento económico bajo, inferior a otros de Europa. De hecho, la campaña electoral de Nicolas Sarkozy, en 2007, se centró en buena medida en preconizar y abanderar un cambio estructural económico que sacara a Francia del marasmo y acabara con su paso lento. ¿Tanto ha cambiado todo? ¿Qué ha ocurrido desde entonces en Francia? Nada. Simplemente, que la estructura económica francesa, propia de caballo percherón, se adecua mejor a tiempos convulsos que otras, más volubles, más gráciles, pero también más frágiles. Francia es sólida, fuerte, sin acelerar nunca mucho, pero tampoco sin retroceder nunca demasiado. "Cuando llegó la crisis mundial, la economía francesa no presentaba ningún punto esencialmente débil", explica Hervé Boulhol, economista de la OCDE. "La economía francesa es menos cíclica que otras, un tanto aislada de los booms, y presenta unos potentes estabilizadores automáticos que absorben buena parte del daño de la crisis", añade Olivier Garnier, jefe de economistas del grupo Société Générale. Uno de los pilares que la sostienen es el mantenimiento del consumo. En 2009 ha aumentado un 1%. Según los expertos, se debió a tres factores. El primero, el colchón social del gran Estado francés, los denominados estabilizadores automáticos, que permitieron en tiempos de crisis que las familias siguieran moviendo la rueda de la economía y no dejaran nunca de consumir. El segundo es el tradicional sentido ahorrativo de los franceses. Es sintomático que si uno abre una cuenta en un banco francés, el empleado encargado de ese cliente insista una y otra vez, y un día y otro, para que el recién llegado se decida a abrir un depósito, aunque sea con

40 aportaciones periódicas mínimas. Francia es una de las economías más hormiguita de Europa, con una tasa de ahorro del 17% (un 2% más que en 2008). Hay que tener en cuenta también que, aunque ahorran bastante, no lo hacen mucho más durante la crisis: siguen manteniendo su nivel de consumo. Tampoco hubo hundimiento inmobiliario, ni las familias temieron no llegar a fin de mes ahogadas por el fardo de la hipoteca mensual cada vez más imposible. Las familias francesas son también de las menos endeudadas de Europa. Los bancos galos, a la hora de conceder un préstamo inmobiliario, exigen durísimas condiciones, ahora y antes de la crisis: el cliente debe contar previamente, al menos, con el 20% del precio de la vivienda y la cuota mensual no puede superar jamás un tercio de sus ingresos. No hubo en Francia ningún boom inmobiliario ni burbuja peligrosa flotando por encima de la economía. Además, los préstamos se hacen casi siempre a un interés fijo. Si el Euríbor sube o baja no importa demasiado al ciudadano: ni siquiera es noticia en los informativos. Pero el aguante del consumo francés no se explica sólo por la naturaleza de su economía, y éste es el tercer factor. Ya en diciembre de 2008, el presidente Nicolas Sarkozy anunció un plan de reactivación económica de 26.000 millones de euros. Además de ciertas inversiones estatales en carreteras, viviendas sociales y líneas de alta velocidad, entre otros, el proyecto preveía una subvención de 1.000 euros para todo aquel que a partir de 2009 cambiara de coche. Así, la matriculación de automóviles el año pasado subió un 32%. Es decir: la venta de ropa y los electrodomésticos, por poner dos sectores que no retrocedieron se sostuvieron por sí solos. La venta de coches necesitó ayuda. Y los especialistas temen que, conforme este estímulo se vaya retirando -se hará de forma progresiva a lo largo de 2010-, se dejen de comprar y el consumo se estanque. La medida no fue concebida sólo para estimular la compra, sino para ayudar a un sector, el automovilístico, clave en Francia, que genera el 10% de los empleos directos. Todos los expertos advierten, sin embargo, de que la recuperación francesa es tímida, pequeña e incipiente y que la economía francesa todavía anda convaleciente del topetazo de la crisis. Es el tuerto en el país de los ciegos. De hecho, el Banco de Francia rebajó el pasado 8 de marzo las previsiones de crecimiento para el primer trimestre del año. Del 0,5% las redujo al 0,4%. La bajada es mínima, pero da cuenta de que la desconfianza todavía cunde en la eurozona y de las consecuencias inmediatas del desplome griego. La ministra de Economía, Christine Lagarde, mantiene que Francia crecerá a lo largo de 2010 un 1,4%. Servirá para que acabe la destrucción de empleo, pero no para empezar a recortarle puntos al paro, que sigue aumentando: el desempleo subió el 1,8% en el último trimestre de 2009, alcanzando el 10% de la población activa. A principios de 2008 rozaba el 7,8%. Sólo en 2009 se perdieron 412.000 empleos, un récord histórico, según el Instituto Nacional de Estadísticas y Estudios Económicos (INSEE), que superó al del año negro de 1993. El sector industrial, con 196.100 parados más, fue el más castigado, por delante de la construcción (53.100) y los servicios (19.500). En lo más duro de la crisis, Sarkozy sufrió varias protestas callejeras y manifestaciones multitudinarias organizadas por las ocho principales centrales sindicales, unidas por primera vez desde hacía muchos años en una movilización. Protestaban por la, en su opinión, insuficiencia de las medidas económicas de Sarkozy, a quien acusaban de ayudar a los banqueros y olvidarse de la gente que no había creado la crisis, pero estaba destinada a sufrirla. Todo apunta a que las protestas volverán. Sarkozy se encuentra ahora en el nivel más bajo de popularidad desde su nombramiento. De hecho, las elecciones regionales que se disputan hoy,

41 y a las que los sondeos pronostican un triunfo de la izquierda, servirán de verdadera radiografía para evaluar hasta qué punto la crisis ha desgastado a un jefe del Estado que prometió más trabajo y más riqueza para Francia. No sólo el paro acosa a la economía francesa. Tan desestabilizante como el desempleo es la deuda pública y el déficit, enfermedades crónicas en Francia. Es el reverso de la moneda de un Estado omnipresente, capaz de absorber los zarpazos del vendaval gracias a sus estabilizadores automáticos y a su colchón social, pero a costa de endeudarse mucho. En 1988, la deuda francesa equivalía al 33% del PIB. En 2008 llegaba al 65%. En 2011 trepará hasta el 87%. Actualmente, el déficit público alcanza el 8,2%. "Soy consciente de que hay que actuar contra la deuda, pero en tiempos de crisis no se puede reducir el déficit", aseguraba el presidente de la República en septiembre de 2009 en una declaración de principios. El gasto público fue uno de los temas de la campaña electoral de 2007. Sarkozy era entonces partidario de atajarlo. Es posible que ese tema sea también protagonista de la campaña presidencial de 2012. "Los problemas estructurales de la economía francesa no han desaparecido. Siguen ahí", comenta Olivier Garnier. "Comparado con Alemania, hay un exceso de gasto público que se refleja en la deuda y en el déficit público. Ahí hay un gran esfuerzo que hacer, para el que no existe mucho margen de maniobra inmediato", añade Garnier. Sarkozy ha advertido de que la, en su opinión, obligatoria reforma de las pensiones se acometerá en septiembre, haya o no consenso social. Actualmente, la edad de jubilación es a los 60 años. El Gobierno ya ha señalado que seguramente se retrasará hasta los 62 años. Desde el año 2000, la industria francesa ha perdido 500.000 empleos. El Gobierno anunció hace dos semanas 23 medidas, entre las que se incluyen la mayor participación del Estado en empresas y las ayudas estatales para evitar deslocalizaciones. Todo, para evitar la progresiva y galopante destrucción del tejido industrial del país. En 2000, el sector engrosaba el 17,7% del PIB, ocho puntos menos que Alemania; ahora sólo alcanza el 13,8%, 12 puntos por debajo del competidor alemán. Los desafíos son claros: evitar que la industria se deshaga, comenzar a enjugar la deuda y el déficit y recortar el paro. Es decir: preparar al viejo caballo percherón de la economía francesa que nunca retrocede, aligerándolo de carga para que, cuando los otros caballos comiencen a correr -en especial el alemán-, él les pueda seguir a no mucha distancia. - http://www.elpais.com/articulo/primer/plano/Francia/resiste/elpepueconeg/20100314elpnegls e_2/Tes

Europa ensaya el gobierno económico La idea de crear un Fondo Monetario Europeo reaviva el debate sobre la integración fiscal - El giro de Berlín, que quiere repartir la factura del fiasco griego, es crucial ANDREU MISSÉ / CLAUDI PÉREZ - Bruselas - 14/03/2010 "Lo importante no es que Alemania proponga un Fondo Monetario Europeo (FME) sino que desee una mayor integración de la zona euro", señalaba el pasado viernes una alta fuente diplomática en Bruselas. "Esto habría sido impensable", añadía, "hace solo unos meses".

De izquierda a derecha, Angela Merkel, Yorgos Papandreu y Nicolas Sarkozy, tras el Consejo Europeo que trató en febrero la crisis griega.- REUTERS

"Lo importante no es que Alemania proponga un Fondo Monetario Europeo (FME) sino que desee una mayor integración de la zona euro", señalaba el pasado viernes una alta fuente diplomática en Bruselas. "Esto habría sido impensable", añadía, "hace solo unos meses". En ese tiempo, la crisis griega ha puesto al descubierto el talón de Aquiles de la zona euro: la falta de un mecanismo de defensa que proteja a sus miembros cuando se vean sacudidos por la crisis. El giro de Alemania y su interés por crear un FME para rescatar a los países con dificultades hay que entenderlo como un intento de evitar pagar toda la factura de sus socios. La búsqueda de soluciones a la crisis se convierte así en un revulsivo a la integración de la zona euro. El FME es la más llamativa de las iniciativas surgidas al calor de la crisis para cimentar un nuevo gobierno económico europeo. En la misma línea, el primer ministro belga, Yves Leterme, ha planteado crear un Ministerio Europeo de Finanzas y una Agencia Europea de la Deuda. No es un debate nuevo. Hace casi dos años, en el décimo aniversario de la moneda única, el entonces comisario de Asuntos Económicos, Joaquín Almunia, ya abogó por "reforzar la coordinación de las políticas presupuestarias y económicas" y promover "un gobierno eficaz" de la Unión Económica y Monetaria. Pero hasta hace muy pocas semanas la referencia a un gobierno económico de la zona euro, abanderada por el presidente francés, Nicolas Sarkozy, era instintivamente rechazada por Berlín. La crisis griega ha trastocado los poderes en la Unión. Ahora es Alemania la que sugiere un mecanismo de ayudas. Y son los pesos pesados del Banco Central Europeo, Jürgen Stark y Axel Weber, también alemanes, quienes se muestran radicalmente en contra de la idea del FME. Temen que interfiera en el creciente poder de la autoridad monetaria, que eclipsa a la Comisión y demás instituciones europeas. El presidente del BCE, Jean Claude Trichet, con más perspectiva política, ha insinuado su apoyo al Fondo.

43 Un FMI europeo sería el primer paso para coordinar mejor las políticas fiscales, la pata coja de la zona euro. Sus valedores replican a los halcones alemanes del BCE que impondría disciplina financiera. Además, terminaría con las dudas respecto a la solidaridad financiera entre europeos, que han permitido a los especuladores ganar dinero a espuertas, atacando la deuda griega. La financiación y funcionamiento del FME presentan serias dudas, pero constituiría un paso decisivo hacia una política económica común. Sus promotores saben que no es una idea para mañana pues precisa la reforma del Tratado. Poul Nyrup Rasmussen, líder de los socialistas europeos, que atribuye la propuesta a "un plan original" de su partido, teme que el FME "se centre demasiado en el aspecto monetario en lugar de promover el crecimiento y el empleo". "Cuando una idea importante se pone sobre la mesa siempre surge una cacofonía de comentarios", apunta el economista Daniel Gros, del Centro de Estudios sobre Política Europea, que hace unas semanas lanzó una propuesta de diseño del Fondo. "El FMI europeo sería muy positivo, tanto para resolver problemas fiscales como para prevenirlos, si se hace bien", asegura Gros, que cree que 120.000 millones de euros serían suficientes para ayudar a países de tamaño medio. Pero algunos expertos no tienen claro las ventajas. "Un FME sería más caro que el actual FMI para el mismo nivel de protección: cualquier sistema de seguro es más barato cuanto más diversificados estén los riesgos cubiertos. Además, puede ser difícil para países de la misma zona euro imponerse medidas los unos a los otros: pueden reverdecer las viejas animosidades entre vecinos, como ya ha sucedido entre Grecia y Alemania", asegura Tomás Baliño, ex subdirector del FMI. "Pero", admite, "puede servir para coordinar políticas fiscales". Luis Servén, economista del Banco Mundial, cree que el hecho de que un país de la eurozona acuda al FMI "suena a vergonzante fracaso". "Esto, tomado literalmente, haría del FME una hoja de parra para cubrir las vergüenzas de la Unión". Charles Wyplosz, del Graduate Institute de Ginebra, va un paso más allá. "El FME es otra mala idea, que nace la vacuidad del Plan de Estabilidad, y lo más probable es que falle. La política fiscal es un elemento de la soberanía nacional, y la creación de un nuevo fondo que imponga políticas a los Gobiernos indisciplinados es un error. La disciplina, en nuestras democracias, las deben imponer los ciudadanos, no los burócratas de Bruselas". http://www.elpais.com/articulo/economia/Europa/ensaya/gobierno/economico/elpepueco/20100314elp epieco_1/Tes

ENTREVISTA: OLLI REHN Comisario de Asuntos Económicos de la UE "Si Grecia fracasa, la credibilidad de la UE sufrirá un daño permanente" RICARDO MARTÍNEZ DE RITUERTO - Bruselas - 14/03/2010 La Unión Europea se la juega en el tratamiento que recete a la crisis griega, según Olli Rehn, nuevo comisario de Asuntos Económicos y Monetarios. "Si Grecia fracasa, y nosotros fracasamos, se producirá un daño permanente a la credibilidad de la UE", señala Rehn. "El euro no es sólo un acuerdo económico, es también el corazón político de la Unión". Con la idea de reforzar la coordinación en política económica, los ministros de Hacienda de la UE se reúnen el lunes y el martes en Bruselas. El objetivo es emplear a fondo los instrumentos disponibles para evitar que no se repitan nuevos casos como el griego. La crisis griega ha hecho saltar todas las alarmas y la Comisión "tiene ya preparado el mecanismo para la asistencia, condicionada y coordinada, si se hace necesaria y es solicitada", dice el finlandés Rehn, en conversación con EL PAÍS y otros cuatro periódicos europeos.

44 Rehn señala que ésa es la estrategia adoptada en el Consejo Europeo informal del pasado mes de febrero para cualquiera de los 16 países de la eurozona, mientras fuentes comunitarias agegan que la vigilancia rigurosa de la aplicación de las medidas será la pauta de cualquier socorro, concebido como contribuciones bilaterales de otros socios al Estado en apuros. "Una estrategia intergubernamental de ayuda es más viable y realista", aclaran las fuentes. Las ayudas pueden ser "créditos o créditos garantizados, porque ninguna de las dos vías requiere que se usen los presupuestos de la Unión". En vísperas de la crucial reunión de la próxima semana, la Comisión cree que el Gobierno de Yorgos Papandreu ha adoptado ya medidas de control convincentes, como han reflejado unos mercados que han reducido su hostilidad ante Grecia y con ella, el asedio especulativo al euro. El caso griego es un caso único, en la medida en que ningún otro Estado ha presentado cuentas tan falsificadas y tan amenazadoras para la eurozona, pero las dimensiones del problema y su potencial extrapolación a otros países exigen que la respuesta sea ejemplar. Rehn considera que la Unión tiene tres desafíos a los que corresponden tres marcos temporales de respuesta. Resolver el caso griego es lo urgente y el comisario cree que está encarrilado, porque Grecia ha hecho su trabajo y en caso de necesidad hay mecanismos de acción preparados. A medio plazo se impone una vigilancia presupuestaria más rigurosa. "Vamos a hacer propuestas para el Ecofín de abril en Madrid, con idea de incrementar la coordinación de las políticas económicas", dice Rehn. "Hasta ahora las valoraciones se hacían con proyecciones en vez de pensar en las orientaciones de las políticas fiscales y monetarias". "No hay que inventar la rueda", añade el responsable de Asuntos Económicos, para el que bastaría con "aprovechar los instrumentos de actuación que ofrece el Tratado de Lisboa para tomar medidas que eviten que se repitan casos como el de Grecia" Al comisario le preocupan los desequilibrios entre los países que comparten la moneda única, de los que se han derivado los actuales desajustes, más acentuados en los países del sur de la Unión. "Como no podemos tener 16 alemanias, 16 países con superávit, tenemos que afrontar los desequilibrios", dice. La medicina es potenciar la demanda interna, un impulso que depende de las políticas nacionales. El comisario observa con interés la idea de crear un Fondo Monetario Europeo (FME), aunque hace notar que requeriría cambios en el Tratado de Maastricht (hoy integrado en Lisboa) que creó la Unión Económica y Monetaria. Evita pronunciarse sobre el fondo, aunque la Comisión ven con buenos ojos la existencia de un FME que ofrezca apoyo a un Estado en situación delicada, emparejado con un paquete de medidas estrictas para disuadir desmanes. "La Comisión es demasiado política para hacer cumplir sus normas, es mejor subcontratar su cumplimiento en un organismo independiente", comentan fuentes comunitarias. http://www.elpais.com/articulo/economia/Grecia/fracasa/credibilidad/UE/sufrira/dano/perman ente/elpepueco/20100314elpepieco_3/Tes

ENTREVISTA: JEFFREY SACHS Economista "Reducir el déficit es lo más importante en estos momentos" J. P. VELÁZQUEZ-GAZTELU - Madrid - 14/03/2010 Jeffrey Sachs, catedrático de la Universidad de Columbia y asesor del Gobierno de José Luis Rodríguez Zapatero, está convencido de que España será capaz de equilibrar su déficit con su plan de subida de impuestos y recorte del gasto. No es tan optimista con la marcha de la economía mundial y opina que mientras los tipos de interés estén tan bajos, es muy posible que reaparezcan comportamientos especulativos como los que causaron la presente crisis. "Me preocupa que estemos creando otra burbuja en lugar de una recuperación a largo plazo", sostiene. Sachs (Detroit, 1954) habló telefónicamente con EL PAÍS desde Londres, donde esta semana ha apoyado una campaña en favor de un impuesto a las transacciones financieras. Pregunta. ¿Por qué está siendo tan lenta la recuperación? Respuesta. El problema es que nuestra crisis es estructural; no se trata de un momento bajo del ciclo. Necesitamos cambios estructurales en nuestra economía, y eso significa un nuevo sector energético, nuevas tecnologías del transporte... Tenemos que combinar la recuperación con nuestros desafíos de sostenibilidad. Es una agenda complicada y aún no la hemos puesto en marcha. Darle al botón de los tipos de interés ya no será suficiente para sacarnos de problemas como los que atravesamos. P. ¿Qué es más importante ahora, reducir el déficit o mantener los estímulos a la economía? R. Entrar en una trayectoria de reducción del déficit es lo más importante en estos momentos. P. ¿Cómo ve la economía española? El país ha sido castigado en los mercados de deuda... R. Creo que estos ataques sobre Grecia, Portugal o España son exagerados. Lo que sí es importante es que el Gobierno español muestre una trayectoria creíble de reducción del déficit. Por lo que oigo en mis reuniones con el Gobierno, estoy convencido de que es así. España no está fuera de control presupuestario. Está recibiendo un golpe duro, pero está preparada para equilibrar el déficit con subidas de impuestos y recortes en el gasto. Ése es el mensaje que se debe enviar a los mercados: que hay un marco financiero a medio plazo que tiene sentido. P. ¿Qué se puede hacer para acelerar la salida de la crisis? R. España necesita nuevos impulsos al desarrollo económico. El país ha vivido un boom de la construcción que no volverá pronto. España tendrá que crear empleo en otros sectores; en las exportaciones de bienes y servicios, por ejemplo. Creo que ése es el gran desafío de España, que tiene mucho que ofrecer al mundo. Es posible una recuperación liderada por las exportaciones. P. ¿Están incurriendo los bancos en prácticas como las que provocaron la crisis? R. La respuesta es sí. No se ha puesto en práctica una buena regulación y tampoco me convence nuestra política monetaria, porque mientras los tipos de interés estén tan cerca del cero las probabilidades de que los comportamientos especulativos reaparezcan son muchas. Me preocupa que estemos creando otra burbuja en lugar de una recuperación a largo plazo.

46 Necesitamos una regulación financiera y una política macroeconómica distinta para revitalizar la actividad. No estoy satisfecho con lo que tenemos en estos momentos. P. La reforma del sistema financiero de Obama afronta tremendos obstáculos en EE UU... R. Como sucede siempre, este tipo de propuestas están sometidas a presiones enormes de los lobbies. Hay que recordar que Wall Street es el mayor lobby de EE UU y el mayor contribuyente de las campañas electorales. Por eso no es fácil sacar adelante una reforma financiera. También opino que la Administración de Obama llegó demasiado tarde con su propuesta y que durante su primer año estuvo demasiado cercana a los bancos. Apoyo a la 'tasa Robin Hood' Es hora de que el sector financiero pague los platos rotos. Más de 300 economistas de todo el mundo, Jeffrey Sachs entre ellos, han firmado una carta dirigida al G-20 en apoyo a la creación de un impuesto sobre las transacciones financieras. La recaudación serviría para que el sector financiero compensara a la sociedad por haber causado la peor crisis económica en 80 años. Y, también, para combatir la pobreza y salvaguardar el medio ambiente en los países en desarrollo. El impuesto ha sido bautizado como tasa Robin Hood en recuerdo al bandido del bosque de Sherwood que robaba a los ricos para ayudar a los pobres. Está inspirado en la llamada tasa Tobin, con la que el premio Nobel estadounidense James Tobin pretendía frenar el exceso de especulación en los mercados. "La crisis ha puesto de relieve los riesgos que acarrea un sistema financiero no regulado y la ruptura del vínculo entre el sector financiero y la sociedad", dicen los economistas firmantes de la carta. "Es hora de restaurar este vínculo y de que el sector financiero devuelva algo a la sociedad". La misiva forma parte de una campaña impulsada por medio centenar de organizaciones, entre ellas Intermón Oxfam, que cifran en 300.000 millones de euros la cantidad que podría recaudarse anualmente con el nuevo impuesto. La idea cobró fuerza en la reunión del G-20 celebrada en septiembre pasado en Pittsburgh. Se espera que el FMI presente pronto una propuesta al respecto, aunque los modelos que se barajan no son exactamente lo que tienen en mente los firmantes de la carta: se trataría más de utilizar la recaudación del impuesto para crear un fondo de ayuda a bancos en apuros y prevenir futuras turbulencias que de financiar la recuperación de los países en crisis o de ayudar al mundo en desarrollo. Sachs cree que el sector financiero ha estado sometido a menos impuestos de lo que debería. "Una combinación de impuesto sobre las transacciones y de impuestos sobre los beneficios es necesaria en estos momentos para reducir los déficits fiscales y para recuperar el control del sistema financiero", afirma. http://www.elpais.com/articulo/economia/Reducir/deficit/importante/momentos/elpepueco/20 100314elpepieco_5/Tes

TRIBUNA: Laboratorio de ideas JAVIER SANTISO Los BRIC miran hacia África JAVIER SANTISO 14/03/2010 Los países BRIC (Brasil, Rusia, India y China) concentran hoy día el 15% del PIB mundial. Como hicieron en 2009 (con la excepción de Rusia), sus economías crecerán este año a tasas superiores a las de los países de la OCDE. Entre 2000 y 2009, los BRIC también vieron sus exportaciones e importaciones crecer a tasas elevadas: su cuota en el comercio mundial pasó del 6% a más del 15%. Estas cifras todavía son relativamente modestas, pero la tendencia es clara: el peso de los BRIC irá creciendo a lo largo de la década que ahora se abre. Todos los rincones del mundo se verán impactados por este auge: Asia, América Latina e incluso África. En este continente, la irrupción de los BRIC en la primera década del siglo XXI ha supuesto un cambio mayúsculo y ha reactivado incluso el interés medio adormecido de los países OCDE por ese continente. China, la India y Brasil se han convertido en el segundo, sexto y décimo socio comercial del continente, respectivamente. En 2009, el principal socio comercial de la mayor economía del continente no ha sido un país OCDE, sino China. Los intercambios comerciales entre los BRIC y África pasaron de unos 22.000 millones de dólares en el año 2000 a 166.000 millones en 2008, y las estimaciones para 2009 apuntan hacia un nuevo récord. China domina esta relación entre las mayores economías emergentes y el continente africano. Con más de 107.000 millones de productos intercambiados en 2008, los flujos comerciales entre China y África representan dos tercios del volumen total de los BRIC, muy por delante de la India (20%), Brasil (11%) y Rusia (4%). En noviembre de 2009, en el marco de la cumbre China-África, Pekín afianzó todavía más sus lazos con el continente africano al anunciar la concesión de 10.000 millones de dólares en préstamos bonificados para África (equivalente al 10% del de la ayuda oficial de los 23 países OCDE que componen el Comité de Ayuda al Desarrollo), además de la cancelación de la deuda de ciertas naciones de ese continente. Sin embargo, esta relación no debe ocultar el creciente interés por parte de los demás BRIC por África. Entre 2003 y 2009, la India invirtió en más de 130 proyectos en el continente, totalizando 25.000 millones de dólares de inversiones, un monto relativamente cercano al invertido por China (28.000 millones de dólares y 86 proyectos) y por delante de Brasil (10.000 millones de dólares y 25 proyectos) y Rusia (93.000 millones de dólares y 47 proyectos). La multinacional india Tata ha sido el segundo inversor extranjero más activo en términos de número de proyectos de inversiones, por delante de Coca-Cola y Lafarge. En total, los BRIC han sido, con más de 60.000 millones de dólares invertidos en África entre 2003 y 2009, uno de los principales inversores en el continente, justo por detrás de Europa (190.000 millones de dólares), Oriente Próximo (170.000 millones) y América del Norte (120.000 millones). Si el activismo de la diplomacia china en África ha sido ampliamente comentado, no deja de llamar la atención que el presidente de Brasil, Luiz Inácio Lula da Silva, visitó más países africanos que cualquier otro dirigente de un país BRIC. Es llamativo que Lula, que visitó la Unión Europea por primera vez en 2007, haya viajado ya en seis ocasiones a África, cubriendo un total de 16 países. Cerca de 90 millones de brasileños (sobre un total de 198) declaran tener ascendencia africana, y en los países de habla portuguesa como Angola o

48 Mozambique las posiciones de las empresas brasileñas como Petrobras, Vale u Odebrecht se han hecho singularmente fuertes. Los intercambios comerciales entre Brasil y África pasaron de apenas 3.000 millones de dólares en 2000 a más de 26.000 millones en 2008. Nigeria, Angola, Argelia y Suráfrica son los principales socios de Brasil. Igualmente, los intercambios entre la India y África pasaron de algo menos de 5.000 millones a más de 32.000 millones a lo largo del mismo periodo. Las crecientes relaciones comerciales, industriales y financieras entre los BRIC y África han estimulado la creación de fuertes vínculos entre empresas. Una de las mayores inversiones extranjeras directas realizadas hasta la fecha por una compañía china ha sido la entrada, con un 20%, en el capital del banco surafricano Standard Bank. La operación fue realizada por el Industrial and Commercial Bank of China (ICBC) en 2007 por un monto de 5.500 millones de dólares. Igualmente, el banco de inversión ruso Renaissance Capital ha construido una franquicia de banca de inversión y gestión de activos que ha apostado fuertemente por el continente africano. En 2008, mientras el mundo industrializado se desplomaba, África recibía un récord histórico de casi 90.000 millones de inversiones extranjeras. Buena parte de estos flujos procedían de los países BRIC. La consolidación de las relaciones entre estos países y el continente africano ilustra la creciente descentralización de la economía mundial. En 2009, la mayor operación de compra por parte de un operador extranjero jamás lanzada en el continente africano no procedía de un país OCDE, ni tampoco estaba vinculada a las materias primas: se trató del intento del operador de telecomunicaciones indio Bharti Airtel de hacerse con el surafricano MTN. Es una prueba más de que el mundo de ayer, dominado por los flujos procedentes de los países OCDE, está cambiando. Lo que está ocurriendo en el continente africano adelanta también lo que será sin duda una de las grandes tendencias de este siglo emergente. http://www.elpais.com/articulo/primer/plano/BRIC/miran/Africa/elpepueconeg/2010031 4elpneglse_5/Tes

REPORTAJE: Laboratorio de ideas Breakingviews. Reuters El dinero llama al dinero Muchos miembros de la lista Forbes heredaron fortunas de sus padres EDWARD HADAS 14/03/2010 Quiere ser rico de verdad? ¿Quiere ocupar el primer lugar de la lista de los multimillonarios del mundo de la revista Forbes? He aquí una buena manera de aumentar las posibilidades: tener unos padres ricos y empresarios. Como por ejemplo Carlos Slim, quien le arrebató a Bill Gates, el dueño de Microsoft, el título de hombre más rico del mundo en la lista de 2010 elaborada por la revista Forbes. El magnate mexicano de las telecomunicaciones sólo heredó de su padre, un inmigrante libanés pobre que se convirtió en un minorista y en un inversor inmobiliario de éxito, una pequeña parte de su fortuna de 53.500 millones de dólares. Pero Slim disfrutó de un buen nido y creció rodeado por el instinto comercial. La mitad de los 20 primeros de la lista tendría que incluir los fondos de sus padres como contribución a la suma total. Como Slim, varios de ellos fueron hijos de hombres que se hicieron a sí mismos. Lakshmi Mittal, el magnate del acero nacido en la India que ocupa el quinto lugar, pasó su infancia en la pobreza, antes de que su padre hiciera su pequeña fortuna en el acero. Incluso cuando no había mucho dinero en casa, a menudo, había ambición. El padre del inversor Warren Buffett pasó del comercio de comestibles a la correduría de Bolsa y, finalmente, al Congreso de Estados Unidos. Como Buffett, muchos de los mega-mega ricos de hoy en día trabajaron duro con lo que les dieron. De los veinte primeros, sólo los tres hijos de Sam Walton, el propietario de Wal-Mart, se pueden considerar herederos tradicionales. Los demás pueden decir que amasaron ellos mismos sus fortunas. El dinero llama al dinero, pero los andrajosos también se pueden convertir en ricos. Larry Ellison, clasificado en sexto lugar, creció con poco, dejó la universidad y, finalmente, fundó la empresa de programas informáticos Oracle. Mucho antes, Ingvar Kamprad, el número 11, fundó Ikea. Era un granjero pobre de Suecia que se dio cuenta de que podía obtener unas buenas ganancias comprando cerillas al por mayor para luego venderlas al por menor. Los envidiosos y ambiciosos estudiantes de la riqueza analizan detenidamente cada año la lista de Forbes. Un examen minucioso muestra lo rápido que la riqueza se desplaza de los países ricos hacia los países en vías de desarrollo y cómo algunos de los económicamente poderosos crecen y unos pocos caen. Pero a pesar de todo ese ir y venir, los ingredientes para la gran riqueza no cambian mucho. http://www.elpais.com/articulo/primer/plano/dinero/llama/dinero/elpepueconeg/20100314elp neglse_6/Tes

TRIBUNA: Laboratorio de ideas CARLOS ARENILLAS Apostando en el Titanic Por CARLOS ARENILLAS 14/03/2010 Hace ya casi tres años desde que la crisis comenzó. Hogares, empresas y Gobiernos luchan por salir de ella, agobiados y con un sistema financiero, origen de la crisis, que necesita ser reparado y rediseñado en gran parte. Reconducir el sistema financiero para que sea más estable, eficiente y preste un mejor servicio a la sociedad implica actuar en varios frentes: mejorar los requerimientos de capital de los diversos intermediarios financieros; establecer sistemas de seguro financiero aportado por los que generan riesgo; mejorar la transparencia y solidez de los mercados y productos; mejorar la supervisión y el gobierno del sistema financiero y aumentar la educación financiera de hogares, empresas y Gobiernos. De todos estos grupos de tareas hay uno que va atrasado en la agenda de trabajo: lo referente a los productos y mercados financieros. Algo preocupante porque los fallos de los mercados -de sus productos y participantes- y su transparencia son claves tanto en el origen como en la solución de la crisis. En las últimas décadas, dominadas por las teorías desreguladoras, se ha permitido la contratación de productos financieros no solo bajo normas legales -unas más suaves que otras-, sino que a menudo se ha dejado libremente a los agentes crear nuevos productos y negociarlos sin procesos previos de autorización e idoneidad y con escasa información sobre su utilización posterior. Algo impensable en la industria alimentaria, farmacéutica o del automóvil, por ejemplo. Esto debería cambiar cuanto antes. En el ecosistema selvático de los mercados financieros tenemos un buen ejemplo: los credit default swaps (CDS), un producto que llevó a la quiebra a AIG en 2008 y que forma parte del guión de la "tragedia griega". - ¿Qué es un CDS y cómo funciona? Un CDS es un contrato de seguro contra un impago negociado entre dos partes. El comprador adquiere un seguro sobre el impago -total o parcial- de un valor -o conjunto de valores- emitido por una entidad pública o privada. El vendedor del CDS recibe una prima -normalmente anual- por el periodo de tiempo que abarque el seguro. Por ejemplo, a finales de febrero el coste de un CDS por asegurarse del impago de los bonos griegos durante 5 años estaba en 400 puntos básicos. El comprador del seguro se comprometía a pagar al vendedor 400.000 euros al año durante 5 años (2 millones de euros en total) por asegurarse del impago de un nominal de 10 millones de euros. Los CDS no están regulados en la mayoría de los países, si es que lo están en alguno. Esto ha creado problemas muy serios y puede seguir creándolos si no se enderezan las cosas. Destacaré algunos problemas del producto CDS tal y como está planteado en la actualidad. Primero, el CDS es un seguro -cosa que sus defensores negarán pomposamente diciendo que es un swap o permuta de un flujo de pagos- pero, y éste es un gran pero, lo puede contratar incluso quién no tenga el valor que quiere asegurar, algo inaceptable en el mundo de los seguros. En la jerga se denominan CDS naked [en descubierto] y son un producto especulativo que supone la mayor parte de lo negociado. ¿Se imaginan que alguien pudiera

51 contratar un seguro sobre la vida de su vecino poco querido? ¿Y que se organizara un mercado en donde se pudiera comprar y vender la póliza? El juego de incentivos podría ser perverso. Segundo, el vendedor del CDS vende protección contra el impago o quiebra de un emisor - una empresa o un Estado- y debería contar con las herramientas de cálculo actuarial y control de riesgos necesarias, así como con recursos financieros suficientes para hacer frente a sus obligaciones. Todo ello debería ser adecuadamente supervisado. En el caso de los CDS sobre emisores privados tenemos un ejemplo demoledor: fueron los CDS sobre bonos hipotecarios subprime que AIG vendió los que la llevaron a la quiebra en 2008. El Gobierno de EE UU, para impedir -se dijo- un colapso financiero mundial en cadena, tuvo que hacer frente a pagos por valor de 27.000 millones de dólares a 16 grandes bancos (algunos europeos) que habían comprado CDS a AIG. En tercer lugar, los CDS sobre deuda pública presentan más problemas aún. Probablemente el riesgo de incumplimiento, por ejemplo de EE UU, haya aumentado a raíz de la crisis. Pero aquellos que negocian los CDS sobre ese hipotético incumplimiento tienen un síndrome de demencia especulativa. Si el impago ocurriera, la situación que se crearía sería caótica. ¿Hay alguna posibilidad de que los poseedores de CDS hicieran frente a los pagos comprometidos en esas circunstancias? Lo dudo. Sería como comprar un seguro sobre el Titanic a alguien que viaja en el Titanic. Cuarto, los CDS se negocian over-the-counter, esto es, de forma bilateral y en mercados no "organizados" lo cual es una fuente importante de riesgos. Cuando Lehman quebró era prácticamente imposible saber quién debía qué a quién. Los supervisores no tenían una idea exacta del tamaño, niveles de actividad y niveles de riesgo que había en el mercado de derivados over-the-counter. Gracias al Banco Internacional de Pagos -que dirige un español, Jaime Caruana- tenemos estimaciones del volumen de CDS que tienen, al menos, los bancos: el valor nocional bruto de CDS al cierre del primer semestre de 2009 era de 36 billones (europeos) de dólares. Por último, en las circunstancias actuales la posibilidad de que bancos que cuentan con apoyo de dinero público, directa o indirectamente, especulen contra los Gobiernos que los rescataron es sencillamente un despropósito ¿Pueden Citibank o Royal Bank of Scotland asegurarse, en el sentido moral y económico, sobre la quiebra o impago de EE UU o del Reino Unido? ¿Y especular sobre ello? - Tiempo de actuar. Obviamente los problemas de Grecia no son culpa sólo de los CDS, pero han jugado su papel, no siempre limpiamente, como se descubrirá y como comprobamos en la quiebra de AIG. Los CDS naked deben prohibirse y punto. Es lícito y necesario que los inversores puedan asegurar sus inversiones mediante el uso de productos ad hoc, pero estos deben cumplir unas normas públicas claras. Los CDS no se usan como productos de seguro sino para especular sobre la evolución del activo subyacente. Pero para eso deberían usarse los futuros y opciones en mercados organizados, más sólidos y transparentes -aunque no perfectos- y que deben desarrollarse más. En la eurozona estos productos sobre las emisiones de los Estados casi desaparecieron tras la llegada del euro, quedando sólo los futuros y opciones sobre bonos alemanes, y siguen siendo casi inexistentes para los emisores privados. La innovación financiera no se debe impedir, pero debe controlarse. Los CDS, como otros productos derivados o estructurados negociados over-the-counter, son productos apalancados que pueden interactuar con otros produciendo sobrerreacciones al alza o a la baja sobre el precio de los valores reales y generando no pocos riesgos para el sistema. Para mitigar sus efectos negativos y asegurar los positivos, todos ellos deberían pasar un stress test gestionado por los supervisores. Aquellos que lo superaran deberían negociarse en mercados organizados

52 y supervisados, y liquidarse a través de una cámara de contrapartida central. ¿Qué se negocia, cómo se negocia, por quién, cuánto y a qué precio? Todo ello debe ser conocido, al menos por los supervisores. Se está hablando mucho, por fin, de los CDS a raíz de la crisis. Esperemos que los Gobiernos, reguladores y supervisores, y el sector financiero terminen su largo diálogo y tomen decisiones. Mucho dependerá de la iniciativa privada -si es capaz de ofrecer soluciones-, pero no olvidemos que la responsabilidad final está en el lado público. La primera quiebra de un hedge fund por las hipotecas subprime y los CDS asociados se produjo en febrero de 2007. Ha pasado mucho tiempo y hay iniciativas para atajar los problemas que he mencionado. Es hora de actuar decididamente sobre los productos y mercados financieros que han fallado. Debemos aliviar los síntomas de la crisis que nos afecta, pero debemos acabar con la enfermedad que los produjo. Sólo intentarlo mejorará la confianza de la que tan necesitados estamos. http://www.elpais.com/articulo/primer/plano/Apostando/Titanic/elpepueconeg/20100314elpn eglse_9/Tes?print=1

REPORTAJE: Información privilegiada El relevo en la CECA, en fase crítica Presiones diversas hacen replantearse el nombre del futuro presidente de las cajas MIGUEL Á. NOCEDA 14/03/2010

De izquierda a derecha: José Luis García Delgado, Isidro Fainé, Jaime Caruana y Jordi Gual.- El relevo al frente de la Confederación Española de Cajas de Ahorros (CECA) ha entrado en una fase crítica. A dos meses para que acabe el mandato de Juan Ramón Quintás, parecía que el nombre del sustituto estaba consensuado y que Amado Franco, presidente de Ibercaja, ocuparía el cargo para el próximo periodo. De hecho, es el único que lo ha reconocido públicamente. Sin embargo, en las últimas semanas ha habido interferencias provenientes del entorno gubernativo, a las que se han sumado otras internas, amparadas en la necesidad de que sea uno de los pesos pesados del sector el que deba conducir los destinos de la CECA. Es decir, el representante de una gran caja. El grupo de las grandes lo forman La Caixa (presidida por Isidro Fainé) y Caja Madrid (Rodrigo Rato) y, en menor medida, las valencianas Bancaja (José Luis Olivas) y la CAM (Modesto Crespo), la andaluza Unicaja (Braulio Medel) y la vasca BBK (Mario Fernández). Muchos focos apuntan a Fainé, comprometido con el desarrollo del sector, pero de ahí a que quiera o vaya a presidirlo va un trecho, aunque al Gobierno le encantaría. Tendrían que aceptarse varios enfoques y exigencias. Hay teorías para todos los gustos a favor y en contra de que sea una gran caja. Pero, contra la idea de que tiene que ser el presidente de una de las grandes el que debe estar al frente, que con todo lo que se viene encima se justifica, está la de los que opinan que es mejor que sea una de las medianas -saneadas, eso sí- la que figure al frente. En ese pelotón figura, precisamente, Ibercaja. Se da la circunstancia de que el antecesor a Quintás fue un presidente de esta caja, Manuel Pizarro. Hay quien sostiene que este pormenor ha podido volverse en contra de Franco por la ascendencia de Pizarro y su ligazón al PP. No obstante, el actual presidente de la caja aragonesa siempre ha mantenido una exquisita equidistancia política.

54 La oportunidad de debatir este asunto llega el miércoles, 17 de marzo, en el consejo de administración de la CECA que celebran en Sevilla, y donde se espera que se despejen muchas incógnitas. También podrán abordar allí la evolución de la reestructuración del sector y los ataques que recibieron el jueves por parte de los bancos. Siempre se han guardado respeto, pero ahora que se va Quintás parece que quieren enviar un recado al sustituto. El jueves, en un acto organizado por APD y Deloitte, el presidente de la Asociación Española de Banca (AEB), Miguel Martín, lanza una batería de andanadas: urgió a que aceleren la reestructuración y culpó del retraso a sus gestores, a los que pidió que no busquen excusas. También sacó a colación a CCM y se preguntó si daba créditos. Le secundaron en las críticas el presidente del Banco Popular, Ángel Ron, y el consejero delegado del Santander, Alfredo Sáenz. Así que el que llegue a la CECA tendrá que marcar el territorio frente a esos ataques. Las cajas los achacan a que les han rebasado en créditos, han crecido más en depósitos en 2009, tienen la misma morosidad y mejor cobertura. Es decir, les quitan negocio. Y, en ese sentido, el presidente de CCM, Xabier Alkorta, le comentó al final a Martín que a él y a los que tienen garantías como él les concede todos los créditos que quieran. Pero la reestructuración de las cajas parece inacabable. En junio se acaba el periodo para las ayudas y apenas hay procesos en marcha. El Banco de España parece desbordado y el gobernador, Miguel Ángel Fernández Ordóñez, ya no sabe qué hacer para apremiar a estas entidades. Optimismo moderado de Jaime Caruana sobre la recuperación "La economía mundial ha iniciado una recuperación lenta, basada en las medidas de apoyo y en el buen comportamiento de las economías emergentes". Jaime Caruana, director general del Banco Internacional de Pagos (BIS, en sus siglas inglesas), mostró esa ventana abierta al optimismo en una intervención el viernes presidida por Isidro Fainé en un acto organizado por la cátedra de Economía de La Caixa, que dirigen José Luis García Delgado y Jordi Gual. El ex gobernador del Banco de España subrayó también que se ha demostrado que la situación procede de claros desequilibrios en el patrón de crecimiento, como el apalancamiento y la toma de riesgos, "a los que no hay que volver". La crisis llevará a un sobreendeudamiento y en 10 años (de 2007 a 2017) habrá supuesto 30 puntos por encima de la media, que en muchos casos supone el doble. El panorama es duro y requiere, en su opinión, ajustes en la economía real y no sólo en las entidades financieras. "Las economías más flexibles se recuperarán con mayor rapidez y, por tanto, tendrán, menos pérdida de empleo y de bienestar social", dijo sin citar en ningún momento a España. Entre los asistentes, Miguel Boyer, Guillermo de la Dehesa, Fernando Restoy, José Luis Malo de Molina, Manuel Pizarro, Manuel Varela, Álvaro Cuervo, Marcelino Oreja, José Antonio Olavarrieta, Pedro Pablo Villasante, Luis Sánchez Merlo... http://www.elpais.com/articulo/empresas/sectores/relevo/CECA/fase/critica/elpepueconeg/20 100314elpnegemp_2/Tes

55 TRIBUNA: Francisco xavier martínez cobas

Los SIP como solución en las cajas Francisco xavier martínez cobas 14/03/2010 La gravedad de la crisis económica y financiera ha golpeado a bancos y a cajas. El aumento de la morosidad y la entrega de activos inmobiliarios como pago de préstamos, condicionan los resultados de las entidades de crédito. Ante este diagnóstico, el tratamiento es doble: por una parte, necesitan capitalizarse para asumir las pérdidas cuanto antes y fortalecer sus recursos propios, y por otra, necesitan ser más eficientes todavía, para generar un mayor margen que ayude a la capitalización. En los bancos la consecuencia es la pérdida de valor de las acciones de sus propietarios, la reducción de los beneficios y, en su caso, las ampliaciones de capital para capitalizar y fortalecer los balances con recursos propios. Si esto no es suficiente lo que estará en cuestión es su permanencia en los mercados. En el caso de los mayores (Santander y BBVA) su tamaño y su presencia en diferentes países y mercados les han permitido compensar la morosidad en España con los resultados de otros territorios. En las cajas de ahorros, que no tienen accionistas, no es posible ampliar capital social, por lo que se pueden emitir títulos de deuda y generar plusvalías a través de la venta de participaciones empresariales y de activos. Por ello, para resolver la situación en las cajas de ahorros surgen opiniones favorables a dos posibilidades que podrían dañar un modelo generador de riqueza social. Estas posibilidades son la bancarización de las cajas y las fusiones. La bancarización consiste en transformar las cajas de ahorros en sociedades anónimas. Esta opción posee para algunos el atractivo adicional de pensar que así se podría financiar el déficit público, ingresando el dinero procedente de la colocación de las acciones. Entre los riesgos de la bancarización estaría la pérdida definitiva de la obra social, así como caminar hacia la exclusión bancaria de la parte de la población con menor renta, que no sería objeto de interés para las cajas, por su escasa rentabilidad. Las fusiones de las cajas son otra de las posibilidades más apuntadas. Ganando en tamaño, la aparición de sinergias permite a la entidad resultante ser más eficiente a largo plazo, y el mayor margen financiero permite un mayor beneficio, y por lo tanto una mayor capitalización. Si la tendencia a la concentración de entidades se va a producir igual, estimulada por el FROB, el ganar eficiencia a través del tamaño será una condición necesaria, no ya para obtener un mayor beneficio, sino para permanecer en el mercado en condiciones de competir. Por otra parte, las fusiones son una operación entre cajas de ahorros, no poniendo en duda la naturaleza jurídica de las entidades. Las ventajas de las fusiones pueden, sin embargo, transformarse en desventajas. En las fusiones entre cajas de diferentes territorios, éstas pueden provocar la pérdida de identidad entre los impositores y "su" caja de ahorros. La identidad, aunque no sea algo tangible, es fundamental para comprender el éxito de las cajas a lo largo de todos estos años, unida a la cooperación a través de la Confederación (CECA). Otra dificultad es de carácter político. Una Comunidad Autónoma difícilmente verá con buenos ojos la pérdida de control sobre una caja. Cuando las fusiones se realizan entre entidades solapadas en un mismo territorio, los beneficios económicos se pueden diluir, porque si la suma de los conjuntos (las cajas)

56 produce un conjunto mayor, la intersección entre las cajas (la duplicidad de sucursales y servicios) resta al conjunto final, sobre todo por la pérdida de empleos. Ahora bien, si ese coste es un esfuerzo adicional para entidades que se fusionan por necesidad, el coste para la economía y para la sociedad de sus comunidades es todavía mayor. Si entre los principales problemas económicos actuales se sitúa el desempleo, la restricción de crédito a las empresas, el déficit público y las cuentas de la Seguridad Social (con la propuesta de ampliar la edad de jubilación), se proponen fusiones dentro de comunidades que provocan desempleo y prejubilaciones, pérdida de competencia y mayor restricción de crédito, así como el empleo de fondos públicos prestados para gastar en buena medida en los costes de la fusión, y no para financiar la morosidad. Tanto es así que el efecto a corto plazo de algunas propuestas podría ser la caída de la solvencia y de la calificación de las entidades a fusionar, justo lo contrario de lo que se pretende. En consecuencia, estas propuestas mantienen la identidad, la naturaleza jurídica de las cajas y el poder competencial de la Comunidad Autónoma, pero reducen, minimizan o incluso pueden llegar a impedir la solución del problema económico, que es de solvencia y capitalización. La aparición del SIP ( Sistema Institucional de Protección) abre una nueva posibilidad que podría permitir conciliar las legítimas intenciones políticas en un Estado descentralizado con el necesario rigor económico. El fundamento es una fórmula de cooperación que permite compartir la liquidez y el riesgo de crédito entre entidades. Para ello es necesario un sistema común de información, contabilidad y auditoría, que permita la evaluación común del riesgo que asume cada entidad y que, compartido, reduce los costes de cada una. La legislación no se pronuncia sobre la estructura jurídica y mercantil que debe conformar un SIP. Un conjunto de cajas de ahorro puede compartir un contrato de grupo o SIP, constituyendo un ente instrumental que gestione los servicios comunes, como comparten otros servicios bajo el paraguas común de la CECA. Para evitar el riesgo de centralización, la constitución de esa sociedad se puede realizar por construcción jurídica inversa, siendo las cajas de ahorros las propietarias de la sociedad común. Si la participación en la entidad común se realiza a partes iguales, y no en función de variables previas de tamaño, se facilitaría la lógica cooperativa. El contrato de SIP debe regular la relación entre las diferentes entidades y, particularmente, hacer constar los mecanismos de compensación entre cajas por el valor de los avales y la cesión de liquidez entre las participantes. De esta manera, se salvaguardan las sedes sociales y fiscales, el ámbito de actuación crediticio y la decisión sobre la obra social de cada caja participante, asegurando la vinculación a cada comunidad, así como el ámbito competencial de las instituciones autonómicas. Una de las críticas al SIP es la opinión de que obliga a crear un banco que dirige el proceso. Sería deseable que se evite este supuesto, y se permita a las cajas de ahorros ejecutar un contrato de SIP sin acudir a otra naturaleza jurídica, bien reconociendo a la agrupación de cajas como fórmula válida o bien modificando la legislación estatal para reconocer una "caja SIP" al igual que la CECA tiene la consideración de caja de ahorros. Un modelo de SIP planteado en los términos propuestos podría, en definitiva, facilitar la solución económica de un problema de naturaleza económica (necesidades de capitalización y eficiencia) con neutralidad política (debate territorial) y jurídica (naturaleza de las cajas), sobre las bases de identidad y cooperación que permitieron avanzar a las cajas de ahorros hasta la posición que ocupan actualmente, tanto en el sistema financiero como en el impacto de su obra social. http://www.elpais.com/articulo/empresas/sectores/SIP/solucion/cajas/elpepueconeg/20100314elpnegemp_8/Tes

Efectos de la crisis financiera La autopsia de Lehman muestra que escondía deuda fuera del balance Los ejecutivos llegaron a ocultar 50.000 millones de dólares sin que el auditor diera la voz de alarma SANDRO POZZI - Nueva York - 13/03/2010 Lehman Brothers recurrió a operaciones fuera de balance para aparentar una situación más saneada y de menor deuda que la real desde finales de 2007. La firma era insolvente dos semanas antes de su colapso, el 15 de septiembre de 2008. Los ejecutivos del extinguido banco de inversión recurrieron a complejas técnicas financieras para maquillar su contabilidad y tapar el agujero que sus arriesgadas apuestas estaban creando. Lehman Brothers recurrió a operaciones fuera de balance para aparentar una situación más saneada y de menor deuda que la real desde finales de 2007. La firma era insolvente dos semanas antes de su colapso, el 15 de septiembre de 2008. Los ejecutivos del extinguido banco de inversión recurrieron a complejas técnicas financieras para maquillar su contabilidad y tapar el agujero que sus arriesgadas apuestas estaban creando. El primer ejecutivo de la firma, Richard Fuld, fue "como mínimo gravemente negligente" y el auditor, Ernst & Young, podría ser acusado de "mala práctica profesional", según las revelaciones del amplio y detallado informe solicitado por el juez que supervisa en Nueva York el proceso de liquidación del banco de inversión. En 2.200 páginas, el informe pretende identificar los factores que hay detrás de la mayor quiebra empresarial en Estados Unidos. Sólo el índice ocupa 45 folios. El trabajo de investigación lo dirigió el abogado Anton Valukas, y su elaboración costó 38 millones de dólares (27 millones de euros). Valukas, presidente del bufete Jenner & Block, es claro desde el principio. La muerte del banco de inversión neoyorquino hace ahora 18 meses fue fruto de "múltiples factores". Y precisa también que Lehman "fue más la consecuencia que la causa" del terremoto financiero que empezaba a gestarse y que hizo tambalear los cimientos de Wall Street, hasta arrastrar al conjunto de la economía global al borde del precipicio de la depresión. El abogado reparte responsabilidades en tres grupos. Primero, acusa a los ejecutivos de Lehman desde haber cometido "errores de juicio" hasta "manipular" las cuentas de resultados para hacer creer que no pasaba nada. Es la parte más crítica del documento, a la que dedica 300 páginas. Segundo, cuestiona el modelo de negocio seguido por la banca de inversión, que premiaba el "riesgo excesivo". Y tercero, carga contra los reguladores, por no "haber identificado mejor y mitigado" el desenlace final. El informe no sólo arroja luz sobre los últimos días de Lehman en septiembre de 2008. Además, revisa lo sucedido cuando empezaron a emerger los primeros problemas en el mercado hipotecario, en la primavera de 2007. Lehman fue "lenta" al anticipar sus efectos. El colapso de Bear Stearns, un año después, dejó claro que la firma estaba en "peligro". "Para ganar tiempo", explica, sus gestores empezaron a "dibujar una realidad engañosa".

58 Lehman procedió así a distorsionar los números, manipulando sus libros contables con un instrumento llamado Repo 105, una venta de activos con pacto de recompra. Activos ilíquidos salían temporalmente del balance en el momento oportuno y en su lugar entraba efectivo, aparentando una posición de mayor liquidez y menor endeudamiento. El instrumento existía desde 2001, cuando Lehman logró constituirlo en Londres a través de la firma Linklaters (tras recibir la negativa de varios despachos de abogados estadounidenses). Pero fue desde 2007 cuando Lehman empezó a usarlo masivamente. Así, con una técnica que recuerda a la que llevó a la quiebra del coloso Enron, la entidad logró ocultar 39.000 millones de dólares (28.500 millones de euros) en activos tóxicos o ilíquidos al final de su ejercicio 2007, cerrado el 30 de noviembre de ese año. La cifra subió a 50.000 millones en el segundo trimestre de 2008. El banco pudo entretanto ir solicitando fondos a sus acreedores para poder operar y mantener viva la confianza del mercado hacia la firma. Las ventas con pactos de recompra son legales si se revela su uso a reguladores, agencias de calificación e inversores. Lehman Brothers, según el informe, no informó debidamente. Las agencias de calificación cayeron en la trampa y mantuvieron hasta el final sus bendiciones para Lehman. Richard Fuld, su consejero delegado, dio el visto bueno a estas transacciones, según el informe, aunque su abogada lo niega. La auditora Ernst & Young también estaba al corriente del uso del Repo 105, pero en ningún momento puso en duda o pidió explicaciones sobre el mismo. Ernst & Young aclara que su última auditoría correspondió al ejercicio de 2007. Asegura que las cuentas de ese año eran correctas y que la responsabilidad sobre las ratios de apalancamiento incluidas en el informe de gestión es de los ejecutivos, no del auditor. El modelo funcionó hasta que todo se vino abajo. La confianza, explica Valukas, era clave para que se sustentara. "Cuando se perdió", señala, Lehman perdió pie. El extenso documento concluye, a partir de esto, que Lehman Brothers era ya insolvente el 2 de septiembre de 2008, casi dos semanas antes de firmar la quiebra el 15 de septiembre. En este punto, añade, las demandas de JPMorgan Chase y de Citigroup contribuyeron a acelerar el colapso del banco, justo cuando el entonces secretario del Tesoro, Henry Paulson, intentaba encontrar una solución. Los rivales de Lehman exigieron 16.000 millones en garantías tomadas de las arcas del banco de inversión apenas unos días antes de la quiebra, cuando veían que no era capaz de mantenerse a flote. Un dinero que necesitaba desesperadamente para no quedarse sin liquidez. Fue el empujón final a la bancarrota, remacha la investigación. El trabajo de Valukas arrancó en enero de 2009, con la misión de encontrar si hubo algún tipo de conducta fraudulenta o impropia. Al ver lo sucedido, al abogado no le extraña que en Wall Street no se siga ya ese modelo de negocio. Y con sus revelaciones, el informe pone el énfasis en la necesidad de que se someta a las firmas financieras a mayor transparencia. No obstante, el abogado admite que no hay indicios suficientes para acusar penalmente a ningún ex ejecutivo de Lehman o de la auditora por violar las reglas financieras. A lo que sí abre la puerta el informe es a la presentación de demandas civiles contra Fuld, otros ejecutivos, Ernst & Young o incluso Citi y JPMorgan. El momento de la publicación del informe no puede ser más oportuno. Año y medio después del terremoto financiero, la aireada reforma del marco que regula a los guardianes de Wall Street sigue atascada. La Casa Blanca perdió el jueves la paciencia y forzó al demócrata Christopher Dodd, presidente del comité bancario del Senado, a romper las negociaciones con los republicanos.

59 El lunes presentará su "plan B" para salir del punto muerto. Dodd deja claro que su iniciativa acabará con el principio del "demasiado grande para quebrar", al establecer un procedimiento para desmantelar de una forma ordenada entidades sistémicas con problemas. Y para evitar otro Lehman, se establecerá un sistema de alerta temprana. La idea es que el presidente Obama tenga el texto final sobre su escritorio antes de que acabe el año. Las consecuencias de la gran quiebra - 15 de septiembre de 2008. El Gobierno de Estados Unidos deja caer Lehman Brothers. La entidad, con 158 años de historia, se declara en bancarrota. El mismo día Bank of America compra otro de los grandes bancos de inversión estadounidenses, Merrill Lynch. Sólo quedan dos de las grandes entidades de inversión: Goldman Sachs y Morgan Stanley. - 3 de octubre de 2008. El hundimiento de Lehman revela la inmensa magnitud de la crisis financiera. El Gobierno de Estados Unidos sale al rescate y el Congreso autoriza la adquisición de activos tóxicos por valor de 700.000 millones de dólares (508.277 millones). Cuatro días después el Gobierno español crea un fondo de 50.000 millones para suministrar liquidez a las entidades españolas. - 10 de octubre de 2008. El Ibex 35 cae un 9%, la mayor desde su creación en 1991. Cinco días después el Dow Jones se deja un 9%, sin precedentes desde el día posterior al lunes negro de 1987. - 12 de diciembre de 2008. Se destapa el mayor fraude de la historia. El financiero Bernard Maddoff timó unos 50.000 millones de dólares. - 16 de diciembre de 2008. La gravedad de la crisis económica fuerza a la Reserva Federal a rebajar los tipos de interés a una horquilla entre el 0% y el 0,25%, una decisión sin precedentes. - 29 de marzo de 2009. El Banco de España interviene Caja Castilla La Mancha. Es la primera vez en la historia que el regulador toma el control de una caja de ahorros. - 7 de mayo de 2009. El BCE rebaja los tipos de interés oficiales del euro al 1%. Se trata de evitar que la recesión se convierta en depresión. - Septiembre de 2009. Las principales economías desarrolladas (Estados Unidos, Francia y Alemania) salen de la recesión. No así España, cuya economía sigue cayendo. - Diciembre de 2009. España encadena siete trimestres consecutivos en recesión. La crisis se ceba con especial virulencia en el mercado laboral, que cierra el año con una tasa de paro del 18,8%. - 11 de febrero de 2010. La situación de las finanzas griegas desata la primera crisis del euro. El presidente de la Unión Europea, Herman Van Rompuy, lanza un mensaje a los mercados: "No dejaremos sola a Grecia". - 10 de marzo de 2010. La OCDE señala que Irlanda y España, por este orden, serán los países desarrollados más afectados por la crisis. - 12 de marzo de 2010. Se hace público el informe judicial de la quiebra de Lehman Brothers, que señala a los gestores del banco y al auditor, Ernst & Young, como principales responsables. http://www.elpais.com/articulo/economia/autopsia/Lehman/muestra/escondia/deuda/fuera/bal ance/elpepueco/20100313elpepieco_5/Tes

Laboratorio de ideas breakingviews.com LEHMAN / E&Y El gafe de los balances NICHOLAS PAISNER 14/03/2010 La búsqueda de explicaciones para la quiebra de Lehman Brothers ha añadido una tardía entrada al glosario de la crisis crediticia: "Repo 105". Esta técnica contable ayudó a reducir el asfixiante apalancamiento aparente del banco durante la crisis. La revelación del papel que desempeñó Ernst & Young en la desaparición de Lehman, le plantea unas difíciles cuestiones al antiguo auditor del banco, y posiblemente también a otros bancos y otras empresas de contabilidad. Una investigación ordenada por un tribunal estadounidense de la quiebra de Lehman daba a entender que E&Y adoptó un punto de vista demasiado indulgente respecto a la gestión del balance general de su cliente. El investigador cree que la empresa debería haber cuestionado el uso por parte de Lehman del complejo pacto de recompra Repo 105. La estructura le permitió excluir eficazmente del balance 50.000 millones de dólares en activos y en deudas, reduciendo así el apalancamiento declarado en un momento crítico. E&Y debe defenderse frente a la acusación de que debería haber forzado la publicación completa de la información relativa a las transacciones. Lehman indicó en sus declaraciones trimestrales de 2008 que los pactos de recompra se estructuraron bajo la forma de préstamos en el balance general. Provistos de esa información, los inversores habrían dado por hecho - erróneamente- que todos los pactos de recompra de la empresa se reflejaban en su balance general publicado. La estructura del Repo 105 no es nada común. A pesar de ello, la respuesta inicial de E&Y ante el informe ha sido decepcionantemente sucinta. La empresa de asesoría afirma que las últimas cuentas auditadas de 2007 se encontraban en consonancia con los principios de contabilidad generalmente aceptados en Estados Unidos. Pero esto realmente no tiene nada que ver con la sugerencia de que E&Y no se aseguró que se divulgara la información completa en los meses siguientes. Sólo era cuestión de tiempo que la atención pública se centrara en el papel de E&Y como auditor de Lehman. Lo sorprendente es quizás que las autoridades no intervinieran antes. Eso se ha podido deber en gran medida a la dificultad de desentramar las finanzas de Lehman; se ha necesitado un año para finalizar la investigación estadounidense. Pero los inversores que luchan por recuperar los activos de la rama europea del banco se quejan desde hace tiempo de que los contables deberían haberse asegurado de que Lehman estaba segregando correctamente los bienes de los clientes de los de la empresa. El sector no ha hecho más que empezar a digerir lo que significa Repo 105. Los primeros indicios muestran que la técnica sólo se podía aplicar con las normas de contabilidad estadounidenses y que no era una característica de los números de los bancos europeos. Tampoco queda claro si otros bancos estadounidenses emplearon dicha técnica. En cualquier caso, E&Y deberá explicar mejor la razón por la que actuó de esa manera. http://www.elpais.com/articulo/primer/plano/gafe/balances/elpepueconeg/20100314elpne glse_8/Tes

Laboratorio de ideas breakingviews.com LEHMAN / FULD Una autopsia complicada ANTONY CURRIE 14/03/2010 Parece que en la autopsia de Lehman Brothers se han descubierto las numerosas causas de la muerte. El médico forense del Tribunal de Quiebras, Anton Valukas, describe al presidente del banco de inversión, Richard Fuld, y a sus lugartenientes como unos personajes más arrogantes e ineptos de lo que se pensaba en un principio. El mordaz informe también detalla una serie de ardides en los balances generales que podría llevar ante los tribunales a los antiguos jefazos y a su empresa auditora, Ernst & Young. Entre las toxinas que se descubrieron había algo llamado Repo 105. Este truco contable ocultó el tamaño del balance general de Lehman mientras aumentaba la presión para que los bancos de inversión redujeran su apalancamiento a finales de 2007, algo que Lehman también estaba haciendo en aquel momento. Aunque el Repo 105 no era mortal, sin duda era venenoso. Lehman llevaba abusando de él desde 2001, mediante el uso de pactos de recompra para financiar activos pero, a diferencia de las típicas transacciones de repos -abreviatura de reposición, la recuperación o embargo de un bien gravado-, los consideraban como vendidos a efectos contables. Esto permitió a Lehman ocultar su apalancamiento real, haciendo que pareciera más bajo de lo que era realmente. Lehman incluso recurrió a veces a sus filiales extranjeras para que funcionara. Bart McDade, el directivo que se encargaba de reducir el balance general, decía despectivamente que el Repo 105 era "una droga más a la que estábamos enganchados". Eso suena a incumplimiento del deber fiduciario, aunque Valukas no cree que lo fuera. Sin embargo, considera que existen sólidos argumentos -o una "demanda plausible", como la llama él- contra Fuld y los tres directores financieros de la empresa en sus 12 últimos meses: Chris O'Meara, Erin Callan e Ian Lowitt. Es más, E&Y podría verse en apuros por una negligencia profesional al permitir que continuaran las actividades del negocio. Por medio de su abogado, Fuld negó tener conocimiento del Repo 105 o de la manera en que funcionaba. El informe engancha incluso sin esta revelación condenatoria. Presenta una imagen mucho más detallada de la que se disponía previamente de una directiva que se cree su propia propaganda y que hace caso omiso del aumento del riesgo y de las preocupaciones de sus subordinados, mientras aumenta sus posiciones en activos ilíquidos como las propiedades inmobiliarias comerciales y el capital riesgo. Se saltaban los límites de riesgo del banco de forma habitual y no incluían esas posiciones en las pruebas de resistencia. Tanto si Fuld y sus colegas acaban ante los tribunales como si no, Valukas ha elaborado al menos una fantástica guía para la administración de empresas. Es el mejor documento que se ha escrito hasta la fecha sobre esta crisis y la manera de evitar futuras quiebras. Debería ser de lectura obligatoria para los directivos de bancos actuales y los del futuro. http://www.elpais.com/articulo/primer/plano/autopsia/complicada/elpepueconeg/20100314elp neglse_7/Tes

Generación noqueada GUILLERMO ABRIL 14/03/2010 Son el rostro del esplendor perdido. La fotografía del derrape económico. El 93% de los empleos destruidos desde el pinchazo de la burbuja española corresponde a menores de 35 años. Vivieron la época más próspera de la historia reciente. Se incorporaron al mercado laboral tras la crisis de los noventa. Crecieron en un entorno en el que parecía haber trabajo para todos. Y muchos de ellos abandonaron los estudios en busca de un futuro fácil. Eso sí: mileurista, precario e inestable. Es lo que había. El ajuste los ha barrido. Eran los más débiles, han sido los primeros en caer. Suman 1,7 millones de proyectos de vida truncados. Resulta curiosa una ratio que manejan los expertos. En 2006, una pareja de trabajadores jóvenes lograba alzar una vivienda media en el transcurso de un año. Récord de producción: España construía unas 700.000 viviendas anuales. Pero algo en la cadena de montaje no encajaba. Esa misma pareja necesitaba casi cuatro años de su sueldo íntegro para pagarla y formar lo que se denomina "un hogar" -dos personas, una casa-. Por eso sólo se formaban 300.000 hogares al año. Y para financiar el desajuste entre hogares y casas cosntruidas se recurría a unas empresas especializadas en dejar para mañana todo lo que no se podía pagar hoy. En una de estas compañías llamadas "financieras" entró a trabajar en 2006 un tipo de 25 años. Alberto Hernández, un robusto metro ochenta y siete, amante del fútbol y de salir por ahí con su novia y sus amigos. Con dotes de cara al público. No se trataba de su primer trabajo. Al cumplir los 18, cuando se matriculó en Empresariales, decidió que no seguiría pidiendo dinero en casa. Iniciativa admirable. Pertenecía a una generación a la que se le solía achacar su pasividad. Primero se dedicó a montar fiestas. Pero, mientras sorbe un licor digestivo en una cafetería cercana a la casa de sus padres, en la que sigue viviendo a los 29, Alberto cuenta cómo en el momento en que uno comienza a ganar dinero ya es muy difícil volverse atrás. Que uno suele buscar más porque cree que puede obtener más. Concepto al que se denomina "expectativa". Mejoró su salario entrando a trabajar de dependiente en unos grandes almacenes. Luego quiso más. Un empleo mejor remunerado. En el que poner en práctica los conocimientos universitarios que iba adquiriendo. Coincidió con la época en que los desajustes monetarios del presente se agudizaron. Por eso Alberto encajó a la perfección con las expectativas de una compañía financiera. Sobraban clientes. Con salario fijo más variable, un buen mes sumaba 3.000 euros. Y sin acabar la carrera. El empleo, de nueve a nueve, le obligó a dejarla al margen. Nunca fue su intención. Se trataba de priorizar. De echar cálculos. De emanciparse. Él lo estaba logrando, a diferencia de la mayoría de sus compañeros de generación. A finales de 2007 decidió ir a por el coche. Poco después le tocó una casa en un sorteo de vivienda pública para cuya financiación habría de tirar de una ecuación de futuro. Pero sin ahogos. Aún vivía bajo el techo paterno. Un afortunado. Y, sin embargo, Alberto da otro trago al digestivo y asegura que a finales de 2007 comenzó a suceder algo extraño en la compañía. Los teléfonos dejaron de sonar. No entraron más hipotecas ni productos financieros. Él aguantó algo más en su puesto. En 2008, mientras uno de los semanarios económicos más prestigiosos publicaba un reportaje sobre España titulado con cierta gracia "La fiesta se ha acabado", la dirección de su empresa le hizo una oferta que claramente debía rechazar: nada de fijos, sólo un sueldo variable en función de los resultados.

63 Una trampa. Su sector se había transformado en un agujero negro. En una máquina precisa que escupía empleados a un ritmo sin precedentes. Una generación entera, la más joven, la nacida y acunada en democracia, acostumbrada a vivir razonablemente bien, casi siempre bajo el techo paterno, estaba a punto de ser vomitada por el mercado de trabajo. Una vez en la calle, a Alberto se le quedó la misma cara que al resto, y 18 meses de paro. Allí estaba. Tenía 27 años. Ni siquiera había llegado a tiempo de matricularse de nuevo en Empresariales. Son el rostro del esplendor perdido. Del frenazo en seco. Una generación noqueada que comenzó a trabajar con todo a favor después de la crisis de los noventa. Cabalgaron la ola más larga y próspera de la historia reciente. Crecieron en un entorno en el que había curro para todos. Precario, inestable, mileurista. Pero trabajo al fin y al cabo. Hasta que dejó de haberlo. Nueve de cada diez personas que han perdido el empleo desde el pinchazo de la burbuja tienen entre 16 y 34 años, según la Encuesta de Población Activa; 1,7 millones de jóvenes (en el sentido amplio del término) expulsados de la cadena productiva desde que se apagó la música de la discoteca española en otoño de 2007. La generación de sus padres y la de sus hermanos mayores, los últimos del baby boom, apenas han perdido 120.000 puestos en el mismo periodo, gracias, sobre todo, a que la mujer madura ha incrementado su ocupación a buen ritmo a pesar de la crisis. Una brecha generacional que nadie parece explicarse y nadie quiere comentar demasiado. No vaya a ser que despierte la bestia. Que comience a protestar. Que salga a la calle. Quizá fueron los contratos precarios, dicen unos. La flexibilidad sobrevenida que nos cogió con el pie cambiado. Otros dirán que fue culpa de la apatía generalizada. De unos ni-nis, perezosos desde la cuna, que necesitaron mano firme en su momento, y ya están perdidos para siempre. Los discursos se cruzan llenos de contradicciones. "Cada vez que hay una crisis social, se le mira al joven como si éste fuera el responsable de su situación. Como si no quisiera trabajar", dice Gabriel Alconchel, de 31 años, director del Instituto de la Juventud (Injuve). Lo único cierto es que se trata de un tajo que cruza fronteras. Dos de cada tres empleos perdidos en la zona euro corresponden a un menor de 35 años en suelo español. Uno de cada cinco era extranjero. A unos los despidieron. A la mayoría, simplemente dejaron de llamarlos. Valeriano Gómez lo ha vivido desde la barrera. Un espectador privilegiado de la devastación. Este economista jiennense de poco más de medio siglo sorbe un café a media mañana mientras articula su discurso sobre la dentellada generacional. Gómez fue secretario general de Empleo durante los dos primeros años del Gobierno de José Luis Rodríguez Zapatero. Cuando los engranajes aún no habían perdido aceite. Y apunta una lógica social y humana detrás del drama. Una regla de oro que "funciona" en tiempos de vacas flacas: "Cuando el mercado de trabajo va mal, el primero que se va es el más joven y el último en marcharse es el que tiene responsabilidades familiares. De esta forma, los efectos sociales no son tan perniciosos. Sería peor si afectara, por ejemplo, a los de 35 a 55 años". La pregunta que hacerse sería por qué los jóvenes no han adquirido responsabilidades. Valeriano Gómez aduce para explicar la criba que no pondría el énfasis en el tipo de contratos (temporales), sino en el sector (construcción). Pero añade, como receta típicamente española, la capacidad para responder a las crisis gracias a la fórmula contractual: "Cuando existe contratación temporal, se responde más rápido al ciclo". El trabajador fugaz como efecto de choque. Una varita mágica intensiva en gente joven. Antes de la crisis, uno de cada dos contratos firmados por los menores de 30 era temporal. La ratio, para los mayores, era de uno a cuatro. Llueve tímidamente sobre los adoquines de la Villa de Vallecas (Madrid) cuando aparece María Dolores Rentero vestida de andar por casa y sin paraguas, sólo cubierta por un forro polar. El encuentro, a primera hora de la tarde, es todo un acontecimiento, ahora que cada día se parece al anterior. "La soledad del paro resulta insoportable. Piensas demasiado. Te pasas

64 el día sin saber qué hacer", dice a sus 34 años. Ella procura mantener una rutina. Aunque haya días que no quiera ni salir de casa. Se levanta "a las ocho o las nueve". Mira el teléfono. Se mete en Internet mientras desayuna. A ver si el boca a boca ha dado resultado. Porque la oficina de empleo e Infojobs hace tiempo que entraron en coma. Luego hace la casa. O se va a la compra. "Esta semana he tenido que pedirle a mi padre 50 euros para el supermercado". Cuando vuelve, cuenta, no puede ni leer porque anda con ese nervio por dentro. Con ese poso que deja el desempleo en una persona activa. y con las manos curtidas. Su vida laboral comienza a los 18. Había optado por cursar una FP. Se sacó el primer año y se dejó de líos. Quiso currar para sentirse productiva. Para ganar dinero. Y comenzó fregando suelos. Hoy le faltan dedos para enumerar empleos: repostera a granel cocinando bollos y roscones de Reyes, conductora de un toro mecánico transportando ferralla para la obra, manipuladora de cintas de vídeo, ayudante de cocina en un restaurante en Faunia, pulidora de chapa y pintura en una fábrica de automóviles, cuidadora de caballos en un cuartel, animadora de niños en una asociación de su barrio, jardinera y sustituta, cubriendo bajas, en polideportivos municipales. Encasillar a esta mujer dentro de un sector económico sería imposible. La única constante en 16 años fue lo que no tuvo: un contrato indefinido: "No he tenido hijos porque no he tenido estabilidad. Siento que se me pasa el arroz. En todos los sentidos. Ya no tengo 25 años, y en algunas entrevistas siguen preguntándome: '¿Piensas tener hijos?". Va a ser que no. Por el momento. En 2009, María dejó de existir para su último empleador. Sin noticias desde entonces para esta mujer que sobrevive gracias a un marido con trabajo, los dos dentro de una casita hipotecada. "Lo peor de todo es el sentimiento de culpa que te come. Te sientes culpable por no estar haciendo nada. Culpable porque no aportas. Y entonces vuelves la vista atrás, a cuando eras más joven. Piensas que igual no tenías que haber?No sé. Te replanteas toda tu vida". Una fórmula sencilla, viéndolo a toro pasado y en mitad de una crisis económica, dice que a mayor nivel educativo, más empleo. Pero esto no siempre fue así. Mientras los ladrillos se iban amontonando en España, y con una industria y un sector servicios pletóricos, el nivel de abandono escolar se disparó. Un sinsentido con una lógica poderosa: había dinero, había trabajo, ¿para qué seguir estudiando? Entre 2000 y 2008 creció del 34% al 40% el número de personas de entre 20 y 24 años que dejó el instituto sin la Educación Secundaria Obligatoria, según la Encuesta Europea de Fuerza de Trabajo. Un dato del que tiraban, sobre todo, los hombres: en 2008 no llegaba al 53% el número de varones de esa edad con título de Secundaria. Por primera vez, una generación se preparaba menos que la anterior. Y sin embargo se batía el récord de afiliados a la Seguridad Social. El problema llegó después. Cuando España se apretó el cinturón y comenzó a sudar el exceso de grasa. Los primeros en caer fueron los menos formados. David, un veinteañero de Logroño, explica cómo, con el viento a favor, lograba reunir más de 2.000 euros al mes. A base de cubrir el suelo con cemento. Abandonó la enseñanza a los 16. Pero de solador le iba mejor que a cualquier universitario de su edad, para quienes el salario medio en 2008 era de 1.495 euros brutos mensuales cinco años después de haber acabado la carrera. Luego llegó el frenazo en seco. Los jefes de obra dejaron de llamar. Entonces fue la mujer la que marcó la diferencia. Un terremoto estadístico sin precedentes. A principios de 2009, la tasa de paro masculina superó a la femenina. Pero sólo entre los menores de 30. La construcción se iba a pique. La industria, también. El varón joven y de baja cualificación enfilaba el acantilado. "Estos chicos que no han estudiado la han cagado. Han cometido un error estratégico histórico", comenta Luis Garrido, director del departamento de estructura social de la UNED. Este antiguo asesor del ex ministro de Economía Pedro Solbes dedica su tiempo a cruzar datos de empleo y formación en busca de respuestas. Y tiene alguna. En el colectivo de 29 a 33 años, explica, las mujeres con estudios universitarios

65 ascienden al 36% de la población. Muy por encima de los hombres, que rondan el 23%. Hace 15 años que se igualó el nivel de estudios entre sexos. Desde entonces, ellas han estudiado más. Han dado ejemplo. Han abierto una brecha. La fábula de la hormiga y la cigarra, en pleno campus universitario. "Sólo que el hombre sería una cigarra rara", añade Luis Garrido. "Una cigarra que decidió trabajar. Porque, en el fondo, eso era ser menos hormiga. Con un empleo y en casa de los padres se vive como un duque". De los 1,7 millones de empleos perdidos entre los menores de 35, los hombres suman el 68%. Varón. De 25 a 29 años. Éste sería el retrato robot de la crisis. El grupo más golpeado, del que quizá la única lectura positiva sea el incremento del 37% de hombres dedicados a las "tareas del hogar", según el Instituto Nacional de Estadística. El sociólogo Enrique Gil Calvo le añade al cuadro matices demoledores: "Estamos hablando de tíos sin estudios, viviendo con sus papás, en los que ha calado la idea de la inutilidad. De que el esfuerzo no tiene recompensas. No han hecho el tránsito a la vida adulta. Ni han vivido la independencia que les corresponde entre los 20 y los 30 años. En parte porque las barreras de entrada eran demasiado grandes. Pero han preferido ganar dinero a través del empleo fácil. Y ahora se ven expulsados del mercado de trabajo. Las mujeres, en cambio, han buscado puestos más estables". El empleo público es un ejemplo. Al principio de la crisis, las menores de 35 sumaban 370.000 puestos, frente a los 343.000 de los varones. "La única luz al final del túnel", concede Gil Calvo, "es que muchos de los expulsados han retomado los estudios". Alberto Hernández, el chico de la compañía financiera, ha vuelto este curso a Empresariales. Se apuntó en la UNED, que en septiembre de 2009 registró un incremento de matrículas cercano al 40%. Cuando se le entrevistó para este reportaje combinaba exámenes y entrevistas de trabajo. "En todas partes piden el título de licenciado", dijo. "Siento que he estado perdiendo el tiempo mientras trabajaba". Pero los estudios y el sexo tampoco garantizan nada. Beatriz Rivero. Mujer, 27 años. El día que apareció por el INEM, la funcionaria no se lo creía. Una carrera, un máster, tres idiomas. Ella dice que aún no se siente parada. Que hasta ahora lo percibe como un tránsito entre un trabajo del que le acaban de despedir y otro que está aún por llegar, pero no llega. Que son cosas de un sector convulso como el suyo. El marketing, la publicidad. Siempre sujeto a las necesidades del cliente. Si éste invierte menos en campañas, las empresas adelgazan su plantilla. Por eso ella presintió que algo fallaba. Una semana antes de que la despidieran, cuenta, se sorprendió a sí misma consultando su vida laboral. A ver cuánto paro le salía. Y bingo. En la siguiente reunión de equipo, a finales de enero, su sexto sentido cobró forma y echaron a tres de golpe. Despido improcedente. "Lo lógico era que saliera yo porque era la que menos tiempo llevaba", dice esta canaria. La frase le sale como una coletilla. Como una providencia. Pero esto tampoco fue siempre así. Hasta 1984, las crisis de empleo se cebaron sobre todo con los mayores. Los jóvenes, mejor formados y mucho más baratos, los iban sustituyendo a un ritmo galopante. Por eso se introdujeron aquel año los contratos temporales, señala el catedrático de la UNED Luis Garrido. Un pacto tácito entre generaciones capaz de frenar la hemorragia. Ya en la crisis de los noventa dejó sentir sus efectos. Los jóvenes acumularon el 80% de los empleos destruidos. La tendencia se ha agravado en la recesión actual, llegando al 93%. Una bomba con efectos retardados que ha levantado un muro entre los que están dentro y los que están fuera. Una barrera en el tránsito hacia la vida adulta. El concepto joven estirado como un chicle. "La precariedad laboral, el acceso a la vivienda. Y ahora, la destrucción de empleo. Si no existe una movilización social es porque están las familias soportando", comenta Almudena Moreno, de 39 años, doctora en Sociología y autora del Informe Juventud 2008. Y apunta un dato para explicarlo: "Si todas las personas de entre 26 y 35 años se independizaran, la tasa de exclusión social se triplicaría, alcanzando el 57%". Pero aquí nadie protesta. El economista

66 Valeriano Gómez guarda en su ordenador una gráfica inquietante, que actualiza cada año. Una curva azul muestra la evolución del número de jornadas perdidas por huelgas desde 1979. La curva comienza en los 18 millones. Y la tendencia se aproxima inexorablemente a cero en nuestros días. Los pocos que se echan a la calle son mayores. Veteranos. Sindicados. Con derechos adquiridos. En defensa de un sistema de pensiones que no deja de ser una incógnita para las generaciones que vienen. El nivel de sindicación entre los jóvenes se encuentra por los suelos. Los menores de 35 años suponen el 24% de los afiliados a UGT, uno de los sindicatos mayoritarios, cuando representan el 35% de los trabajadores. Varios de los entrevistados para este reportaje comentaron: "Estamos como atontados. Perdiendo los derechos que ganaron nuestros padres". Sólo uno de los seis que aparecen en estas páginas pertenecía a un sindicato. José García, de 23 años, educador social en paro. Lo hizo por cuestión de principios. Pero comprende que sus compañeros de viaje se frenen. ¿Sirve de algo afiliarse o echarse a la calle cuando el contrato se renueva cada día? Y por 7,40 euros la hora. Un hombre llama y pide ayuda al otro lado del hilo telefónico. Su hija, dice, compró un cocodrilo y ahora anda suelto por la casa. "Un momento, por favor". Josefa García Garrido, con unos auriculares y un micrófono enganchados a la cabeza, teclea en el ordenador. Y conecta al cliente con una empresa cuidadora de animales. Caso resuelto. De teleoperadora no se gana demasiado. Al menos resulta entretenido. A Josefa, de 26 años, una huelga ni se le pasaba por la cabeza. La contrataban de tres en tres meses. O por semanas. Incluso por días. Según los picos de trabajo. Y un día de 2009 dejó de haberlos. Ella aprovecha ahora el tiempo para darle duro al inglés y al francés. Vive con sus padres y su hermano mayor. Cobra 420 euros de paro y sueña con que los idiomas le abran un hueco estable en la recepción de un hotel. "Mi idea es agotar el paro mientras estudio. Y luego, si acaso, buscar algo que me permita seguir con los idiomas". Con una FP de grado medio -corte y confección-, Josefa apenas trabajó tres meses de lo suyo en una tienda de trajes de novias. El resto se lo ha pasado de cara al cliente en grandes almacenes. Y luego, colgada del teléfono. Siempre en servicios. Dos de cada tres empleos destruidos entre las mujeres menores de 35 (550.000 en total) correspondían a este sector, en el que la temporalidad alcanza una de sus cotas más altas. "Cada generación ha tenido sus ventajas y sus inconvenientes", explica el ministro de Trabajo, Celestino Corbacho. La suya, dice a los 60 años, aspiraba a tener un trabajo para toda la vida y a jubilarse en la misma empresa, yendo del escalafón más bajo hacia puestos de cada vez mayor responsabilidad. La de ahora, en cambio, difícilmente aspira a perpetuarse. "Hay más movilidad, pero también más inestabilidad", explica a través del correo electrónico. "Los jóvenes acostumbran a trabajar con contratos temporales, que son los primeros que se rescinden a la hora de hacer ajustes", dice sobre la actual crisis de empleo. Un hecho que no se puede desligar de las decisiones individuales: "Hubo personas que abandonaron los estudios para ponerse a trabajar. Podían ganar dinero fácilmente, sin esperar a tener una mejor preparación. En esta crisis hemos comprobado cómo el empleo más frágil es el que requiere menos cualificación". Por eso, explica, las recetas del Gobierno apuntan en una dirección: educación, para avanzar hacia el cambio de modelo productivo. "Los trabajadores mejor formados y con mayor capacidad de adaptación tienen más fácil acceder al empleo y mantenerlo". Un poco por eso, Abdessamad Ghoual le vio las orejas al lobo y volvió a los libros. A sus 20 años, este hijo de inmigrantes marroquíes ya ha currado de camarero, de peón en la obra, en un taller de coches y de cantero. "Con un bloque de granito puedes tirarte tallando una semana", dice. Curtido en la filosofía del trabajo para salir adelante, para aportar en casa, Abdessamad no acabó la Secundaria. Se sacó un programa de garantía social. Le buscaron un hueco en la obra, de ocho a cuatro, para que pudiera llegar a los entrenamientos en

67 Valdebebas. Juega en la cantera del Real Madrid y dice que lo suyo, ahora que el empleo hay que buscarlo debajo de las piedras, es que le fuera bien con el fútbol. Pero, por si acaso, en 2008 se matriculó de nuevo en una escuela para adultos. Se sacó la ESO. Ahora anda a vueltas con el Bachillerato. Le dedica su tiempo por las tardes, "antes del entreno". Por la mañana se cruza la ciudad para asistir a una academia de policía. No quiere jugárselo todo a una carta. "Prefiero perder dos años estudiando y ganar un empleo para toda la vida. Con el que pueda mantener una familia". Ha llegado a la entrevista vestido de punta en blanco. Impecable. El pelo engominado. Con paso decidido. De pronto abre la carpeta que ha traído bajo el brazo. Muestra algunas fotocopias de un libro de texto. Los apuntes a bolígrafo con una letra comprimida. No, no es eso. Busca entre las pestañas de cartón y por fin lo encuentra. Un folio mecanografiado. Sin foto. Abdessamad alarga su currículo. Y dice: "Lo traje por si acaso. Igual sale algo. Nunca se sabe". http://www.elpais.com/articulo/portada/Generacion/noqueada/elpepueco/20100314elpepspor_ 9/Tes

La deuda autonómica se dispara a una velocidad inédita desde 1995 Los números rojos de las comunidades crecen un 25%, hasta los 86.280 millones LUIS DONCEL - Madrid - 13/03/2010 Ninguna Administración se libra de la factura que hay que pagar en tiempos de crisis. El Banco de España puso ayer de manifiesto que las comunidades no son una excepción a esta regla. La deuda de las autonomías creció el año pasado como no lo había hecho desde 1995, cuando la economía sufrió una fuerte embestida, pero no tanto como la actual. Ninguna Administración se libra de la factura que hay que pagar en tiempos de crisis. El Banco de España puso ayer de manifiesto que las comunidades no son una excepción a esta regla. La deuda de las autonomías creció el año pasado como no lo había hecho desde 1995, cuando la economía sufrió una fuerte embestida, pero no tanto como la actual. Las 17 comunidades debían a finales del año pasado 86.280 millones de euros, un 25,8% más que 12 meses atrás. Aunque el ritmo de crecimiento se relajó durante el último trimestre del año pasado, es preocupante la carrera alcista de los números rojos autonómicos. Porque tras una década en la que las tasas de variación se han quedado muy por debajo del 10%, se han disparado desde mediados de 2008. Esta subida tocó techo en el tercer trimestre del año pasado, con una variación interanual del 33%. Pero las regiones no son las que más han incrementado sus necesidades de financiación. La deuda del Gobierno central subió en el último trimestre del año pasado un 32%. Los ayuntamientos -con menos alternativas a la hora de buscar fuentes externas para captar capital- se tuvieron que conformar con una subida del 9%. "El principal foco de preocupación de la estabilidad presupuestaria del Estado está en las comunidades y en los ayuntamientos. El Gobierno central ha hecho sus deberes con su plan de recorte de gastos y aumento de ingresos, pero nadie conoce la hoja de ruta de las otras administraciones", señala el economista jefe de Intermoney, José Carlos Díez. Díez reclama, para empezar, una comunicación más eficiente sobre la evolución de la deuda por parte de las entidades territoriales. "Cada mes veo a Ocaña [Carlos, secretario de Estado de Hacienda] dando los datos del Gobierno central. Pero no hay datos mes a mes de cómo va el presupuesto previsto de comunidades y ayuntamientos. Estoy a favor de descentralizar el gasto, pero se tiene que hacer de una forma eficiente y sin poner en peligro la estabilidad presupuestaria", concluye. "El volumen de deuda puede ser preocupante. En lo que va de año, las comunidades han emitido deuda por valor de más de 5.000 millones de euros", añade Johanna Prieto, responsable de asesoramiento financiero a comunidades autónomas de AFI. No hay ni una sola autonomía que se librara el año pasado del repunte de la deuda, pero sigue habiendo grandes diferencias entre unas y otras. La media de todas se sitúa en un 8,2% del producto interior bruto (PIB). Pero la Comunidad Valenciana es, un año más, la campeona del endeudamiento al superar el 14%. El sindicato CC OO acusó ayer a la Generalitat de que ese volumen de deuda "no ha supuesto una mejora" de los servicios públicos, sino que se han destinado "ingentes cantidades de dinero a proyectos faraónicos y acontecimientos sin utilidad

69 pública", informa Efe. El Gobierno valenciano tiene una visión diametralmente opuesta. Considera los datos del Banco de España "muy positivos", por haber sido la segunda comunidad donde menos ha subido la deuda. Tras Valencia, vienen Baleares y las dos Castillas, todas ellas con un porcentaje de endeudamiento sobre PIB por encima del 11%. El País Vasco marca récords por arriba y por abajo. Es la comunidad donde más creció la deuda, un 182%, pero al mismo tiempo se mantiene como la que tiene un peso inferior en la economía, de tan sólo el 3,8%. En Murcia y Castilla-La Mancha también ha aumentado muy por encima de la media española. A la deuda de las autonomías -en la que se incluye la Administración general, las universidades y los organismos y empresas administrativos- hay que sumar 15.416 millones de euros del endeudamiento de los organismos autónomos no administrativos, entes y empresas dependientes de las comunidades clasificadas como administraciones públicas. La deuda de las corporaciones locales -ayuntamientos, diputaciones provinciales, consejos y cabildos insulares- subió el año pasado un 9%, hasta los 34.594 millones de euros. A este dinero hay que añadir otros 7.855 millones de sus organismos dependientes. Los principales responsables de los números rojos de las corporaciones locales son los ayuntamientos, que suman 28.770 millones, un 10% más. Pero en este capítulo, la parte del león se la lleva la capital. Madrid, con 6.762 millones, no sólo supera con mucho al resto de ciudades de España, sino que sólo hay cuatro comunidades -Cataluña, la valenciana, Madrid y Andalucía- que deban más dinero. La comparación entre las dos ciudades más grandes es aún más llamativa, ya que Madrid debe nueve veces más que Barcelona, cuya deuda se situó en 725 millones. http://www.elpais.com/articulo/economia/deuda/autonomica/dispara/velocidad/inedita/1995/e lpepieco/20100313elpepieco_12/Tes?print=1

González pide al Gobierno que cuide la credibilidad de España

El presidente del BBVA no explica en la junta de accionistas por qué prolonga su mandato tres años más

"Todos, empezando por mí, tenemos que estar orgullosos de lo que ganamos"

El banco reconoce que ha puesto en venta la sede operativa de Bilbao

Í. DE BARRÓN / A. URIONA - Madrid / Bilbao - 13/03/2010 En teoría, la junta del BBVA era un trago difícil para Francisco González, presidente del banco. Tenía que explicar por qué los resultados del BBVA han caído un 16%; el dividendo en metálico ha bajado un 18%; las razones por las que el presidente ha prolongado su mandato tres años más (segundo punto del orden del día), con posibilidades de que sean cinco; la marcha del número dos, José Ignacio Goirigolzarri; la asignación de su jubilación por valor de 79,7 millones, y las perspectivas ante la crisis. En teoría, la junta del BBVA era un trago difícil para Francisco González, presidente del banco. Tenía que explicar por qué los resultados del BBVA han caído un 16%; el dividendo en metálico ha bajado un 18%; las razones por las que el presidente ha prolongado su mandato tres años más (segundo punto del orden del día), con posibilidades de que sean cinco; la marcha del número dos, José Ignacio Goirigolzarri; la asignación de su jubilación por valor de 79,7 millones, y las perspectivas ante la crisis. La realidad fue muy distinta. En las más de tres horas que duró la junta, González desarrolló con detalle la situación macroeconómica y la del banco, pero ni una palabra de las demás cuestiones. Sólo a preguntas de los accionistas tocó, por encima, algunos de estos espinosos asuntos monetarios. Otros, como el cambio de gestor, ni mención. El presidente del segundo banco comentó que España tendrá una recuperación más lenta que su entorno y mencionó las debilidades. "España tiene un endeudamiento exterior que en 2009 superó el 160% del PIB. Además, la salida de la crisis se ve dificultada por un déficit público insostenible, un crecimiento explosivo de la deuda y el deterioro de parte del sistema financiero". González pidió que se aborden estos problemas "con urgencia. España no puede perder la credibilidad de los mercados que nos financian". Cree que se necesita "un proceso creíble y sostenido de saneamiento de las finanzas públicas". A continuación, abordó el problema del crédito. González piensa que no crecerá hasta que no se sanee el sistema financiero, pero destacó que el BBVA está fuerte. "Tenemos capital y liquidez para dar crédito a los 47 millones de clientes, pero no hay demanda. Ésa es la realidad. No son ciertas esas informaciones que dicen que se ha cortado el grifo del crédito, al menos para el BBVA". La entidad asegura que atiende el 75% de las demandas de préstamos. Al igual que Ángel Cano, nuevo consejero delegado, González destacó que el banco ha incrementado las provisiones para fortalecer la entidad. "No hemos tenido ningún apoyo

71 público. Ahora estamos en las mejores condiciones para afrontar 2010 y los años siguientes con la máxima ambición", enfatizó. Hasta aquí el guión escrito. Llegado el turno de los accionistas, salieron a la palestra los otros temas arrinconados, pero presentes en el público que llenaba el Palacio de Euskalduna de Bilbao. La primera accionista que tomó la palabra cuestionó que González se mereciera una pensión de casi 80 millones, "y encima pone en venta la sede de Gran Vía en Bilbao". Otros accionistas, representantes sindicales, compararon su pensión con la media de un empleado del BBVA: 12.000 euros. "¿Sabe cuántas veces cobra usted esta cantidad? No lo sé, pero es una obscenidad", dijo Francisco Arrese, de ELA. "Hace 10 años éramos 30.000 empleados y 100 directivos. Ahora somos 26.000 trabajadores y 2.200 ejecutivos. Éste es el verdadero problema de costes", insistió otro. "Usted cobra 5,3 millones y el presidente del BCE, Jean Claude Trichet, 360.000 euros. Es una desproporción enorme", apuntó Arrese. También se criticó la continuidad como presidente hasta los 70 años "mientras prejubila a otros a los 50 años. Increíble", dijo Teresa Richard, una accionista. En el turno de respuestas, González admitió que el banco está vendiendo la sede en Bilbao, un hecho que hasta ahora siempre había soslayado. "Qué vamos a hacer, no la vamos a regalar", dijo. González se mostró molesto con las quejas sindicales sobre los salarios. "No es verdad que los empleados hayan perdido poder adquisitivo", enfatizó. Apuntó que los trabajadores tienen la "tranquilidad de cobrar la nómina a final de mes". Y a continuación soltó la perla: "Todos en este banco, empezando por mí, tenemos que estar orgullosos de lo que ganamos, cada uno en su nivel", dijo. González fue reelegido por el 93,5% de los votos (hubo un quórum del 59,31% del capital). En 2005 logró el 99% de apoyos. http://www.elpais.com/articulo/economia/Gonzalez/pide/Gobierno/cuide/credibilidad/Es pana/elpepueco/20100313elpepieco_8/Tes

Alemania dice que los Estados que no puedan ajustar sus cuentas deberían salir del euro Bruselas exigirá más esfuerzos a los países porque la recuperación no es tan fuerte ANDREU MISSÉ - Bruselas - 13/03/2010 "Si un miembro de la zona euro no es capaz finalmente de consolidar su presupuesto o restaurar su competitividad, este país debería, en última instancia, abandonar la Unión Monetaria aunque podría seguir como miembro de la Unión Europea". El ministro alemán de Finanzas, Wolfgang Schäuble, lanzaba así en un artículo en Financial Times, un ultimátum para restaurar cuanto antes la confianza en el euro. Se acabaron los paños calientes. Berlín no está dispuesto a que se juegue con la fortaleza del euro. En opinión del ministro, "para mantener la confianza, esta crisis debe superarse rápidamente". Y por si a alguien se le olvidaba "el euro es igual de estable que el marco alemán, hay poca inflación y los costes financieros son generalmente bajos". Para Alemania el

72 referente es siempre la estabilidad del marco lograda tras la II Guerra Mundial. Con ella, la primera economía europea conjuró el fantasma de la hiperinflación que condujo a la crisis de 1923, algo que ha marcado la memoria colectiva alemana. Schäuble propone duras medidas concretas para restaurar la confianza con la moneda única. "A partir de ahora", señala, "los países que mantengan una situación de déficit excesivo no recibirán fondos de cohesión si no hacen el suficiente ahorro". Las contundentes advertencias alemanas se producen unos días antes de la reunión del eurogrupo y del consejo Ecofín -el grupo de ministros de finanzas de la UE- que deberá examinar la situación de Grecia. También el próximo miércoles Bruselas presentará sus primeras recomendaciones a los programas de estabilidad de varios países, entre los que se encuentran España, Alemania, Austria, Bélgica, Francia, Irlanda y Holanda, ente otros. Un portavoz de la Comisión ha señalado que se pedirá en todos los casos un mayor esfuerzo para reducir el déficit del que han previsto en los respectivos planes presentados a Bruselas. "La razón", señala el portavoz, "es que ahora estamos viendo que la recuperación está siendo menos sólida de lo que se creía cuando se elaboraron los planes de estabilidad". En sus recomendaciones, la Comisión pedirá a los respectivos países "una mayor concreción a las medidas propuestas" a partir del próximo año. En el caso de España, es probable que Bruselas exija un compromiso más definido en la reforma de pensiones. http://www.elpais.com/articulo/economia/Alemania/dice/Estados/puedan/ajustar/cuentas /deberian/salir/euro/elpepueco/20100313elpepueco_2/Tes

Los países del euro ultiman un plan para dar soporte financiero a Grecia Medidas como una emisión de bonos europeos, préstamos directos o avales a la deuda del país heleno pueden plantear problemas técnicos y normativos Alemania dice que los Estados que no puedan ajustar sus cuentas deberían salir del euro Atenas reduce el déficit en los dos primeros meses del año Alemania dice que los Estados que no puedan ajustar sus cuentas deberían salir del euro Lo que Grecia ha enseñado a Europa Trichet cree convincente el plan de ajuste de Papandreu ¿Cuánto vale una isla griega? ANDREU MISSÉ - Bruselas - 13/03/2010 Los países de la zona euro han mantenido intensas reuniones con representantes de la Comisión Europea para concretar un plan de ayudas a Grecia y poner fin a la actual situación de incertidumbre. Una propuesta con una amplia gama de soluciones y mecanismos será presentada por la Comisión Europea en la reunión del eurogrupo del próximo 15 de marzo. Fuentes comunitarias reconocieron que desde hace semanas se están estudiando distintos mecanismos que puedan ser compatibles con el Tratado de Lisboa. Entre las medidas que se barajan figuran un préstamo otorgado por los países de la zona euro, similar a los que la UE ha concedido a los países que no tienen la moneda única; una segunda

73 opción sería una emisión de bonos de la UE garantizada por los países de la zona euro. Una tercera posibilidad sería la de avalar las emisiones de la deuda griega por parte de los miembros del eurogrupo. Fuentes comunitarias insistieron en que todas las iniciativas presentan serios problemas técnicos y de compatibilidad con el Tratado, lo que dificulta una solución rápida. Fuentes consultadas indican que el volumen de recursos que se manejan podría ascender a 25.000 millones de euros. Grecia tiene todavía necesidad de emitir en torno a unos 50.000 millones de euros este año tanto para renovar las emisiones que vencen durante este ejercicio, así como por las nuevas necesidades de financiación. En todo caso, el objetivo de estos mecanismos no es conceder dinero a Grecia sino facilitar a este país la financiación de su deuda a un precio más barato, que el que tiene que pagar por la actuación de los especuladores. Para ello se utilizaría la máxima garantía de la Unión o la de los países de la zona euro, según fuentes comunitarias. El presidente de la Comisión Europea, José Manuel Barroso, confirmó el pasado martes que la Comisión estaba trabajando "activamente con los miembros de la zona euro para diseñar un mecanismo que Grecia podría utilizar en caso de necesidad". Sin embargo, hasta el momento el primer ministro griego, Yorgos Papandreu, no ha solicitado públicamente ayuda financiera alguna. Barroso señaló que tal mecanismo "estaría en conformidad con el actual Tratado de Lisboa, y en particular con la cláusula de rescate e incluiría condiciones muy severas". Las cláusulas de no rescate impiden a los países de la zona euro asumir la deuda de otros países del grupo. La primera medida, la de los llamados préstamos back to back que la UE ha utilizado para rescatar a Letonia, Hungría y Rumania, fue una de las primeras medidas que se consideraron para Grecia. En estos tres casos, la Comisión, amparándose en la calificación AAA de la UE, obtiene financiación del mercado de capitales a precios más baratos y transfiere los fondos a los Estados necesitados. Los expertos encuentran dificultades en la aplicación de esta medida cuando la emisión no es de los Veintisiete, sino de 15 países. La emisión de eurobonos requiere un mecanismo muy complejo técnicamente y los avales presentan muchos problemas con el Tratado, por su proximidad con la prohibición del rescate, según fuentes jurídicas. http://www.elpais.com/articulo/economia/paises/euro/ultiman/plan/dar/soporte/financier o/Grecia/elpepueco/20100313elpepueco_1/Tes

ANDREU MISSÉ - Bruselas - 13/03/2010 Los países del euro ultiman un plan para dar soporte financiero a Grecia Medidas como una emisión de bonos europeos, préstamos directos o avales a la deuda del país heleno pueden plantear problemas técnicos y normativos Los países de la zona euro han mantenido intensas reuniones con representantes de la Comisión Europea para concretar un plan de ayudas a Grecia y poner fin a la actual situación de incertidumbre. Una propuesta con una amplia gama de soluciones y mecanismos será presentada por la Comisión Europea en la reunión del eurogrupo del próximo 15 de marzo. Fuentes comunitarias reconocieron que desde hace semanas se están estudiando distintos mecanismos que puedan ser compatibles con el Tratado de Lisboa.

74 Entre las medidas que se barajan figuran un préstamo otorgado por los países de la zona euro, similar a los que la UE ha concedido a los países que no tienen la moneda única; una segunda opción sería una emisión de bonos de la UE garantizada por los países de la zona euro. Una tercera posibilidad sería la de avalar las emisiones de la deuda griega por parte de los miembros del eurogrupo. Fuentes comunitarias insistieron en que todas las iniciativas presentan serios problemas técnicos y de compatibilidad con el Tratado, lo que dificulta una solución rápida. Fuentes consultadas indican que el volumen de recursos que se manejan podría ascender a 25.000 millones de euros. Grecia tiene todavía necesidad de emitir en torno a unos 50.000 millones de euros este año tanto para renovar las emisiones que vencen durante este ejercicio, así como por las nuevas necesidades de financiación. En todo caso, el objetivo de estos mecanismos no es conceder dinero a Grecia sino facilitar a este país la financiación de su deuda a un precio más barato, que el que tiene que pagar por la actuación de los especuladores. Para ello se utilizaría la máxima garantía de la Unión o la de los países de la zona euro, según fuentes comunitarias. El presidente de la Comisión Europea, José Manuel Barroso, confirmó el pasado martes que la Comisión estaba trabajando "activamente con los miembros de la zona euro para diseñar un mecanismo que Grecia podría utilizar en caso de necesidad". Sin embargo, hasta el momento el primer ministro griego, Yorgos Papandreu, no ha solicitado públicamente ayuda financiera alguna.Barroso señaló que tal mecanismo "estaría en conformidad con el actual Tratado de Lisboa, y en particular con la cláusula de rescate e incluiría condiciones muy severas". Las cláusulas de no rescate impiden a los países de la zona euro asumir la deuda de otros países del grupo. La primera medida, la de los llamados préstamos back to back que la UE ha utilizado para rescatar a Letonia, Hungría y Rumania, fue una de las primeras medidas que se consideraron para Grecia. En estos tres casos, la Comisión, amparándose en la calificación AAA de la UE, obtiene financiación del mercado de capitales a precios más baratos y transfiere los fondos a los Estados necesitados. Los expertos encuentran dificultades en la aplicación de esta medida cuando la emisión no es de los Veintisiete, sino de 15 países. La emisión de eurobonos requiere un mecanismo muy complejo técnicamente y los avales presentan muchos problemas con el Tratado, por su proximidad con la prohibición del rescate, según fuentes jurídicas. http://www.elpais.com/articulo/economia/paises/euro/ultiman/plan/dar/soporte/financiero/Grecia/elpepueco/201 00313elpepueco_1/Tes

Corbacho llama "radical" a la CEOE por proponer bajadas de sueldos para frenar el paro Según el ministro han de tomarse otras "medidas de contención" EFE - Barcelona - 13/03/2010 El ministro de Trabajo e Inmigración, Celestino Corbacho, ha calificado hoy de "radical" la propuesta de la CEOE de recortar los sueldos para reducir el paro. En la inauguración de la asamblea anual del PSC del Baix Llobregat, que se ha celebrado en el Palau Falguera de Sant Feliu de Llobregat, Corbacho ha pedido "contención" para salir de crisis, frente a las "propuestas radicales" y "extremas". El ministro de Trabajo ha criticado las tesis del presidente de la CEOE, José Luis Feito, que cree que cuanto más caigan los salarios mayores son las posibilidades de aumentar el empleo. "Este no es el camino. El camino adecuado es el que emprendieron patronal y sindicatos con el acuerdo alcanzado recientemente para los próximos tres años", ha dicho Corbacho, que ha recordado que "este acuerdo garantiza que los sueldos no perderán poder adquisitivo y que determina un sacrificio durante el ejercicio 2010". "El camino debe ir por la vía de la contención y no de las recetas radicales que crean incertidumbre", ha añadido el ministro de Trabajo. Corbacho ha asegurado que la salida de la crisis está cerca y que se observan síntomas de una recuperación "constante y tímida", como demuestra el hecho de que "el consumo eléctrico haya subido, las exportaciones vayan mejor y la confianza de los consumidores haya mejorado http://www.elpais.com/articulo/economia/Corbacho/llama/radical/CEOE/proponer/bajadas/sueldos/frenar/paro/el pepuesp/20100313elpepueco_3/Tes

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La CEOE pide menos salarios "por persona y hora" para frenar el paro Feito cree "indispensable" que los costes salariales en España estén por debajo de sus competidores AGENCIAS - Madrid - 12/03/2010 El presidente de la Comisión de Economía de la patronal CEOE, José Luis Feito, ha afirmado que "cuanto más caigan los salarios por persona ocupada y hora trabajada, mayores serán las posibilidades de aumentar el empleo e impulsar la actividad productiva". Feito sostiene esta idea en un artículo titulado La crisis, los costes salariales y el empleo, que ha sido publicado en la revista de la Cámara de Comercio de Madrid. Feito insiste en que es necesaria una contracción salarial en España para reavivar la competitividad y la recuperación económica. A su juicio, resulta "indispensable" que los costes salariales nominales por unidad de producto crezcan menos que los de los competidores de España. El dirigente de la patronal también propone que la productividad española crezca por encima de la de sus competidores. Pero, precisa Feito, a corto plazo y estando en recesión, la única vía para que aumente la productividad es que caiga el empleo más de lo que cae el PIB. El responsable económico de la CEOE ha dicho que las subidas reales de los costes salariales en 2008 y 2009 (con un 2,3% y un 4%, respectivamente, frente al 0,1% y el 1,1% de la media europea) "han exacerbado" la destrucción de empleo durante la crisis. "En una crisis económica, cuanto más rígidos a la baja sean los salarios reales, menores serán las posibilidades de crecimiento a medio plazo de estos salarios", ha advertido Feito. UGT ve "obscenas" las declaraciones de Feito El secretario de Acción Sindical de UGT, Toni Ferrer, cree que empieza a ser "obsceno" que el presidente de la Comisión de Economía de la CEOE, José Luis Feito, plantee como única salida a la recesión recortar salarios. La realidad, ha dicho Ferrer, es que la causa hay que buscarla en el sector financiero. El sindicalista considera que Feito tiene una visión "pasiva" de cómo mejorar la competitividad de las empresas pues, al no poder devaluarse la moneda, lo que propone, en suma, es una "devaluación salarial". Ferrer ve "indignante" que el presidente de la Comisión de Economía de la CEOE salga con éstas cuando hace poco más de un mes su organización firmó con los sindicatos el acuerdo de negociación colectiva. Tal acuerdo apuesta por la recuperación de la economía y del empleo a través del impulso al consumo y a la inversión, siendo una parte fundamental para ello el crecimiento moderado de los salarios.Una caída de éstos, asegura el de UGT, equivaldría a subir los tipos de interés, provocando a su vez una depresión del consumo. http://www.elpais.com/articulo/economia/CEOE/pide/salarios/persona/hora/frenar/ paro/elpepueco/20100312elpepueco_11/Tes

TRIBUNA: WILLIAM CHISLETT Se necesita una economía exportadora Terminado el ladrillo, el crecimiento de la economía española sólo puede venir de la demanda externa. Pero España es el menos exportador de los grandes países europeos y no se ven planes para cambiar esto WILLIAM CHISLETT 13/03/2010 España se encuentra en una encrucijada de su desarrollo económico, ya no puede seguir por el mismo camino. El derrumbe del sector inmobiliario ha puesto brutalmente de manifiesto la cortedad de miras de un modelo excesivamente basado en la construcción. Ahora es más urgente que nunca elegir entre una economía que continúe basándose en el trabajo físico (el uso intensivo de la mano de obra no cualificada) o en el mental (más apoyada en el conocimiento y más internacionalizada). A medio plazo, la primera creará más empleo, pero, como ha demostrado la recesión española con más claridad que la de ningún otro país de la UE, no es ésta una solución duradera. El plan anticrisis del Gobierno, que prima la construcción con rebajas fiscales a la rehabilitación de viviendas, no apunta al cambio del modelo productivo que España necesita. Está empíricamente demostrado que las empresas con más presencia internacional (es decir, las que exportan o adquieren compañías en el exterior) crean más empleo estable y de mayor calidad en sus países de origen que las que operan únicamente en su mercado interno. En general, dichas empresas son de mayor tamaño para tener un mayor potencial, y, con el fin de sobrevivir, han de ser más productivas y competitivas. Con todo, el tamaño no es ni el primer ni el único requisito para introducirse con éxito en los mercados internacionales. Muchas empresas pequeñas han conseguido labrarse un espacio propio partiendo de su tecnología o de un buen modelo empresarial. Lo que hay que saber es si España es capaz de crear una economía más internacionalizada. Observemos los datos. Entre 1988 y 2009, la aportación de la demanda externa -no de la interna-, al crecimiento del PIB únicamente ha sido positiva en seis años (dos de ellos durante una recesión, 1993 y el pasado año, cuando las empresas, mimadas por el auge del mercado interno, se afanaron por vender más en el exterior). Las importaciones se vieron arrastradas y, unidas al escaso nivel de las exportaciones, hicieron que el déficit comercial llegara al 7,9% del PIB en 2008 y el déficit por cuenta corriente, al 9,5%. Dentro de las cinco economías principales de la UE, las exportaciones de España son las de menor tamaño en relación con el PIB (26,5% en 2008) y, en términos per cápita, también son de las más escasas de las naciones desarrolladas: 5.355 dólares (3.917 euros) por persona en 2007, frente a los 34.453 dólares (25.200 euros) de Holanda, los 16.175 (11.831) de Alemania y los 7.717 (5.644) de Reino Unido, según los últimos datos comparados del Banco Mundial. Por otra parte, las importaciones de España (el 32,4% del PIB) son las segundas más cuantiosas, después de las alemanas. En 2009, la recesión redujo considerablemente el déficit comercial, pero en gran medida esto se debió al desplome de las importaciones. En términos generales, cuanto más elevada es la aportación de la demanda externa, más éxito tiene la economía de un país. ¿De dónde va a venir el futuro crecimiento de la economía española, y por ende la creación de empleo, si no de la demanda externa? La Ley de Economía Sostenible del Gobierno constituye un intento insuficiente de crear una estructura más productiva y más amparada en la demanda externa. Ni siquiera acomete la ardua tarea de mejorar el sistema educativo, cuyo escandaloso deterioro ha permitido la mediocre clase política actual. Aquí radica la piedra angular de una economía más basada en el conocimiento que en el ladrillo y el mortero, y, por tanto, más capaz de internacionalizarse y de generar un mayor valor añadido.

78 Cuando casi uno de cada tres individuos de entre 18 y 24 años tienen como máximo la educación obligatoria y no siguen en formación; con malos resultados de lectura, matemáticas y conocimiento científico en los informes PISA; con ninguna universidad situada entre las 150 mejores del mundo y un gasto en I+D muy por debajo de la media de los 27 miembros de la UE, para crear las condiciones necesarias para impulsar las exportaciones es preciso realizar un esfuerzo hercúleo en la educación, que ni siquiera se ha iniciado. Será necesaria una década para incrementar realmente el nivel educativo. No resulta, pues, sorprendente que los productos españoles de alta tecnología sólo representen el 5% de las exportaciones manufactureras, situándose casi en el nivel más bajo de la UE. Sí lo es, en cambio, que esas deficiencias no hayan impedido la aparición de un núcleo duro de multinacionales. El stock de inversión directa española en el extranjero representaba el 37,5% del PIB a finales de 2008. Es decir, se habían multiplicado por 12 desde 1990, siendo las más elevadas las de las grandes economías de la UE. Sin su creciente y sólido negocio internacional, los grandes bancos y empresas españoles hubieran generado muchos menos beneficios el año pasado. Gracias a ellas, el Ibex 35 subió casi un 30% en 2009 (hasta ocho puntos más que los índices de otros mercados europeos), aunque este indicador no es representativo ni de la situación de todas las empresas registradas ni de la del contexto económico, en general adverso, como se ha visto este año con la brusca caída del Ibex. Siete proveedores de infraestructuras españoles se encuentran entre las 10 principales empresas del sector del transporte en el mundo. Durante 2009, sus negocios en el extranjero les permitieron compensar, en mayor o menor medida, el deterioro de su mercado interno. Las empresas, y no sólo las más grandes, tienen un margen considerable de expansión en el exterior, sobre todo en Asia, que apenas han tocado. Estrechamente relacionadas con una mayor internacionalización de la economía están la marca España y la imagen del país y de sus marcas en el exterior. Cuanto más conocida sea una marca y más positiva la imagen del país, más posibilidades habrá de que los consumidores adquieran los productos y servicios de esa empresa. Un reciente y exhaustivo análisis comparado realizado por Young & Rubicam (R&Y) demuestra que España todavía se sigue considerando, en mayor o menor medida, un país de fiestas y siesta, y que sus productos y servicios, con algunas notables excepciones, suelen relacionarse con una imagen de escasa calidad y de niveles de innovación, liderazgo y dinamismo escasos. Según R&Y, el desafío radica en alcanzar el equilibrio adecuado entre la pasión y la sociabilidad, principales elementos del ADN del país, y la alta calidad y la seriedad. En este sentido, ayudaría que España dispusiera de más diplomáticos para fomentar los intereses del país (Reino Unido tiene 4.000 y España, unos 1.000; es decir, proporcionalmente su dotación es mucho menor, ya que la población española representa el 75% de la británica, y su PIB se sitúa en torno a tres tercios del de ese país). Otro paso positivo sería constituir la Comisión de Diplomacia Pública que, anunciada por José Luis Rodríguez Zapatero en julio de 2008, no ha logrado despegar aún, en parte debido a restricciones presupuestarias. En este contexto, el esperpento de propuesta de la presidenta de la Comunidad de Madrid sobre el "patrimonio cultural" de las corridas de toros nada ayuda -todo lo contrario- a mejorar la imagen de España en el exterior. España ha avanzado mucho en los últimos 35 años, pero no debería resignarse a creer que no puede ir más allá. Quedarse parado no es una opción. Traducción de Jesús Cuéllar Menezo. http://www.elpais.com/articulo/opinion/necesita/economia/exportadora/elpepuopi/20100313elpepiopi_ 12/Tes

ENTREVISTA: ALMUERZO CON... BLANCA LLEÓ "Reciclar espacios y ciudades es el lado positivo de la crisis" M. JOSÉ DÍAZ DE TUESTA 13/03/2010 ¿Un restaurante castizo y japonés? ¿Y eso cómo se come? Pues le acaban de dar una estrella Michelin. Lo japonés, ya se verá. Lo castizo está claro: de postre, chocolate con churros. La arquitecta Blanca Lleó (Madrid, 1958) arranca la conversación aludiendo a la "perplejidad" que sintió Soledad Puértolas cuando recientemente ingresó en la Academia Española (RAE) porque fue más noticia que una mujer accediera a ese reducto aún tan masculino que al hecho en sí. ¿Un restaurante castizo y japonés? ¿Y eso cómo se come? Pues le acaban de dar una estrella Michelin. Lo japonés, ya se verá. Lo castizo está claro: de postre, chocolate con churros. La arquitecta Blanca Lleó (Madrid, 1958) arranca la conversación aludiendo a la "perplejidad" que sintió Soledad Puértolas cuando recientemente ingresó en la Academia Española (RAE) porque fue más noticia que una mujer accediera a ese reducto aún tan masculino que al hecho en sí. Lleó es profesora titular en la Escuela de Arquitectura de Madrid de la asignatura de Proyectos, que junto con Urbanismo son los huesos de la carrera. Titulares de estas materias existen muy pocas en España, pero es que catedrática no hay ninguna. Por eso compañeros y ex maestros la han animado a que se presente a la cátedra. "Me cuentan que en Pediatría tampoco existen catedráticas y, peor aún, ni en Obstetricia y Ginecología; esto sí que deja perpleja y es un derroche de energía insostenible. En las aulas la mitad del alumnado son mujeres y ese número no se refleja en las categorías superiores. Catedráticas en todas las carreras sólo son el 14% y en Arquitectura, el 7%". Acabó la carrera con 24 años y llegó a la docencia de la mano de Sáenz de Oiza ("fui su discípula y me respaldó mucho") y Moneo. Pero ante su nueva odisea siente cierto miedo escénico. ¿A qué? "A la inercia que nos rodea, a meterme en un territorio que no es nuestro... En realidad no es ningún planazo y me gustaría que otras también se animaran a poner en valor su talento, no quiero ser una pieza rara y me gusta pensar que no lo hago en solitario". Llega el menú, elegido por Ricardo Sanz, el chef. La invitada y amiga del cocinero sólo le pide que no haya excesos. Los camarones y las ortiguillas (sesos de mar) parecen recién llegados de Cádiz, y en tempura resultan una rareza exquisita. Qué decir de un langostino relleno de huevo con codorniz, "una obra de arte", decide la arquitecta. La autora de la Torre Acciona bioclimática, en Barcelona, tiene dos grandes preocupaciones. Una, la comunicación (o incomunicación) en las grandes ciudades, que expresó en su famoso edificio Mirador de viviendas sociales en Sanchinarro (Madrid) diseñado junto con MVRDV para que sus habitantes se encontraran. "La ciudad es el gran invento porque es donde se producen las relaciones más intensas. En cambio, las nuevas ciudades de periferia son guetos, islas que no están pensadas para la gente, donde apenas se ve, inhumanas. Pero el urbanismo exigía esos volúmenes macizos, introvertidos, una aberración". La otra obsesión de Lleó es que el alquiler sea el centro de la política de vivienda. Ha firmado unas viviendas sociales de alquiler para jóvenes en la Zona Franca de Barcelona. "En EE UU y Alemania lo tienen clarísimo, una persona ha de coger las riendas de su vida y asumir sus responsabilidades a partir de los 18 años, lo contrario no lo permite ni la sociedad, ni los padres, ni uno mismo". En estos tiempos de crisis, apuesta por el reciclaje. "Es una actitud contemporánea: no crear nuevos edificios, sino aprovechar los existentes. Reciclar espacios y ciudades, sacar más partido a lo que se tiene es el lado positivo de la crisis". http://www.elpais.com/articulo/ultima/Reciclar/espacios/ciudades/lado/positivo/crisis/elpepiult/20100313elpepiu lt_2/Tes

Greetings from Roubini Global Economics! (12 Marzo, 2010) Check out all of the RGE Analysis and EconoMonitor contributions that were published this past week at roubini.com. RGE Analysis: [Available only to RGE clients] The Eurozone’s ‘Bay of PIIGS’ by Arnab Das, Elisa Parisi-Capone, Natalia Gurushina, Katharina Jungen and Jennifer Kapila Greece is the frontline of the battle to restore eurozone (EZ) fiscal solvency and discipline, improve and better align structural policies, reduce EZ divergences and sustain the euro. The battle encompasses Portugal, Ireland, Italy, Greece and Spain—grouped together as the “PIIGS” because they are at risk from the housing bust, the financial crisis or the ensuing deleveraging. RGE ranks 16 EZ members by domestic and external vulnerability, following the methodology in Gros/Mayer (2010). Their external index shows that Greece, Portugal, Ireland, Italy and Spain are the most vulnerable to external shocks, in that order. Applied to the domestic market, our analysis shows that Spain, Ireland, Portugal and Italy are most vulnerable on the home front (like unemployment and productivity). February Payrolls: It’s the Economy, Not the Weather by Arpitha Bykere and Christian Menegatti. Although the official unemployment rate remains unchanged, many job market indicators show that the economy is still shedding jobs and is likely to continue. The recent report showing a downturn in payrolls cannot be explained away by recent bad weather but rather is the result of persistent, poor economic conditions. Meanwhile, jobless claims data continue to support RGE’s view of a “jobless recovery.” Who Will Buy the U.S. Treasurys? by Rachel Ziemba With the record levels of U.S. Treasury bonds and bills issued to finance the growing U.S. fiscal deficit, questions remain over who will purchase the debt and what premium they will require to do so. Demand for Treasurys remained strong in 2009, and auctions have tended to be oversubscribed, particularly at the short end of the curve. But now that risk appetite is back and the Federal Reserve has ended its Treasury purchasing program, yields may continue to inch up to maintain demand. LatAm: What’s Coming Up? (Week of March 8, 2010) by Bertrand Delgado and Juan Lorenzo Maldonado. The most relevant information this week will be Brazil’s retail sales for January and GDP growth data for Q4 2009, as both are likely to show that positive growth dynamics remain in place. Inflation related data and the central bank focus report will also be closely monitored to fine tune expectations on Brazil's monetary policy decision. Moreover, markets will closely watch inflation and activity indicators in Mexico, where RGE anticipates inflation in February to move higher but start showing some stabilization, and industrial production for January to print a strong reading. LatAm: Waiting on Hikes and Surveying Quake Damage by Bertrand Delgado and Juan Lorenzo Maldonado. Inflation and inflation expectations in Brazil are continuing to deteriorate, though at a weaker pace than a few weeks ago. To keep medium- to long-term inflation expectations anchored, the central bank will likely initiate the tightening cycle in March or April 2010. Meanwhile, price dynamics in Mexico suggest that price contamination from higher taxes and fuel prices has been limited and that the monetary authority will stay put through H1 2010. China: What to Expect from the February Data by Adam Wolfe and Rachel Ziemba

81 Despite the distortion from the New Year holiday, China’s main economic indicators for February should continue to show an improving outlook. For the markets, the most important figures should be the trade and inflation data, given their key role in making the domestic case for further monetary tightening. On Nouriel Roubini's Global EconoMonitor, Nouriel discusses China’s cautious behavior when it comes to allowing the yuan to appreciate. See Bloomberg Reports Roubini Says Cautious China to Limit Yuan Gain to 4%. On the RGE Analyst’s EconoMonitor, Michael Moran asks whether the “trans-Atlantic relationship” can still be reliably described with that comfortable old phrase, or has it evolved into a series of complex bilateral and multilateral conversations fated to wax and wane between partnership and rivalry? Please read Choppy Waters Rock the Trans-Atlantic Relationship. In RGE’s Arun Motianey Discusses the SuperCycles Theory with CNBC’s Squawk Box, Arun Motianey discusses his theory of supercycles, which are continuous long waves of boom and bust that undulate through the global economic and financial systems. On the Finance & Markets Monitor, derivative regulation was fueling the discussion. Don’t miss: Morgenson on Municipalities’ Swap Fiascoes by Yves Smith ‘Swap Tango’ – A Derivative Regulation Dance: Part 1 by Satyajit Das ‘Swap Tango’ – A Derivative Regulation Dance: Part 2 by Satyajit Das Time to Regulate Derivatives (Like Every Other Financial Instrument) by Barry Ritholtz Also on the Finance & Markets Monitor: A New Index of Financial Conditions by James Hamilton More on the Resolution Authority Headfake by Yves Smith Happy Anniversary: Top and Bottom! by Barry Ritholtz The Gold Bubble by Rick Bookstaber Business Economists on the CFPA by James Kwak On the Peterson Institute for International Economics Monitor, Simon Johnson and Peter Boone suggest that the U.S. should encourage an orderly resolution to problems in Europe, and press the Europeans to bring in the IMF in an appropriate fashion. Please see The Greek Tragedy That Changed Europe. On the Global Macro EconoMonitor, Antonio Carlos Lemgruber comments on what he believes will be the major global macroeconomic themes of 2010 as the consequences of the different economic policy responses undertaken around the world begin to take shape. Please read 2010: BRICs, PIIGS, and the G-5 Countries. In Vola-geddon Models & Agents looks for lessons from history to see if the fears of Armageddon are justified as monetary authorities around the world contemplate their exit strategies. In Iraqi Elections Likely to Fuel Ethnic Tensions, Further Delay Access to Kirkuk’s Reserves Gareth Jenkins comments on what this past week’s elections in Iraq meant to the long-running dispute of the administration of the ethnically mixed and resource-rich province of Kirkuk in the north of the country.

82 On the U.S. EconoMonitor, Simon Johnson looks to explain why there has been no attempt from the top to push through the key message of the day, which is financial reform. Please read Does the Obama Administration Even Want to Win in November? and The Speech for Which We Have Been Waiting. In Bail Out Our Schools, Robert Reich implores that over the long term we must shift incentives away from financial capital toward human capital. Also on the U.S. EconoMonitor: Employment Chart Roundup by Barry Ritholtz Real Personal Income Less Transfer Payments by Tim Duy On the Emerging Markets Monitor, Dominique Strauss-Khan argues that in the wake of the global financial crisis there is a fresh energy in Sub-Saharan Africa and claims that Africa Is Back. In China’s Reserves – What Are They Good For – Not As Much As You Think China Economist agrees with a recent post by Michael Pettis but emphasizes the political importance of maintaining stability through jobs. On the Asia EconoMonitor, Rajeev Mantri looks at India’s budget and believes that India’s potential remains untapped, as its political masters toy with the economy and important policy pronouncements. Please read India’s Finance Minister Plays It Safe with 2010 Budget. On the Europe EconoMonitor, Rebecca Wilder considers the battle for exports in Europe and wonders what happens when export income does not provide the impetus for aggregate demand growth. Please read The End Game for Europe: Wage Cutting and the Battle of Exports. In March Madness, Rob Parenteau argues that whatever relief rally shows up in eurozone equities or the euro itself on the good news that Greece is taking the bitter medicine is built on a mistaken or at best partial understanding of the dynamics that have been set in motion. In Hanging in the Balance over at the ECB Edward Hugh considers Europe’s monetary leaders’ exit strategy. Also on the Europe EconoMonitor: German Responsible for Stability and Growth Pact Wants to Bail Out Greece by Edward Harrison European Monetary Fund, Arriving Soon by Simon Johnson Rain and Tears in Greece by Paolo Manasse The Misleading Political Calm in Turkey by Emre Deliveli The German Economy Is Essentially “Intact” by Edward Hugh

German Exports Decline 6.3% m/m in January: Blip or Trend?

German exports registered a strong contraction in January 2010 following four months of gains, the German Federal Statistical Office, Destatis, announced on March 9. The data release raises concerns regarding the strength and sustainability of the German recovery. Due to Germany's excessive reliance on exports, an improvement in global—and especially European—demand for German exports is a crucial ingredient for a swift and robust recovery.

U.S. Trade Deficit Narrows on Lower Imports

The U.S. trade deficit narrowed by 7% to reach US$37.3 billion in January 2010, after widening by 10% m/m in December 2009. Both imports and exports declined in January, but imports contracted faster. The narrowing of the deficit came from a 3% decline in nominal petroleum imports, despite a 5.3% jump in import fuel prices. Non-petroleum imports fell 2% and exports fell 1%, causing the non-oil deficit to shrink 5% to US$25.4 billion in January. The services surplus rose 1% in January, while the real trade deficit narrowed 6% m/m, the U.S. Bureau of Economic Analysis reported on March 11.

South Korea Keeps Interest Rate on Hold in March: Is a Hike Still Far Away?

South Korea’s central bank held its seven-day repurchase rate unchanged at 2.0%, the lowest level on record, at the March 2010 meeting. Because of the slowdown in economic recovery in Q4 2009, the rising unemployment rate and the approaching regional elections in June, the government has been participating in the monetary policy committee meetings to pressure the central bank to maintain loose monetary policy. Low inflationary pressures so far have been a plus, but analysts worry that continued capital inflows and higher commodity prices could raise inflation risks in the coming months. The current central bank governor’s term ends in March 2010, and candidates for the next governor are perceived to be dovish and to have close relations with the government. Due to political challenges and uncertainty about the global recovery and capital flows, the BoK might delay a rate hike until H2 2010.

Sovereign Debt and Derivatives: Is a Ban on Naked CDS Justified?

European leaders are calling for an urgent ban on sovereign bond speculation, with some pushing for a ban on naked CDS trading (i.e., buying insurance without owning the underlying bond) and others in favor of suspending short sales. However, there is no international consensus on such a measure, which stands to water down its effect. Since it emerged that investment banks, in particular Goldman Sachs, had structured derivatives deals to temporarily disguise the true level of incurred liabilities, a backlash is underway against opaque financial instruments that contributed to spreading the crisis and forced governments to ultimately backstop their financial systems.

84 Investors themselves are reportedly holding back due to fears of a political backlash that could ultimately lead to much stricter rules.

Choppy Waters Rock the Trans-Atlantic Relationship

RGE Analysis by Michael Moran: Each day in recent weeks has brought new evidence of troubles in the once stalwart “trans-Atlantic relationship,” the outdated misnomer for ties between Washington and its major Western European partners: Britain, France, Germany and more recently, the European Union. Disputes and slights – some real, some imagined – have led to speculation about a drift in a relationship that dominated (and indeed founded) most of the global institutions of the second half of the 20th century. While few see any evidence of an actual rivalry between the two sides, it’s possible that the combined damage to the relationship caused by the 2003 Iraq War and then the global financial crisis in 2008 has altered the way the major players view each other. In particular, hopes that maturing EU institutions could simplify this relationship so far remain unfulfilled. Given the diverging economic, demographic and geostrategic outlooks involved, can the trans-Atlantic relationship still be reliably described with that comfortable old phrase, or has it evolved into a series of complex bilateral and multilateral conversations fated to wax and wane between partnership and rivalry?

12.03.2010 €55bn for a Greek bailout

The Austrian newspaper Der Kurier has quite detailed information leaked from the ongoing negotiations for a Greek bailout scenario. According to their sources, Germany and Paris agreed that Greece might need €55bn until the end of the year to prevent insolvency. The German government would be ready to contribute €20bn, the French €10bn. Other member countries, except those that are themselves in trouble (Spain, Portugal and the UK), will have to contribute according to their shares in the ECB. How the money will be provided is still open. Germany prefers to provide half of its share through guarantees and the other half by purchases of Greek bonds through the KfW. Angela Merkel outlined the time frame, with the first intervention around Easter. The plan is strictly confidential (well except for the leaks), no written testimony, and coordinated with the German government and the ECB. (But we should not get too excited about this: Even if there is an agreement on a technical level, at a political level this is not yet a done deal). Schäuble wants to legalise the euro exit This is probably the single most important part of the Schäuble proposal. In a column in the FT and other papers the German finance minister, while defending his idea of a European Monetary Fund, said this: “Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union while being able to remain a member of the EU.” In the article he is setting out in great detail his vision of a new euro area governance system that links an EMF with a strengthened stability pact. The latter is to be based on strict sanctions – withdrawal of voting rights, withdrawal of EU cohesion funds. This is Germany’s price for accepting an EMF. Greek strikes are a hugely disruptive It is one thing to read about Greek strikes in non-Greek papers, and quite another to read what is happening on the ground in Kathimerini, which has a blow-by-blow account of all the stoppages that have ground the country to a stillstand: Teachers, public transport, landfill

86 workers, petrol stations. The list is very long. The union say that they are not prepare to shoulder the lion share of the cost to pay for the Greek solvency crisis. ECB criticises Spain and others over budget plans The spotlight is now turning to Spain. El Pais reports that the ECB has been critical of the Spanish government’s lack of concrete proposals to reduce the defict from 11.4% in 2009 down to 3% in 2013. The ECB has demand that the Spanish government defines exactly how it wants to do this, rather than content itself with stating the objective in broad terms. Ireland has also been criticised. The paper says the existing stability programme sets out some measures for the period 2011 to 2013, including the withdrawal of housing deductions, and more generally stated goals to reduce spending on public sector employees. The article also makes the point that all the stability programmes implicitly assumed a strong recovery, which is now not happening. Spanish private bankers are getting nervous about the lack of restructuring El Pais has an interesting article this morning about a meeting of the Spanish Banking Association, in which its president Miguel Martin said that not enough progress is made in respect of balance sheet cleanup in the savings bank sectors, which is threatening to drag down the entire Spanish financial system , as foreign investors did not distinguish banks and savings banks, so the failure to restructure the savings bank sector would drag down the private sector as well. Conflicting reports in FT and FT Deutschland about what the EU will do about hedge funds FT Deutschland reports on its front page that the other EU countries are ready to use the qualified majority voting system to overrule British objections to hedge fund regulation, and make a decision at the next Ecofin meeting on Tuesday. The FT reports that last minute negotiations were taking place and that Britain and France were together trying to find a solution. EU finance commission Michel Barnier reject US criticism of the proposed regulation as saying that it was consistent with the G20 goals. The biggest disagreement between the British and the others is the third country issue – access and terms for alternative investment fund managers – the polite term for hedge funds – from outside the EU. Critics say the current proposal is potentially protectionist. Also note: The EP has co-decision, and there are 1700 amendments already on the table. http://www.eurointelligence.com/article.581+M53b52e4d5c3.0.html#

87 BRUSSELS France and UK seek hedge fund deal By FT reporters Published: March 11 2010 15:29 | Last updated: March 12 2010 02:47 Gordon Brown and Nicolas Sarkozy will on Friday try to hammer out a compromise deal over European Union reforms that the US and UK believe could damage the hedge fund and private equity industries. The British prime minister shares the concerns of Tim Geithner, US Treasury secretary, that a draft EU directive to introduce tighter regulatory controls could impose new barriers to business. Schäuble calls for tough EMF sanctions - Mar-11 Text: Geithner letter to Barnier - Mar-11 Geithner warns of rift over regulation - Mar-10 Investors warn EU on private equity rules - Mar-09 Editorial: EU’s credit default flop - Mar-10 In depth: Hedge funds - Mar-07 London believes that French cultural opposition to hedge funds lies behind the drive to clamp down on the operation of “alternative investment funds”. British officials say Mr Brown will discuss the issue when he meets the French president in London on Friday, ahead of an EU summit this month. The debate over the shape of financial regulation and the EU directive has raised transatlantic tensions. Mr Geithner, in a letter to Michel Barnier, Europe’s internal market commissioner, voiced concern about “various proposals that would discriminate against US firms”. The US has stopped short of threatening retaliatory action. However, if the directive becomes law in its current form, Europe-based fund managers could face reprisals in the US Congress for what is being seen as an attempt to dictate the global regulatory landscape. Senior EU officials hit back on Thursday at the US criticism. A spokesman for Michel Barnier, the new EU internal market commissioner who is responsible for financial services regulation and to whom Mr Geithner addressed his concerns, said that the EU decision to act on hedge funds was in line with a G20 decision to reinforce transparency in the financial system. Diplomats from the EU’s 27 states again failed to agree a compromise package of rules. Britain, Europe’s biggest centre for hedge funds, is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London. He added that the new commissioner wanted to “work closely” with the US, to ensure “robust standards” in financial services. Mr Barnier is due to visit the US shortly, although no final date has been set.

88 The spat comes at a sensitive time. Diplomats from the 27 EU member states again failed on Thursday to agree a compromise package for regulating hedge funds and private equity funds on a pan-EU basis. Britain, by far Europe’s biggest centre for hedge funds, is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London. Alistair Darling, UK chancellor of the exchequer, has argued that hedge funds authorised by regulators to operate in one EU country should be allowed to operate under a “passport” in all other countries. He has sided with Mr Geithner in opposing provisions that would mean that US hedge funds – or funds operating from London but registered for tax outside Europe – would need authorisation from each European jurisdiction. A US Treasury spokesman said: “All financial institutions, including hedge funds, should be covered by the global regulatory net. “But we need to ensure any regulation is sensible and proportionate. There have already been significant improvements to the EU proposal since it first emerged last year and we’ll keep working with our European partners to improve it further.” Other countries unhappy with aspects of the proposed text are thought to have included Ireland, the Czech Republic, Malta, Sweden and Austria. The latest setback comes after lengthy discussions that have now been under way for about six months. However, Spain, which holds the rotating EU presidency, is understood to be anxious to take a text to a scheduled meeting of EU finance ministers next Tuesday. Further negotiation and efforts at finessing the text are expected to continue over the weekend. People involved in the discussions say a couple of issues remain particularly difficult. The biggest is the so-called “third country” issue – the access, and the terms on which this would be given, for alternative investment fund managers (AIFMs) from outside the EU to market to professional investors within the bloc. This was the issue that Mr Geithner raised and which has sparked fears of protectionism. The Spanish compromise text proposed allowing access, provided that there were “appropriate co-operation arrangements for the purpose of systemic risk oversight and in line with international standards … in place between the competent authorities of the member state where the fund is marketed and the competent authorities of the AIFM”. However, without more detail on how these so-called “equivalence” arrangements will work, the fund management industry is concerned that the directive will become protectionist. “All the guys here are very worried about the free flow of capital,” said Javier Echarri, director-general of European Private Equity & Venture Capital Association, speaking from an investors’ forum in Geneva. He pointed out that economic conditions had led to an unprecedented drop in fund-raising and investment last year, and said he was concerned that the regulatory hiatus might deter recovery. “Investors say they need legal certainty,” Mr Echarri. The hedge fund rules will also need approval from the European Parliament, as well as individual member states.

89 MEPs are working on their own amendments to the original, much-criticised European Commission proposals. While these have not yet crystallised, there are signs that the MEPs may take a more conciliatory approach on the “third country” issue – allowing current national arrangements to remain in place for a transition period while the equivalence standards are drawn up. Managers from third countries which met the equivalence standard might also enjoy EU-wide marketing rights – a so-called “EU passport”. Reporting by George Parker and Sam Jones in London, Nikki Tait in Brussels and Tom Braithwaite in Washington http://www.ft.com/cms/s/0/3a2d919e-2d1e-11df-8025-00144feabdc0.html

BRUSSELS Schäuble calls for tough EMF sanctions By Gerrit Wiesmann in Berlin and Ralph Atkins in Frankfurt Published: March 11 2010 19:27 | Last updated: March 11 2010 19:27 Wolfgang Schäuble, German finance minister, wants a European monetary fund to be backed by tough sanctions to enforce budgetary discipline, with countries failing to comply facing expulsion from the eurozone “as a last resort”. Writing in the Financial Times, Mr Schäuble addressed his critics by declaring Greece’s crisis had shown it was “obvious” that the 16-nation eurozone’s rules were “incomplete” and unable to deal with situations long thought “inconceivable”. Opinion: Why Europe’s monetary union faces its biggest crisis - Mar-11 His argument comes after days of vigorous debate within Germany, and with other European Union partners, with some questioning the timing of the initiative and others the need for an alternative to the International Monetary Fund. The Bundesbank, Germany’s national central bank, this week signalled its opposition to any proposal that might distract eurozone governments from the more immediate task of bringing Greece’s public finances under control. Axel Weber, Bundesbank president, described as “not helpful” discussions about the “institutionalisation of emergency help”, which he said could prove “counterproductive” given that eurozone countries were currently helping Greece. However, Mr Weber did not object to measures strengthening the implementation of the EU’s fiscal rules, and on Wednesday, Jean-Claude Trichet, European Central Bank president, stressed the idea of a European monetary fund had not been rejected by the ECB. Mr Schäuble on Thursday also received support from Angela Merkel, German chancellor, who said “stronger sanctions” were needed, while Jean-Claude Juncker, prime minister of Luxembourg and chair of the eurozone finance ministers, said the idea did not breach the bloc’s “no-bailout clause”. In a nod to the plunge of investor confidence in Greece, Mr Schäuble warned the eurozone was “unprepared” for any “severe situations” that demanded “comprehensive intervention” by members to stop a crisis spreading.

90 Stricken eurozone countries having trouble refinancing themselves on the financial markets should be allowed to apply for “emergency liquidity aid from a ‘European monetary fund’ to reduce the risk of defaults”, Mr Schäuble said. “Strict conditions and a prohibitive price tag must be attached so that aid is only drawn in the case of emergencies that present a threat to the stability of the whole euro area,” the minister argued, stressing: “Aid must be a last resort.” Measures could be reinforced by excluding the country asking for help from taking part in decisions about its provision; eurozone countries could also impose “stricter sanctions” on the applicant’s budgetary reforms. “Emergency liquidity aid must never be taken for granted,” Mr Schäuble said. “It must still be possible for a state to go bankrupt. Facing an unpleasant reality could be the better option in certain conditions.” Mr Schäuble stressed his initiative was “in no way” meant to deal with Greece, which had signed up to austerity measures under pressure from the eurozone. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/c36bf126-2d41-11df-9c5b-00144feabdc0.html

COMPANIES Investors warn EU on private equity rules By Martin Arnold in London and Nikki Tait in Brussels Published: March 9 2010 22:51 | Last updated: March 9 2010 22:51 Europe risks building a protectionist wall between itself and the global private equity industry if plans for a sweeping overhaul of regulation in the sector go ahead, some of the world’s biggest institutional investors have warned. The warning from the International Limited Partners Association, representing 220 of the biggest pension funds, endowments and sovereign wealth funds, comes at a sensitive time with European Union lawmakers and member states close to agreeing new rules. Text: ILPA letter - Mar-09 Business Life: Exploding the myths of private equity - Mar-09 In depth: Private equity - Feb-03 Investors based in the EU could be barred from investing in private equity funds based outside the 27-country bloc, said the ILPA, whose members have more than $1,000bn (£667bn) invested in private equity worldwide. In addition, the proposed regulation could “severely disturb” many of the world’s biggest private equity groups by depriving them of access to EU investors, while in turn reducing foreign investment into EU companies. “Not only will EU investors have reduced access to non-EU private equity managers, there exists a real concern that the proposal will effectively close Europe off from the capital solutions . . . that comprise the global private equity industry,” it said.

91 The ILPA issued its warning in a letter to Michel Barnier, the new EU internal market commissioner, and Jean Paul Gauzès, the French MEP steering the legislation through the European Parliament. The European Commission said it had not seen the letter and therefore could not comment. ILPA said it welcomed “an increase in transparency and disclosure”. But it was concerned about proposals to limit the leverage ratio – or level of indebtedness – allowed in private equity funds. Another worry for the ILPA is the proposal to force private equity portfolio companies to disclose “sensitive information” and “trade secrets” beyond their own investors. http://www.ft.com/cms/s/0/8766c834-2bcc-11df-8033-00144feabdc0.html

COMMENT

Why Europe’s monetary union faces its biggest crisis By Wolfgang Schäuble Published: March 11 2010 19:15 | Last updated: March 11 2010 19:15 Greece has reached a crossroads. For the first time, we in the eurozone are engaged in full surveillance over the fiscal and economic policy of one of the member countries of the European monetary union. Greece’s case admonishes us to draw lessons for monetary union. My thoughts are in no way directed at the specific measures to stabilise Greece. Nor do they relate to discussions about the need for a form of economic government to provide improved co-ordination on economic policy throughout the European Union. My thinking focuses on making monetary union more resilient to a crisis. The euro has shown itself to be a reliable anchor of stability in the crisis. It has protected us from intra-European currency turbulence that would otherwise have aggravated the situation in Europe. Nevertheless, we in the monetary union now face a decisive moment. The fallout from the crisis is becoming ever more visible, labour markets in some countries are languishing and government debt almost everywhere is far in excess of permissible deficit limits. There is only one course of action: all eurozone members must return to adherence to the stability and growth pact as rapidly as possible. I underline this message because I have the impression that global financial markets seem to be speaking far more plainly than many of the voices from the political sphere. Grave structural weaknesses have been revealed in some euro area states – weaknesses that have to be addressed by a long, painful process of adjustment. Economic and fiscal policy surveillance in the eurozone was insufficient to prevent undesirable trends in a timely manner. We must therefore make more decisive use of the instruments available. From now on, a member state with an excessive deficit should not receive EU cohesion funds if it is not making sufficient savings. It is obvious that the European body of regulations is still incomplete. Monetary union is unprepared for extremely severe situations of the type we are now seeing and that demand a comprehensive intervention to avert greater systemic risks. In the faith that budget surveillance was effective, the disequilibrium today was held to be inconceivable.

92 If we wish the euro to be strong and stable on a lasting basis – our condition for bringing the DM and its high credibility into the euro fold – we have to be prepared to integrate further in the eurozone. Co-ordination between euro members must be more far- reaching; they must take an active part in each other’s policymaking. I understand that a great deal of political resistance will have to be surmounted. Nevertheless, I am convinced that from Germany’s perspective, European integration, monetary union and the euro are the only choice. What is decisive is Europeans’ ability to co-operate in partnership to deal with adversities. For the first time, it has become clear that a monetary union member with weak economic fundamentals can quickly lose the confidence of global financial markets in an acute budget crisis. This raises questions about how it would be possible to offer a member state support and simultaneously avert the threat of default when that country is consolidating its finances. Traditionally these are tasks that the IMF has assumed in many crises, and it has produced strong results. For a member of the monetary union, this approach is not without problems because a central policy area, namely monetary policy, has been pooled. The involvement of the IMF is therefore being hotly debated. It is better for the eurozone member states to forearm themselves for such crises and augment their institutional framework. We could build on experience gained from use of the EU’s facility for medium-term financial aid to non- eurozone member states. In May 2009, the funding was topped up substantially on account of the considerable economic difficulties faced by some central and eastern European member states. This helped curb the consequences of a crisis. Eurozone members could also be granted emergency liquidity aid from a “European monetary fund” to reduce the risk of defaults. Strict conditions and a prohibitive price tag must be attached so that aid is only drawn in the case of emergencies that present a threat to the financial stability of the whole euro area. This effect should be further reinforced by excluding the country concerned from the decision-making process – aid must be the last resort. Political decisions about aid should be taken in the Eurogroup in agreement with the ECB. Emergency aid could also be coupled on a mandatory basis with stricter sanctions within the framework of budget deficit proceedings. Monetary penalties could be imposed immediately and, once the aid and cooling-off period end, enforced against the member state without any recourse to reclaim the fine. The prospect of emergency aid connected with hard corrective fiscal action would boost the confidence of financial markets, thus preventing a deepening of the crisis and obviating the eurozone members’ need to call upon the IMF in future. Emergency liquidity aid may never be taken for granted. It must, on principle, still be possible for a state to go bankrupt. Facing an unpleasant reality could be the better option in certain conditions. The monetary union and the euro are best protected if the eurozone remains credible and capable of taking action, even in difficult situations. This necessarily means suspending an unco-operative member state’s voting rights in the Eurogroup. A country whose finances are in disarray must not be allowed to participate in decisions regarding the finances of another euro member. Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union while being able to remain a member of the EU. The voting rights of a eurozone member should furthermore be suspended for one year if infringement proceedings establish that this country intentionally breached European economic and monetary law. The true extent of the Greek budget disaster only became clear when the manipulated statistics were uncovered last autumn. I favour the EU statistical office

93 Eurostat having the right to inspect all public accounts where suspicion of manipulation is substantiated. Without doubt, it will take a great deal of political willpower to adapt the rules of monetary union speedily to suit the new realities. Yet there is no alternative to monetary union. There are some people who might feel that their scepticism towards the euro has been vindicated. They are overlooking the strengths of Europe and the problems faced in other leading global economic zones. Greater calm is needed. The euro is the DM’s equal in terms of stability, there is little inflation and financing costs are generally low. The euro is now the second most important reserve and investment currency. A major reason is that financial markets have a great deal of trust in the ECB. To maintain this confidence, the crisis must be surmounted rapidly. This credibility is advantageous to the monetary union in overcoming the financial crisis. If we are successful in putting fiscal policies in the member states back on the right course, the crisis will have brought about a change for the better. The writer is the German finance minister http://www.ft.com/cms/s/0/2a205b88-2d41-11df-9c5b-00144feabdc0.html

La banca urge a las fusiones de cajas para no lastrar el sistema financiero La AEB pide que el dinero público no se utilice para problemas particulares - Las entidades se sienten perjudicadas en los mercados internacionales ÍÑIGO DE BARRÓN - Madrid - 12/03/2010 Quedan tres meses y medio para que se termine el plazo dado por Bruselas para que las entidades pidan dinero al fondo de rescate y nadie lo ha solicitado. Ha pasado un año y medio desde el estallido de la crisis, con la caída de Lehman Brothers, y no hay más de siete cajas - de las 44- implicadas en fusiones. Quedan tres meses y medio para que se termine el plazo dado por Bruselas para que las entidades pidan dinero al fondo de rescate y nadie lo ha solicitado. Ha pasado un año y medio desde el estallido de la crisis, con la caída de Lehman Brothers, y no hay más de siete cajas - de las 44- implicadas en fusiones. El Banco de España ha alertado de que el retraso gangrena la situación, pero no ha infundido temor. Las cajas piden menos control político y cambios legales, y los bancos, fusiones inmediatas. Pero lo cierto es que, por una u otra razón, nadie mueve ficha. Ayer, la patronal bancaria, la Asociación Española de Banca, AEB, elevó el tono de las críticas con acusaciones contundentes. Miguel Martín, presidente de la AEB, dijo: "Hay un exceso de capacidad que se centra en las entidades menos fiables. ¿Quién es el responsable de reestructurar el sistema? Los gestores de cada entidad son los máximos responsables", enfatizó. En su opinión, "no es aceptable que digan que no lo hacen porque no cuentan con los instrumentos necesarios o porque las comunidades autónomas no facilitan las fusiones. No hay que buscar excusas", resaltó. Martín, durante su intervención en unas jornadas de la Asociación para el Progreso de la Dirección (APD) y la consultora Deloitte, pidió que el dinero público sólo se utilice para mejorar la salud del sistema financiero, no para problemas particulares. "El sistema no mejorará mientras haya entidades inviables y hay que actuar para que se reestructuren. De lo contrario, no habrá crédito y no se recuperará la economía ni el conjunto de las entidades", añadió. Alfredo Sáenz, vicepresidente y consejero delegado del Santander, y Ángel Ron, presidente del Popular, coincidieron al 100% en esta línea de argumentación. Estos directivos pidieron que las entidades "débiles" no sigan operando, ni que se "salve" a ninguna sin que se fusione con otra, es decir, desaparezca, paguen sus gestores y cierre oficinas. Fuentes bancarias comentarias ayer que en los mercados internacionales no se distingue entre cajas y bancos. Así, con cada informe negativo sobre las cajas, los inversores desconfían de todo el sistema financiero español. Según estas fuentes, el perjuicio se refleja en una caída de la cotización, la carestía de la financiación cuando hacen emisiones y en que se han convertido en el foco de la prensa internacional, que ha olvidado problemas más graves de los bancos británicos, alemanes u holandeses, para centrarse en los españoles. Martín concluyó su conferencia pidiendo a las cajas que revisen su modelo. "Las autoridades van a exigir capital de más calidad y las cajas no tienen acceso a él. Deben revisar su modelo.

95 Creo que las cajas tienen futuro, pero si llevan adelante su reconversión", sentenció el ex subgobernador del Banco del España. Sáenz consideró "imprescindible la reestructuración; que se haga bien, es decir, se saneen los balances y se reduzca la capacidad instalada". Ron, sin mencionar explícitamente a las cajas, pidió que se reestructuren "las entidades menos solventes y con modelos de negocio menos recurrentes". Para Sáenz, se deberían permitir las quiebras "ordenadas" de entidades sin que cueste nada al contribuyente, y consideró que si el ahorro de costes no se combina con el saneamiento de los balances no será posible que la economía "vuelva a la normalidad y al crecimiento". Las cajas coinciden en que es urgente que se cierren los procesos abiertos de fusiones, pero para ello creen imprescindible que "se flexibilicen las condiciones de las Comunidades Autónomas para que se consolide el sistema", según José Antonio Olavarrieta, director general de la Confederación Española de Cajas de Ahorros (CECA). En contra de lo dicho por Martín, sí considera que los impedimentos autonómicos y legales (reforma de lo normativa contable y fiscal) son trabas que justifican el retraso. Olavarrieta dijo que él nunca hablará de bancos y negó que la falta de fusiones paralice la economía. "Estamos dando más créditos que los bancos, así que no sé por qué dicen eso", respondió. Fuentes de las cajas comentaron ayer que los ataques se deben a que están perdiendo cuota de mercado. También consideran que se están difundiendo afirmaciones falsas, "como que no hay capital suficiente en las cajas. Hemos pedido más poderes para el Banco de España, para que se imponga sobre las Comunidades Autónomas, pero no se ha movido nada". Según Olavarrieta, "es urgente finalizar los procesos de fusión" de las cajas de ahorros porque el 30 de junio es el límite del Fondo de Reestructuración Ordenada Bancaria (Frob). El directivo de la CECA apuntó además que no tiene constancia de que haya en España entidades que no sean viables. Por otra parte, destacó la necesidad de flexibilizar los instrumentos de captación de capital ante el incremento de las exigencias. El presidente de Unicaja, Braulio Medel, defendió las fusiones entre entidades de la misma región, tal y como ha hecho esta caja al integrarse con Caja Sur y Caja Jaén. Rechazó que exista una crisis en el sistema o en las cajas, aunque admitió que hay entidades que necesitan "una cura", y otras, "un tratamiento preventivo". http://www.elpais.com/articulo/economia/banca/urge/fusiones/cajas/lastrar/sistema/financi ero/elpepieco/20100312elpepieco_2/Tes?print=1

Financial system reforms won't wait By David Cho and Brady Dennis Washington Post Staff Writer Friday, March 12, 2010; A11 Senate banking committee Chairman Christopher J. Dodd (D-Conn.) said Thursday he will move forward next week with sweeping legislation to revamp the nation's financial regulatory system, despite failing to resolve key differences with Republicans. Although Dodd said he will continue bipartisan talks, unveiling the measure on Monday puts pressure on GOP senators by creating a sense of urgency and forcing the debate into the open. Republicans opposed to key elements of the bill, such as new protections for consumers, would have to make their case publicly. After months of talks, the two sides have been unable to reach final agreement over the enforcement powers of a new consumer watchdog, the scope of the Federal Reserve's regulation over banks and the financing of a new authority that would allow the government to wind down large, troubled financial firms without cost to taxpayers. Dodd said he decided to introduce his bill so the committee could begin discussing it before the Easter recess in early April. He also had been facing pressure from liberals who feared he was compromising too much during recent negotiations. "Clearly, we need to move along . . . as time moves on, it does limit the possibility of getting something done," Dodd told reporters. "The idea of putting something on the table is not a reflection of something breaking down. Quite the opposite." Dodd's strategy risks estranging Republican senators who might be willing to support a deal. While Dodd conceivably could move a bill from his committee with only Democratic support, he ultimately must garner GOP support. Democrats control only 59 votes in the Senate, and 60 votes would be needed to overcome a Republican filibuster. Dodd's decision appeared to wound his closest Republican ally on the committee, Sen. Bob Corker (R-Tenn.). The pair had worked for weeks to resolve thorny issues, and both men had said they were on the brink of a deal. A visibly dejected Corker said he was disappointed to learn of Dodd's decision during a meeting Wednesday afternoon. "There was no breakdown. Like, none," Corker told reporters. "What happened was, you were on the five-yard line and the lights went out." Corker acknowledged that with the health-care debate coming to a head and a push by the Obama administration to complete legislation ahead of the November midterm elections, Dodd is under pressure to produce a bill as soon as possible. Still, he said that trying to push such a complex bill out of committee before the coming recess "would be a travesty." But Dodd, who announced his retirement in early January, said he needed to push forward to have any hope of fixing the flaws that remain in the financial system a year and a half after the 2008 market meltdown. "I don't have a lot of time left in this Congress," said Dodd. "I think all of us who have been in this room and around the years know how this can go by very quickly." Still, Corker said he would continue to work toward agreement on the remaining issues.

97 "What Chairman Dodd is going to do, probably, is introduce a bill on Monday that is a little to the left of where we were, to try to ensure that he can do as much as he can in the way of getting Democratic support on the committee," Corker said. "And then I think he will move to the right." One of the major sticking points between Dodd and Corker has been the enforcement powers of the consumer watchdog, which is expected to be housed at the Federal Reserve in the forthcoming bill. Republicans want an elaborate appeals process to resolve conflicts between the consumer agency and regulators charged with keeping banks in good health. Corker said Thursday he thought the two sides had found consensus on the matter. But other government sources said that although Dodd had expressed openness to the idea, he never agreed to it. Dodd is now expected to roll out a bill that is more in line with the Obama administration, which envisions a consumer agency with stronger enforcement powers. Dodd's staff is receiving proposals from Treasury officials for legislative language in areas where he could not find common ground with Republicans. Some Democrats want to force GOP senators to publicly state their opposition to the consumer agency. Sen. Charles E. Schumer (D-N.Y.) said that if Republicans held back their support for Dodd's bill, he saw no reason to offer a compromise on the watchdog's enforcement powers. "This would be a bad policy even if it were bipartisan," Schumer said. "But there's even less reason to accept a watered-down watchdog agency if those who insisted on it are prepared to walk away from the negotiations." Dodd said he was fortunate to have a "strong partner" in Corker and that the updated draft would reflect the agreements he had reached with those on the right. Several other elements of the bill also remained unresolved, such as the oversight of derivatives and reform of corporate governance rules. Congressional aides said these issues, however, were not expected to be significant roadblocks to a deal. If senators reach consensus on these issues, amendments can be added later, the aides said. Even with the latest hiccup, senators maintained a measure of optimism Thursday. Dodd insisted that "we're on a positive and optimistic track" in bringing financial overhaul to fruition. "I still think we're going to get there," Corker said. "I think we are going to get there, but it's going to be far messier." Staff writer Binyamin Appelbaum contributed to this report. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/11/AR2010031102005.html?wpisrc=nl_headline

98 Business

March 11, 2010 Democrats Push Ahead on Finance Bill By SEWELL CHAN WASHINGTON — Democrats said on Thursday that they would go it alone in an effort to pass an overhaul of financial regulation, increasing the likelihood of a bitter partisan showdown. Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, said he would put forward his own bill on Monday, despite the lack of a single Republican endorsement. Democrats concluded that bipartisan talks were not making enough progress and that going their own way was the only realistic hope of getting the legislation adopted in an election year, he said. Mr. Dodd said the bill would rewrite the rules of Wall Street, end the “too big to fail” phenomenon and protect consumers from risky or abusive financial products. The Congressional calendar meant that further delay could imperil the legislation’s chances, he said. The chief Republican negotiator on the bill, Senator Bob Corker of Tennessee, called Mr. Dodd’s decision “very disappointing” and said, “There’s no question that White House politics and health care have kept us from getting to the goal line.” Mr. Corker said the impasse was caused by the Democratic threat to use the parliamentary procedure known as reconciliation to overhaul health care. “The elephant in the room is reconciliation,” he said, describing Mr. Dodd as “a victim of health care policy.” The White House, which has called the legislation one of its top priorities, rejected that explanation. “Republicans in the Senate are going to have to ask themselves why they would stand in the way of financial reform,” Mr. Obama’s press secretary, Robert Gibbs, said at a news conference. Mr. Gibbs, who said that “lobbyists are being hired hand over fist to kill financial reform,” said of lawmakers: “I don’t believe many are going to want to go home and face voters next November not having done something.” While Mr. Dodd and Mr. Corker took pains to praise each other and held out hope that a compromise could still be achieved, the developments clearly made the prospects for the legislation more difficult. Mr. Dodd said he intended for the committee to take up formal consideration of the bill during the week of March 22, with the goal of a committee vote before Congress recesses on March 26. “As time moves on, you just limit the possibility of getting something done, particularly a bill of this magnitude and this complexity,” he said. But Mr. Corker said it “would be a travesty” to push a bill of such length and complexity through in one week. The lack of agreement put the process closer to a showdown. Democrats, who control 59 votes in the Senate, would have to successfully woo at least one Republican to achieve the 60 votes needed to overcome a filibuster.

99 The Senate majority leader, Harry Reid of Nevada, said that Mr. Dodd “has done his very utmost to do something on a bipartisan basis.” He said of Mr. Dodd’s impending proposal, “I hope it’s something that we can move on quickly.” Senator Richard C. Shelby of Alabama, top Republican on the committee, who found himself in the unusual position of being largely left out of the negotiations after his talks with Mr. Dodd broke down last month, issued a conciliatory statement. “As long as we remain focused on policy and not politics, an agreement is still very possible,” he said. Labor, consumer and civil rights groups have been increasingly critical of Mr. Dodd, and Mr. Corker said he believed that Mr. Dodd, who is retiring at the end of this year, was responding to pressure from the left. In a news conference, Mr. Corker disclosed significant details about compromises that he said had been reached with Mr. Dodd, as well as remaining areas of disagreement. He said that both sides had agreed to house a new consumer financial protection agency within the Federal Reserve, with a director appointed by the president and broad ability to write rules governing mortgages, credit cards and the so-called shadow banking system of payday lenders, debt collectors, and loan originators and servicers. Whether that agency would have independent enforcement powers has been a major point of contention. Mr. Corker said Mr. Dodd had agreed that the agency would not be able to conduct its own compliance examinations, as consumer advocates have urged. Instead, other regulators, who are already charged with ensuring the soundness of banks, would take on the responsibility for protecting consumers, too. The negotiators had also agreed, Mr. Corker said, to strip the Fed of its power to supervise bank holding companies except those with assets of $100 billion or more. Whether to remove from the central bank its oversight of state-chartered banks that are members of the Fed system, he said, was still to be determined. “The Fed no doubt is going to have its wings clipped,” he said. Consensus had also been reached on the creation of an interagency council, led by the Treasury, to detect and monitor systemic risk; the establishment of an Office of Research and Analysis that would give the council daily updates on the stability of individual firms and their trading partners; and the removal of credit rating agencies’ exemption from liability under securities laws. Mr. Corker revealed several areas that remained in dispute at the point that Mr. Dodd announced that he would move ahead on his own. One of them, he said, was the extent to which banks would be exempt from new requirements for greater transparency in the trading of derivatives. While standardized derivatives would have to be traded through clearinghouses, some banks have pushed to have transactions of some of their most complex derivatives — including the credit-default swaps that helped bring on the financial crisis — shielded from public view. Gary G. Gensler, the chairman of the Commodity Futures Trading Commission, said on Thursday that the loophole some banks were seeking would exempt as much as 60 percent of derivatives. The banks have found allies in companies like Boeing and Caterpillar that use derivatives to hedge against risk, but such derivatives trades make up only 9 percent of the market, Mr. Gensler said.

100 Other areas of disagreement, Mr. Corker said, included whether shareholders should be allowed an advisory vote, by proxy, on executive compensation, and how much credit risk mortgage originators should be required to keep when they packaged and sold loans. Mr. Corker also said that details remained to be worked out over a new “resolution authority” that would empower the government to seize and dismantle a systemically important financial institution on the verge of failure. http://www.nytimes.com/2010/03/12/business/12regulate.html?th&emc=th

Business Economists on the CFPA

James Kwak Mar 11, 2010 3:10PM The National Association for Business Economics does a semi-annual Economic Policy Survey of its members, who are primarily private-sector economists. The March 2010 survey isn’t up on their site yet, but this is what it has to say about the Consumer Financial Protection Agency:

“A key point of discussion in Congressional deliberations on financial services regulatory reform has been the establishment of an independent agency focused on consumer financial protection. Fifty-four percent of survey respondents feel that creating such an agency would not impair safety and soundness regulation; 25 percent believed it would be detrimental. On a related issue, 43 percent of respondents indicate that a consumer financial protection agency would not impair access to credit while 39 percent believed it would.”

The financial sector has been demanding that any new consumer protection agency be made subservient to the traditional safety and soundness regulators, and has also been threatening that greater regulation will make credit harder to come by. Apparently the business community–a group that is pretty skeptical about government, judging by some of the other survey responses–isn’t buying it.

Originally published at The Baseline Scenario http://www.roubini.com/financemarkets- monitor/258524/business_economists_on_the_cfpa

101 The German Economy Is Essentially "Intact" Edward Hugh Mar 11, 2010 3:00PM According to Bundesbank President Axel Weber, Germany’s economic recovery is “essentially intact”, and is now set to benefit from stronger demand in countries outside the euro region. “I firmly believe that the recovery process that began in summer 2009 is essentially intact, and that it will continue despite the slower growth dynamic in the winter semester. An additional factor in this context is that the German labor market continues to be in extremely robust shape.” What exactly it means to say that an economy is intact we will explore below, but it is clear that some confirmation for the view that the German economy is benefiting from increased demand originating outside the Eurozone can be found in the latest press release on manufacturing industry turnover from the Federal Statistics Office, where they note that while January's manufacturing sector turnover surpassed that of January 2009 – by a working day adjusted 2.6% - domestic sales actually fell (by 1.1%), and export turnover rose by 7.3%. Most interestingly, as between destinations, sales to euro area countries only increased by 2.4%, while those to other foreign countries were up 12.0%. This illustrates two points: that the German economy is now more dependent than ever on exports, and that sales to emerging markets are what is really driving export growth at this point. This latter development is hardly surprising given the strong fiscal corrections being applied in many of Germany's former customer countries. In fact, while German industry is surely now in "recovery mode", the process is something of a stop-start one (see chart below), since even though according to the latest data from the technology ministry output was up by an estimated 0.6% in January over December (and even up by 2.2% over the very low level hit in January last year) it is still down by 18.5% over the March 2008 peak.

More Export Dependent Than Ever Still the story of the German economy remains very much one of a tale of two components, with net trade offering some relief to pretty negative domestic demand data. According to the Federal Statistical Office, German gross domestic product stagnated in the fourth quarter of

102 2009, remaining unchanged from the level of the previous quarter level(0.0% change). Thus the slight upward trend noted during the second (+0.4%) and third quarters of 2009 (+0.7%) did not continue.

GDP from October to December was down by 1.7% on a year earlier. The decrease, which was smaller than in the previous quarters of 2009 still meant that German GDP fell by 5% in 2009 as a whole when compared with 2008.

Economic growth in the fourth quarter of 2009 was, in fact, only really supported by foreign trade: exports rose 3.0% on the previous quarter, while imports decreased 1.8%.

The resulting balance of exports and imports contributed 2.0 percentage points to GDP growth. That positive contribution was, however, entirely offset by a fall of 2 percentage points in total domestic demand (including inventory movements). Both household

103 consumption expenditure and gross fixed capital formation exerted a negative impact on growth. Final private consumption expenditure fell by 1.0% shaving 0.6 percentage points from headline GDP growth.

Interestingly German wage rates rose (see chart below) in the second half of 2009 (although due to significant quantities of short time working, gross wages were more or less stationary), but even this seems surge to have had little in the way of positive impact on consumption.

Gross fixed capital formation fell back, and was down by 0.5% (spending on machinery and equipment fell by 1.5%).

104 In addition the German government started to rein in spending (after many quarters of significant support) following the election, and government final consumption expenditure fell by 0.6%.

So We Are Back To Inventories In fact however, the biggest drop in domestic demand did not come from household spending, or from fixed capital investment, or from government consumption: it came from movement in inventories. Inventories were cut back sharply again during the quarter, and made a negative contribution to growth of 1.2 percentage points (out of the 2 percentage point negative contribution from domestic demand as a whole). This drop followed a considerable increase in inventories in the third quarter, wherby they contributed 1.5 percentage to growth. Now, I think I am begining to discern a pattern in these large swings in trade and inventories which characterise German GDP movements. Basically, it is important to keep in mind the East European component in German manufacturing (Hans Werner Sinn's Bazaar - not bizarre - economy idea). Basically a significant part of German exports are assembled products put together from materials manufactured in the East (a process which Delia Marin suggestively calls Maquilladores in reverse), and thus there may well be a correlation between high imports in one quarter (based on anticipated demand) and rising inventories (and falling imports) in the subsequent one as demand expectations systematically fail to be achieved (the excessive business expectations factor). Let's see. Below you will find three charts summarising movements in the key components of German GDP during the last three quarters of 2009. In Q2, as you will see, trade is up (as exports rise much faster than imports), while inventories are down, as accumulated stocks are exported.

105 The in Q3 we see the opposite phenomenon, as inventories pile up, as imports surge without the expected growth in exports.

Then finally we have Q4, and the opposite happens again, imports fall, exports rise, net trade is a growth positive, and inventories are cut back. In each case the other components of growth are rather insignificant, and have in fact weakened as the recession has progressed - I hope this is not what Axel Weber means by saying that the German economy has survived the recession "intact" (namely that it is as export dependent now as ever it was).

Well, this is only a hypothesis. But if the hypothesis has any validity we should be able to make some predictions on the basis of it. I would make two. Firstly, since East Europe's economies are often dependent for their growth on exports to the West, and in particular to Germany, then we should be able to see some "shadow" of this German process cast out into the East. In the second place, we should see the process continue to some extent in Q1 2010. That is, based on what we have seen so far, in Q1 imports should rise, as industrial output in the early parts of the supply chain surges, and net trade should as a consequence be less positive than in Q4 2009. On the other hand, all the imported components awaiting processing should make inventories rise. So that's a prediction. Now we need to wait and see how good it is. But on the upstream componenents, maybe we can learn something from the East. Let's start with Hungary, which has Germany as its largest single customer, and the manufacturing Purchasing Manager's Index (PMI).

106

Well, basically if we think about the fact that German inventories were run down in Q4 last year, and imports slumped, then it is interesting to note that Hungarian manufacturing, after improving steadily during the earlier part of the year (barring August), slumped back again in the three months from October to December. If we also look at Czech industry, a similar sort of picture emerges - stagnation in Q4 2009, and a surge in activity in this quarter.

When we come to Poland things are rather different, since the Polish economy have vibrant autonomous demand, so the Polish industrial sector has local market growth to give some impetus, but things did taper off a bit in Q4, and they have now rebounded.

So What Does "Intact" Really Mean In The German Case?

107 So, to come back to Axel Weber's point, I fear intact does mean "business as usual". Certainly, if we look at the most recent manufacturing PMI, the pace of expansion has improved slightly over the previous quarter, which may mean that those good old inventories are simply piling up again.

While the services element has, if anything, lost momentum over Q4.

Bad weather seems to have sent construction falling off a cliff - falling an estimated 14.3% in January:

And the February construction PMI looks even worse, with the indicator showing the worst decline in activity since the survey was introduced in September 1999.

108 Poor weather conditions continued to have a negative impact upon the construction sector in February. Anecdotal evidence pointed to widespread weather disruptions, alongside relatively weak underlying demand. As a result, the headline seasonally adjusted Construction Purchasing Managers’ Index – a single-figure snapshot of overall activity in the construction economy – fell sharply from 40.2 in January to 28.9 in February. This was the lowest reading in the survey’s ten-and-a-half year history. Consumer and business confidence readings are faltering:

Retail sales have been in serial decline since the VAT increase in January 2007.

And the February retail PMI showed another sharp contraction, although again, weather conditions do seem to have played a part.

109 Retail sales in Germany declined sharply on a month-on-month basis in February. At 42.1, down from 42.7 in January, the seasonally adjusted Retail PMI was below the 50.0 no-change threshold, continuing the trend observed since June 2008.The latest reading pointed to the sharpest rate of contraction since January 2009, which survey respondents linked to a combination of bad weather and unfavourable economic conditions. A post-scrappage scheme downturn in demand for new cars was also cited by those in the automobiles sector.

So, to conclude where we started, we can well agree with Axel Weber that the German economy is indeed intact - intact and near stationary. If we look at the composite PMI below (which is the nearest thing we have to a GDP indicator), it does show slight improvement over Q4 2009, but only a very slight one. Given everything I have said above about swings in imports and inventories, I would say German GDP will be very near to stationary again this quarter, with a possible slight upside depending on the inventory swing, but whatever upside we do see will more than likely disappear as quickly as it came when we get to the Q2 2010 data.

Originally published Global Economy Matters http://www.roubini.com/euro- monitor/258523/the_german_economy_is_essentially__intact_

110

Opinion

March 12, 2010 OP-ED COLUMNIST Health Reform Myths

By PAUL KRUGMAN Health reform is back from the dead. Many Democrats have realized that their electoral prospects will be better if they can point to a real accomplishment. Polling on reform — which was never as negative as portrayed — shows signs of improving. And I’ve been really impressed by the passion and energy of this guy Barack Obama. Where was he last year? But reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform, myths that are believed by many people who consider themselves well-informed, but who have actually fallen for deceptive spin. The first of these myths, which has been all over the airwaves lately, is the claim that President Obama is proposing a government takeover of one-sixth of the economy, the share of G.D.P. currently spent on health. Well, if having the government regulate and subsidize health insurance is a “takeover,” that takeover happened long ago. Medicare, Medicaid, and other government programs already pay for almost half of American health care, while private insurance pays for barely more than a third (the rest is mostly out-of-pocket expenses). And the great bulk of that private insurance is provided via employee plans, which are both subsidized with tax exemptions and tightly regulated. The only part of health care in which there isn’t already a lot of federal intervention is the market in which individuals who can’t get employment-based coverage buy their own insurance. And that market, in case you hadn’t noticed, is a disaster — no coverage for people with pre-existing medical conditions, coverage dropped when you get sick, and huge premium increases in the middle of an economic crisis. It’s this sector, plus the plight of Americans with no insurance at all, that reform aims to fix. What’s wrong with that? The second myth is that the proposed reform does nothing to control costs. To support this claim, critics point to reports by the Medicare actuary, who predicts that total national health spending would be slightly higher in 2019 with reform than without it. Even if this prediction were correct, it points to a pretty good bargain. The actuary’s assessment of the Senate bill, for example, finds that it would raise total health care spending by less than 1 percent, while extending coverage to 34 million Americans who would otherwise be uninsured. That’s a large expansion in coverage at an essentially trivial cost. And it gets better as we go further into the future: the Congressional Budget Office has just concluded, in a new report, that the arithmetic of reform will look better in its second decade than it did in its first. Furthermore, there’s good reason to believe that all such estimates are too pessimistic. There are many cost-saving efforts in the proposed reform, but nobody knows how well any one of these efforts will work. And as a result, official estimates don’t give the plan much credit for

111 any of them. What the actuary and the budget office do is a bit like looking at an oil company’s prospecting efforts, concluding that any individual test hole it drills will probably come up dry, and predicting as a consequence that the company won’t find any oil at all — when the odds are, in fact, that some of the test holes will pan out, and produce big payoffs. Realistically, health reform is likely to do much better at controlling costs than any of the official projections suggest. Which brings me to the third myth: that health reform is fiscally irresponsible. How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit? Critics argue that we should ignore what’s actually in the legislation; when cost control actually starts to bite on Medicare, they insist, Congress will back down. But this isn’t an argument against Obamacare, it’s a declaration that we can’t control Medicare costs no matter what. And it also flies in the face of history: contrary to legend, past efforts to limit Medicare spending have in fact “stuck,” rather than being withdrawn in the face of political pressure. So what’s the reality of the proposed reform? Compared with the Platonic ideal of reform, Obamacare comes up short. If the votes were there, I would much prefer to see Medicare for all. For a real piece of passable legislation, however, it looks very good. It wouldn’t transform our health care system; in fact, Americans whose jobs come with health coverage would see little effect. But it would make a huge difference to the less fortunate among us, even as it would do more to control costs than anything we’ve done before. This is a reasonable, responsible plan. Don’t let anyone tell you otherwise. http://www.nytimes.com/2010/03/12/opinion/12krugman.html?th&emc=th The Baseline Scenario What happened to the global economy and what we can do about it The Coming Greek Debt Bubble By Peter Boone and Simon Johnson Bubbles are back as a topic of serious discussion, as they were before the financial crisis. The questions are: (1) can you spot bubbles, (2) can policymakers do anything to deflate them gently, and (3) can anyone make money when bubbles get out of control? Our answers are: Spotting pure equity bubbles may sometimes be hard, but we can always see unsustainable finances supported by cheap credit. But policymakers will not act because all great (and dangerous) bubbles build their own political support; bubbles are invincible, until they collapse. A few investors can do well by betting against such bubbles, but it’s harder than you might think because you have to get the timing right – and that’s much more about luck than skill. Bubbles are usually associated with runaway real estate prices (think Japan in the 1980s and the US more recently) or emerging market booms (parts of Asia in the 1990s and, some begin to argue, China today) or just the stock market gone mad (remember pets.com?) But they are a much more general phenomenon – any time the actual market value for any asset diverges from a reasonable estimate of its “fundamental” value.

112 To think about this more specifically, consider the case of Greece today. It might seem odd to suggest there is a bubble in a country so evidently under financial pressure – and working hard to stave off collapse with the help of its neighbors – but the important thing about bubbles is: Don’t listen to the “market color” (otherwise known as ex post rationalization), just look at the numbers. By the end of 2011 Greece’s debt will around 150% of GDP (the numbers here are based on the 2009 IMF Article IV assessment; we make some adjustments for the worsening economy and the restating of numbers since that time – for example, the fiscal deficit in 2009 will likely turn out to be about 8 percent, which is double what the IMF expected until recently). About 80 percent of this debt is foreign owned, and a large part of this is thought held by residents of France and Germany. Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2 percent of GDP abroad to those bondholders. What if Greek interest rates rise to, say, 10% – a modest premium for a country which has the highest external public debt/GDP ratio in the world, which continues (under the so-called “austerity” program) to refinance even the interest on that debt without actually paying a centime out of its own pocket, and which is struggling to establish any sustained backing from the rest of Europe? Greece would need to send at total of 12% of GDP abroad per year, once they rollover the existing stock of debt to these new rates (nearly half of Greek debt will roll over within 3 years). This is simply impossible and unheard of for any long period of history. German reparation payments were 2.4 percent of GNP during 1925-32, and in the years immediately after 1982, the net transfer of resources from Latin America was 3.5 percent of GDP (a fifth of its export earnings). Neither of these were good experiences. On top of all this Greece’s debt, even under the IMF’s mild assumptions, is on a non- convergent path even with the perceived “austerity” measures. Bubble math is easy. Hide all the names and just look at the numbers. If debt looks like it will explode as a percent of GDP, then a spectacular collapse is in the cards. Seen in this comparative perspective, Greece is bankrupt today without a great deal more European assistance or without a much more drastic austerity program. Probably they need both. Given there’s a definite bubble in Greek debt, should we expect European politicians to help deflate this gradually? Definitely not – in fact, it is their misleading statements, supported in recent days (astonishingly) by the head of the International Monetary Fund, that keep the debt bubble going and set us all up for a greater crash later. The French and Germans are apparently actually encouraging banks, pension funds, and individuals to buy these bonds – despite the fact senior politicians must surely know this is a Ponzi scheme, i.e., people can get out of Greek bonds only to the extent that new investors come in. At best, this does nothing more than postpone the crisis – in the business, it is known as “kicking the can down the road.” At worst, it encourages less informed people (including perhaps pension funds) to buy bonds as smarter people (and big banks, surely) take the opportunity to exit. While the French and German leadership makes a great spectacle of wanting to end speculation, in fact they are instead encouraging it. The hypocrisy is horrifying – Mr. Sarkozy and Ms. Merkel are helping realistic speculators make money on the backs of those who take seriously misleading statements by European politicians. This is irresponsible. What should be done?

113 1. The Greeks and the Europeans must decide: do they want to keep the euro, or not. 2. If they want to keep the euro in Greece, the Greeks need to come up with realistic plan to start paying back debt soon. Any Greek plan will not be credible for the first few years, so the Europeans must finance the Greeks fully. This does not mean 20bn euros, it means making available around 180bn euros – i.e., the full amount of refinancing that Greece needs during this period. 3. If they don’t want to keep the euro then they should start working now on a plan for Greece’s withdrawal. The northern Europeans will need to bail out their own banks, because Greek debt must fall substantially in value – euro denominated debt will need to be written down substantially or converted to drachmas so it will be partially inflated away. The Greeks can convert local contracts, and deposits at banks, into drachma. It will be a very messy, difficult transition, but the more the debt bubble persists, the more attractive this becomes as a “least awful” solution. Regardless of the decision on whether Greece will keep the drachma or give it up , the IMF should be brought in to conduct the monitoring and burden share. The Europeans flagrant deception which we now observe – claiming the Greeks have made a big step and encouraging people to buy Greek bonds – proves they do not have the political capacity to be realistic about this situation. Who can now be believed on needs for Greek financial reform and what is truly a credible response? The only credible voice left with the capacity to act is the IMF – and even the Fund risks being compromised by the indiscreet statements of its top leadership as the bubble continues. If such measures are not taken, we are clearly heading for a train wreck. The European politicians have been tested, and now we know the results: They are not careful, they are reckless. An edited version of this post appeared this morning on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times. Written by Simon Johnson March 11, 2010 at 11:56 am http://baselinescenario.com/2010/03/11/the-coming-greek-debt-bubble/

March 11, 2010, 1:53 pm Beware of Greeks Getting Gifts? Bloomberg Greek CDS spread Markets are getting slightly more bullish on Greek debt — and Peter Boone and Simon Johnson are crying bubble. I’m not so sure, but I think their argument highlights something else: the possibility of multiple equilibria in sovereign solvency. What they argue, basically, is that with Greek debt likely to hit 150 percent of GDP, the burden of servicing that debt will be intolerable. They reach this conclusion by assuming that Greece will have to pay very high interest rates, say 10 percent, on its debt.

114 But in the past, some countries have managed levels of debt that high or higher, without default: By the way, this wasn’t all about wars. In the 20th century, British debt passed 150 percent of GDP for the first time in 1921; it didn’t fall below 150 percent again until 1937. So how is that possible? Suppose that Greece had as much credibility as Germany, and could borrow at a real interest rate of 2 percent. Then stabilizing the real value of its debt, even with a debt ratio of 150 percent, would require a primary surplus of only 3 percent of GDP. That’s certainly possible for some countries, although maybe not for Greece. Boone and Johnson assume, however, that Greece would have to pay 10 percent nominal, say 8 percent real. Servicing that would require a primary surplus of 12 percent of GDP, probably impossible for almost anyone. So this suggests that optimism or pessimism about future default can, to at least some degree, be a self-fulfilling prophecy. Not a new insight, I know, but it looks increasingly important for thinking about where we are now.

March 11, 2010, 1:28 pm China’s Swan Song Today’s markets are being somewhat roiled by news of accelerating inflation in China, leading to worries that China will have to tighten monetary policy. But, you know, that’s not what China is supposed to do in this situation. There’s an oldie but goodie in international macro known as the Swan Diagram — not instructions for making an origami swan, but the insightful analysis developed by the Australian economist Trevor Swan. He suggested that we think of countries as having two objectives — keeping unemployment as low as is consistent with stable inflation, but not lower — and keeping the trade balance at an acceptable level. He also suggested that we think of two kinds of policies: things like monetary and fiscal policy that affect the overall level of domestic spending, and exchange rate policy that affects the competitive position of exporters and import-competing industries. He summarized all this with a diagram: There are four “zones of economic unhappiness”; getting out of them requires some combination of exchange rate adjustment and changes in domestic demand. So where’s China? It’s clearly in the lower zone: a trade surplus at levels that is raising international tension, plus inflation. It’s actually not clear which way domestic demand should do — but renminbi appreciation is clearly indicated, for China’s own sake, not just to head off the outraged reactions of the rest of the world. There are obviously political considerations keeping the Chinese from doing the right thing. But with a little encouragement — say, a Treasury report saying that yes, they do manipulate their currency — things might happen. http://krugman.blogs.nytimes.com/2010/03/11/chinas-swan-song/ (en el diagrama de Swan, aplicado a China, Krugman sustituye Relative costs por Real exchange rate y Fiscal deficit por Real domestic demand)

115 http://en.wikipedia.org/wiki/Swan_diagram: (In economics, a Swan diagram, also known as the Australian model (because it was originally used by Australian economists to model the Australian economy during the Great Depression), represents the situation of a country with a currency peg. The concept was developed by Trevor Swan in 1955. Two lines represent a country's respective internal (employment vs. unemployment) and external (current account deficit vs. current acount surplus) balance with the axes representing relative domestic costs and the country's fiscal deficit. The diagram is used to evaluate the changes to the economy that result from policies that either affect domestic expenditure or the relative demand for foreign and domestic goods.

LATIN AMERICA’S SWAN SONG (1998) The spread of the global financial crisis to Latin America in general, and Brazil in particular, has changed the complexion of the problem in several ways. Obviously the stakes are now even higher than before, especially for the United States; obviously, also, the fact that contagion can take place in this way makes it even harder than before to blame the whole crisis on "Asian values" and "crony capitalism". Beyond this, Latin America’s troubles bring out in an even clearer fashion than before the unpleasant dilemmas that all developing countries (and perhaps even smaller developed economies) now face. A good way to illustrate these dilemmas is to consider a classic analysis of macroeconomic policy in an open economy: Trevor Swan’s 1955 discussion of the difficulty of reconciling "internal balance" (i.e., more or less full employment) with "external balance" (an acceptable current account deficit) . The "Swan diagram" analyzes the economic effects of two kinds of policies: those that affect the overall level of domestic expenditure, such as the fiscal deficit; and those that affect the relative demand for domestic and foreign goods. The figure shows a standard Swan diagram. We imagine a country with a pegged exchange rate and high capital mobility, so that interest rates are determined by the need to avoid rapid depletion of reserves, and in effect monetary policy is removed as a tool of stabilization. Thus the "expenditure level" policy variable on the horizontal axis is fiscal; glossing over many complications, we can simply think of it as the budget deficit. On the other axis we show an "expenditure composition" variable, the cost of production in our country relative to that abroad. What Swan pointed out was that the nature of the difficulties facing a country depend on where in this space it resides. To see this, we draw two curves. One curve represents conditions under which the country has "internal balance"; as drawn, it is upward-sloping. The reason is that any rise in the country’s relative

116 costs would tend to reduce exports, increase imports, and thus reduce employment; to compensate, to keep employment constant, the country would need to have a fiscal stimulus – a larger budget deficit. At any point to the right or below this internal balance curve, the economy will suffer from too much demand for its goods, and will experience inflationary pressures. At any point above or to the left, it will suffer from unemployment. The other curve shows conditions under which the country has "external balance". It slopes downward, because an increase in spending would other things equal increase the current account deficit; to offset this the relative cost of production in this country would have to fall. At any point below or to the left of the external balance curve, the country will have a current account surplus (or at least a deficit below what is really appropriate), at any point above or to the right an unacceptably high current account deficit. These two curves define four "zones of economic unhappiness", shown in the figure; only at the point where the two curves cross is the economy without problems internal or external. (All happy economies are alike; each unhappy economy is unhappy in its own way). A country may have an external surplus or deficit; it may have unemployment or inflation. And by considering what kind of economic problems a country has, one gets a clue as to what kind of policy action is appropriate. Which brings us to Latin America. Focus on Brazil, although Argentina’s situation is similar in some respects. Brazil is clearly in the top zone of unhappiness: there is little inflation, but high and rising unemployment, together with a worrying external deficit. The textbook analysis clearly indicates, then, that Brazil’s relative costs are too high. In principle, at least as far as macroeconomic policy is concerned, it is not clear which way the budget deficit should go (although realistically the size of that deficit raises enough concerns about long-run solvency that it surely must be reduced whatever the diagram says). How can relative costs be reduced? Well, the obvious, textbook answer is a devaluation, which brings about an immediate reduction in costs measured in terms of other countries’ currencies. And five years ago many economists – myself included – might have cheerfully recommended a one-time devaluation, or a temporary period of floating, as a way to get Brazil’s relative costs into the right place. After all, Britain and Sweden did it in 1992, and nothing bad happened. Indeed, by any measure the devaluing economies did better than the hard- currency countries. But nobody who looks at the terrible experiences of Mexico in 1995 or Thailand in 1997 can remain a cheerful advocate of exchange rate flexibility. It seems that there is a double standard on these things: when a Western country lets its currency drop, the market in effect says "Good, that’s over" and money flows in. But when a Mexico or Thailand does the same, the market in effect says "Oh my God, they have no credibility" and launches a massive speculative attack. So the question for Brazil is, do you think that the market will treat you like Britain, or do you think it will treat you like Mexico? And this is not an experiment that any responsible policymaker wants to try. And yet the economic unhappiness remains. Indeed, even if the current speculative pressure on Brazil lets up a bit, the country will clearly be forced both to retain high interest rates and to make massive cuts in its budget deficit – pushing it much further from internal balance, and probably causing a sharp recession. In effect, fear of speculative attack has paralyzed macroeconomic policy, and even forced it into acting perversely. So what are the options? Brazil – and many other developing countries – now have three possible courses of action, all extremely dangerous. They are: 1. Hold the line on the exchange rate, and rely on gradual reductions in relative costs – via productivity increases and deflation relative to the rest of the world – to restore internal balance. In principle this should eventually work. However, the operative word is "eventually": all experience (Britain in the 1920s; France since 1987) suggests that this is an extremely protracted process. Even aside from the sheer economic cost, can the social and political fabric stand the strain? 2. Hold your breath, cross your fingers, and devalue or let the exchange rate float – accompanying this with market-friendly policies like sharp fiscal contraction and privatizations, in the hope that the markets will treat you like Britain instead of Thailand. But they probably won’t. 3. Impose temporary currency controls to prevent a speculative attack, then use the breathing space to engage in a one-time devaluation-cum-fiscal-stabilization, in the hope that after a little while the markets will calm down and let you return to business as usual. But currency controls are hard to implement and enforce, they disrupt normal trading relations, and they may impair confidence for a long time to come.

117 What is the right answer? Honestly, I don’t really know – but neither does anyone else. What is clear is that something has gone tragically wrong with the whole system, if these are the available alternatives.

LATIN AMERICA’S SWAN SONG (1998) http://web.mit.edu/krugman/www/swansong.html Economist's View Mar 11, 2010 "We Need to Recognize the Difference" We are all very lucky that David Broder is not in charge of fiscal policy. He thinks it's a good idea to balance the budget in a recession: What the states could teach Washington about budgets, by David S. Broder, Commentary, Washington Post: ...The record of the Washington politicians is summarized in the report that came out of the Congressional Budget Office last week. That nonpartisan scorekeeper announced that it projects the cumulative national debt to increase in the next decade by $9.8 trillion. ... The state side of the story is told most clearly in another report this week, this one from the private Center on Budget and Policy Priorities. ... The Great Recession knocked state tax revenue down by $87 billion in the fiscal year that ended last September -- an 11 percent decline that was the steepest on record. In response, the first thing the states did was cut spending... -- even as Medicaid rolls swelled and other recession-related expenses climbed. But the governors and legislators did not stop there. Two-thirds of the states, 33 of 50, also raised taxes last year, adding more than $30 billion in revenue. ... While the federal government was handing out tax rebates and is preparing to extend many of the Bush-era tax cuts, 13 states were raising personal income taxes; 17 were passing sales tax and various business tax increases; and 22 were increasing excise taxes on tobacco, alcohol or gasoline. ... Once again this year, Congress has passed a "pay-as-you-go" bill, requiring lawmakers to make compensatory cuts whenever they increase appropriations... Then Congress turned right around and began waiving the requirement when circumstances pinched. Discipline is visible in the states. It is still a stranger to Washington. From the same editorial page, some sanity: Smart debt, dumb debt -- there is a difference, by E.J. Dionne Jr., Commentary, Washington Post: Because we never face up to how much we need government to do, there is a pathetic quality to our discussion of big deficits. It's a debate also characterized by a politically convenient amnesia. Just a decade ago, we were running surpluses so big that Alan Greenspan, then chairman of the Federal Reserve, worried about what would happen once our national debt was liquidated. We had this problem well in hand until we started waging wars and cutting taxes at the same time.

118 What would a rational approach to the budget look like? It would begin by accepting that running deficits at a time of high unemployment is a good thing. We would celebrate the fact that the world's governments were far wiser in this downturn than their counterparts were during the Great Depression. It is a hugely underrated achievement of international cooperation that the world's 20 leading economic powers pumped trillions of dollars into the global economy to prevent collapse. Catastrophe was averted, and growth, although sluggish, has resumed. True, unemployment in our country is still too high. But the lesson here is not that President Obama's economic stimulus failed but that it was too small to do all that was needed. Those who would repeal stimulus spending -- the bright idea of the House Republican Study Committee -- would take us backward. Yet no one should doubt that we must put our long-term fiscal house in order. ... There's smart debt and there's stupid debt. We need to recognize the difference. Same for columnists. http://economistsview.typepad.com/economistsview/2010/03/we-need-to-recognize-the- difference.html

March 11, 2010, 8:53 am Fifty-One Herbert Hoovers More than a year ago I coined a phrase that seems to have made its way into the econolexicon; writing about how cutbacks at the state and local level would tend to undermine fiscal stimulus at the federal level, I said that we had fifty Herbert Hoovers. But I was wrong. Via Mark Thoma, we have at least fifty-one — because we have to add David Broder to the list. Before I get there, let’s note that fears about fiscal drag at the state and local level have, in fact, proved justified. Aizenman and Pasricha have a fairly definitive analysis; you can get the quick and dirty version just by looking at government purchases of goods and services: The green line shows the rate of growth of federal G, which did shoot up, although it’s starting to fade out. The red line shows state and local G, which moved in the opposite direction. And the blue line in the middle shows the total, which did nothing much. Now, this omits tax cuts and transfer payments, which presumably did something. But I think it’s fair to say that state and local cuts largely offset federal stimulus. And David Broder thinks this is a good thing, that Washington should be more like the states. What amazes me is that Broder doesn’t even seem to be aware that there’s an argument on the other side, let alone that most economists are dismayed by the effects of fiscal austerity. If Broder is a guide to Beltway conventional wisdom — which he usually is — we’ve got a big problem.

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Rajiv Sethi thoughts on economics, finance, crime and identity... Wednesday, March 10, 2010 On Asymmetry, Reflexivity and Sovereign Default One of the most rewarding aspects of blogging is that it gives me the opportunity learn from those who read and comment on the ideas expressed here. I have had the good fortune of being visited by a number of informed and thoughtful readers, whose remarks have often been of greater quality than the posts to which they were responding. Among those for whom I have developed the greatest respect is the anonymous author of Macroeconomic Resilience, who left a couple of very helpful comments in response to my recent post on credit default swaps. MR pointed out that the idea of multiple self-fulfilling default probabilities plays a key role in George Soros' theory of reflexivity, and linked to an article in which Soros interpreted the Lehman bankruptcy in precisely these terms. In fact, it is a combination of reflexivity and a particular kind of risk/reward asymmetry that gives rise to what Soros calls self-validating bear raids: First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market... Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks. The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a

120 CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks.

The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract... The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self- validating. That is in direct contradiction to the efficient market hypothesis.

Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination. Soros' point about risk/reward asymmetry directly answers one objection to curtailing purchases of naked credit default swaps, namely that such contracts "provide identical leverage both to the optimistic and the pessimistic side of the transaction." Leverage may be considerable on both sides of the contract but this does not mean that market clearing prices reflect optimistic and pessimistic beliefs in equal measure, because the spreads at which sellers are willing to enter the contract must offer them adequate compensation for the significant downside risk that they face. MR does not consider reflexivity to be a routine problem in credit markets, arguing that "only when the entity is in a state of low resilience that markets are sufficiently reflexive to push it over the edge." This is also David Merkel's view of the matter: ... if a company or government has a strong balance sheet, and has a lot of cash or borrowing power, there is nothing that speculators can do to harm you. You have the upper hand. But, if you have a weak balance sheet, I am sorry, you are subject to the whims of the market, including those that like to prey on weak entities. Even without derivatives, that is a tough place to be. But what causes a balance sheet to become weak? In the case of sovereign states, it could be widespread tax avoidance and excessive spending relative to revenues, as has been alleged in the case of Greece. But it could also be a significant decline in economic activity that reduces the tax base and triggers automatic stabilizers. This is how Paul Krugman interprets the experience of Spain, which had a budget surplus three years ago, but "is running huge deficits now [as] a consequence, not a cause, of the crisis: revenue has plunged, and the government has spent some money trying to alleviate unemployment." Any attempt to raise taxes or cut spending in this environment could make it even harder for the country to meet its near term debt obligations. For this reason, Felix Salmon's claim that countries "have essentially no limit on how much they can tax or cut spending in order to

121 make their debt repayments" cannot possibly be correct as a general principle. A government can change expenditure policies and tax rates, but has no direct control over realized revenues and outlays. As a result, raising tax rates or trimming expenditures (such as unemployment benefits) in the face of severe deficiencies in aggregate demand can worsen rather than improve its balance sheet position. Under such circumstances, it is terribly important to determine whether the looming threat of default is simply one of several possible equilibrium paths. As Felix acknowledged in his response to my post, it is true in principle that "a company or country can find it easy to repay debt when spreads are low, thereby justifying the low spreads, while finding it hard to repay debt when spreads are high, justifying the high spreads." Default under these conditions would be terribly wasteful, and I can see no reason why attempts to avoid it should not be pursued vigorously. --- Update (3/11). Paul Krugman also seems to think that it's worth considering the possibility of multiple self-fulfilling default probabilities in the context of sovereign defaults (h/t Mark Thoma): Markets are getting slightly more bullish on Greek debt — and Peter Boone and Simon Johnson are crying bubble. I’m not so sure, but I think their argument highlights something else: the possibility of multiple equilibria in sovereign solvency... Suppose that Greece had as much credibility as Germany, and could borrow at a real interest rate of 2 percent. Then stabilizing the real value of its debt, even with a debt ratio of 150 percent, would require a primary surplus of only 3 percent of GDP. That’s certainly possible for some countries, although maybe not for Greece. Boone and Johnson assume, however, that Greece would have to pay 10 percent nominal, say 8 percent real. Servicing that would require a primary surplus of 12 percent of GDP, probably impossible for almost anyone. So this suggests that optimism or pessimism about future default can, to at least some degree, be a self-fulfilling prophecy. Not a new insight, I know, but it looks increasingly important for thinking about where we are now. Posted by Rajiv at 3/10/2010 06:17:00 PM http://rajivsethi.blogspot.com/2010/03/on-asymmetry-reflexivity-and-sovereign.html

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Greetings from RGE! Last week, Nouriel Roubini released an analysis exclusively for RGE clients. While maintaining his core projection of protracted U-shaped growth in the United States, Roubini argued that the risks of a double-dip recession in the United States are rising. The following content is excerpted from that analysis, the full version of which is still available just for clients on Roubini.com.

V, U and W A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession. This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others. The U camp includes—among others—Roubini Global Economics, Goldman Sachs’ U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009, I worried in a Financial Times op-ed about the risk of a double-dip recession even if our RGE benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others concerned about the double-dip risk include also David Rosenberg, Gary Shilling and John Makin. Ed Hyman and I debated whether the recovery would be U or V-shaped on a February 22 conference call attended by over 2,200 listeners. Since that call, a slew of new U.S. macro data have come out. They have been almost uniformly poor, if not outright awful. Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply, and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, initial claims for unemployment benefits remain stubbornly high (way above the 400K mark). Real disposable income for Q4 has been revised downward while real disposable income (before transfers) for January was negative again. The manufacturing ISM index—while still expanding being above 50—has now fallen a couple of notches and its production and new orders index levels are falling, too; and global PMIs suggest a loss of momentum in the global economic recovery. Real inventories look unchanged in Q1 relative to Q4; auto sales were at best mediocre; core CPI was

123 falling and core PCE was close to 0%, suggesting anemic demand and economic weakness. Q4 GDP growth was revised upward to 5.9% but most of it (3.9%) was due to inventories; final sales grew at a 1.9% rate while consumption grew at a dismal 1.7% (down from 2.8% in Q3). Q3 growth has been revised from an initial 3.5% to 2.8% to 2.2%, with final sales growing only 1.7%. So, at the time of maximum policy stimulus (H2 of 2009), final sales were growing only at a pathetic 1.8% average rate. The eurozone (EZ) debt crisis, which RGE discusses in depth in a major new paper, predisposes Europe to a rising double-dip risk, due to the wave of fiscal austerity sweeping the periphery of the EZ. Even if the EZ doesn’t enter a double dip, the growth of domestic demand there will be as or more constrained than in the United States. This, in turn, will be a drag on the potential for U.S. export growth. The U.S. dollar rally on risk aversion reflects this risk. The U.S. dollar is settling back down and the threat of a debt crisis is headed off by a stronger Greek fiscal adjustment and potential adjustment package. But fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector—on top of private sector retrenchment—will remain. A similar retrenchment may well lie ahead in the United Kingdom, given rising fiscal sustainability concerns and the threat of a sterling crisis. Europe then will have great difficulty being a source of demand for U.S. exports, and may even provide impetus to faltering global demand growth, contributing to the threat of a wider double dip across high-income countries.

We Might Default on Our Governments’ Debt in the Future. Do You Know How Often We’ve Done So in the Past? Fabius Maximus Mar 11, 2010 11:04PM Summary: Hard times might lie ahead, forcing difficult choices. We must clearly understand our alternatives, and their history. IMO only clarity of thought and resolute wills will see us through the next decade. How to manage public finances might be our greatest challenge. Why do we continue down a path which almost certainly ends badly? Since President Reagan we — citizens, voters — have indulged in an orgy of deficit spending — plus writing ourselves promises of vast future benefits. The reasons are complex and many. One is a belief that governments are reliable. Governments — real governments, of developed nation — do not default. Or so we believe. Even implying that governments like ours might default earns scorn from most experts and major institutions. Yet governments do default, in many ways, frequently, when the time comes to pay high debt loads. And then life goes on. Default is not the end of a people, or even a nation. Like wars, often what happens afterwards has equal impact as what came before. For a brief review of sovereign defaults see “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises“, Carmen M. Reinhart and Kenneth S. Rogoff, April 2008. Even superpowers default, as described in “The Sustainable Debts of Philip II: A Reconstruction of Spain’s Fiscal Position“, 1560-1598″, Mauricio Drelichman and Hans-Joachim Voth, 6 November

124 2007. But there is no need to look at foreigners, we have our own history of defaulting. The United States has twice done soft defaults. First on 3 June 1933 with the wonderfully titled congressional resolution “To assure uniform value to the coins and currencies of the United States” (text here). And again in 1971, when President Nixon ended convertibility of the US dollar into gold by governments (see Wikipedia). Other examples are the mini-soverign sub-units of the United States. The 11th Amendment to the Constitution prevents citizens from using the Federal Courts to compel States to honor their contracts. Only State constitutions and laws can do so, and they often allow flexibility to their governments. States have defaulted 17 times (perhaps more), in many ways. • Eight States defaulted during the 1840’s. Four outright repudiations: Arkansas, Florida, Michigan, and Mississippi. Adjustments in Pennsylvania, Maryland, Illinois, Indiana, and Louisiana. • Eight States defaulted to varying degrees during the 1870’s and 1880’s: Alabama, Arkansas, Florida, Georgia, Louisiana, North Carolina, South Carolina, Tennessee, and West Virginia. • Arkansas defaulted on its bonds in 1933; but eventually paid all creditors in full. Most of these were settled only after long battles in the State legislatures and courts (State and Federal), usually with partial payments (often long delayed). As a result there is a large body of case law on State defaults, which we might soon dust off and use. Defaults of municipalities are governed by Chapter 9 of the Federal Bankruptcy Code. It too might get wide use during the next few decades. For more information The information about State defaults presented here comes from American State Debts by B. U. Ratchford, Asst Prof Economics at Duke (1941). For more detailed information I recommend The Repudiation of State Debts by William A. Scott, Asst Prof of Political Economy, U Wisconsin )1893) — available on Google Books. Other useful reports: • “The 2010-11 Budget: California’s Fiscal Outlook“, California Legislative Analyst’s Office, 18 November 2009 — Grim reading. • “Nightmare scenarios haunt states“, Stateline, 14 December 2009 • ”California at the Brink of Financial Disaster“, Michael E. Genest (California Director of Finance), 13 January 2010 • “State of the States 2010: How the Recession Might Change States“, Pew Center on the States, 11 February 2010 • “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform“, Pew Center on the States, 18 February 2010

Originally published at Fabius Maximus http://www.roubini.com/

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Time to Regulate Derivatives (Like Every Other Financial Instrument) Barry Ritholtz Mar 11, 2010 3:18PM What is it about derivatives that makes otherwise rational humans become so damned stupid? There is no need to over-complicate this; a rather simple series of steps can be undertaken to bring the most dangerous of derivatives out of the shadows and into light of day. Radical derivative deregulation had a bastard birth: On the eve of a holiday break, Texas Senator Phil Graham attached a budget bill rider titled the Commodity Futures Modernization Act of 2000. This was done at the behest of his wife Wendy, who was a member of the Board of Directors of Enron. What the CFMA did was create a unique financial product. Derivatives and Swaps entered a world where they were treated very differently from all other financial products. Stocks, bonds, options, futures all follow specific rules. Securitized derivative products (collaterallized paper such as CDOs, CMOs, CLOs, etc.) and Credit Default Swaps (CDSs) do not. Consider for example these characteristics of most financial instruments: -They trade on an exchange; -Participants have sufficient capital to engage in trading; -Counter-parties disclosure is known (at the least to the exchange) - Potential future payments require capital reserves to meet obligations; -The full amount of traded instruments is transparently disclosed; -There is a regulator in charge of insuring the above rules are followed. Derivatives had none of those. Indeed, the CFMA specifically exempted derivatives not only from these items, but added they were exempt from state insurance regulators. Let’s not over-complicate this: We need to do 3 things to rein in the worst aspects of derivatives, and dramatically reduce the systemic risk they present, while retaining their ability to be a valid financial instrument for hedging risk: 1. Repeal the Commodity Futures Act of 2000 2. Treat Derivatives like all other financial instruments: All of the above elements need to be derivative requirements; 3. Give the Commodity Futures Trading Commission full oversight and the teeth to enforce the rules. Wall Street and the banks will fight this tooth and nail, as they are reaping billions in derivative trading profits. Never mind that whole 2008-09 meltdown thingie — that’s ancient history. This is simple, folks: Derivatives should not receive special treatment — they need to be regulated the way most other financial products in the world are.

Originally published at The Baseline Scenario and. http://www.roubini.com/financemarkets- monitor/258525/time_to_regulate_derivatives__like_every_other_financial_instrument_

126 Global Business

March 11, 2010 Patchwork Pension Plan Adds to Greek Debt Woes By LANDON THOMAS Jr. ATHENS — Vasia Veremi may be only 28, but as a hairdresser in Athens, she is keenly aware that, under a current law that treats her job as hazardous to her health, she has the right to retire with a full pension at age 50. “I use a hundred different chemicals every day — dyes, ammonia, you name it,” she said. “You think there’s no risk in that?” “People should be able to retire at a decent age,” Ms. Veremi added. “We are not made to live 150 years.” Perhaps not, but it is still difficult to explain to outsiders why the Greek government has identified at least 580 job categories deemed to be hazardous enough to merit retiring early — at age 50 for women and 55 for men. Greece’s patchwork system of early retirement has contributed to the out-of-control state spending that has led to Europe’s sovereign debt crisis. Its pension promises will grow sharply in coming years, and investors can see the country has not set aside enough to cover those costs, making it harder for Greece to borrow at a reasonable rate. As a consequence of decades of bargains struck between strong unions and weak governments, Greece has promised early retirement to about 700,000 employees, or 14 percent of its work force, giving it an average retirement age of 61, one of the lowest in Europe. The law includes dangerous jobs like coal mining and bomb disposal. But it also covers radio and television presenters, who are thought to be at risk from the bacteria on their microphones, and musicians playing wind instruments, who must contend with gastric reflux as they puff and blow. And Greece may be an early indicator of troubles to come. Bigger countries like Germany, France, Spain and Italy have relied for decades on a munificent state financed by a range of stiff taxes to keep the political peace. Now, governments are being pressed to re-examine their commitments to generous pensions over extended retirements because the downturn has suddenly pushed at least part of these hidden costs to the surface. The situation in the United States is different but also painful. The government will face its own fiscal reckoning, analysts say, as 78 million baby boomers begin drawing on Social Security and Medicare programs to support them in retirement. Without some combination of higher taxes, benefit reductions or an increase in the retirement age, both programs will run short of money to make their promised payments within the next few decades. And many American states are woefully behind on funding their pension obligations for public employees.

127 In Europe, the conflict has already erupted on the streets, with workers demanding that generous retirement policies be kept while governments press to pare pensions and raise retirement ages because taxpayers cannot bear any additional weight and creditors will no longer finance excessive borrowing. The problem goes well beyond how to keep up payments and deal with budget deficits resulting from the financial crisis. Because of generous promises, unfunded pension liabilities in Europe far outweigh the stated debt that governments owe creditors, which have caught Greece and several other weak European nations in a borrowing vise. According to research by Jagadeesh Gokhale, an economist at the Cato Institute in Washington, bringing Greece’s pension obligations onto its balance sheet would show that the government’s debt is in reality equal to 875 percent of its gross domestic product, which is the broadest measure of a nation’s economic output. That would be the highest debt level among the 16 nations that use the euro, and far above Greece’s official debt level of 113 percent. Other countries have obscured their total obligations as well. In France, where the official debt level is 76 percent of economic output, total debt rises to 549 percent once all of its current pension promises are taken into account. And in Germany, the current debt level of 69 percent would soar to 418 percent. Mr. Gokhale, like many other economists, says he believes that this is a more appropriate way to assess a country’s debt level because it underscores the extent to which the cost of providing for rapidly aging populations, if left unchanged, will add to already troubling debt burdens. “You have to look ahead and see how pension expenditures are rising in comparison to the revenues needed to finance them,” he said. “It’s not just Greece; all major European countries are facing pension shortfalls. It is a very difficult challenge because it involves selling pain to current voters.” He estimates that to fully finance future pension obligations, the average European country would need to set aside 8 percent of its economic output each year, a practical impossibility given that raising already high taxes so much would impose a crushing economic burden. Mr. Gokhale has done a similar calculation for the United States and estimates that the truest measure of federal government debt, incorporating Medicare, Medicaid, Social Security and other obligations, is $79 trillion, or about 500 percent of the nation’s output. Currently, its public debt is equal to about 60 percent of its domestic output. Many of these liabilities will not be coming due for decades. But as most developed countries experience having fewer workers to cover pensions and health care bills for the elderly, their ability to borrow more is rapidly approaching its limits.

128 In its 2009 annual report on Greece, the International Monetary Fund warned that the government’s excessive pension and health payments to the elderly would result in a debt level of 800 percent of its output by 2050 if left unchecked, similar to the figures Mr. Gokhale calculated. That is a theoretical number, of course: international creditors, who are already balking at lending Greece more money, would require changes in government programs well before Athens borrowed that much. “The pension crisis is the biggest single test of Greece’s willingness to tackle longstanding reform,” said Kevin Featherstone, an expert on the Greek political economy at the London School of Economics. “Any meaningful reform must lead to reduced benefits for workers — the government needs to show that it can overcome union pressure.” Greece has proposed raising its average retirement age to 63, and that may be just a beginning. The French president, Nicolas Sarkozy, has met with union leaders and broached the prospect of raising the normal retirement age from 60. Spain has gone further, proposing to raise the retirement age to 67, from 65. In the face of union opposition, however, the government is wavering. Pensions have become a divisive topic not just among workers and governments, but among governments within Europe. Germany, which has taken politically difficult steps to increase its retirement age to 67 while reducing benefits, is serving as the most stubborn taskmaster on fiscal matters for Greece. Greece’s pension problem far outweighs the finagling with its accounts that it relied upon in the early 1990s to get its official deficit figures low enough to qualify to join the euro club. A recent report by the European Commission found that the amount Greece spends on pensions and health care for its aging population, if left unchecked, would soar to about 37 percent of its economic output by 2060 from just over 20 percent today, making it the highest level in Europe. “Projected pension expenditures are expected to double,” said Manos Matsaganis, a professor at the University of Athens and author of numerous papers on Greece’s pension system. “That is unsustainable.” Still, the millions who have come to rely on these payouts will not give up their pensions easily. “Nobody thinks they have to be the one to sacrifice,” Mr. Matsaganis said. That’s certainly true of Christos Bourdakis, a retired government accountant. Sitting in a dusty union hall in Athens, he is in no mood to offer any concession on his pension, regardless of the severity of the crisis. He is a full-throated proponent of a system that pays him a yearly gross pension of 30,000 euros, or $41,000, more than he was making when he retired 13 years ago at the age of 60. He has even written a book in defense of it, “The Guide to Granting Civil Service Pensions in Greece.” “We have to protect our standard of living,” Mr. Bourdakis said. “The pensioners should not have to pay for the crisis created by the bankers.” Niki Kitsantonis contributed reporting. http://www.nytimes.com/2010/03/12/business/global/12pension.html?th&emc=th

129 Business

March 11, 2010 Report Details How Lehman Hid Its Woes as It Collapsed By MICHAEL J. de la MERCED and ANDREW ROSS SORKIN It is the Wall Street equivalent of a coroner’s report — a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing. The report, compiled by an examiner for the bank, now bankrupt, hit Wall Street with a thud late Thursday. The 158-year-old company, it concluded, died from multiple causes. Among them were bad mortgage holdings and, less directly, demands by rivals like JPMorgan Chase and Citigroup, that the foundering bank post collateral against loans it desperately needed. But the examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. The bank’s bankruptcy, the largest in American history, shook the financial world. Fears that other banks might topple in a cascade of failures eventually led Washington to arrange a sweeping rescue for the nation’s financial system. According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case. Richard S. Fuld Jr., Lehman’s former chief executive, certified the misleading accounts, the report said. “Unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,” Mr. Valukas wrote. Mr. Fuld was “at least grossly negligent,” the report states, adding that Henry M. Paulson Jr., who was then the Treasury secretary, warned Mr. Fuld that Lehman might fail unless it stabilized its finances or found a buyer. Lehman executives engaged in what the report characterized as “actionable balance sheet manipulation,” and “nonculpable errors of business judgment.” The report draws no conclusions as to whether Lehman executives violated securities laws. But it does suggest that enough evidence exists for potential civil claims. Lehman executives are already defendants in civil suits, but have not been charged with any criminal wrongdoing. A large portion of the nine-volume report centers on the accounting maneuvers, known inside Lehman as “Repo 105.”

130 First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman’s books at a time when the bank was under heavy scrutiny. According to Mr. Valukas, Mr. Fuld ordered Lehman executives to reduce the bank’s debt levels, and senior officials sought repeatedly to apply Repo 105 to dress up the firm’s results. Other executives named in the examiner’s report in connection with the use of the accounting tool include three former Lehman chief financial officers: Christopher O’Meara, Erin Callan and Ian Lowitt. Patricia Hynes, a lawyer for Mr. Fuld, said in an e-mailed statement that Mr. Fuld “did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.” Charles Perkins, a spokesman for Ernst & Young, said in an e-mailed statement: “Our last audit of the company was for the fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.” Bryan Marsal, Lehman’s current chief executive, who is unwinding the firm, said in a statement that he was evaluating the report to assess how it might help in efforts to advance creditor interests. Repos, short for repurchase agreements, are a standard practice on Wall Street, representing short-term loans that provide sometimes crucial financing. In them, firms essentially lend assets to other firms in exchange for money for short periods of time, sometimes overnight. But Lehman used aggressive accounting in its Repo 105 transactions: it appears to have structured transactions such that they sold securities at the end of the quarter, but planned to buy them back again days later. These assets were mostly illiquid real estate holdings, meaning that they were hard to sell in normal transactions. The effect of the accounting was to artificially and temporarily lower the firm’s debt levels to hit certain targets, making the firm look healthier than it really was. In a series of e-mail messages cited by the examiner, one Lehman executive writes of Repo 105: “It’s basically window-dressing.” Another responds: “I see ... so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?” The first executive replies: “Yes, No and yes. :)” Mr. Valukas was appointed by the United States Trustee in the case in January 2009 to investigate the causes of the Lehman bankruptcy, as well as to find out if any fraud or misconduct took place. Mr. Valukas writes in the report that “colorable claims” could be made against some former Lehman executives and Ernst & Young, meaning that enough evidence existed that could lead to the awarding of damages in a trial. He added that Lehman’s directors were not aware of the accounting engineering. By his reckoning, Lehman managed to “shed” about $39 billion from its balance sheet at the end of the fourth quarter of 2007, $49 billion in the first quarter of 2008 and $50 billion in the second quarter. At that time, Lehman sought to reassure the public that its finances were fine — despite pressure from short-sellers like the hedge fund manager David Einhorn. Executives, including Herbert McDade, who was known internally as the firm’s “balance sheet czar,” seemed aware that repeatedly using Repo 105 was disguising the true health of the

131 investment bank. “I am very aware ... it is another drug we r on,” he wrote in an April 2008 e- mail cited by the examiner’s report. At other times, he is described as calling for a limit to the number of Repo 105 transactions. By May and June of 2008, a Lehman senior vice president, Matthew Lee, wrote to senior management and the firm’s auditors at Ernst & Young flagging “accounting improprieties.” Neither Lehman executives nor Ernst & Young alerted the firm’s board about Mr. Lee’s allegations, according to the report. Mr. Fuld is described in the examiner’s report as denying having knowledge of the Repo 105 transactions, and there is no evidence that he directed subordinates to make use of that aggressive accounting. (He did recall issuing several directives to reduce the firm’s debt levels.) But Mr. McDade is reported as telling Mr. Fuld about using Repo 105 to achieve that goal. http://www.nytimes.com/2010/03/12/business/12lehman.html?th&emc=th

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March 11, 2010 Mises Daily

The Gold Standard by Ludwig von Mises on March 11, 2010 [This article is excerpted from chapter 17 of Human Action: The Scholar's Edition Men have chosen the precious metals gold and silver for the money service on account of their mineralogical, physical, and chemical features. The use of money in a market economy is a praxeologically necessary fact. That gold — and not something else — is used as money is merely a historical fact and as such cannot be conceived by catallactics. In monetary history too, as in all other branches of history, one must resort to historical understanding. If one takes pleasure in calling the gold standard a "barbarous relic,"[1] one cannot object to the application of the same term to every historically determined institution. Then the fact that the British speak English — and not Danish, German, or French — is a barbarous relic too, and every Briton who opposes the substitution of Esperanto for English is no less dogmatic and orthodox than those who do not wax rapturous about the plans for a managed currency. The demonetization of silver and the establishment of gold monometallism was the outcome of deliberate government interference with monetary matters. It is pointless to raise the question concerning what would have happened in the absence of these policies. But it must not be forgotten that it was not the intention of the governments to establish the gold standard. What the governments aimed at was the double standard. They wanted to substitute a rigid, government-decreed exchange ratio between gold and silver for the fluctuating market ratios between the independently coexistent gold and silver coins. The monetary doctrines underlying these endeavors misconstrued the market phenomena in that complete way in which only bureaucrats can misconstrue them. The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure that generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines. In the 17th century, the rates at which the English government tariffed the coins overvalued the guinea with regard to silver and thus made the silver coins disappear. Only those silver coins that were much worn by usage or in any other way defaced or reduced in weight remained in current use; it did not pay to export and to sell them on the bullion market. Thus England got the gold standard against the intention of its government. Only much later the laws made the de facto gold standard a de jure standard. The government abandoned further fruitless attempts to pump silver standard coins into the market and minted silver only as subsidiary coins with a limited legal tender power. These subsidiary coins were not money, but money-substitutes. Their exchange value depended not on their silver content, but on the fact that they could be exchanged at every instant, without delay and without cost, at their full face value against gold. They were de facto silver printed notes, claims against a definite amount of gold. Later in the course of the 19th century, the double standard resulted in a similar way in France and in the other countries of the Latin Monetary Union in the emergence of de facto gold monometallism. When the drop in the price of silver in the later 1870s would automatically have effected the replacement of the de facto gold standard by the de facto silver standard, these governments suspended the coinage of silver in order to preserve the gold standard. In

133 the United States, the price structure on the bullion market had already, before the outbreak of the Civil War, transformed the legal bimetallism into de facto gold monometallism. "If one takes pleasure in calling the gold standard a 'barbarous relic,' one cannot object to the application of the same term to every historically determined institution." After the greenback period, there ensued a struggle between the friends of the gold standard on the one hand and those of silver on the other hand. The result was a victory for the gold standard. Once the economically most advanced nations had adopted the gold standard, all other nations followed suit. After the great inflationary adventures of the First World War, most countries hastened to return to the gold standard or the gold-exchange standard. The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market.[2] It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth's surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another. It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes. All those intent upon sabotaging the evolution toward welfare, peace, freedom, and democracy loathed the gold standard, and not only on account of its economic significance. In their eyes the gold standard was the labarum, the symbol, of all those doctrines and policies they wanted to destroy. In the struggle against the gold standard, much more was at stake than commodity prices and foreign-exchange rates. The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavors to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them, credit expansion is the panacea for all economic ills. It could lower or even entirely abolish interest rates, raise wages and prices for the benefit of all except the parasitic capitalists and the exploiting employers, free the state from the necessity of balancing its budget — in short, make all decent people prosperous and happy. Only the gold standard, that devilish contrivance of the wicked and stupid "orthodox" economists, prevents mankind from attaining everlasting prosperity. The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd. In a living and changing world there cannot be any such thing as stability of purchasing power. In the imaginary construction of an evenly rotating economy there is no room left for a medium of exchange. It is an essential feature of money that its purchasing power is changing. In fact, the adversaries of the gold standard do not want to make money's purchasing power stable. They want rather to give to the governments the power to manipulate purchasing power without being hindered by an "external" factor, namely, the money relation of the gold standard.

134 The main objection raised against the gold standard is that it makes operative in the determination of prices a factor that no government can control — the vicissitudes of gold production. Thus an "external" or "automatic" force restrains a national government's power to make its subjects as prosperous as it would like to make them. The international capitalists dictate and the nation's sovereignty becomes a sham. However, the futility of interventionist policies has nothing at all to do with monetary matters. It will be shown later why all isolated measures of government interference with market phenomena must fail to attain the ends sought. If the interventionist government wants to remedy the shortcomings of its first interferences by going further and further, it finally converts its country's economic system into socialism of the German pattern. Then it abolishes the domestic market altogether, and with it money and all monetary problems, even though it may retain some of the terms and labels of the market economy.[3] In both cases it is not the gold standard that frustrates the good intentions of the benevolent authority. The significance of the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold is, of course, that it limits the government's power to resort to inflation. The gold standard makes the determination of money's purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and "scientific" yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be "measured." The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper. "People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty." It has been asserted that the gold standard too is a manipulated standard. The governments may influence the height of gold's purchasing power either by credit expansion — even if it is kept within the limits drawn by considerations of preserving the redeemability of the money- substitutes — or indirectly by furthering measures that induce people to restrict the size of their cash holdings. This is true. It cannot be denied that the rise in commodity prices that occurred between 1896 and 1914 was to a great extent provoked by such government policies. But the main thing is that the gold standard keeps all such endeavors toward lowering money's purchasing power within narrow limits. The inflationists are fighting the gold standard precisely because they consider these limits a serious obstacle to the realization of their plans. What the expansionists call the defects of the gold standard are indeed its very eminence and usefulness. It checks large-scale inflationary ventures on the part of governments. The gold standard did not fail. The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an appropriate means of lowering the rate of interest and of "improving" the balance of trade. No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which nationalistic governments try to

135 isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market. If a government wants to sever its domestic price structure from that of the world market, it must resort to other measures, such as prohibitive import and export duties and embargoes. Nationalization of foreign trade, whether effected openly or directly by foreign exchange control, does not eliminate gold. The governments qua traders are trading by the use of gold as a medium of exchange. Notes [1] Lord Keynes in the speech delivered before the House of Lords, May 23. 1944. [2] T.E. Gregory, The Gold Standard and Its Future (3d ed. London, 1934), pp. 22 ff. [3] Cf. Human Action, chapters XXVII–XXXI. http://mises.org/daily/4153

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Release Date: March 10, 2010 Consumer Advisory Council will meet on March 25, 2010 For immediate release The Federal Reserve Board announced Wednesday that the Consumer Advisory Council will hold its next meeting on Thursday, March 25. The meeting will take place in Dining Room E, Terrace Level, in the Board's Martin Building. The session will begin at 9:00 a.m. and is open to the public. For security purposes, anyone planning to attend the meeting should register no later than Tuesday, March 23, by completing the form found online at: https://www.federalreserve.gov/secure/forms/cacregistration.cfm. Attendees must present photo identification to enter the building and should allow sufficient time for security processing. The Council's function is to advise the Board on the exercise of its responsibilities under various consumer financial services laws and on other matters on which the Board seeks its advice. Time permitting, the Council will discuss the following topics:

• Proposed rules to implement the Credit Card Accountability Responsibility and Disclosure Act of 2009

• Foreclosure issues

• Short-term and small-dollar loan products Reports by committees and other matters initiated by Council members may also be discussed. The Board invites comments from the public on any of these matters. http://www.federalreserve.gov/newsevents/press/other/20100310a.htm

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11.03.2010 Germany and France call on a ban on speculative trading in CDS

The momentum for a ban on naked CDS is getting stronger. Germany and France on Wednesday called on the European Union to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading, the FT reports. Angela Merkel and Francois Fillon sent a letter to Jose Barroso yesterday, asking for an immediate investigation of the role and effect of speculative trading in CDSs in the sovereign bonds of European Union member states. Fillon assured after talks in Berlin, that both governments are “very much in agreement in tackling extreme speculation”. Earlier this week, Mario Draghi indicated that tighter regulation of CDS could become a G20 issue when he confirmed that the subject will be on the agenda of the Financial Stability Board (FSB), Reuters reports. An FT editorial says that the proposal has the purpose to “deflect attention from their inability to deal with the Greek debt crisis” and does “nothing to solve the crisis or make future ones less likely”. But banning naked CDS would be “silly”. Bloomberg reports that Merrill Lynch and INvesco warn investors to avoid Spain’s bonds as the euro region’s highest levels of joblessness stifle the country’s ability to cut its budget deficit. Geithner warns EU of regulatory rift The US has warned the EU Commission that plans to regulate hedge funds and private equity companies would cause a transatlantic rift because they discriminated against US groups. The FT reports that diplomats in Brussels are edging towards a final agreement on a legislation that is likely to impose tough conditions on the industry. A British minister told industry representatives he would fight for the free movement of capital, but warned they would not get the directive they wanted. The French position towards the EMF Jean Quatremer has some details about the French reaction to the EMF. It has caused Paris by surprised, and the media reaction was most sceptical. Christine Lagarde said diplomatically that it was an interesting idea, but not a priority right now, while the Elysee is more positive. The main problem for Sarkozy is that it was not his idea.

138 The Greeks are expecting a long recession The Wall Street Journal reports of a poll in the To Vima newspaper, according to which 37.9% of Greeks expect the recession to last three to four years. Another 19.3% think it could last five to nine years, and 22.4% think it could take a decade or longer for Greece to emerge from recession. Only a small minority, 15.4%, reckon that a recovery will come in the next year or two, the poll showed. In Greece, trade unions will shut down hospitals, airports and schools today in Greece’s second general strike this month to protest Prime Minister George Papandreou’s latest round of budget cuts, Bloomberg reports. The unions consider the measures as unjust, as they are demanding sacrifices from workers more than from employers, businessmen and bankers that created the crisis. How Spain can avoid being Greece Luis Garicano has an editorial in the FT, in which he said that Spain has the means to avoid the Greek fate as long as carries out three specific reforms. The first are financial reforms, especially a consolidation of the undercapitalised cajas, the second is budgetary reform, a return to sustainability, and finally, significant structural reform, in the labour market in particular. The most important task is to end the dual labour market. Credit markets return to average This is a little technical but interesting. John Authers reports of a Deutsche Bank research, according to which credit is now trading at average historical levels. “Deutsche finds the historical rate at which different classes of bonds have defaulted and assumes that this is the default rate they will suffer in future. They can then work out the “spread”, or extra yield, that these bonds would have to pay so that they would, given the average default rate, pay out as much as a government bond.” http://www.eurointelligence.com/article.581+M5201ecc7caa.0.html# BIS-FSB's Draghi-systemic regulation needed to address CDS Mon Mar 8, 2010 2:45pm GMT BASEL, March 8 (Reuters) - Greater regulation would be a natural outcome to deal with systemic risks such as those arising from credit default swaps, the head of the Financial Stability Board said on Monday. "Whenever something has systemic implications, you can bet it is going to get systemic regulation," Mario Draghi told a news conference in response to a question on credit default swaps. "It's very unlikely that these markets will be left in the same state as they were before the crisis." Draghi, who is also head of the Italian central bank, said that it was too early to say what sort of regulatory mechanisms the FSB might use to address the problem. Draghi was speaking at a media briefing on the sidelines of a meeting of the FSB at the Bank for International Settlements in the Swiss city of Basel. The FSB is made up of senior representatives of national central banks, regulatory and supervisory authorities and ministries of finance, international financial institutions, standard setting bodies, and committees of central bank experts. The board has been established to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability. The FSB has been tasked by the G20 group of countries to make sure that a wide range of new financial regulation is applied consistently across the world. (Reporting by Krista Hughes and Tamora Vidaillet; Editing by Toby Chopra) http://uk.reuters.com/article/idUKLAG00615920100308

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Spain has the means to avoid the fate of Greece By Luis Garicano Published: March 11 2010 02:00 | Last updated: March 11 2010 02:00 After six quarters of negative growth and unemployment rates inching towards 20 per cent, perhaps the most surprising feature of the situation in Spain is the inaction of the government and central bank. The government initially misdiagnosed the crisis as a temporary drop in demand that could be remedied with short-term, stop-gap measures, and has accepted only recently the need for structural economic reforms. The Bank of Spain, after being praised for sound banking regulation that impeded the accumulation of "toxic assets", is dithering about the restructuring of the financial system. Credit to all sectors is plummeting, with the perverse exception of the moribund property sector. Yet Spain does not need to be the next Greece. Public debt is still low. Foreign investors have no immediate cause for concern, as the country can easily meet its obligations over the next few years. But the social fabric cannot long withstand this inaction. The diagnosis is now generally agreed. Yes, the crisis was global, but Spain was particularly exposed. Over the last decade, the country experienced no productivity growth, but gross domestic product per capita grew, and fast, owing mainly to increases in the working population as a percentage of the total population and to unemployment reductions. Then the property bubble burst, destroying in its wake a large portion of families' highly leveraged wealth. Apparently solid public finances were revealed as no more than an illusion. What needs to happen now falls into three categories. First, the financial system must be restructured. As well as world-class banks such as BBVA and Santander, Spain has a large number of smaller, undercapitalised "cajas" that are unquoted and often controlled by regional political bosses. Many are heavily exposed to the €325bn ($442bn, £296bn) stock of dubious loans to property developers now on Spanish banks' books. To compound the problem, freewheeling book-keeping is going unchecked. Even with unemployment rising and non- performing loans increasing at other banks, cajas have reported several quarters of improvements or stability in their non-performing loan figures. Credit Suisse analysts put "true" non-performing loans at twice the 5 per cent currently reported. While parliament last July authorised a fund of up to €100bn to restructure banks, this has yet to be used. The problem is proving intractable owing to the unwillingness of the government and central bank to challenge the regional authorities that control the cajas. Second, the government accounts must move towards sustainability. The government needs to raise €200bn in gross debt this year, including €100bn in net new debt to pay for the 2010 deficit. A key upside risk here is the pending restructuring of the financial system, which, if it costs the full €100bn, will push the debt-to-GDP ratio towards 80 per cent. In recent months, the government has announced and then shelved or equivocated over measures such as a freeze in civil service wages and tax increases. Some announced measures, such as public sector job cuts, cannot be implemented without regional collaboration in a country where only 22 per cent of 2.7m public employees work for the central government. A key issue, again, is

140 the haphazard decentralisation of the state. Third, structural reforms, particularly in the labour market, are needed to lift productivity. The "dual" labour market (extremely protected insiders, completely flexible temporary jobs) has limited the scope for youngsters to get a job with a future; plentiful opportunities in tourism and construction, meanwhile, have encouraged teenagers to leave school in droves. Employers are reluctant to provide training for workers on temporary contracts and the vocational training system for the unemployed does little to upgrade their skills. The result is a labour force that is simply not qualified for a globalised, know-ledge-intensive economy. The government and the Bank of Spain need to face up to the gravity of the situation. Fiscal consolidation and structural reform are the main tasks for the former while the latter must dramatically increase the transparency of the financial system and jump-start its restructuring. Such reforms could unleash the potential of the country. The alternative is years of anaemic growth and persistently high unemployment. The writer is professor of economics and strategy at the London School of Economics http://www.ft.com/cms/s/0/b9d59ad0-2cac-11df-8abb-00144feabdc0.html

11.03.2010 The Greek crisis and the future of the Eurozone By: Paul De Grauwe The crisis that started in Greece culminated into a crisis of the Eurozone as a whole. There is no doubt that the major responsibility rests with the Greek authorities who mismanaged their economy and deceived everybody about the true nature of their budgetary problems. The solution of the problem will therefore necessitate drastic changes in Greek economic and budgetary policies. This being said, there is more than one villain in the play. The financial markets and the eurozone authorities also bear part of the responsibility for letting this crisis degenerate into a systemic crisis of the eurozone. The destabilizing role of financial markets has been illustrated dramatically again. Periods of euphoria alternate with periods of depression amplifying movements in asset prices that are unrelated to underlying fundamentals. This is not new, of course, but the speed with which this has occurred is baffling. Just a year ago the sovereign bond markets were gripped by a bubble leading to record low levels of long term interest rates at the time when governments added unprecedented amounts of new bonds in the market. In a few weeks time the situation turned around dramatically and bond markets in a number of countries crashed. It is a repeat of a sad story. Financial markets are first blinded and see no risks, until the wake-up call and then they overreact making the resolution of the problem more difficult. The rating agencies take a central position in the destabilizing role of the financial markets. One thing one can say about these agencies is that they systematically fail to see crises come.

141 And after the crisis erupts, they systematically overreact thereby intensifying it. This was the case two years ago when the rating agencies were completely caught off guard by the credit crisis. It was again the case during the last few months. The sovereign debt crisis started in Dubai. Only after Dubai postponed the repayment of its bonds and we had all read about it in the FT, did the rating agencies realize there was a crisis and did they downgrade Dubai’s bonds. Having failed so miserably in forecasting a sovereign debt crisis, they went on a frantic search of possible other sovereign debt crises. They found Greece which of course was a natural target. They did not limit their search to Greece but “visited” other countries, mostly Southern European countries and started the process of downgrading. This in turn led to a significant increase in government bond rates in these countries. The crisis was allowed to unfold also because of hesitation and ambiguities by both the Eurozone governments and the ECB. The Eurozone governments failed to give a clear signal about their readiness to support Greece. The failure to do so mainly resulted from disagreements among member state governments concerning the appropriate response to the Greek crisis. The ECB, in turn, created ambiguities about the eligibility of Greek government debt as collateral in liquidity provision. As is well-known, the ECB relies on ratings produced by American rating agencies to determine eligibility of government bonds as collateral. Prior to the financial crisis the minimal rating needed to be eligible was A- (or equivalent). In order to support the banking system during the banking crisis, the ECB temporarily lowered this to BBB+. At the end of 2009, however, the ECB announced that it would return to the pre-crisis minimal rating from the start of 2011 on. As the Greek sovereign debt had been lowered to BBB+, this created a big problem for financial institutions holding Greek government bonds, which now face the prospect that their holdings of Greek government bonds may become extremely illiquid. No wonder many dumped Greek government bonds, precipitating the crisis. Similar uncertainties about the future ratings of other Eurozone government bonds hang as a sword of Damocles over the Greek government bond market and more generally over the government bond markets of the weaker countries in the Eurozone. What’s to be done: the short-run The Greek government debt crisis should be stopped. There are at least three reasons why it is imperative that this crisis be stopped. First, allowing the Greek crisis to lead to default, risks leading to contagion that will affect other government bond markets in the eurozone. Second, and following up on the previous statement, such a contagion to other government bond markets will affect the banking sector in the Eurozone. Many banks have started to recover from the banking crisis by arbitraging the yield curve, i.e. by borrowing short from the central bank at very low interest rates and investing in longer term government bonds. The steepness of the yield curve has been an important source of profits for the banks. A crisis in the government bond markets, i.e. sharply declining bond prices, would lead to large losses on the balance sheets of the banks. This could trigger a new banking crisis in the Eurozone. A third reason for the need to stop the Greek government bond crisis is at least as important. If not stopped, the crisis will lead to increases in government bond yields in a significant number of Eurozone countries. This will put pressure on the governments of these countries to sharply contract fiscal policies, leading to deflationary effects and risking to pull down the Eurozone economies into a double-dip recession. Such an outcome would not only be bad news for the unemployed, but would also make it even more difficult for the Eurozone countries to reduce their budget deficits and debt levels.

142 The choice the Eurozone authorities face today is between two evils. The first one arises from moral hazard. Bailing out Greece is bad because it gives a signal that irresponsible behaviour will not be punished. The second evil arises from the contagious effects of letting Greece default on the banking system and macroeconomic policies in the Eurozone. Authorities have to choose for the lesser evil, which in this case is the second one. This is also what they did when they bailed out the banks that had been at least as irresponsible as the Greek government. While there can be little doubt that the crisis must be stopped now rather than later, much doubt has been voiced that the European Union, or for that matter the member countries of the Eurozone, have the means to do so. Doubts have been voiced at the legal level and at the level of the financial capacity of the union to organize a bail-out. The legal skeptics argue that the no-bail out clause in the Treaty forbids the member states of the union to provide financial assistance to another member state. But this is a misreading of the Treaty. The no-bail-out clause only says that the European Union shall not be liable for the debt of governments, i.e. the governments of the Union cannot be forced to bail-out a member state (see Article 103, section 1). But this does not exclude that the governments of the EU freely decide to provide financial assistance to one of the member states. In fact this is explicitly laid down in Article 100, section 2[1]. Thus euro zone governments have the legal capacity to bail out other governments. There can be equally little doubt that the Eurozone member countries have the financial capacity to bail-out Greece if the need arises. It does not cost them that much. In the event that Greece were to default on the full amount of its outstanding debt, a bail-out by the other euro zone governments would add about 3% to these governments’ debt. A small number compared to the amounts added to save the banks during the financial crisis. One can conclude that the member countries of the Eurozone have the legal and financial power to bailout Greece. Up to now the only obstacle has been political, i.e. the lack of consensus among the different member states about the necessity to do so. One can only hope that this political obstacle will go away soon. The Greek government of course has the key to eliminate the obstacle by providing a credible budget cutting policy. This seems to be the case today after the new round of budget cutting measure. It is unclear though whether the other EU countries are willing to take up their part of the deal. There is one important element missing, though. This is an announcement by the ECB about its collateral policy. As argued earlier, the uncertainty about what the ECB will do in the coming months with Greek government debt remains. The ECB should clearly signal that it will continue to accept Greek government debt as collateral, independently of the ratings concocted by the agencies. The experience we now have with the ECB policy regarding the eligibility of government bonds as collateral in liquidity provisions leads to the conclusion that there is an urgent need for the ECB to change this policy. More precisely, the ECB should discontinue its policy of outsourcing country risk analysis to American rating agencies. The latter have a dismal record. As argued earlier, they have made systematic mistakes, underestimating risks in good times, and overestimating risks in bad times. Relying on these agencies to decide about such a crucial matter as the selection of government bonds, is simply unacceptable. It helps to destabilize the financial markets in general and the Eurozone in particular. Surely, the ECB should not be a primary source of financial instability in the Eurozone. The ECB is better placed to do the job of analyzing the creditworthiness of member countries of the Eurozone than the rating agencies. It has a pool of highly skilled analysts who are equally capable if not

143 more so than the analysts working for the rating agencies. What’s to be done: the long term The crisis has exposed a structural problem of the Eurozone that has been analyzed by many economists in the past. This is the imbalance between full centralization of monetary policy and the maintenance of almost all economic policy instruments (budgetary policies, wage policies, etc. ) at the national level. Put differently the structural problem in the Eurozone is created by the fact that the monetary union is not embedded in a political union. This imbalance leads to a dynamics of creeping divergencies between member states and no mechanism to correct or to alleviate it. These divergent developments have much to do with the fact that important economic decisions (decisions about wage agreements, budgetary policies, social policies, credit regulations, etc. ) are decided at the national level. These divergent movements in competitiveness also lead to budgetary divergences whereby countries that loose competitiveness experience stronger deteriorations or their budgetary situations. Thus the lack of political integration leads to a buildup of economic and budgetary divergencies leading to a crisis. When the crisis erupts, the same absence of political integration makes it difficult to resolve the crisis as was illustrated in the previous sections. This structural problem has to be fixed before we are hit by the next crisis. But that is also the hard part. There is today in the Eurozone no willingness to move forward into a more intense political union. Even the thought of adding just 0.1% to the European Union budget makes some countries extremely jittery. Thus, a very small scale fiscal union that would transfer just a few percentage points budgetary and tax responsibilities appears to be out of the question. One is led to the conclusion that the inability to create a more intense political union in the eurozone will continue to make the latter a fragile construction, prone to crises and great turbulence each time such a crisis must be resolved. While a grand plan for political unification does not seem to be possible, smaller but focused steps towards such a future union can be taken. Two such steps are worth mentioning here. One is the idea of creating a European Monetary Fund (EMF), an idea put forward by Daniel Gros and Thomas Mayer. The EMF would be a new European institution which would obtain its funding from countries with excessive budget deficits and debt levels. In times of crisis it would have the means to support countries in need of financial assistance, while at the same time it would have the authority to impose conditions for the granting of financial assistance. Another idea is to create new common Euro government bonds in which each country would participate pro rata of its capital share in the ECB (for more detail see De Grauwe and Moesen(2009)). In order to deal with obvious moral hazard problems, the interest rate each of the participating countries would have to pay would depend on the interest rates each of these governments pay when they issue bonds in their own markets. Thus the more profligate governments like Greece would have to pay a higher interest rate than the more orthodox governments. The common bond interest rate would then be the weighted average of these national interest rates. Such a scheme would go a long way in pacifying the fears about moral hazard implicit in common bond issues; fears that are very strong in countries like Germany. In addition, by creating a new bond market with sufficient size it would also be attractive to outside investors, creating a liquidity premium that would profit everybody, including Germany. These proposals are only small steps towards political unification. They have the important

144 quality of being signals of a determination of the members of the eurozone to commit themselves to a future intensification of the process of political union. Such signals are of crucial importance today. They make it clear that the members of the eurozone are serious in their desire to preserve the eurozone. Without these (or similar) steps there can be little doubt that the Eurozone has no future. References: De Grauwe, P. and W. Moesen (2009), “Gains for All: A Proposal for a Common Euro Bond”, Intereconomics, May/June. Gros, D. and T. Mayer (2010), Towards a Euro(pean) Monetary Fund, CEPS Policy Brief, No. 202, Centre for European Policy Studies, Brussels.

[1] Here is the text: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned”. http://www.eurointelligence.com/article.581+M53f4f1dc3ab.0.html#

COMMENT Europe’s sovereign credit default flop Published: March 10 2010 19:29 | Last updated: March 10 2010 19:29 Proposals by European leaders to crack down on sovereign credit default swaps serve an important purpose: to deflect attention from the fact that their inability to deal with the Greek debt crisis is a trap of their own making. It does nothing, however, to solve the crisis or make future ones less likely. George Papandreou, the Greek prime minister, has been excoriating “speculators” for putting Greece at risk by destabilising the market for its debt. They supposedly do this by pushing up CDS prices (a CDS insures against a Greek sovereign default), putting pressure on the yield Greece must pay on its bonds. Germany’s Angela Merkel and France’s Christine Lagarde echo his calls for limits on some forms of CDS trading. Gillian Tett: Common sense eludes ECB - Mar-10 Call for ban on CDS speculation - Mar-10 Trichet hints at monetary fund backing - Mar-10 Opinion: How to stay ahead on sovereign debt - Mar-10 Lex: Naked CDS - Mar-10 Regulators face CDS headache - Mar-09 They are at best misinformed. As the FT has reported, the rise in bond yields earlier this year preceded that in CDS prices, not the reverse. BaFin, the German regulator, says the net volume of CDS on Greece’s sovereign debt since January remains unchanged at $9bn – a drop in the ocean of some €300bn of Greek bonds. The most frenetic CDS buyers recently, moreover, are the European banks holding most of Greece’s debt, not dastardly hedge funds (which are more likely to be selling the protection the banks need). “Naked” CDS, where the buyer does not own the underlying bond, are often likened to insuring one’s neighbour’s house against fire. But while arson is easy, no speculator has deep

145 enough pockets to bring down Greece at will. The rise in risk premia reflects not manipulation but simply an increased default risk perceived by traders. This is not to deny that CDS can create instability. AIG fell because it held too little capital against the CDS it sold. But states are less vulnerable than companies, and plans to require derivatives to be traded on exchange and centrally cleared will in any case do a lot to make derivatives markets more transparent and efficient. These reforms must be seen through. But banning naked CDS – actual hedging is hopefully not in the crosshairs – is silly. Nakedness is hard to define: may sovereign CDS be used to hedge against default by a company in the same country? A ban, if it could be enforced, would also confine hedging to a world of barter, requiring one to find those with the opposite hedging needs of one’s own without intermediates. Greek profligacy and ill-handled eurozone rules caused the debt crisis, not CDS buyers. The only punishment leaders should consider meting out to them is to ensure that Greece does not default. http://www.ft.com/cms/s/0/7256bd26-2c78-11df-be45-00144feabdc0.html

Global Insight: Common sense eludes ECB By Gillian Tett Published: March 10 2010 21:54 | Last updated: March 10 2010 21:54 Heikki Niemeläinen, a senior Finnish government official, is feeling cross. In the past eight years, he has run the Helsinki-based Municipal Guarantee Board, which offers central guarantees for local bonds. On paper, this is run in a commonsense way: Mr Niemeläinen’s group allows investors to use Finnish local government bonds as collateral, but only with sliding “haircuts”, which penalise badly run regions (by charging a penalty), and reward those with sound public finances. Editorial Comment: EU’s credit default flop - Mar-10 Call for ban on CDS speculation - Mar-10 Trichet hints at monetary fund backing - Mar-10 Opinion: How to stay ahead on sovereign debt - Mar-10 Lex: Naked CDS - Mar-10 Regulators face CDS headache - Mar-09 However, to his surprise, he has recently realised that these commonsense ideas are rare – at least as far as the European Central Bank is concerned. Instead, when banks lodge eurozone government bonds with the ECB, as collateral, there is no sliding scale of “haircuts”, as long as all the bonds are rated higher than BBB, a low rating. Thus a Greek bond is essentially treated in the same way as a Finnish bond, notwithstanding the fact that the yield on 10-year bonds is almost 7 per cent, about twice the market rate for Finnish or Greek bonds, since Athens’ fiscal position is dramatically worse than, say, that of Helsinki. And that, in effect, means any bank holding Greek bonds can freely exchange them for euros or even Finnish bonds via the ECB – thus enjoying a backdoor financial boost.

146 “There seems to be a very dangerous flaw in the design of the European Central Bank, which gives some countries and banks a possibility to conduct a European carry trade,” fumes Mr Niemeläinen. “Some countries are utilising this situation, and other countries like Finland are seen as suitable for conducting rescues,” he adds. This pattern has helped to weaken banks over the past year to such an extent he says that if the ECB cuts off “this money pump”, it risks creating a new liquidity crisis for many European banks. No doubt Jean Claude Trichet, ECB president, would describe this pattern rather differently: in recent months, he has insisted the ECB is committed to forcing Greece and others to reform themselves. And in practical terms the ECB is due to tighten collateral rules this year, which may make it harder for Greek bonds to be used as collateral. It plans to reinstate a rule that bonds can be used only with a rating of more than single A; on current trends Greece could be down-graded below that level. Nevertheless, whatever the geeky details of the rules, it is hard to avoid the conclusion that Mr Niemeläinen has a point: to a casual observer, or the average Finnish voter, this situation looks bizarre. And politicians would ignore that at their peril. For while the immediate sense of crisis on Greece has receded slightly, after the successful sale of a €5bn ($6.8bn, £4.6bn) Greek bond last week, this crisis has revealed a fissure at the heart of Europe, which will not be so easily healed. On one side stand Portugal, Italy, Ireland, Greece and Spain, which are now suffering from weak fiscal positions. On the other, is a quasi “northern bloc”, of countries such as Germany, the Netherlands and Finland, which have been more prudent. Most investors assume this core northern group will support its more profligate colleagues; after all, Germany appears to have offered tacit support to Greece in recent days. However, anger is rising in Germany. And many Finns feel particularly irritated. Finland suffered its own debt and banking crisis 20 years ago, which destroyed much of the banking system, because no one else stepped in to help. Many Finns think their country is now better as a result of that shake-out. So why, they ask, should Greece not take the same medicine? Or why – as Mr Niemeläinen puts it, not simply run the ECB on the same principles as Finland’s Municipal Guarantee Board, which penalises the profligate? In truth, the answer is that introducing a Finnish-style rule would simply be too painful for Greece to bear right now – and too big a step for politicians in Germany or France to contemplate. Nevertheless, the longer countries such as Greece writhe in fiscal pain, the more pertinent that question will become. Perhaps it is time for politician in Athens, Frankfurt or Paris to pay a visit to the board; if nothing else, it would offer a bracing glimpse of an alternative way for the ECB to conduct its affairs. http://www.ft.com/cms/s/0/db074de0-2c6e-11df-be45-00144feabdc0.html

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Geithner warns of rift over regulation By Martin Arnold and Sam Jones in London and Nikki Tait in Brussels Published: March 10 2010 20:50 | Last updated: March 10 2010 20:50 Tim Geithner, US Treasury secretary, has delivered a blunt warning to the European Commission that its plans to regulate the hedge fund and private equity industries could cause a transatlantic rift by discriminating against US groups. A letter sent by Mr Geithner this month to Michel Barnier, Europe’s internal market commissioner, makes it clear that the European Union is heading for a clash with Washington if it pushes ahead with what the US – and Britain – fear could be a protectionist law. Editorial Comment: EU’s credit default flop - Mar-10 Gillian Tett: Common sense eludes ECB - Mar-10 Lex: Naked CDS - Mar-10 Call for ban on CDS speculation - Mar-10 The debate over the shape of future financial regulation has reached a critical point in Brussels. Diplomats were on Wednesday night moving closer to a compromise on the sweeping overhaul that has angered the industry and worried institutional investors. The draft EU directive would impose tighter restrictions on hedge funds, private equity and other alternative investment funds. It has caused alarm in the City of London, where some in the industry say it is a thinly veiled attempt by France and Germany to undermine the UK’s dominance of financial services. If European diplomats reach agreement at a meeting on Thursday, the directive will be put to EU finance ministers when they convene on Tuesday. The proposed rules will require approval by EU lawmakers. Mr Geithner’s one-page letter, sent on March 1, stresses the need for the US and Europe to work together on regulation of the financial services industry. He underlines last autumn’s commitment by the Group of 20 nations to avoid discriminatory measures in any regulatory response to the financial crisis. Mr Geithner warns that US hedge funds, private equity groups and banks could be discriminated against if proposals to restrict the access of EU investors to funds based outside the 27-country bloc are included in the final law. So-called “third country” elements of the directive would force non-EU funds to comply with the new rules if they wish to market themselves at all within the EU. The directive could also force EU-based private equity and hedge funds to use only locally based banks as custodians and depositaries. Contentious areas also include rules on remuneration, limits on borrowing, the disclosure of sensitive information and the regime for depositaries. Paul Myners, UK financial services minister, told a meeting of private equity executives on Wednesday that he would fight “line by line and minute by minute” to defend the free movement of capital. But he also warned that “nobody in this room is going to get the directive they want”.

148 One senior private equity executive said the UK needed to take a stand before others would rally behind it. http://www.ft.com/cms/s/0/e0990432-2c83-11df-be45-00144feabdc0.html

BRUSSELS Trichet hints at monetary fund backing By Ralph Atkins in Rome Published: March 10 2010 22:23 | Last updated: March 10 2010 22:23 Jean-Claude Trichet, European Central Bank president, on Wednesday night hinted he might yet support proposals for a European Monetary Fund to help crisis-hit countries, despite scepticism expressed by German ECB governing council members. The ECB had not “rejected” the plan put forward by Wolfgang Schäuble, the German finance minister, but more details were required before a verdict could be reached, Mr Trichet said in a speech in Frankfurt on Wednesday night. Editorial: Exit this way - Mar-04 Italian MP campaigns to support Draghi - Mar-05 Editorial: Euro succession - Feb-17 ECB begins leadership overhaul - Feb-16 Portugal’s bank chief leads ECB deputy race - Feb-15 In depth: Central banks - Nov-16 His comments pointed to splits within the 22-strong ECB governing council. Earlier this week, Axel Weber, Bundesbank president, had warned that the proposal could prove a distraction from attempts by countries such as Greece to bring their public sector deficits back under control. Jürgen Stark, a former Bundesbank vice-president and ECB executive board member, has taken a similarly hostile view. But other ECB policymakers are likely to be more sympathetic to proposals that would strengthen the political effectiveness of Europe’s 11-year-old monetary union. Mr Schäuble floated his EMF idea in response to the crisis over Greece’s public finances, which has exposed shortcomings in the eurozone’s “crisis management” capabilities. No details have been given, but Berlin envisages that help would be given only under tough conditions. Mr Trichet said he understood “the idea which is to have very strong conditionality for support to a particular country”. But he said Greece had announced “convincing” plans to reduce its public sector deficit – noting that “convincing” was not a word the ECB used often. In practice, the time it would take to set up any EMF would make it irrelevant to the Greece. Even with ECB support, the idea would also face considerable resistance from elsewhere in Europe – especially if it required changes to European Union treaties. The ECB has opposed the idea of the International Monetary Fund becoming involved in more than technical assistance in a case such as in Greece. But other eurozone policymakers argue that rather than setting up an EMF, Europe would be better served by finding ways to work better with the IMF.

149 The ECB’s main worry would be that an new institution would undermine the effective implementation of the EU’s fiscal rules. But Mr Trichet has implicitly backed the idea that in an extreme case, outside help should be provided. http://www.ft.com/cms/s/0/a0dd7e3c-2c82-11df-be45-00144feabdc0.html

How to handle the sovereign debt explosion By Mohamed El-Erian Published: March 10 2010 19:43 | Last updated: March 10 2010 19:43 Every once in a while, the world is faced with a major economic development that is ill- understood at first and dismissed as of limited relevance, and which then catches governments, companies and households unawares. We have seen a few examples of this over the past 10 years. They include the emergence of China as a main influence on growth, prices, employment and wealth dynamics around the world. I would also include the dramatic over-extension, and subsequent spectacular collapse, of housing and shadow banks in the finance-driven economies of the US and UK. Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind. First, at the most basic level, what we are experiencing is best characterised as the latest in a series of disruptions to balance sheets. In 2008-09, governments had to step in to counter the simultaneous implosion in housing, finance and consumption. The world now has to deal with the consequences of how this was done. US sovereign indebtedness has surged by a previously unthinkable 20 percentage points of gross domestic product in less than two years. Even under a favourable growth scenario, the debt-to-GDP ratio is projected to continue to increase over the next 10 years from its much higher base. Many metrics speak to the generalised nature of the disruption to public finances. My favourite comes from Willem Buiter, Citi’s chief economist. More than 40 per cent of global GDP now resides in jurisdictions (overwhelmingly in the advanced economies) running fiscal deficits of 10 per cent of GDP or more. For much of the past 30 years, this fluctuated in the 0- 5 per cent range and was dominated by emerging economies. Second, the shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter. Third, the issue is not whether governments in advanced economies will adjust; they will. The operational questions relate to the nature of the adjustment (orderly versus disorderly), timing and collateral impact.

150 Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty. Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialise on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation. Fourth, governments can impose solutions on other sectors in the domestic economy. They do so by pre-empting and diverting resources. This is particularly relevant when there is limited scope for the cross-border migration of activities, which is the case today given the generalised nature of the public finance shock. Fifth, the international dimension will complicate the internal fiscal adjustment facing advanced economies. The effectiveness of any fiscal consolidation is not only a function of a government’s willingness and ability to implement measures over the medium term. It is also influenced by what other countries decide to do. These five points all support the view that the shock to balance sheets is highly relevant to a wide range of sectors and markets. Yet for now, the inclination is to dismiss the shock as isolated, temporary and reversible. This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward- looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena. There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments. Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them. The writer is chief executive of Pimco http://www.ft.com/cms/s/0/c8655bdc-2c78-11df-be45-00144feabdc0.html

151 UK Turner orders tougher stress testing By Brooke Masters, Chief Regulation Correspondent Published: March 10 2010 14:16 | Last updated: March 10 2010 14:16 Regulators have ordered UK banks to run a new round of tougher stress tests that assume the economy will endure a double-dip recession that would force unemployment up to 13.3 per cent. The banks will be required to prove that their tier core one capital ratio – a key measure of banking safety – would stay above 4 per cent even if the economy contracted an additional 2.3 per cent for a total fall of 8.1 per cent from the boom, the Financial Services Authority said in its annual Financial Risk Outlook. Editorial: Moral hazard is still alive - Mar-09 MEPs seek tougher curbs on bankers’ bonuses - Mar-08 Sterling hit by double-dip recession fears - Feb-25 US impetus drives bank regulators - Feb-04 The tests are more stringent than the ones the banks were required to pass last year, which assumed peak unemployment of 12.5 per cent and a peak to trough slump of 6.9 per cent in gross domestic product. Lord Turner, who chairs the FSA, said the regulator believes the economy is on track for a slow recovery but is worried that households and some businesses are still carrying too much debt and remain vulnerable to economic shocks. “We are not anticipating that [meeting the new requirements] requires a whole lot of extra capital. A lot of the banks will have a stronger starting point” than they did when running the 2009 stress tests, Lord Turner said. But he said the FSA was also concerned that some banks and building societies might struggle to meet planned global regulations that will impose higher capital and liquidity requirements. Low interest rates are also squeezing margins at building societies and would likely force them to slow or cut back their lending, the FSA said. Some financial institutions may also have trouble finding stable long-term funding as Bank of England carries out its plan to withdraw its special liquidity scheme in 2012. That scheme allowed banks to borrow £185bn in Treasury bills, using troubled assets, such as securitised mortgages. The regulator also warned banks and insurance companies that it expected them to prepare for higher capital and liquidity requirements by storing up capital but also through “higher quality lending” that will make their asset books less risky. Lord Turner specifically singled out mortgages where borrowers “self-certify” their income as an example of “very bad lending.” The FSA said the actual fall in the UK economy in 2009 was slightly larger than it had expected when designing stress tests for banks last year, but unemployment did not rise as quickly as it had feared and property prices had proved more resilient, leading to lower than

152 expected losses on residential mortgages. The new stress tests therefore assume house prices will fall by a total of 36 per cent, less than the 50 per cent assumed in the 2009 tests. The regulator said it feared lenders might be “underestimating the number of borrowers in financial difficulty” and failing to prepare for a rapid rise in defaults, should interest rates rise. Insurers, meanwhile, must adjust their expectations, the FSA said. “It is unlikely that the trading environment will quickly, if ever, allow firms to return to the levels of income and profitability experienced prior to the crisis,” the 88-page report said. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/31f3a820-2c28-11df-9187-00144feabdc0.html

Call for ban on CDS speculation By FT reporters Published: March 10 2010 19:49 | Last updated: March 10 2010 22:26 Germany and France on Wednesday called on the European Union to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading.The move came as Angela Merkel, German chancellor, called for EU institutions to be given “more teeth” both to control speculation and to police the deficit spending of member states. François Fillon, French prime minister, said after talks in Berlin that both governments were “very much in agreement in tackling extreme speculation”. Editorial Comment: EU’s credit default flop - Mar-10 Gillian Tett: Common sense eludes ECB - Mar-10 Trichet hints at monetary fund backing - Mar-10 Opinion: How to stay ahead on sovereign debt - Mar-10 Lex: Naked CDS - Mar-10 Regulators face CDS headache - Mar-09

The two leading economies in the eurozone are asking for an immediate investigation of the role and effect of speculative trading in CDSs in the sovereign bonds of European Union member states. Their request came in a letter sent on Wednesday to José Manuel Barroso, president of the European Commission, and José Luis Rodríquez Zapatero, Spanish prime minister and current chairman of the EU ministerial council.

153 As an alternative to a ban on speculative trading in CDSs they suggest a bar on so-called naked transactions, in which investors buy swaps without holding a direct investment in the underlying debt, and tighter regulation of short-term swaps in the bond markets. A growing European consensus on the need for tougher regulation of CDS trading was reflected by Lord Turner, chairman of the UK Financial Services Authority, who warned that naked trading in corporate CDSs could force companies into default. The Franco-German initiative, backed by Luxembourg and Greece, also calls for regulators to be given “unlimited access” to a register of derivatives trading in order to identify who is trading and what they are doing. It proposes that derivatives transactions should only be allowed on exchanges, electronic platforms and through centralised clearing houses. CDSs are commonly used by banks and hedge funds to reduce their risk, but they are also popular with investors who buy and sell them with an eye to making a quick profit. Naked CDSs have been blamed for helping driving down Greek bonds this year and financial companies last year. Lord Turner, who is also a member of the Financial Stability Board, which works on global regulatory proposals, said he wanted regulators to look at the question of naked CDSs on both corporate and sovereign debt. “We need to think about whether we are being radical enough on credit default swaps . . . as to whether naked CDSs should be allowed,” Lord Turner said, adding he was particularly concerned that corporate CDSs could be manipulated to force a company into default, a form of market abuse. But he warned against hasty action. “We need to look at these issues very carefully. There is a danger of an oversimplistic belief that everything going on is shorting in the CDS market,” Lord Turner said. In a clear indication of the gathering international support for action, Mario Draghi, chairman of the FSB, signalled this week that the group was focused on the issue. “This way of betting has systemic implications,” he said. “The sense I have is that governments are increasingly uneasy with this. Whenever something has systemic implications, you can bet it is going to get systemic regulation.” Reporting by Quentin Peel in Berlin, Brooke Masters and Sam Jones in London, Aline van Duyn in New York, and David Oakley The problems with derivative regulation Why has the controversy over credit derivatives blown up? The Greek budget deficit crisis has focused attention on the market because of accusations that speculators used it to cause a sell-off in the Athens debt and stock markets and made large sums from violent moves in prices. So what is a credit derivative? Otherwise known as credit default swaps (CDS), it is a contract between two parties. One buys protection against a certain bond defaulting, while the other sells protection in a swap agreement. Buying a CDS contract is not the same as buying an insurance contract, but it does reduce market risk for a buyer.

154 Why have calls for regulation increased? The Greek deficit crisis has prompted some politicians to demand more oversight and restrictions of the market. However, moves to regulate the market have been in motion since the financial crisis because it is considered too opaque and murky as it is traded privately, or over-the-counter, and is difficult to track. Is a credit derivative used for speculation or to hedge risk? Both. This is where problems exist in regulating the market as hedging risk is considered a legitimate use of the instrument. However, it is difficult to differentiate between funds that are speculating to make quick profits and those that are trying to reduce their risks by buying CDS protection. What type of regulation is likely? It seems certain that regulators will force CDS to become a public market by making banks and funds trade them on exchanges or through clearing houses, which will oversee and publish trades. Naked CDS trading is also under attack. What’s that? This is trading a CDS contract by a bank or hedge fund that does not own the underlying bond or related security. Some politicians blame this kind of trade for exacerbating the Greek deficit crisis as they say it is purely speculative and designed to make quick profits mainly by hedge funds.

Will naked CDS trading be banned? This could prove tough and regulators are increasingly against it because it is difficult to define.

Will regulations be co-ordinated globally? The Basel-based Financial Stability Board is co-ordinating the G20’s response to the financial crisis and will try to encourage similar regulations in different jurisdictions. If regulations are not co-ordinated globally, then traders will simply migrate to the markets where there are no regulations. http://www.ft.com/cms/s/0/e7ba5862-2c7c-11df-be45-00144feabdc0.html

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Crisis en la UE: ¿Está en riesgo el futuro del euro? Los recientes problemas de Grecia y la incertidumbre de que los mismos se repitan en países de más peso como España e Italia han puesto de relieve la necesidad de un nuevo modelo de supervisión y medidas más contundentes en la Unión Europea (UE). Por el camino, el euro ha perdido fortaleza frente al dólar, los diferenciales de la deuda del Viejo Continente se han disparado y cada vez más expertos vaticinan que las mayores dificultades están todavía por llegar. Un ejemplo de ello es George Soros, uno de los inversores más influyentes del mundo y la vigésimo novena mayor fortuna del mundo, que considera que el futuro del euro está en peligro. El dueño de Soros Fund Management sostuvo recientemente en un artículo publicado en el diario británico Financial Times que Europa necesita "un proceso de supervisión más activo así como mecanismos institucionales de ayuda condicional". "Un mercado de eurobonos bien organizado sería deseable, la cuestión es si puede generarse la voluntad política para adoptar esas medidas", aseguró este inversor. Para Soros, “la supervivencia de Grecia” no resuelve el debate sobre el futuro del euro, ya que los verdaderos campos de batalla son Portugal, Italia, Irlanda, Grecia y España. Junto a Soros, otro de los mayores críticos con la actual situación europea es el economista y Premio Nobel Paul Krugman, quien opinó en un artículo del Wall Street Journal que el problema de esta región ha sido “la arrogancia de las élites; concretamente, las élites políticas que instaron a Europa a adoptar una moneda única mucho antes de que el continente estuviera preparado para un experimento de este tipo”. Tal y como opinan Soros y Krugman, dos voces de reconocido prestigio a nivel mundial, la crisis ha hecho aflorar problemas antes imperceptibles de la zona euro. Una de las corrientes más extendidas achaca estas dificultades a la independencia fiscal que tiene cada uno de los países miembros de esta unión. “La Europa de la Zona Euro (16 países) no puede tener una Unión Monetaria y 27 políticas fiscales (UE 27) distintas”, señala Robert Tornabell, profesor de Finanzas de Esade y autor del reciente libro “El día después de la Crisis”. Estados Unidos, dice, “tiene una moneda única, con una misma política monetaria y, por supuesto, idéntica política fiscal para todos los estados de la Unión (incluyendo Alaska, Hawai, etcétera)”. Los defensores de esta teoría argumentan que la Unión Europea necesita de una vigilancia y una supervisión mucho más rígidas y tachan de débil el Pacto de Estabilidad y Crecimiento (PEC), un acuerdo regional alcanzado en 1997 con el objetivo de facilitar y mantener la unión económica y monetaria. Este pacto establece actualmente el 3% del PIB y el 60% de la deuda pública como los límites deficitarios de un país. Sin embargo, la Comisión Europea sentó un mal precedente en 2004 al perdonar una sanción a Alemania y Francia por superar estos umbrales. Es en este terreno donde George Soros pide una “monitorización más intrusista”. En medio de este escenario, aparece otro de los debates que más está aflorando en los últimos

156 meses: la salida del euro de algunos países. Así, los Estados que más están sufriendo la crisis podrían dejarse llevar por la tentación de volver a tener al alcance de su mano la opción de devaluar la moneda, bajar los tipos de interés o emitir más moneda para impulsar el consumo. Una posibilidad que Rafael Pampillón, director del Área de Economía de IE Business School, descarta. “Nadie va a salirse del euro”, señala, “pero si algún país se ha endeudado en exceso y ahora no puede devolver su créditos, que se declare en concurso de acreedores”, añade. Posibles soluciones Además, la posible solución de abandonar la moneda única no sería sencilla, porque, como han advertido recientemente desde la agencia de calificación crediticia Standard & Poor’s (S&P), la salida de un país del euro supondría una enorme devaluación de su nueva divisa y un mayor coste para financiarse. “Aunque negociar la salida del euro es posible, la retirada unilateral sería controvertida desde el punto de vista político”, explican en un comunicado desde la agencia. En opinión de Juan Mascareñas, catedrático de economía financiera de la Universidad Complutense de Madrid (UCM), “la imagen del euro se vería debilitada si algún miembro lo abandona. Además, en el caso español, y creo que en cualquier otro, el impacto psicológico en la población sería de tal calibre que nos pasaría algo parecido a lo de la generación del 98 con la pérdida de Cuba (grupo de escritores españoles que se vieron profundamente afectados por la crisis moral, política y social acarreada en España por la derrota militar frente a EEUU en Cuba) y de los restos del Imperio, porque representaría que no somos capaces de mantenernos en un club económicamente serio”. Otro de los agravantes de la situación de la eurozona es que sus organismos no tienen mecanismos suficientes para sustentar a los países en dificultades. Dentro de este contexto una de las posibilidades sería establecer ayudas condicionadas, como propone Soros. "La solución más eficaz consistiría en una emisión de eurobonos garantizados de modo conjunto y particular para refinanciar por ejemplo el 75% de la deuda griega en fase de vencimiento a condición de que Grecia cumpla sus objetivos, y dejando que el 25% restante lo financie Grecia como pueda", asegura el inversor. Pero la actual regulación de la UE no contempla la opción de realizar rescates a los países miembros y la del Banco Central Europeo (BCE) la rechaza literalmente. La única posibilidad que existe por el momento es que sean unos países los que rescaten a los otros, o que sea el Fondo Monetario Internacional (FMI) el que acuda al auxilio. “Debe ser el FMI quien rescate a Grecia y quien le ponga las medidas de ajuste necesarias para poder recibir el crédito, porque todos los países ya pagamos nuestras cuotas al fondo y ese dinero está ahí también para casos como éste”, apunta el profesor Pampillón, para quien, además, sentaría un precedente brutal que Europa saliera al rescate económico de Grecia, porque abriría la veda al resto de países miembros a endeudarse en exceso, con la tranquilidad de que luego vendría Bruselas en su rescate. “Que aquellos que han comprado deuda griega paguen su mala inversión, ¿Por qué debemos pagarlo el resto de socios de la Unión?”, añade el experto de IE Business School. Pero así parece que va a ocurrir. Los dirigentes de la eurozona, liderados por Alemania y Francia, se han comprometido a ayudar al país heleno a hacer frente a su crisis de deuda, aunque sin especificar cómo. “La canciller Angela Merkel y el presidente Sarkozy (lo han dicho en público) van a garantizar la solvencia de Grecia. Alemania y Francia no pueden permitirse que sus propios bancos, por tratar de ganar miles de millones comprando deuda pública griega, tengan fuertes pérdidas”, explica Robert Tornabell.

157 Juan Mascareñas añade que lo más justo es que “los Estados con problemas los resuelvan al coste que sea pero que no comprometan a los que han sabido gestionar mejor su crecimiento (los ciudadanos alemanes deben estar hartos de pagar con sus ahorros las fiestas de los demás) enviándoles un mensaje de responsabilidad. Ser rescatado para mantenerse dentro del euroclub debe tener un coste”. El coste del rescate La opción del rescate entre diferentes países miembros es, para los expertos, asumible en el caso de Grecia, pero no tanto si hubiera que rescatar a países de la envergadura de España. Según cálculos de BNP Paribas publicados por Wall Street Journal, un plan para devolver la confianza en España podría costar 270.000 millones de dólares (198.039 millones de euros), frente a los 68.000 (49.876,4) de Grecia, los 47.000 (34.473,4) de Irlanda o los 41.000 (30.072,5) de Portugal. Para el rotativo norteamericano, España se ha convertido en "el próximo campo de batalla del euro" que podría determinar si la moneda de los 16 países aguanta o cae". Juan Mascareñas señala que “Italia y España son los que más peso tienen en el PIB de la zona euro, entre ambos, un 28%. Un serio problema de uno o de los dos sería algo grave para el euro porque hay que tener en cuenta que una parte importante de los acreedores de ambos estados son los otros componente de la zona euro (Alemania y Francia, en especial)”. Aun así, esta opción es todavía lejana para otros muchos expertos como Michel Camdessus, gobernador honorario del Banco de Francia y ex director gerente del Fondo Monetario Internacional (FMI) entre 1987 y 2000, quien aseguró durante una conferencia realizada por la Fundación Rafael del Pino que “es una estupidez pensar que las dificultades de Portugal, Italia, Grecia y España puedan hacer estremecer, ni mucho menos caer, al euro”. Robert Tornabell va más allá y asegura que “no existe por ahora ningún peligro para Irlanda (que está reduciendo el gasto público de manera acelerada), ni para Portugal. Y desde luego mucho menos para Italia y España”. Lejos de este escenario de quiebras de países y salidas del euro, los expertos reclaman medidas que creen una unión real entre los diferentes países que utilizan esta moneda. La ausencia de proyectos claros que resuelvan la situación actual se está plasmando en los mercados: el euro se ha depreciado en un 10,6% entre diciembre y febrero, pasando de los 1,51 a 1,35 dólares; y los diferenciales y CDS (seguros que protegen ante un impago de los bonos) de la deuda pública de algunos países europeos se ha disparado. Una opción de ello es la posibilidad que han planteado los ministros de Finanzas de la UE de que el BCE asigne sus propias calificaciones crediticias a la deuda pública de los países miembros, para que las decisiones de S&P, Moody`s y Fitch no influyan tanto en la economía de la región. De hecho, como señala el profesor Pampillón, “los inversores ya distinguen entre países, aunque todos tengan el euro como moneda, de ahí los diferenciales de España o Grecia respecto al bono alemán”. Todo apunta a que la UE afronta momentos históricos que determinarán su existencia, fortaleza y credibilidad. Al igual que se reclama con el sector financiero, los expertos esperan medidas que eviten situaciones similares en el futuro y flexibilicen que la UE salga del paso en los peores momentos. “La UE avanza a base de crisis, el euro es hijo de una de ellas. Esta crisis puede impulsar aún más la integración de la UE”, sentencia Juan Mascareñas. http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=1858&language=spanish

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10.03.2010 It looks like they might really ban naked CDS

Germany and France, working with Luxembourg and Greece, are planning a joint anti- speculation initiative to galvanise action by the European Commission to tighten regulation of derivatives trading, and in particular of CDS in the sovereign debt markets, the FT reports. Angela Merkel called on Tuesday for the “fastest possible” adoption of new rules to clamp down on the most speculative elements of derivatives trading, including so-called naked CDS. The four-nation initiative was aimed to speed up the regulatory process for CDS in particular. On his visit to Washington, George Papandreou, told the press that the G20 group will consider a European initiative. US regulators meanwhile stepped up calls for greater disclosure of prices of credit default swaps. There are still differences between France and Germany that appear unresolved. “While Germany favours a ban, France is more inclined to give regulators the power to suspend such trading. Berlin also wants to make the market for credit derivatives more transparent by forcing buyers to register trades with a European equivalent to the US Depository Trust and Clearing Corporation. Earlier José Manuel Barroso had announced that the European Commission was examining “the relevance of banning purely speculative naked sales on credit default swaps of sovereign debt”. Where do we stand on the EMF? Der Spiegel reports that the eurogroup will decide on Monday to institute the EMF. Frankly, we don’t believe this. The report, which is extremely vague, says that finance minister want to make a fundamental declaration, despite not knowing how this can be implemented. FT Deutschland reports that opposition to the plan is coming from the CDU/FDP parliamentary faction in the Bundestag, including at top levels, which regards the establishment of a fund to bail out countries with excessive deficits as difficult to justify when Germany itself is embarking on a savings spree.

159 Axel Weber opposes EMF plans The proposal, while supported by German politicians throughout party lines, has hit strong opposition from the Bundesbank. Axel Weber said that the discussion about a new institution for emergency help “not helpful”, when countries like Greece should be focused on cutting public sector borrowing. Throughout Europe, politicians reacted differently. The French finance minister Christine Lagarde described the proposal as “interesting” but not “an absolute priority in the short term”. It took 40 years to build the IMF, Le Monde quotes. Anders Borg, her Swedish counterpart, supported “an organisation that can more concretely help countries with financial problems” but “most important” was to tighten the rules to stop countries from “misbehaving”. The FT concludes that Berlin had either failed to consult properly in advance or knew its proposal would face resistance.” The latest to support for the proposal comes from Jean Claude Juncker. Panic among German commentators We disagree with almost every word in those comments, but the recent comment series by Holger Stetzner in Frankfurt Allgemeine is a good indication of how europhobic conservative Germany thinks. On Monday, he argued that the Greek crisis was a conspiracy engineered by certain Anglo-Saxon financial newspapers (which one did he have in mind, we wonder?), concluding that a bailout would automatically trigger the end of the euro, and force the re- introduction of the D-Mark. Now he hyperventilates against the EMF as a form institutionalised sin. We have some trouble summarizing the paranoia. So if you can stand this, read the original. Wolf on Germany Martin Wolf has a nice column, in which he analysis Germany’s dilemma with the euro area. Germany’s position is inconsistent – it cannot simultanoues demand fiscal rigour, while maintaining a massive current account surplus. Germany’s position was an infringement of Kants categorical imperative, he writes, and concludes that the only way for the euro area to become more German is for Germany to become less German. Will France lose its triple-A rating? Jean Quatremer has the story that France may lose its tripple-A rating, along with the UK and Spain, according to an analysis by Fitch Rating, which said that these need to step up their fiscal consolidation efforts. Quatremer argues that if this threat materialises, it could quickly lead to a crash in global bond markets.

Questioning the status of a benchmark Deutsche Bank analysts called into question the continued use of developed countries’ government bond yields as the risk-free rate that investors benchmark other assets against because of politicians’ struggles to convince markets of their ability to meet their obligations, reports the FT. The risk-free benchmark rate is considered the bedrock against which the value of other investments is measured and has been taken to be the bond yields of top-rated governments such as the US, the UK and Germany. A change in the definition of the risk-free rate could have implications for investors’ asset allocation decisions. http://www.eurointelligence.com/article.581+M50fe6fc7324.0.html#

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Germany's eurozone crisis nightmare By Martin Wolf Published: March 9 2010 20:02 | Last updated: March 9 2010 20:02

Ever since the federal republic was founded, Germany has had two over-riding strategic objectives: sound money and European integration. These were the twin imperatives learned from the calamities of the early 20th century. The euro embodies these aims. Now they conflict with each other. Martin Wolf: China’s exchange rate concerns us - Dec-08 Martin Wolf: Tax the windfall banking bonuses - Nov-19 Economists’ forum - Oct-01 Blog: Money Supply - Oct-07 Martin Wolf: Victory in the cold war was a start as well as an ending - Nov-10 Martin Wolf: Turner is asking the right questions on finance - Sep-10 Is the right answer to rescue sinners, thereby strengthening the cohesion of the eurozone, but threatening monetary stability? Or is it to let sinners default, thereby strengthening monetary credibility, but weakening cohesion? Germany could avoid such choices before the single currency: uncompetitive countries simply devalued. Unfortunately, the domestic German debate assumes, wrongly, that the answer is for every member to become like Germany itself. But Germany can be Germany – an economy with fiscal discipline, feeble domestic demand and a huge export surplus – only because others are not. Its current economic model violates the universalisability principle of Germany’s greatest philosopher, Immanuel Kant. The idea that countries are in difficulty because of their own sloppiness is easy to reach in the case of Greece. According to the latest Economic Outlook from the Organisation for Economic Co-operation and Development, gross public debt was 115 per cent of gross domestic product last year, the general government deficit was 12.7 per cent of GDP and the current account deficit was 11.1 per cent. This, then, would be a classic case for intervention by the International Monetary Fund. Normally, the latter would offer temporary liquidity support in return for a devaluation and fiscal stringency. Yet the German government rejects the idea that an outside body should dictate policy to a country that shares Germany’s money. It suggests, instead, that a European Monetary Fund should be created, to provide conditional liquidity support. Under the

161 direction of the other members of the eurozone, the EMF would dictate fiscal policy to the sinner. Members of the German government also want penalties to be imposed. Among the ideas are: suspension of European Union subsidies, the “cohesion funds”, to countries that fail to observe fiscal discipline; suspension of voting rights in ministerial meetings; and even suspension from the eurozone. A less controversial idea is to enforce fines already permitted under the EU’s “stability and growth pact”.

Yet, establishing the EMF would require a new treaty, as would exclusion from eurozone institutions (while a country could not be stopped from using the euro itself). Fining countries in fiscal difficulties has proved unworkable in the past. Today, most members would need to be fined. Dream on! We must note an even greater difficulty. The notion that the big threat is fiscal indiscipline is false. Greece is a special case. Today’s fiscal excesses are not the result of fiscal indiscipline, but of private indiscipline. The latter, moreover, was an inherent element in the workings of the eurozone itself. It is how the eurozone economy balanced, at a reasonable level of overall demand, in the pre-crisis period. The point is best understood from the financial balances of eurozone members in 2006, before the crisis, and 2009, at its height (see charts). The balance between income and expenditure in the private, government and foreign sectors must sum to zero. In 2006, Germany, the Netherlands and Austria ran huge private surpluses, relative to GDP, while the private sectors of Portugal, Ireland, Greece and Spain ran huge deficits. Fiscal positions seemed under control everywhere: Ireland and Spain even ran substantial (albeit illusory) fiscal

162 surpluses. Meanwhile, the private surpluses of Germany and the Netherlands were offset by huge capital outflows. In all, we see private disequilibria, but the illusion of fiscal stability, with countries more or less in line with treaty criteria for fiscal deficits. Then came the crisis: overextended private sectors retrenched. By 2009, the private sectors of almost every member were running a huge surplus: they are all Germans now! So what are the offsets? The answer is: fiscal deficits. The picture for Ireland and Spain is dramatic. In the short run, it is impossible to shift external balances quickly, particularly when domestic demand in the surplus countries is so weak. Now Germany insists that every country should eliminate its excess fiscal deficit as quickly as possible. But that can only happen if current account balances improve or private balances deteriorate. If it is to be the latter, there needs to be a resurgence in private, presumably debt- financed, spending. If it is to be the former, there are two choices: first, current account balances must deteriorate elsewhere in the eurozone, entailing a move to smaller private surpluses in countries like Germany. Or, second, the overall balance of the eurozone must shift towards surplus – a “beggar my neighbour” policy. In practice, the most likely outcome of such fiscal retrenchment would be a slump in countries with large external and fiscal deficits. Given the lack of competitiveness of such external deficit countries and the weakness of demand elsewhere in the eurozone, such slumps might become very long-lasting. The question is whether populations would put up with this. If not, political crises will emerge, with inherently uncertain consequences. Let me put the point starkly: Germany’s structural private sector and current account surpluses make it virtually impossible for its neighbours to eliminate their fiscal deficits, unless the latter are willing to live with lengthy slumps. The problem could be resolved by a eurozone move into external surpluses. I wonder how the eurozone would explain such a policy to its global partners. It might also be resolved by an expansionary monetary policy from the European Central Bank that successfully spurred private spending in the surplus countries and also raised German inflation well above the eurozone average. Germany is in a trap of its own devising. It wants its neighbours to be as like itself as possible. They cannot be, because its deficient domestic demand cannot be universalised. As another great German philosopher, Hegel, might have said, the German thesis demanded a Spanish antithesis. Now that the private sector’s bubble has burst, the synthesis is a eurozone fiscal disaster. Ironically, Germany must become less German if the eurozone is to become more so. http://www.ft.com/cms/s/0/d23c785e-2bb3-11df-a5c7-00144feabdc0.html

163 03/09/2010 04:18 PM Built on a Lie The Fundamental Flaw of Europe's Common Currency The euro is under attack like never before, as the promises on which it was based turn out to be lies. Hedge funds are speculating against Greek debt, while euro-zone politicians work behind the scenes to cobble together rescue packages. But fundamental flaws in the monetary union need to be fixed if Europe's common currency is to survive. By SPIEGEL staff. German Chancellor Angela Merkel was full of praise and recognition for Greek Prime Minister Georgios Papandreou. His government, Merkel said on Friday evening after the two leaders had met to discuss the Greek financial crisis, had performed "a massive feat of strength." The Greeks, Merkel continued, had implemented a package of measures, which impressed the capital markets, "in a remarkably short space of time." Merkel said that she was pleased to see how successful the placement of the Greeks' new government bond issue had been. "It worked out well," she said. Papandreou also seemed pleased as he listened to the German leader, thanking her profusely for her support and making it clear that he had not asked for financial assistance. Both politicians seemed to have emerged as winners. Last Wednesday, Papandreou unveiled a series of austerity measures that imposed billions in cuts on Greek retirees, drivers and civil servants. The next day, Greek government negotiators easily managed to secure €5 billion ($6.8 billion) in new loans in the international capital market. Merkel called it a "very, very important signal." "This is the only way Greece can secure its future," Papandreou said. Two winners appeared to be celebrating their triumph, and the message they sought to convey to the public was that the Greek crisis is over. Breathing Room If only that were the case. The truth is that the two leaders have won, at best, a battle, but not the entire war. Europe has given itself a few weeks' breathing room. But the doubts over whether Greece and the common currency can be defended in the long run, and whether the country will truly make it on its own, as Alternate Greek Foreign Minister Dimitris Droutsas insisted in a SPIEGEL interview, have hardly been diminished. The risks are considerable. Greece's trade unions and other special interest groups have announced new strikes and large-scale protests. The economic forecasts for the highly indebted country are deteriorating from week to week. And speculators on the international financial markets are firmly convinced that Athens will be in financial difficulties again, perhaps as soon as April, when the country is scheduled to repay loans worth €12 billion, or in May, when another €8 billion will come due. "We seriously doubt that Greek politicians have the necessary political capital to push through their reforms," New York hedge fund manager Jonathan Clark wrote to his investors. And Hans-Günter Redeker, the chief foreign currency strategist at major French bank BNP Paribas, predicts that the country and its neighbors will experience "a deflationary shock." At issue are the stability of the euro, Europe's political unity and the eternal question of who will prevail in the struggle over the future of a currency. One side consists of the international financial industry, which is betting billions on a Greek bankruptcy or the demise of the euro.

164 The other side comprises European governments, which are determined to defend their common currency, introduced 11 years ago, at all costs. Battle between Good and Evil The war of nerves reached an initial climax last week. It was a struggle characterized by bluffs and threats, gambling and trickery, complete with dramatic scenes reminiscent of Hollywood films in which two drivers race toward a cliff: Whoever slams on the brakes first is the loser. And, again in typical Hollywood fashion, European governments tried to frame the conflict as a final battle between good and evil: between politicians acting for Europe's common good and greedy financial sharks interested purely in their profits and capital gains. But it isn't quite that easy. Many of the most notorious gamblers don't work on the trading floors of international financial centers, but in government offices in Athens, Madrid, Berlin and Brussels. They have either used the euro, along with tricks and falsification, to live for years at the expense of others, or they have deliberately looked the other way. The notion that the European common currency is based on nothing but a series of lies is now taking its toll. All of the founders of the euro knew that the new currency could only be stable if all member states committed themselves to sound financial policy and, in the long run, spent only as much as they collected in tax revenue. But many ignored this principle right from the start. Violating the Rules The euro had hardly been introduced before the monetary union turned into more of a debt union. Violating the union's self-imposed rules of solid budget practice soon became routine, and not only in Greece. Sometimes it was done openly, and sometimes not. Sometimes it triggered conflict among the member states, while at other times there was mutual agreement over the practice. In general, the offenders seemed to believe that things would work out in the end, and that others would foot the bill. The first lie was soon followed by the second. The euro-zone members had promised to support the common currency with a common policy. The problem was that they were not prepared to make good on their promise. Instead, each of the 16 euro-zone countries behaved, and continues to behave, as if it were still managing its own currency. Each country went its own way when it came to lowering or raising taxes, or borrowing money or cutting costs, almost as if it were expected not to take the other euro countries into account. But in a monetary union, almost every economic decision has consequences for the partner countries. When wage costs fall in Germany, business owners and workers are affected in even the most remote corners of Ireland or Portugal. In the past, exchange rates cushioned the consequences of diverging developments. When a country gained in economic strength, the value of its currency rose. If it loosened the reins, its currency was devalued. Unpalatable Alternatives This adjustment mechanism is absent in the monetary union, with dramatic consequences. For instance, if a country has gone too deeply into debt, the government can no longer choose the gentle option of devaluing its currency. Instead, it must impose austerity measures that directly affect the standard of living of its citizens, as is currently the case in Greece, where wages and pensions are being reduced and government expenditures slashed.

165 This is the unavoidable consequence of monetary union. But European governments were in denial about the risk, and they were certainly unwilling to openly own up to their mistakes. Instead, they maintained the status quo and took a devil-may-care attitude. For a while, it even went well. But now the imbalance can no longer be covered up. Not just Greece, but other euro countries, as well, have accumulated towers of debt that now threaten to collapse. A number of countries, known informally by the acronym PIIGS (Portugal, Ireland, Italy, Greece and Spain), are at risk. If one of the large nations on the continent were to go bankrupt, Europe would face two equally unpalatable alternatives. If such a bankruptcy were simply accepted, it could trigger a disastrous chain reaction in the financial markets, much like the one that occurred after the Lehman Brothers bankruptcy in 2008. But if the remaining euro countries decided to come to the bankrupt country's aid with loans, "Germany's creditworthiness would eventually be threatened," says Deutsche Bank chief economist Thomas Mayer. No wonder the poker game over Greece has caused such frayed nerves in Europe's capitals. The stakes are high, and the many players are financially strong. They can be found in Manhattan office buildings, luxury condominiums on the Cayman Islands or at the headquarters of major international banks. They all share a common interest: to make money from the Greek drama, or at least to ensure that they don't lose any money because of it. The latter is the objective of many European banks, which have significantly expanded their holdings of Greek bonds in the last two years. German financial institutions like Commerzbank or HRE currently have about €32 billion worth of Greek treasury bonds on their books, while the Greek holdings of French banks are almost twice as high. Tempting Deals The deals were simply too tempting. During the course of the financial crisis, banks were able to borrow money from the European Central Bank at lower and lower rates, culminating at a mere 1 percent. When they used the cheap money to buy Greek bonds, with yields upwards of 5 percent, it was a -- supposedly -- surefire deal, practically a license to print money. The credit managers were all the more horrified when their supposedly highly solvent customer turned out, in recent weeks, to be a candidate for bankruptcy. Since then, they have been urging European governments to come to the Greek government's aid with comprehensive state-backed assistance as quickly as possible. The pressure is being amplified by influential major investors who are at home in the trading rooms of powerful investment banks and on the executive floors of hedge funds. For some of them, the fall of the euro is a done deal, and they are doing their utmost to make sure that their predictions come true. One of the attackers is New York hedge fund manager John Paulson, who controls a fund worth $30 billion. He has been considered a guru in the investment community ever since, beginning in 2005, he bet on a collapse of the American real estate market -- with resounding success. He told a hearing before the US Congress a few weeks ago that he just wanted to "protect our investors' money." He sounded as cold and unemotional as if he were ordering a plate of French fries.

Betting against the Euro

166 The enemies of the common currency also include John Taylor and Jonathan Clark, two major American speculators who run New York-based FX Concepts, one of the world's largest hedge funds. The traders in their Global Currency Program alone have $3 billion at their disposal. "We are betting on a decline in the price of the euro," Clark said in early February. At about the same time, speculative net short positions in the euro rose sharply on the Chicago Mercantile Exchange. An investigation launched by the US Justice Department two weeks ago suggests that the attackers may have taken a conspiratorial approach at times. The authorities suspect that hedge funds run by Paulson and other industry giants, including the fund headed by legendary investor George Soros, were planning a concerted attack against the euro. They also believe that the players may have reached illegal agreements over speculation. Germany's Federal Financial Supervisory Authority (BaFin) also has significant evidence that speculators have increasingly targeted Greece recently. In doing so, they have apparently employed their favorite toy, the credit default swap (CDS), which already played a notorious role in the financial crisis. Insurance Policy A CDS is a contract under which one side pays an annual fee to buy protection against default, while the seller promises to cover losses in the event of a default. They are in effect an insurance policy against defaults of bonds and other debt. The buyer gets a payoff if the underlying bond goes into default. In February, investors held CDS's for Greek government bonds worth $85 billion, twice as much as only a year earlier, according to a report BaFin officials prepared for the German Finance Ministry. The German bank regulators warn that these CDS's could grow into a real problem for the Greek government's money-raising efforts, as well as for the cohesion of the monetary union. As CDS's for Greece become more and more expensive, investors could lose confidence in Greek bonds. This, according to the BaFin report, could lead to a "buyers' strike" for Greek bonds, which would create "the risk that the refinancing is unsuccessful, resulting in default." To curb future speculation with CDS's, the bank regulators propose establishing a central European authority where the controversial financial instruments would be registered. This would enable authorities to recognize immediately where trouble is brewing as a result of speculation. The BaFin experts are opposed to a general ban on CDS's, however, arguing that it would be "counterproductive." Keeping an Eye on Bankers In addition to CDS's, financial regulators are also keeping a watchful eye on top bankers, who have been meeting with European leaders. One of them is Deutsche Bank CEO Josef Ackermann, who flew to Athens two Fridays ago to meet with Prime Minister Papandreou and discuss how the country could borrow fresh capital at reasonable terms. After meeting with Papandreou, Ackermann spoke by phone with Jens Weidmann, an advisor to Chancellor Merkel. To solve its problems, Ackermann said, Greece would need €15 billion in loans. How, he wanted to know, would the German government feel about a consortium of private banks and government institutions, like the state-owned bank KfW, dividing up the amount? Deutsche Bank, he added, could manage the deal. But Weidmann rebuffed Ackermann, arguing that the deal he was proposing would not only have violated the European monetary treaties, but it would also have reduced a large share of

167 the credit risk of the participating commercial banks -- at the expense of German taxpayers. "Under those circumstances, we might as well have issued the loan ourselves," German government representatives said indignantly. A few days later, politicians in Berlin were in for a surprise that was no less unpleasant. Despite Berlin's rejection of the idea, British papers reported that the German government was developing a rescue package based on Ackermann's plan. Going In for the Kill It was a deliberate disruptive maneuver, which the government in Berlin speculates was launched by precisely those financial institutions in London and New York that have always been opposed to the European common currency. Now the euro's opponents apparently felt that the time had come to go in for the kill on the weakened currency. The European governments retaliated with a two-pronged strategy. Behind the scenes, they put together a government bailout package for the event that Greece does indeed file for bankruptcy. Publicly, however, they made it clear that the government in Athens would have to help itself for the foreseeable future. Their goal was to make it less attractive for speculators to bet on a Greek bankruptcy and, at the same time, to chip away at the foundation of the European Monetary Union. The campaign, which began last week, had been long in the making. Last Wednesday, Prime Minister Papandreou unveiled his catalog of harsh measures: an increase in the rate of value- added tax from 19 to 21 percent; additional taxes that would increase the prices of gasoline and diesel, liquor and cigarettes, yachts, precious stones and luxury cars; a freeze on pensions; and a cap on wages and salaries for civil servants. In return, Papandreou received the "direct reaction" he had been promised. Before the Greek premier had even disclosed the details of the new austerity plan, it was "welcomed" in Brussels, praised in Berlin as a "very important signal," and lauded in Paris as "tough and concrete." None of what happened in Athens came as a great surprise. The EU finance ministers had even agreed to the financial scope and precise figures of the government's austerity program in mid-February. 'Torture Instruments' The pressure on Athens was followed by part two of the government's strategy: the threat against the financial markets. The head of the euro group, Luxembourg Prime Minister Jean- Claude Juncker, began the attack. If the financial markets did not stop speculating against the euro, despite the ambitious plan for Greece, he warned, they could expect to see "decisive and coordinated action." He added that he still had a few "torture instruments" up his sleeve. European government representatives and central bankers soon made it clear what Juncker meant. Some ignited a debate over the possibility of enacting a law to put a stop to trading in highly speculative derivatives. Others let it be known that the private rating agencies could be getting some competition in the future, if the European Central Bank were given the power to assess the creditworthiness of countries itself, rather than relying on private rating agencies such as Standard & Poor's. The rating agency Moody's reacted quickly, expressing uncharacteristic praise for the Greek austerity program. That was followed by a successfully placed Greek government bond issue and corresponding declarations of victory from Berlin, Paris and Brussels.

168 Now the protagonists are hopeful, but not truly sure of success. Will the Greeks actually implement its brutal cost-cutting program? Will the government survive this trial? And will the speculators back off? Preparing for the Worst-Case Scenario No one knows the answers to those questions -- which is why a second Europe, which remains largely concealed from the public, currently exists in parallel to the public Europe of summit meetings, government statements and official visits. Behind the closed doors of government headquarters, finance ministries and central banks, European governments are preparing for the worst-case scenario: Greece is unable to avert bankruptcy on its own steam, forcing its European partners to intervene. A top-secret team of half a dozen experts has been working on the bailout measures for weeks. The team includes Jörg Asmussen, a senior official in the German Finance Ministry, and his French counterpart. The ECB is represented by its chief economist, Jürgen Stark, and a senior official represents the European Commission. Alternating representatives of other potential donor countries are also taking part in the discussions. The team is far along in its preparations. "We could pay out the money in 48 hours, if necessary," Asmussen recently told his boss, German Finance Minister Wolfgang Schäuble, a member of the conservative Christian Democratic Union (CDU). The bailout package will consist of loans and loan guarantees that the participating euro countries will make available to Greece. The package would be worth up to €25 billion, with Germany assuming about 20 percent of the burden. The team has dismissed concerns that a bailout could be in violation of European Union treaties. For them, the top priority is to preserve the integrity of the monetary union. If the program were implemented, the guaranteed bonds would essentially no longer be Greek bonds, but securities with a German risk premium. It would be the worst-case scenario for a German government that has consistently emphasized its intention to avoid assistance payments to other euro countries at all costs. It would also serve as proof that the European Monetary Union is poorly designed, and that the euro zone's members are tied together in a way that German politicians have always categorically ruled out: namely that Greek debts are German debts. It would also be the definitive euro lie, because Article 125 of the Treaty on the Functioning of the European Union, the so-called "no bailout" clause, states unequivocally: " A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State." 'Muddled Vision' More than two decades ago, when the first serious discussions about a common European currency began, many experts feared that this would be a fair-weather clause. At the time, in the late 1980s, French politician Jacques Delors, the then-president of the European Commission, proposed a common European currency. The idea met with head-shaking and resistance in Germany, particularly among central bankers in Frankfurt. The Delors proposal was "a muddled vision" with "wild ideas," Karl Otto Pöhl, the then- chairman of Germany's central bank, the Bundesbank, later told author David Marsh. Pöhl didn't believe that a monetary union would materialize within the foreseeable future. "I thought that maybe it would happen sometime in the next 100 years," he said. But Germany's top central banker had underestimated the sheer force of political events. The fall of the Berlin Wall triggered the resurgence of old fears of German economic dominance,

169 particularly in France. At the time, French President François Mitterrand believed that a monetary union was a suitable means of destroying the dominant position of the German currency. In return for agreeing to part ways with the German mark, Chancellor Helmut Kohl secured France's approval of German reunification and, for himself, a second entry into the history books: Not only was he the chancellor behind German unity, he could also take credit for a common European currency. Political factors carried the euro to victory, while the concerns of economists were swept aside. Former German Economics and Finance Minister Karl Schiller, for example, complained that the German mark would dissolve in the new monetary union "like a sugar cube in a glass of tea." Critics warned that the monetary union could only work if accompanied by a political union, otherwise the member states' diverging decisions on financial and economic policy would soon tear apart the monetary union. Opposed to Monetary Union The public was also not particularly enamored of the idea of a European monetary union. Sixty percent of Germans were opposed to it. One of their fears was that they would eventually be held liable for the debts of financially unsound member states. The politicians in Bonn, aware of the concerns of their citizens, did everything in their power to provide additional safeguards for the European currency. For one, they incorporated a clause into the Maastricht Treaty that stated that no EU nation was permitted to pay the debts of another. In addition, the then-German Finance Minister Theo Waigel pushed for the so- called Stability Pact. Only financially sound nations were to be accepted, and to satisfy this criterion, the pact stipulated so-called stability criteria for the member states. Under these criteria, no country was permitted to accumulate debts exceeding 60 percent of its gross domestic product. In addition, member states were only permitted to take on new debt if the scope of the loans did not exceed 3 percent of their GDP. "Three point zero is three point zero," Waigel's rule stated. Violations were to be rigorously punished. Not surprisingly, the Germans were skeptical when the euro was introduced on Jan. 1, 1999, initially as an accounting currency, at an exchange rate of $1.1789. The notes were issued three years later, in the biggest monetary exchange program in human history. In a ceremony at Berlin's Brandenburg Gate, DJs played records as then-Finance Minister Hans Eichel exchanged 200 old German marks into brand-new euros. Economic Bonanza To the Germans' surprise, the new money proved to be an economic bonanza at first. The monetary union created a common economic zone, which now includes 16 countries and 320 million people. Prices remained stable and, perhaps most importantly, the euro established itself as a second reserve currency next to the US dollar. All of Europe benefited from the new currency, but no other country gained quite as much from the euro as Germany, for many years the world's leading exporter. In the past, German industry had been forced to accept heavy losses whenever the Italian lira or the French franc was devalued once again, automatically making German goods more expensive. The euro, on the other hand, even guaranteed German exporters stable prices in a turbulent global economy. During the most recent financial crisis, for example, the common currency "proved to be beneficial," says German constitutional law expert Paul Kirchhof. From the very beginning, however, the euro was actually far more vulnerable than investors and politicians were willing to admit. Several member states used the façade of a strong

170 global currency primarily to blatantly live beyond their means. They accumulated enormous mountains of debt and immersed themselves in a bizarre competition to circumvent the European stability rules as cleverly as possible. Ironically, it was the Germans who proved to be particularly creative. On one occasion, then Finance Minister Theo Waigel tried to raid the gold reserves of the Bundesbank. Another time, his successor Hans Eichel sold part of the government's stakes in Deutsche Post and Deutsche Telekom to private investors. Both measures were intended to artificially spruce up Germany's debt statistics. It was Germany, of all countries, that was the second member state after Portugal to be subjected to an excessive deficit procedure by the European Union. 'Sickly Premature Birth' In actual fact, the Brussels-based Commission should have set the sanction mechanism in motion earlier than it did. But then Chancellor Gerhard Schröder, who had once denigrated the euro as a "sickly premature birth," promised improvement. By ingratiating himself around Europe, the chancellor long managed to avoid being sanctioned. It was Schröder's finance minister who, in light of a pending EU excessive deficit procedure against Germany, achieved an "improvement in the implementation of the Stability and Growth Pact" at a special meeting of the Ecofin Council on March 20, 2005. The lofty title was more than misleading, however. After the meeting, "exceptional and temporary" violations of the deficit reference value could occur much more frequently than in the past. The Bundesbank ruled that the changes would "decisively weaken the rules of sound financial policy." As a consequence, the central bank wrote, "the goal of achieving sustainable public finances in all member states of the monetary union is being jeopardized." By that point, the pact had clearly been weakened. The infractions accumulated, as did the tricks used by members of the monetary union to satisfy the stability criteria: Revenues were antedated, expenditures were concealed and debts were hidden. Creative Tricks Since joining the euro zone, the 16 euro countries have violated the deficit rule, under which net new debt cannot exceed 3 percent of GDP, 43 times. Most of the infractions have occurred in the last two years. Greece is at the top of the list of violators. Only once did the country manage to push its deficit rate below the magic limit, and only with an extremely creative trick: The Greeks sugarcoated their statistics by including prostitution, black-market trade and gambling in the calculation of economic output. As a result, GDP rose by a stunning 25 percent in 2006, and the deficit dropped to 2.9 percent. Major investment banks also played a key role in fudging the numbers. With the help of complex financial instruments, the Greeks obtained additional loans that did not appear in the Eurostat deficit statistics. The concealed borrowing centered around so-called swaps "with which the Maastricht rules can be circumvented, completely legally," says a trader with one bank. In early 2002, the US bank Goldman Sachs provided the Greeks with an additional loan for roughly $1 billion, triggering a wave of indignation throughout Europe. Even German Chancellor Merkel was outraged, saying that it would be "a disgrace if it turns out that banks, which have already taken us to the brink of disaster, were also involved in the falsification of statistics in Greece." Cosmetically Enhancing Debt

171 Merkel could soon have even more reason to be outraged. A year after the Goldman deal, Deutsche Bank's London office set up a questionable deal for the Greeks. Together with the government financing division of Eurohypo, now a subsidiary of Commerzbank, it provided Athens with a loan for the purchase of military equipment. "In 2003, Eurohypo took over a loan to the Greek government worth around €1 billion, which was repaid last year," confirms a Eurohypo spokesman. "The transaction was based on two swaps, which a bank in London had made available to the Greek government." Deutsche Bank is unwilling to comment on the details of the transaction. Behind the scenes, it is said that Eurostat investigated the deal, and its goal was never to engage in cosmetically enhancing debt -- even though it can hardly be denied that this was precisely what the deal was intended to achieve. It meant that the Greeks did not need to enter the loan in its books right away, but only several years later, when the weapons were delivered. Drifting Apart It isn't just the culture of trickery that undermines the basis of the euro. It is also harmful that each country continues to pursue its own financial policy, lowering taxes or government spending as it pleases. As a result, a level economic playing field has not developed among the member states as hoped. In fact, they have drifted further apart. On the one side are the EU's heavyweights, headed up by Germany. The new currency has made them more competitive, and they now produce far more than they consume. On the other side are countries like Spain and Ireland, which attracted large amounts of foreign capital, and where wages and asset prices rose rapidly. In the past, these countries' central banks would have promptly devalued the peseta or the Irish pound, thereby strengthening exports. But this safety valve has been sealed off by the common currency. Another design flaw in the Maastricht Treaty is the no-bailout clause. Under this principle, each country must take responsibility for its own national debts. Of course, this rule has never been credible. Otmar Issing, the former chief economist at the European Central Bank, insists that the clause allows no room for compromises. Current German President Horst Köhler was one of the architects of the Maastricht Treaty back when he was a senior official in the Finance Ministry. When asked in a 1992 SPIEGEL interview whether the monetary union could allow a country to go bankrupt, he replied: "Why not?" But such assurances seem to lose their value as soon as push comes to shove. A De Facto Agreement Last February, then-Finance Minister Peer Steinbrück openly stated that if one of the euro countries encountered financial difficulties, "the community will have to come to its aid." There is a de facto bail-out agreement among the euro countries, says Hamburg economist Dirk Meyer, noting that the no-bailout clause is "not workable." Many now feel vindicated, including Harvard Professor Martin Feldstein, a prophet of the euro's demise for many years. This is the sort of thing that happens when different countries are forced to live with one interest rate that isn't appropriate for all members, says Feldstein, who warns of something he already predicted 15 years ago: the dissolution of the monetary union. The German foes of the euro, led by economist Wilhelm Hankel and Wilhelm Nölling, a former chairman of the State Central Bank in Hamburg, are also feeling revitalized. They

172 have even threatened to file a complaint in Germany's Constitutional Court if Greece, in violation of treaty provisions, does in fact receive help from Germany. Naive Considerations It has long been under discussion whether Greece should simply be ejected from the monetary union or should voluntarily abandon the euro. The boldest critics have even suggested that Germany reintroduce the German mark, so that it will not have to take responsibility for foreign debts. But such considerations are naïve. It's possible that the euro was indeed introduced too soon. But that is by no means an argument to abolish it prematurely. It is clear that a fracture in the monetary union would not just be a political disgrace, but also an economic catastrophe. For 10 years, European businesses and banks have become accustomed to a uniform European basis of calculation. Reversing it would trigger economic disruptions so severe that the Greek crisis pales by comparison. Europe doesn't need a new currency. What Europe does need is the culture of stability, transparency and credibility that its governments have promised citizens, but have never created. Although the euro zone has a common monetary policy, it lacks a shared financial and economic policy. 'The Stability Pact Is Not Enough' The crisis has exposed the deficiencies. "It has become clear that the Stability Pact is not enough," says Clemens Fuest, an economics professor at Oxford University and chairman of the economic council in the German Finance Ministry. But he also believes that the remainder of the treaty that gives the euro its legal framework is inadequate. Government experts are already thinking about whether the monetary union needs its own stabilization fund, modeled after the International Monetary Fund. They also believe that the Stability Pact needs to be strengthened. Some are considering ways to beef up the treaty so that the fraudulent culture of past years can be eliminated once and for all. One idea is to require member states to obtain the approval of the remaining nations if they intend to run deficits above the 3 percent threshold. Even if the Germans are far from supporting a European economic government, as the French have long advocated for the euro zone, the German government believes that cooperation on economic policy must be coordinated far more closely and intensified in the future. Bearing the Burden Government officials have also thought about creating an insolvency statute for member states of the monetary union. Economic Council Chairman Clemens Fuest has already envisioned what it could look like. With such a statute in place, an affected country would be able to petition for its own insolvency. In return for debt relief, it would be subject to harsh conditions from partner countries. It is important, says Fuest, that the donor nation be required to bear a portion of the burden by cancelling some of the troubled country's debt. He reasons that donors will be more cautious from the start if they are stuck with a portion of their loss. The changes could arrive more quickly than expected, because there has been a noticeable change of awareness in the governments of the euro zone. In the past, it was assumed that small economies on the periphery could not pose a threat to the monetary union. This

173 assumption was one of the arguments that was used to dispel doubts over whether Greece was even ready to be a member of the euro zone. The recent crisis shows, however, that even small countries can jeopardize the entire common currency project. "European leaders are now realizing that the members of the monetary union are all in the same boat," says one senior Brussels diplomat, "and that its members, for better or worse, are dependent on each other." BEAT BALZLI, ALEXANDER JUNG, CHRISTOPH PAULY, CHRISTIAN REIERMANN, WOLFGANG REUTER, MICHAEL SAUGA, HANS-JÜRGEN SCHLAMP Translated from the German by Christopher Sultan

URL: The Fundamental Flaw of Europe's Common Currency03/09/2010 04:18 PM http://www.spiegel.de/international/europe/0,1518,682432,00.html RELATED SPIEGEL ONLINE LINKS: Photo Gallery: Euro Under Attack by Speculators http://www.spiegel.de/fotostrecke/fotostrecke-52644.html Saving the Euro: Berlin and Paris Take Aim at Speculators (03/09/2010) http://www.spiegel.de/international/europe/0,1518,682550,00.html Greek Alternate Foreign Minister on Germany: 'Reparation Payments Remain an Open Question' (03/08/2010) http://www.spiegel.de/international/europe/0,1518,682336,00.html Greek Debt Crisis: Proposal for European Monetary Fund Wins EU Support (03/08/2010) http://www.spiegel.de/international/europe/0,1518,682296,00.html The World from Berlin: 'The Greek Crisis Induces a Sense of Deja Vu' (03/04/2010) http://www.spiegel.de/international/germany/0,1518,681733,00.html New Austerity Measures: Athens Turns Screws on Civil Servants as EU Hints at Help (03/03/2010) http://www.spiegel.de/international/europe/0,1518,681519,00.html Moody's Blues: Euro-Zone Governments Want to Curb Power of Rating Agencies (03/03/2010) http://www.spiegel.de/international/europe/0,1518,681486,00.html

174 Coulisses de Bruxelles, UE Jean Quatremer 09/03/2010 Après la Grèce, la France ?

La France pourrait perdre son « triple A », la note maximale dont peut bénéficier un pays, ce qui lui permet d’obtenir des conditions de financement de sa dette particulièrement favorables. C’est l’agence de notation Fitch (filiale anglo-saxonne d’un groupe français) qui a brandi aujourd’hui cette menace inattendue. Pour Fitch, « les pays dotés de notes de crédit élevées doivent faire état de plans de consolidation budgétaire plus crédibles et plus robustes en 2010 pour soutenir la confiance dans la robustesse de leurs finances publiques à moyen terme et dans leurs engagements d'inflation basse et stable ». Paris n’est pas seule visée : le Royaume-Uni et l’Espagne sont, eux aussi, placés sous surveillance : « le Royaume-Uni, l'Espagne et la France en particulier (trois pays qui bénéficient chez Fitch d’un AAA assorti d’une perspective stable, NDA) doivent énoncer des programmes plus crédibles cette année, étant donné le rythme de la détérioration des finances publiques et les difficultés auxquelles ils font face dans la stabilisation de la dette publique", a estimé Brian Coulton, l’un des responsables de l’agence. Cette mise en garde obéit a priori à une certaine logique, vu la dégradation rapide de la dette publique française. Cela étant, elle est quelque en contradiction avec une étude d’une autre agence de notation, Moody’s, parue il y a un an, et qui plaçait la France parmi les débiteurs les plus solides de la planète (lire mon article). Si la France perd son statut de triple A, on peut sérieusement se demander qui bénéficiera encore de cette note, mis à part le Luxembourg… Si la menace se concrétise, cela pourrait annoncer un krach mondial sur la dette souveraine, celle-ci ayant démesurément gonflé depuis 2008 à cause de la crise financière. Les marchés risquent en effet de se détourner des emprunts d’État, ce qui serait catastrophique pour la stabilité financière des pays et donc pour la croissance. Reste qu’on ne peut qu’être fasciné par le tranquille aplomb avec lequel Fitch tance les États, elle qui avec ses consœurs a joué un rôle important dans le déclenchement de la crise et donc dans l’accroissement du déséquilibre des comptes publics, puisqu’elles ont été incapables d’analyser correctement les risques que représentaient les subprimes… Mais, dans ce petit monde de la finance, le ridicule n’a jamais tué personne. Rédigé le 09/03/2010 à 22:34 http://bruxelles.blogs.liberation.fr/coulisses/2010/03/apr%C3%A8s-la-gr%C3%A8ce-la-france-.html

175 Global Business

March 9, 2010 European Leaders Call for Crackdown on Derivatives By LYNNLEY BROWNING and MATTHEW SALTMARSH Goldman Sachs had a bright idea for its clients: buy credit-default swaps — those controversial instruments that helped trip up the American International Group — in case certain nations ran into financial trouble. That advice, contained in a confidential report prepared by the bank last August, turned out to be prescient. It arrived months before Greece and its staggering debts became the big story in the financial markets. The report, a copy of which was obtained by The New York Times, warned that the risks posed by spiraling government debts might be graver than people realized. Now, some European leaders are pointing fingers at the very financial instruments that Goldman was recommending. They insist that credit-default swaps — and the traders who wield them — have worsened the problems in Greece and elsewhere. Calls are growing for the United States and Europe to crack down on speculative trading in general and on such swaps in particular. On Tuesday, as the Greek prime minister, George A. Papandreou, met with President Obama in Washington, the German chancellor, Angela Merkel, added her voice to the chorus calling for closer scrutiny of derivatives. The president of the European Commission, José Manuel Barroso, also weighed in, saying his office would closely examine certain types of swaps trades that he called “purely speculative.” “If needed, the commission will use the competition powers it has in that matter,” Mr. Barroso said, speaking at the European Parliament in Strasbourg. But even among policy makers, the exact role of credit-default swaps — which essentially provide insurance in the event a company or government defaults on its debts — remains the subject of fierce debate. Germany’s financial services regulator, known as BaFin, said Tuesday that despite all the hand-wringing it had found no evidence that speculators were using swaps to bet aggressively against Greece. Instead, BaFin said, the evidence suggested that most investors were trying to use the instruments to hedge their risks, much the way farmers use futures to guard against a sudden plunge in crop prices. But in a speech in New York, Gary Gensler, chairman of the Commodity Futures Trading Commission, singled out credit-default swaps as directly contributing to the financial crisis and needing comprehensive reform. “The 2008 financial crisis had many chapters, but credit-default swaps played a lead role throughout the story,” he said. “We need broad regulatory reform of over-the-counter derivatives to best lower risk and promote transparency in the marketplace.” He said credit- default swaps had “unique features that require additional consideration.”

176 The criticism of credit-default swaps stems, in part, from the multiple and at times seemingly conflicted roles that investment banks like Goldman Sachs often play in the markets. Over the last decade, Goldman and others helped the Greek government legally mask its debts so the nation appeared to comply with budget rules governing its membership in the euro, Europe’s common currency. In that role, Goldman advised Greece and, in return, collected hundreds of millions of dollars in fees from Athens. But, just as the true extent of Greece debts began to worry investors, Goldman put on another hat. Last July, it sent clients a 48-page primer on credit-default swaps entitled “C.D.S. 101.” The report said that credit-default swaps enabled investors “to short credit easily” — that is, to bet against certain borrowers. The report made no mention of Greece. Goldman followed up with its August report, issued by its hedge fund research unit, which said the price of swaps “may be too cheap as it may underestimate the risks to developed countries who have recently issued large amounts of debt.” “Buy C.D.S. of developed sovereigns,” the report said. Again, no countries were singled out. Despite such advice, Goldman promptly went back to work for the Greek government. Since last September, the bank played a role in underwriting more than $33 billion of new bonds for Greece, Spain and Britain, according to data compiled by Dealogic. Those three countries are among the most heavily indebted developed nations, as measured by their debts relative to economic output. Goldman, in a statement, said its reports merely outlined a variety of trading strategies. The bank said it saw no conflicts in its various roles. “It is not a conflict to sell new products on behalf of clients while suggesting to other clients, who may have different opinions and objectives, that they may want to buy insurance to protect themselves,” Goldman said. Andrew Ang, a finance and economics professor at Columbia Business School, said banks typically tried to maximize their profits across a range of businesses, and that he saw no conflict in Goldman Sachs’s approach. Still, others warn that credit-default swaps have evolved from what was essentially an insurance product into instruments of pure speculation. Jack Ewing contributed reporting.

http://www.nytimes.com/2010/03/10/business/global/10swaps.html?th&emc=th

177

09.03.2010 Sorry, no EMF – can’t be done

So here they make the biggest governance proposal in the history of the euro, and it looks like they messed it up. A treaty change is needed to implement Schauble’s proposal, as Merkel now admits and the French also think it is not realistic. Schauble’s big proposal is in the process of being relegated as a long term goal. The FT quotes Angela Merkel as saying that she supports the plan, especially the independence from the IMF, but she does not think it is realistic right now. The FT quoted Merkel as saying she thought the plan was “interesting”. It is obviously not her plan. Jurgen Stark wrote in Handelsblatt that an EMF violated the existing treaties and would undermine the public’s trust in the euro. What was needed was a stricter application of the budget rules. The ECB said Mr Stark’s views did not represent those of the ECB, but were personal. The FT has an editorial which condemns the EMF plan as addressing the wrong issue. “Europe is more in need of a system to press surplus countries to consume than it is of further punishments for its already pummelled debtors. One reason to have an EMF would be to do this: to harass the overprudent as well as the prodigal so that deleveraging does not mean depression. But that is not what Mr Schäuble has in mind.” The case for an EMF Writing in the FT Giancarlo Corsetti and Harold James make the case for a European Moneatary Fund. They write that the discussion goes back to the 1970s, a time when the EU was subject to signficant market instability. The say the IMF is not the right institution, as it would send the wrong signals, and as it might not act fast enough. “ In the long run, Europe needs something like an EMF, through which support operations can be calmly negotiated without exciting political passions. Designing such an institution may take some time, but it would be an important complement to existing European institutions, and even perhaps a complement to the IMF. In the short run, Europe may have to make do with the IMF.” Wilder on competitive devaluation Rebecca Wilder (aka Paul Krugman) is worried about competitive devaluation in the euro area. “The battle for exports has begun. Compared to the same period in 2008, Q1-Q3 2009 annual hourly labor costs growth are down 4.9% in Lithuania, 0.8% in the U.K., and 0.5% in Estonia. In fact, every country across the 26 countries listed except Belgium,

178 Germany, Greece, and Spain, saw the rate of hourly wage growth decrease since 2008. The currency is pegged, so the only mechanism to increase external competitiveness is through price (wages) declines. To be sure, this growth model cannot work for the Eurozone as a whole.” Krugman made a comparison with Andrew Mellon: “It’s the euro version of Andrew Mellon: liquidate Latvia, liquidate Greece, liquidate Spain, purge the rottenness ….” Austria’s consolidation targets for 2011 The Austrian government is set to enact €1.7bn in expenditure cuts and €1.7bn in tax increases (of which €1.1bn will remain at the federal level) on to reach its deficit target for 2011, Der Standard reports. The government needs to raise €2.8bn to reduce the deficit from currently 4.7%of GDP to 4%. The plans, which are to be agreed upon by the cabinet today, also include expenditure cuts of 2.6% for pensions and social security and 3.5% budget cuts for all departments. On the revenue side, the discussion is still open and includes bank charges, higher taxes on foundations, carbon taxes and VAT. A financial conditions index James Hamilton has an interesting article about a new financial conditions index, worked out by a group of five economists from the private and academic sectors, which purports to be a leading indicator of future GDP growth. While it is well know that financial indicators emit important signals about the real economy, there are tons of technical difficulties in producing a composite index, in this case, including 44 time series. Hamilton describes the econometric details in detail. We are reproducing the index here:

It shows a renewed deterioration, despite the fact that other financial indicators, such as the steep yield curve, low TED spreads and booming stock markets would normally point to a recovery. http://www.eurointelligence.com/article.581+M5ab9e4032dc.0.html#

179 Editorial COMMENT The burden of German thrift Published: March 8 2010 20:32 | Last updated: March 8 2010 20:32 Wolfgang Schäuble is keener on stability than growth. In response to the Greek debt crisis, the German finance minister wants to create new economic surveillance and co-operation structures to preserve the “internal equilibrium of the eurozone”. But what might look like a balanced European economy from Berlin looks like stagnation from anywhere else. The most important part of Mr Schäuble’s proposal for a European Monetary Fund involves new instruments to prevent eurozone countries from accumulating large fiscal deficits. Berlin’s fiscal hawks are considering barring the profligate from receiving the European Union’s cohesion funds, removing their voting rights in ministerial committees and even suspending sinners from the eurozone – whatever that means. Diplomats seek common line - Mar-08 Global Insight: A distant goal - Mar-08 Opinion: Why Europe needs its own IMF - Mar-08 Q&A: Reducing uncertainty - Mar-08 Lex: Eurozone IMF: creeping integration - Mar-08 Money Supply: New fund on the bloc? - Mar-08 The EMF is largely the product of European pride. The thought of the Washington-based IMF bailing out a eurozone country is intolerable. But a thin skin is a poor reason for institutional innovation. If this new body is to be set up, it must address the real problems within the currency union. Forcing governments to live within their means will help to prevent fiscal crises. Mr Schäuble’s plan should also ease the nerves of German taxpayers, who fear being called upon as Europe’s lender of last resort. A mechanism for providing liquidity to eurozone governments could be helpful, too. But if Europe were only to become better at stopping debtor nations from spending excessively and no defter at encouraging parsimonious peoples to consume, the future would be bleak. This is hardly a novel insight. In November 1941, John Maynard Keynes proposed that “a country finding itself in a creditor position against the rest of the world as a whole should enter into an obligation to dispose of this credit balance ... the creditor should not be allowed to remain passive”. Quite right. A rebalancing achieved by forcing deficit countries to cut spending alone is an inevitably contractionary process. Europe’s creditor-in-chief is Germany. Its economy, more than one quarter of the monetary union’s, is the iron heart of the eurozone. But its people remain ultra-frugal. So the German heart beats only weakly, buying very little from its neighbours. This must change, otherwise there will be no forces to counteract the fiscal contractions in the profligate nations. The continent’s smaller members may fall into prolonged recession as they struggle to balance their budgets. Europe is more in need of a system to press surplus countries to consume than it is of further punishments for its already pummelled debtors. One reason to have an EMF would be to do

180 this: to harass the overprudent as well as the prodigal so that deleveraging does not mean depression. But that is not what Mr Schäuble has in mind. His plan is to turn the paradox of thrift into the immutable law of the eurozone. Mr Schäuble’s EMF would be a destructive mistake. A scrimping Germany will be a greater burden for the eurozone than spendthrift Greece. http://www.ft.com/cms/s/0/33ce9360-2aef-11df-886b-00144feabdc0.html

European Monetary Fund Q&A By Ralph Atkins in Frankfurt Published: March 8 2010 17:37 | Last updated: March 8 2010 17:37 Why has Germany suddenly proposed a European Monetary Fund? The turmoil over Greece’s public finances has shown Europe’s monetary union, which today has 16 member states, ill equipped to manage crises. The debt problems of one of the eurozone’s smallest economies have threatened the stability of the entire region because it was unclear what m0ight happen in a worst case. Behind the scenes, eurozone politicians have been considering the lessons. Establishing a European Monetary Fund could reduce uncertainty – bail-out procedures would have been agreed in advance – thus preventing crises from spinning out of control. How would such a fund work? So far, the German finance ministry has provided few details. But ideas were provided in a paper published last month by Daniel Gros, director of the Brussels-based Centre for European Policy Studies, and Thomas Mayer, chief economist at Deutsche Bank. Editorial Comment: The burden of German thrift - Mar-08 Diplomats seek common line - Mar-08 Global Insight: A distant goal - Mar-08 Opinion: Why Europe needs its own IMF - Mar-08 Lex: Eurozone IMF: creeping integration - Mar-08 Money Supply: New fund on the bloc? - Mar-08 They proposed funding the EMF out of levies on countries that breached European Union fiscal rules (thus increasing the incentive to comply), supplemented by borrowing in the markets. If such a fund had been launched with the euro in 1999, the two authors calculated, it would have accumulated €120bn ($163bn, £108bn) by now – enough to rescue a small-to-medium-sized eurozone member. In a crisis, a country could call on funds up to the amount it had paid in, providing its fiscal policies were approved by other eurozone members. Help beyond that amount would entail a supervised “adjustment programme”. At the weekend, Wolfgang Schäuble, Germany’s finance minister, floated the idea of an EMF in a eurozone context. The role, if any, of non-eurozone countries (for instance, the UK) is unclear. But we already have an International Monetary Fund. Yes – and that is a point that is likely to be heard a lot in coming weeks. There are at least two reasons why eurozone governments might prefer their own fund, however. First, it would put the eurozone in charge of its own destiny. Second, the European Union institutions would have greater powers to punish fiscal miscreants – for instance, by ending regional aid or make a country’s assets ineligible for use as collateral in European Central Bank liquidity operations. As Mr Gros and Mr Mayer noted:

181 “The IMF can do very little if the country in question just does not live up to its promises, except withhold further funding.” Has Germany gone soft? Possibly. A big worry of some conservative policymakers is that an EMF would undermine the effectiveness of fiscal rules, which set limits on fiscal deficits, and that procedures for dealing with violators, as well as the eurozone’s “no bail-out clause”, which prevents collective liability for debts incurred by a member. But arguably an EMF would, in fact, toughen the environment for countries violating the rules. Today Athens can more or less assume that other countries would help out if it came close to default, because of the havoc that would be wreaked across the eurozone if they did not. An EMF would allow an orderly default, so there would be less chance of a comfortable bail-out. Will this solve the crisis in Greece? No, the debate on an EMF has only just begun and it could be years before such an institution is created. Greece’s difficulties will have to be dealt with under the current, uncertain, regime. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/69fc315c-2ad8-11df-886b-00144feabdc0.html ft.com/money-supply The ECB and a new fund on the bloc? March 8, 2010 4:38pm by Ralph Atkins What does the European Central Bank really think about an European Monetary Fund. The first public comments have been negative. Jürgen Stark, executive board member, argues in an article to appear in tomorrow’s Handelsblatt newspaper that such a fund would discourage fiscal discipline and violate eurozone principles. But Mr Stark’s comments were his personal view, the ECB says. So far Jean-Claude Trichet, ECB president, has refused to comment publicly. After meeting global counterparts in Basel, Switzerland, earlier today, he said the idea had not been discussed at all. Last Thursday, he said the 22-strong ECB governing council did not have a position. The impression I have is that there are divisions within the ECB that Mr Trichet has yet to smooth over. As I noted in a previous post,there are at many in Frankfurt who, in the wake of the crisis over Greece, would like to see more joined up thinking by eurozone political leaders - with a view to strengthening Europe’s 11-year-old monetary union. The ECB president himself seemed entirely happy with the pledge last month by eurozone leaders “to take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area”. A European Monetary Fund would address the obvious weakness exposed by Greece in the eurozone’s “crisis management” capabilities. No doubt, the devil will be in the detail. The ECB will want to study the implications for the “stability and growth pact,” which sets fiscal rules for eurozone member states, and for existing enforcement procedures. So, we will probably hear a lot in coming days about how an EMF can be no substitute for fiscal discipline. But, even if it could, I am not sure if the ECB would want to block Germany’s initiative. http://blogs.ft.com/money-supply/2010/03/08/the-ecb-and-a-new-fund-on-the-bloc/

COMMENT

182 Why Europe needs its own IMF By Giancarlo Corsetti and Harold James Published: March 8 2010 16:27 | Last updated: March 8 2010 16:27 Like every good tragedy, the current Greek crisis has its origins in events and decisions long past. In particular, two historical flaws in the European approach to monetary and fiscal management have emerged as threats to European stability. They are not fatal; but they need to be fixed. The first is the absence of a mechanism to address financial crises that could threaten, via contagion, the whole European market. It is worth recalling that this problem was well understood by the founding fathers of the common currency. The agreements of 1978 that produced the European Monetary System as a comprehensive fixed exchange rate regime also provided for the establishment of a European Monetary Fund within two years. An EMF would play an analogous role to that of the International Monetary Fund in the defunct international fixed exchange rate regime that had been created at Bretton Woods. In particular, it would allow countries that were hit by a sudden or unanticipated crisis to draw on its resources, and, like the IMF, would have allowed formal policy conditions to be imposed on countries. The EMF was never realised – but is once again under discussion. The second historical shortcoming emerged during the negotiation of the 1985 Single European Act, which laid the foundation for the subsequent process of monetary union. At that time, Greece was facing substantial fiscal and payments problems, and feared being forced into a difficult negotiation with the IMF. Since the act required the unanimity of all European Community members, Greece could leverage its vote into a more or less condition- free Ecu 1.75bn emergency credit from the EC. In other words, despite the agreement on the principles of fiscal stability and no bail-out as a foundation of the common currency, the political process has often led to convenient leniency – at times even rationally so, given the limitations of the agreed-upon rules. So, while the creation of the EMF was forgotten, the temptation may now be to improvise an informal structure, performing, inefficiently, the same task. European monetary integration rested on the idea that the adoption of quantitative rules on deficit and debt levels, coupled with surveillance, could be enough to prevent future problems. This approach was criticised early on, exactly as regards the shortcomings of the rule, and the lack of institutional provisions consistent with the need to address systemic risks and contagious crises. Even if the rules operated perfectly, as they clearly have not, they do not deal with the situation of a country with an apparently strong fiscal position that is suddenly hit by a fiscal shock by an event such as major bank collapses (or the collapse of a major industry, or the bursting of a housing bubble). Ireland, for example, had a strong fiscal position until the outbreak of the banking crisis, and was comfortably within the rules of the stability and growth pact, but now requires major remedial treatment. When a crisis occurs, it can in consequence only be handled by high-level and very politicised negotiations. These inevitably give the appearance that some special favour is being given: an impression that produces deep resentments in both the debtor and the creditor countries. The advantages of IMF procedures are twofold. First, they follow established procedures. They are thus less likely to produce moral hazard and the assumption that a country can, just

183 by letting matters slip and getting into a bad situation, trigger a costly international rescue operation. Secondly, the attractions of an IMF deal lie in the fact that they take some of the political sting out of support operations. In the mid-1990s, for instance, a purely bilateral support operation by the US for Mexico would have revived memories of a century-old history of US interventions. In the mid-1970s, when Italy needed international support, it could have concocted a deal with Germany, but the Germans preferred to see the IMF negotiating with Rome. Multilateralising the deal through the IMF in both cases was a way of extracting political poison from a situation that was complicated by historical sensitivities and historical injustices. The disadvantages of the IMF approach lie in the fear that Europe might give the impression that Europeans are not capable of dealing with their own problems; that the IMF action might come too late and thus cost more than if financial crisis and contagion had been prevented at an earlier stage; and that the involvement of the IMF might give a negative signal to markets and lead to the downgrading of credit ratings. History has taught us that one should never underestimate the possibility of mis-communication and market instability after official interventions meant to achieve the opposite. The European Central Bank is not a substitute for an EMF, because the central bank is barred from giving credit to governments, and because a politically independent central bank is not the right institution to lay down policy conditions. Only an institution that has a clear measure of political responsibility to its member governments could take on such a task. In the long run, Europe needs something like an EMF, through which support operations can be calmly negotiated without exciting political passions. Designing such an institution may take some time, but it would be an important complement to existing European institutions, and even perhaps a complement to the IMF. In the short run, Europe may have to make do with the IMF. Giancarlo Corsetti is Pierre Werner professor at the European University Institute. Harold James is professor of history and international affairs at Princeton University and Marie Curie professor at the European University Institute. http://www.ft.com/cms/s/0/c4853732-2ab4-11df-b7d7-00144feabdc0.html

184 UK Trade gap widens despite weak pound By Daniel Pimlott, Economics Reporter Published: March 9 2010 11:04 | Last updated: March 9 2010 11:04 The UK’s trade deficit in goods widened in the three months to January, as imports rose more quickly than exports, in spite of a near 30 per cent drop in the pound since the beginning of the financial crisis. The goods trade deficit grew by £1.4bn to £21.8bn in the three months to the end of January, compared with a deficit of £20.4bn in the three months to October, according to seasonally adjusted figures from the Office of National Statistics. PwC predicts more tax, less spend to cut debt - Mar-09 Weak housing sales increase price fears - Mar-09 UK producer prices rise more than 4% - Mar-05 The deterioration in the UK’s trade situation came as exports rose by 4.5 per cent to £60.3bn, but imports rose by 5.1 per cent to £82.1bn. In January, exports dropped by 6.9 per cent, while imports fell 1.6 per cent, leaving the deficit for the month £8bn, compared with £7bn in December. The UK’s surplus in services fell to £4.2bn in January, leaving the overall deficit on trade in goods and services at £3.8bn in January – the largest since August 2008 – compared with £2.6bn in December. The growing deficit comes despite a sharp fall in sterling over the last few years, which should make British goods more competitive abroad, and foreign goods more expensive in the UK. On Tuesday the pound fell to its weakest level for a week against the dollar to $1.4954 after the trade figures were released. Figures showing fresh signs of weakness in the housing market and a report from Fitch, the rating agency, raising questions about the UK’s record debt levels, also weighed on the pound. Hopes for a sustained recovery in the UK to some extent rest on the weaker pound encouraging exports as well as prompting residents to buy British goods and services, even as consumers and the government are forced to retrench. “February’s UK trade figures suggest that the much needed pick-up in the external sector is still not in evidence. If anything, things are getting worse,” said Vicky Redwood of Capital Economics. “There is clearly a big question mark over whether any improvement in net trade will come through quickly or strongly enough to offset the weakness in domestic demand.” The poor figures for January add to already weak data on retail and housing for the early part of the year that appear to have been affected by heavy snowfall. Alan Clarke of BNP Paribas said that there had been reports of logjams at ports because of snow in the month, although it was unclear why this should hit exports more than imports. Particularly hit in January were exports of chemicals, which were down nearly 10 per cent in the month, and which on their own contributed half of the widening in the deficit.

185 Exports of basic materials were down by quarter and food exports were down by 9.2 per cent. In the three months to January imports of capital goods and intermediate goods made up much of the excess of imports above exports. Car imports also picked up but were offset by exports of cars – both probably reflecting the bounce back in car production, but also demand delivered by car scrappage schemes in the UK and Europe. However, in January itself, both imports and exports of cars fell sharply. Exports to and imports from the EU rose by slightly more than 5 per cent in the three months to January leading to a widening of the deficit with the bloc by £600m to £10.4bn. The deficit with the rest of the world widened by £800m to £11.5bn. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/eafabe9e-2b65-11df-9d96-00144feabdc0.html

Print | Close this window January trade gap widest since August 2008

Tue Mar 9, 2010 10:44am GMT LONDON (Reuters) - Britain's goods trade deficit with the rest of the world unexpectedly widened to its biggest since August 2008 in January, after the sharpest drop in exports in over three years, official data showed on Tuesday. The Office for National Statistics said that Britain's goods trade gap widened to 7.987 billion pounds from a downwardly revised 7.010 billion in December, and well above the 7 billion pounds forecast by economists. The goods trade gap with non-EU countries also widened unexpectedly to 4.834 billion pounds from 3.428 billion, the biggest deficit since January 2009. The deterioration in the global trade balance was a result of a 6.9 percent fall in exports, the biggest fall since July 2006. Imports were down just 1.6 percent. January was an unusually icy month in Britain, which may have disrupted the transport of goods for export to ports, though the ONS said that Tuesday's data in itself did not provide firm evidence of that. Exports to non-EU countries suffered their sharpest fall since January 2009, dropping by 12.5 percent on the month, while imports rose by 1.6 percent. The figures are likely to further raise policymakers' concern that the sharp fall in sterling over the past two years has not led to the expected boost in exports -- a point reiterated by Bank of England policymaker Kate Barker on Monday. The ONS said there was a broadbased fall in exports. http://uk.reuters.com/article/idUKTRE62817620100309

186 MARKETS Shorting US Treasuries could be a mistake By Dino Kos Published: March 8 2010 16:12 | Last updated: March 8 2010 16:12 Should traders and investors short the US Treasury market? The bearish case is straightforward. The budget deficit assures massive supply of government debt for years. Foreigners are having second thoughts about financing the deficit, highlighted by recent reports that China was selling some of its Treasuries. The crisis in Greece and elsewhere emphasises the risks of buying bonds from heavily indebted countries. Finally, the expansion of the Fed balance sheet through a variety of lending and asset purchase programmes threatens both the central bank’s credibility and its inflation performance. Higher inflation would surely push long term yields much higher. Indeed, a month ago a prominent author and hedge fund manager suggested that “every single human being” should be short Treasuries. Short view: US Treasuries - Feb-16 Jitters over China’s waning taste for T-bills - Feb-18 Short View: US yield curve - Feb-22 Maybe so. Certainly over the long run the US must rediscover fiscal prudence and reduce its deficits or face a costly rise in borrowing costs. However over the medium term – say the next several quarters, a reasonable investment horizon – there are reasons to expect the Treasury market to hold its own, and perhaps even surprise with lower yields. The deficit is high at about $1,500bn, roughly 11 per cent of GDP, similar to 2009. That 2010 deficit forecast has been fairly consistent for a year now. In other words, current prices – and the steep yield curve – reflect this level of supply. With the economy stabilising, receipts should also stabilise soon. In any case, the link between the absolute size of deficits and yields is inconclusive. Japan has run huge deficits for 20 years yet with the lowest yields worldwide. But Japan finances itself from internal savings, while the US relies on foreigners. Aren’t those foreigners getting edgy? Last month the Treasury reported its monthly tally of Treasury holders. While foreigners as a group were adding to their Treasury holdings, the Chinese were apparent sellers. Was this the canary in the coal mine? China’s holdings reportedly declined from $800bn at the peak to $755bn at year end. This story received significant attention but, barely noticed, were subsequent revisions to that data series. These revisions showed that foreigners, in aggregate, were even larger buyers in 2009 than initially reported. Most notably, China’s holdings were revised higher – significantly – with the latest estimate being that it holds $894bn rather than the earlier estimate of $755bn. Additionally, the US private sector is now deleveraging. Households and businesses are now paying down debt according to the Fed’s flow of funds data. Savings are rising. In short, the government is not competing with – or “crowding out” – other borrowers in what is a bigger pool of domestic savings while foreigners, as noted, are not showing signs of decreased demand.

187 But what about “sovereign risk” worries? Global markets are interrelated and money is constantly seeking the best risk-adjusted rates of return. At times of stress, investors seek perceived havens. Right now the focus is very much on the European periphery. The dollar has risen 10 per cent since November, in part due to the structural flaws now being exposed (though long-known) in the euro area. The Treasury market has treaded water in recent months, responding more to signs of US recovery, albeit weak. Should the crisis expand beyond Greece, the Treasury market is more likely to become the recipient of investment capital as investors factor in a broader period of stress in Europe. Won’t the Fed’s balance sheet expansion and “quantitative easing” policies generate inflation and thereby degrade the Treasury’s debt? The recovery, while moving in the right direction, is weak by historical standards and the ongoing deleveraging process acts as an ongoing headwind on both growth and inflation. Slack in the economy is high and inflationary pressures are likely to stay low. Remember the Bank of Japan pushed rates to zero, launched quantitative easing and assorted programmes to jump start lending – all while the government ran substantial budget deficits – and still Japan remained mired in deflation. Indeed the yield on 10-year JGBs fell to an ultimate low of 49 basis points (0.49 per cent) in spring 2003. Perhaps more money was lost shorting JGBs in the 1990s than any other single trade. This is not to say the US need not address its fiscal problem in the long run. Failure to do so will ultimately lead to higher yields. But for investors, the imperative is to define one’s time horizon. Over the next several quarters, evidence of stabilising deficits, ongoing foreign demand for Treasuries, stresses in Europe that push capital flows to the US, and the lack of inflationary signs suggest yields might surprise to the downside. In that environment aggressive short positions have the wrong risk/reward profile. Dino Kos is managing director of equity research at Portales Partners and a former executive vice president of the markets group at the Federal Reserve Bank of New York http://www.ft.com/cms/s/0/f53c0380-2ac6-11df-b7d7-00144feabdc0.html

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Beijing says it will keep buying US debt By Jamil Anderlini in Beijing Published: March 9 2010 05:36 | Last updated: March 9 2010 05:36 China’s investments in US Treasury bonds are continuing “every day” and should not be politicised, according to the head of China’s foreign exchange administration, which manages the country’s $2,400bn in foreign exchange reserves. Chinese investments in US Treasuries were “market investment behaviour”, said Yi Gang, director of the State Administration of Foreign Exchange, on Tuesday. “We do not want to politicise [these investments] ... We are a responsible investor and in the process of these investments we can definitely achieve a mutually beneficial result.” Beijing remains divided over currency peg - Mar-08 Editorial: Beijing balances - Mar-08 Is China ‘the mother of all bubbles’? - Mar-09 Trading in forward renminbi surges - Mar-08 Lex: Wen on to a good thing - Mar-08 Beijing studies severing peg to US dollar - Mar-07 Senior Beijing officials have voiced fears that US economic policies would see the value of the dollar suffer and since China is the biggest foreign holder of US Treasury bonds, there is speculation that the country is reducing its holdings of dollar assets. The composition of China’s reserves is a state secret but Mr Yi said Tuesday that Safe had built a “moderately diversified currency structure including the US dollar, euro, Japanese yen etc.” Around two-thirds of the reserves are invested in US dollar-denominated assets, according to analysts and people who work closely with Safe. A decline in China’s direct holdings of US Treasuries in recent months has also led to the suggestion that Beijing may be deliberately cutting its exposure in retaliation for worsening relations between the two countries and intensifying calls from the US for Beijing to strengthen its currency. But analysts say the monthly Treasury data that show a dip in Chinese holdings recently do not capture the extent of Safe’s purchases through international banks and overseas financial centres such as London and Hong Kong. They say when the data are revised at the end of the second quarter, China’s continuing purchases of US Treasuries will be evident. The price of gold fell $3 in the hour after Mr Yi spoke because he said China would be “cautious” about adding more gold to its foreign exchange reserves and that gold would never become a big part of Safe’s overall portfolio. He pointed out that any large gold purchases by China would quickly push up the price of metal in international markets.

189 China is the world’s biggest gold producer and Safe has been quietly buying from state- owned domestic producers, raising its total holdings from 600 tonnes in 2003 to 1,054 tonnes in the middle of last year. Despite the financial crisis and Safe’s ill-timed 2008 diversification into global equities, Mr Yi said his agency had achieved “relatively good” returns from its management of the reserves over the last two years. http://www.ft.com/cms/s/0/bd0d0d24-2b39-11df-9d96-00144feabdc0.html

Beijing balances Published: March 8 2010 21:59 | Last updated: March 8 2010 21:59 A crack has opened in China’s monolithic resistance to strengthening its undervalued currency. Zhou Xiaochuan, People’s Bank of China governor, called the dollar peg an anticrisis policy which can “sooner or later” be modified. Letting the renminbi appreciate from its current value of 6.83 per dollar would be good for the world. Not so much because shrinking China’s trade surplus would boost global demand much – it amounts to less than half of one per cent of world output – as because it would forestall a resurgence of the cheap credit tsunami that helped to cause the subprime bubble. Beijing remains divided over currency peg - Mar-08 FT Alphaville: More revaluation rumbles - Mar-08 Trading in forward renminbi surges - Mar-08 Lex: Wen on to a good thing - Mar-08 Beijing studies severing peg to US dollar - Mar-07 China hints at addressing trade imbalance - Mar-07 But much more importantly, it would be good for China. It is after all absurd that a poor country (national income per capita was some $3,000 last year) should be devoting its human and physical resources to producing gadgets for the enjoyment of consumers elsewhere when ordinary Chinese are not reaping the fruits from this effort. A large part of the proceeds is instead saved and recycled into lending to rich western countries. A stronger currency would also help to lift some pressure off an economy running at dangerously high steam. Bank lending jumped to $1,400bn in 2009, which kept growth humming through the global recession. The cost was a red-hot real estate market whose turnover nearly doubled from 2008. Chinese leaders are not oblivious to these arguments. They have allowed a gradual appreciation of the renminbi before: its value against the dollar rose by 21 per cent between 2005 and 2008. Politically, however, they cannot afford to be seen as caving in to foreign pressure. The point of Mr Zhou’s new tones – against a long-ringing chorus that appreciation is not on the cards – may be to prepare the political ground for allowing appreciation to resume. If so, it is a development to be welcomed. But it is only a small part of the equation. Exchange rate adjustments cannot alter the underlying structure of this economy built for

190 export without the political will to lower an extremely high savings rate, shift investment into activities that better match the needs of Chinese citizens, and start to run down bloated reserves. That is unlikely as long as mercantilist thinking continues to dominate the renminbi debate. http://www.ft.com/cms/s/0/37be33c2-2aef-11df-886b-00144feabdc0.html

Beijing remains divided over currency peg By Geoff Dyer and Jamil Anderlini in Beijing Published: March 8 2010 14:55 | Last updated: March 8 2010 14:55 China’s National People’s Congress is usually a platform for the leadership to drive home a handful of key economic messages for the year. On the issue of China’s controversial currency policy, however, this year’s session of the legislature has demonstrated instead the divisions within the government that still remain. Zhou Xiaochuan, governor of the People’s Bank of China, used an appearance at the NPC to give the clearest indication in months that Beijing is preparing to abandon the peg to the US dollar it informally introduced in mid-2008. Editorial Comment: Beijing balances - Mar-08 FT Alphaville: More revaluation rumbles - Mar-08 Trading in forward renminbi surges - Mar-08 Lex: Wen on to a good thing - Mar-08 Beijing studies severing peg to US dollar - Mar-07 China hints at addressing trade imbalance - Mar-07 Mr Zhou told a press conference that the currency peg was a “special measure” introduced to help China weather the financial crisis. “These kinds of policies sooner or later will be withdrawn,” he said. After several months of tough talk from Beijing about not giving in to foreign pressure amid accusations that its currency is undervalued, his comments were a significant shift in official rhetoric. ”This is the most explicit comment on the renminbi’s exit from current de-facto peg made publicly by top Chinese policymakers so far,” said Qu Hongbin, chief economist for China at HSBC. Yet Mr Zhou’s tone was not shared by other senior officials. Chen Deming, the commerce minister whose department has close ties to China’s export sector, said at the weekend that it would be another two or three years before exports fully recovered to their pre-crisis levels. He told Reuters on Monday that any shift in currency policy would only be “gradual and controlled”. CURRENCY RANTS Wen Jiabao, Chinese leader: ‘We will not yield to any pressure of any form forcing us to appreciate’ December 26 2009

191 ‘We will continue to improve the mechanism for setting the renminbi exchange rate and keep it basically stable at an appropriate and balanced level’ March 5 2010 Tim Geithner, US Treasury chief ‘President Obama . . . believes that China is manipulating its currency’ January 22 2009, prior to being confirmed in post ‘They understand they need to do it [move to a more flexible exchange rate]. I think they want to do it, and I’m actually quite confident that they will do it’ November 20 2009 In his speech on Friday, Wen Jiabao, premier, said only that the currency would remain “basically stable”, the phrase he has used for months and a sharp contrast to his pre-crisis pledge at the NPC in 2008 to increase the flexibility of currency policy. When the offshore market that trades the Chinese currency opened on Monday, there was a flurry of activity as investors initially speculated about a prompt appreciation in the renminbi as a result of Mr Zhou’s comments. However, as economists digested the comments, some began to wonder if Mr Zhou was not subtly suggesting any shift in policy might still be some time coming. “I wonder whether this is his way of asking for more time,” said one foreign exchange analyst. Although Mr Zhou said that the 18 month-old peg to the dollar was a “special” policy for the crisis period, he also emphasised that the Group of 20 summit in Pittsburgh last autumn had cautioned against “premature withdrawal of stimulus policies”, which could be a hint that the timing of a change in China’s currency policy might not be until the US starts to raise interest rates. “We think that Zhou’s comments support our call that the move might come later rather than sooner,” said Callum Henderson, head of FX Research at Standard Chartered Bank in a note. “We think the renminbi will be de-pegged as part of major economies’ overall ‘exit strategy’ from extraordinary and unconventional monetary policy.” A former senior Chinese official said that the government was concerned about the consequences of making a move on its exchange rate before other countries unwind their stimulus policies. Wu Xiaoling, a former deputy governor of China’s central bank, said that on the one hand, Beijing may need to raise interest rates or appreciate the currency to meet its target of keeping inflation below 3 per cent this year. However, the government was very wary of large inflows of speculative capital taking advantage of higher interest rates or using more flexibility in its currency policy to bet on further renminbi appreciation. “No other country’s economy is doing as well as China’s, and this puts the government in a very difficult position,” she said. http://www.ft.com/cms/s/0/3d2356fc-2aaf-11df-b7d7-00144feabdc0.html

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Is China ‘the mother of all bubbles’? By Arthur Kroeber, managing director of Dragonomics Research & Advisory Published: March 9 2010 04:00 | Last updated: March 9 2010 04:00 Is China a bubble? External market sentiment has gyrated wildly from one extreme, thinly supported opinion to another over the past year. A year ago consensus held that China faced feeble growth and social revolt by an army of millions of laid-off workers. That turned out to be wrong. By mid-year consensus believed China’s spectacular growth would continue to accelerate. That is turning out wrong, too. Now the flavour of the month, introduced by legendary short-seller Jim Chanos, is that China is “the mother of all bubbles”. Wrong again. To the short-sellers, a cursory inspection of various indicators makes it “obvious” that China is a giant bubble. We agree that China’s economy suffers from many distortions and systemic mispricing of capital. But the problem is that a lot of what goes on in China’s economy is non-obvious, especially to people who have not bothered to educate themselves on the unusual structure of China’s political economy. The easiest way to understand this is to look at the property market. Pessimists note that China’s commercial and office markets are wildly overbuilt, and that house prices are far too high relative to household incomes. Therefore, prices must crash dramatically, with dire consequences for the economy. The premises are true: the commercial and office markets are overbuilt, and house prices are too high relative to income. But the conclusions do not follow so straightforwardly. In macroeconomic impact, the commercial and office markets are of marginal relevance since they account for only 20 per cent of real estate construction volume. They could collapse and remain in the doldrums for years without having a material impact on heavy industrial demand. Housing is the key driver. But here a variety of hidden subsidies enable people to buy much pricier flats than their income alone would allow, and with little leverage. This helps to sustain rising house prices while reducing the chances of a leverage-fuelled banking collapse. Roughly 80 per cent of China’s urban residents own their homes – an astonishing number for a country that only began to privatise its housing stock in 1998. In most Western countries, by comparison, average home-ownership rates are around 60 per cent. The biggest driver of home ownership has been implicit government subsidies. One-third of home owners purchased their homes at subsidised rates from their work units during the initial housing reform programme. So long as these hidden subsidies continue to have a market impact – and many Chinese urbanites flipping luxury homes today started with a small, government-subsidised apartment – house prices can continue to look strangely high.

193 Eventually – meaning over the next five years or so – prices will have to normalise, and new housing construction will need to reflect underlying demand from new, low-income urbanites, rather than the desire of the existing urban middle class to store their wealth. Government policy should anticipate and encourage this shift, by taxing property values and encouraging the development of more low-cost housing. A property tax would help bring down prices and provide local governments with a sustainable revenue stream. Private developers, meanwhile, have little incentive to build affordable housing while margins on luxury homes are so much higher. Unlike Singapore or Hong Kong, China has no national or municipal housing authorities responsible for building cheap apartments. Nobody is arguing that the imbalances and inequities in China’s housing market are not great. But we have a hunch that this is a market that can stay irrational longer than those betting against it can remain solvent. http://www.ft.com/cms/s/0/1e54e9c2-2b2a-11df-93d8-00144feabdc0.html

Beijing studies severing peg to US dollar By Geoff Dyer in Beijing Published: March 6 2010 13:38 | Last updated: March 7 2010 19:24 China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy. Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis. China hints at addressing trade imbalance - Mar-07 Lex: Wen on to a good thing - Mar-08 Editorial: China’s migrants need more help - Mar-07 Wen warns of recovery risks - Mar-05 Consequences of stronger renminbi dawn on US - Feb-23 “This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.” Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: “We will not yield to any pressure of any form forcing us to appreciate.” Chinese officials have repeatedly emphasised the need for a stable exchange rate. However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders. Indeed, Mr Zhou gave no hint about the possible timing of a shift in policy.

194 Chen Deming, commerce minister, said the outlook for international trade remained “uncertain and unstable” and that it would take two or three years before Chinese exports recovered to pre-crisis levels. The argument over Chinese currency policy has been one of a string of disputes that have led to difficult relations in recent months between China and the US, including disagreements over Taiwan, Tibet, climate change and human rights. Mr Zhou’s different tone on the exchange rate came as the foreign minister said it was up to the US to improve relations between the two countries. At a separate Sunday press conference on the margins of the National People’s Congress in Beijing, Yang Jiechi, foreign minister, said: “The responsibility for the difficulties in China- US relations does not lie with China. The US should take seriously China’s position and respect China’s core interests.” He dismissed suggestions that China had been taking a more confrontational approach in diplomacy of late. “Resolutely adhering to one’s principled stance is not the same thing as being hardline,” he said. A long-planned oil pipeline between China and Russia would be completed this year, he said. Mr Yang also rebutted criticism that China’s economic ties with Africa were encouraging more corruption and hurting labour conditions. “I notice that some people in the world are not happy to see the development of China-Africa relations, and so they are always trying to find fault in energy cooperation between China and Africa,” he said. ”We as guests in Africa should all respect the host’s inclinations and freedom to choose cooperative partners and friends.” http://www.ft.com/cms/s/0/6cd3a766-2925-11df-972b-00144feabdc0.html

195 COLUMNISTS Japan edges from America towards China By Gideon Rachman Published: March 8 2010 22:02 | Last updated: March 8 2010 22:02

Sitting in his office in Tokyo last week, a senior official pointed to a recently published volume called “Japan Rising”. “I look at that book every now and then to cheer myself up,” he said. It is easy to understand why. Right now, Japan has got that sinking feeling. China is about to overtake Japan as the world’s second-largest economy. The country’s national debt has hit an awesome 180 per cent of gross domestic product, (un)comfortably the highest in the world among rich countries – and there is no credible plan in place to hack it back. Toyota, a company that used to embody Japan’s reputation for quality, is enmeshed in a safety and public relations nightmare. Last year, the Japanese economy shrank by more than 5 per cent. And the high hopes that surrounded the reformist government of Yukio Hatoyama, the prime minister who was elected last summer, have quickly dissipated. Mr Hatoyama’s approval ratings are sinking and the Japanese business and civil service establishment seem eager to dismiss him as an ineffectual clown. Gideon Rachman blog

Across the globe: Read the FT’s international affairs columnist’s authoritative and lively commentary How Japan reacts to this new sense of weakness – exaggerated though it may be – will matter to the whole world. The country’s size and strategic importance make it critical to America’s Pacific strategy and to China’s geopolitical calculations. As it adapts to Japan’s new circumstances the Hatoyama government has, almost unwittingly, initiated a debate about the value of Japan’s alliance with the US. Some

196 western observers in Tokyo muse that perhaps Japan is once again following its historic policy of adapting to shifts in global politics by aligning itself with great powers. Before the first world war the country had a special relationship with Britain. In the inter-war period Japan allied itself with Germany. Since 1945, it has stuck closely to America. Perhaps the ground is being prepared for a new “special relationship” with China? When Mr Hatoyama’s Democratic Party of Japan took power last August, it broke more than 50 years of almost continuous administration by the Liberal Democratic Party. The DPJ is keen to differentiate itself from the LDP in almost every respect, and foreign policy is no exception. In an interview last week, Katsuya Okada, Japan’s foreign minister, said that the LDP followed US foreign policy “too closely”. “From now onwards,” says Mr Okada, “this will be the age of Asia.” The foreign minister adds that talk of Japan choosing between China and the US is meaningless, and that Japan’s friendship with America will remain “qualitatively different” from its relations with China. But some DPJ party members have called for a policy of “equidistance” between China and the US. The early policies of the Hatoyama government have confirmed the impression that something is afoot. The DPJ wants to move a vital US military base on the island of Okinawa– a move that has alarmed and angered the Americans and raised questions about the future of the US-Japan security treaty, and of the 50,000 or so US troops stationed in Japan. If the Okinawa dispute was an isolated incident it might be taken as a bit of an accident, stemming as it did from a campaign promise. But Mr Hatoyama seems to have gone out of his way to confirm that things are changing. In an article for the New York Times, published just before he took office, he decried the failures of American capitalism – what he called “unrestrained market fundamentalism” – and implied that the US is in irreversible decline. The new Japanese prime minister has also spoken of establishing a new East Asian community, including China but excluding the US, and modelled on the early versions of the European Union. The impression of a tilt away from America and towards China was confirmed last December when Ichiro Ozawa, the dominant figure in the DPJ, led a delegation of more than 600 Japanese to Beijing, including 143 parliamentarians. Hu Jintao, the Chinese president, posed smilingly for photos with every one of them. When Xi Jinping, tipped to be Mr Hu’s successor, visited Tokyo shortly afterwards, he was rushed in to see the emperor – the usual requirement that 30 days notice be given for such a visit was waived. So what is Mr Hatoyama up to? The uneasy suspicion in Tokyo is that even the prime minister himself may not really know. Mr Hatoyama, it is said, often proposes grand- sounding schemes – whether on climate change or Okinawa – without really thinking them through. The prime minister’s vagueness means that it is probably overdoing it to suggest that Japan is definitively shifting away from its postwar special relationship with the US. But, nonetheless, over the long term the country clearly faces a crucial strategic choice. One option would be to assume that China is gradually going to displace the US as the dominant power in the Asia-Pacific region and, therefore, to try to cultivate a much warmer relationship with the government in Beijing. The alternative would be to hug the US even closer and to cultivate warmer relations with other democratic nations in the region, such as India and Australia, in what would be an undeclared policy of “soft containment” of Chinese power. For the moment, it makes sense for Japan to aim for good relations with both the US and China. In the long run, Japan is likely to face an uncomfortable choice. http://www.ft.com/cms/s/0/4a7c23a2-2aef-11df-886b-00144feabdc0.html

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News N Economics

Daily analysis of global economic and financial conditions It Takes Two to Tango: A Look at the Numerator AND Denominator MONDAY, MARCH 8, 2010

This is a guest contribution by Marshall Auerback, Braintruster at the New Deal 2.0 by Marshall Auerback A new book by Kenneth Rogoff and Carmen Reinhart, "This Time It's Different: Eight Centuries of Financial Follies", has occasioned much comment in the press and blogosphere (see here and here) The book purports to show that once the gross debt to GDP ratio crosses the threshold of 90%, economic growth slows dramatically.

But that's too simplistic: a ratio is just a number. Debt to GDP is a ratio and the ratio value is a function of both the numerator and denominator. The ratio can rise as a function of either an increase in debt or a decrease in GDP. So to blindly take a number, say, 90% debt to GDP as Rogoff and Reinhart have done in their recent work, is unduly simplistic. It appears that they looked at the ratio, assumed that its rise was due to an increase in debt, and then looked at GDP growth from that period forward assuming that weakness was caused by debt instead of that the rise in the ratio was caused by economic

198 weakness. In other words, they have the causation backwards: Deficits go up as growth slows due to the automatic countercyclical stabilizers.They don't cause the slow down, etc. After the Second World War, the debt ratio came down rather rapidly—mostly not due to budget surpluses and debt retirement but rather due to rapid growth that raised the denominator of the debt ratio. By contrast, slower economic growth post 1973, accompanied by budget deficits, led to slow growth of the debt ratio until the Clinton boom (that saw growth return nearly to golden age rates) and budget surpluses lowered the ratio. From 1991 through 2001 the growth of government debt had been falling and since then rising most recently at a faster pace. The raw data comes courtesy of the St. Louis Fed (and attached spreadsheet). The Ratio of the rates of change of Debt / GDP is rising faster than the change in Debt indicating that both the increase in Debt and the fall in GDP are contributing to a rising Debt / GDP ratio. For policy makers who obsess about a rising Debt / GDP ratio, they fail to understand that austerity measures that cut GDP growth will cause a rise in the Debt to GDP ratio. Basically, it boils down to this simple observation: it is foolish, dangerous, and thoroughly counterproductive to treat fiscal balances in isolation. In particular, setting a fiscal deficit to GDP target equal to expected long run real GDP growth in order to hold public debt/GDP ratios at a completely arbitrary (indeed, literally pulled out of thin air) public debt to GDP ratio without for a moment considering what the means for the feasible range of current account and domestic private sector financial balance is utterly nonsensensical. It is crucial that investors and policy makers recognize and learn to think coherently about the connectedness of the financial balances before they demand what is being currently called fiscal sustainability. As it turns out, pursuing fiscal sustainability as it is currently defined will in all likelihood just lead many nations to further private sector debt destabilization. To put it bluntly, if the private sector continues to pursue a high net saving/financial surplus position while fiscal retrenchment is attempted, unless some other bloc of nations becomes large net importers (and the BRICs are surely not there yet), nominal GDP will fall in the fiscally "sound" nations, the designated fiscal deficit targets WILL NEVER BE ACHIEVED (there can also be a paradox of public thrift), and private debt distress will simply escalate. In fact, if austerity measures are based on measures of debt relative to economic growth there is a very real risk of a downward spiral where economic growth declines at a faster pace than government debt and the rising Debt / GDP ratio leads to ever greater austerity measures. At a minimum, focusing only on the debt side of the equation risks increasing the Debt / GDP ratio that is the object of purported concern is likely to lead to policy incoherence and HIGHER levels of debt as GDP plunges. The solution is to recognize that the increase in the ratio is in some fair measure the result of declining economic growth and that only by increasing economic growth will the ratio be brought down. This may cause an initial rise in the ratio because of debt financing of fiscal stimulus but if positive economic growth is achieved the problem should be temporary. The alternative is to risk a debt deflationary spiral that will be much more difficult (and costly) to reverse.

Posted by Rebecca Wilder at 3:24:00 PM

199 News N Economics

Daily analysis of global economic and financial conditions The endgame for Europe: wage cutting and the battle for exports SUNDAY, MARCH 7, 2010

Yesterday I argued that Latvia's cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia's efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009. After an email exchange with Marshall Auerback, and thinking more about the cross-section of Europe, I now see a very scary trend emerging across Europe: the fight for exports.

200 But look at the similar wage-cutting behavior occurring across the European Union, especially in the Eurozone hopefuls (Latvia, Lithuania, and Estonia are preparing to adopt the euro in coming years). The battle for exports has begun. Compared to the same period in 2008, Q1-Q3 2009 annual hourly labor costs are down 4.9% in Lithuania, 0.8% in the U.K., and 0.5% in Estonia. In fact, every country across the 26 countries listed except Belgium, Germany, Greece, and Spain, saw the rate of hourly wage growth decrease since 2008. The currency is pegged, so the only mechanism to increase external competitiveness is through price (wages) declines. To be sure, this growth model cannot work for the Eurozone as a whole. Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income. It's especially bad for countries like Latvia or Hungary, where the lion's- share of trade occurs withing the boundaries of Europe. And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone! http://www.newsneconomics.com/2010/03/end-game-for-europe-wage-cutting- and.html Rebecca Wilder

Posted by Rebecca Wilder at 12:34:00 PM Rebecca Wilder

I am an Economist in the financial services industry in Boston, MA and remain anonymous due to possible conflicts with my employer. The blog presents lots of data - mostly in the areas of macroeconomics and international finance - pertaining to current events, politics, and finance both in the U.S. and abroad. I assure you that my education qualifies me to run an economics blog, but I just love thinking and talking about economics. http://www.newsneconomics.com/

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Obama launches attack on health insurance companies By Amy Goldstein and Scott Wilson Washington Post Staff Writer Tuesday, March 9, 2010; A01 The White House is mounting a stinging, sustained broadside against health insurance rate increases as President Obama and his aides enter what they hope will be the final stretch of a year-long political war over health-care reform. Obama and his health secretary staged a two-pronged attack Monday in a stern letter to health insurance chief executives and a speech in which the president castigated insurance companies 22 times. "How much higher do premiums have to rise," he demanded, "before we do something about it?" The messages are part of a strategy that Obama and those around him have begun to employ lately, to ratchet up the pace and the populist appeal of their rhetoric against the health insurance industry. The barbed tone moves far beyond that of the 2008 presidential campaign, when Obama began to say that medical coverage should be accessible and affordable for more Americans. It remains unclear whether the strategy, coming this late in the debate, will mobilize support among the public and on Capitol Hill for the legislation that the White House and congressional Democrats favor. Obama has asked Congress to conduct final votes on the proposal within 10 days, before lawmakers leave for a two-week break. Democratic congressional leaders, especially those in the House, are struggling to secure enough votes within their party; Republicans are calling for the proposal to be abandoned, saying that most Americans oppose it. The near-daily demonization of the insurance industry is an attempt by the White House to play to Americans' anxieties about the health-care system -- and about the prospect of changing it. Polls consistently show that most people fear that the legislation would make their treatment more expensive. By focusing on escalating insurance rates, especially for the sliver of the market in which people buy health coverage individually, the administration is emphasizing that costs will increase if Congress does not act. "Part of the motivating factor here is letting members of Congress know there's a price to pay for failure," White House Chief of Staff Rahm Emanuel said Monday in an interview. "And for the public, it's important to remind them that there are premium increases of 40 percent for as far as you can see if nothing is done." Emanuel's figure referred to a recent move by Anthem Blue Cross of California to raise premiums by 39 percent for people who buy individual policies. As the White House has launched its last-minute public relations blitz, "there could have been no greater gift" than Anthem's proposed rate increase, said Drew E. Altman, president of the Henry J. Kaiser Family Foundation, a nonpartisan health policy and research organization.

202 The Obama administration, Altman said, is "trying to connect better with average people" in terms more concrete than the president used earlier in the debate when he spoke about "bending the curve" of escalating health-care costs and curbing future budget deficits. Republicans doubt that the rhetoric will work. Linda DiVall, a GOP strategist, said White House officials "are trying to disguise their vulnerability" that the Democrats' approach would not control costs "by hiding behind a greater villain" -- insurance firms. Last year, premiums for employer-sponsored health insurance rose by an average of 5 percent, while overall prices fell nearly 1 percent, according to Kaiser. Over the previous decade, premiums went up by 131 percent, compared with 28 percent for inflation. The administration contends that the rate increases reflect excessive profits; insurance lobbyists counter that their rates simply mirror underlying increases in prices charged by doctors, hospitals and drug firms. America's Health Insurance Plans, the industry's main lobby, plans to spend more than $1 million on a nationwide advertising campaign this week to, as one official with the group said, "set the record straight about rising health-care costs." Americans' attitudes toward health insurance are complex. Broad majorities of insured people say they are satisfied with their coverage, according to Washington Post-ABC News polls. Only one in eight say insurance would improve if the health-care system were changed. But that relative satisfaction coexists with anxiety. More detailed Kaiser surveys show that two-thirds of insured people say they worry that their insurance or their care will become more expensive -- and nearly half say they have delayed or skipped care because of the cost. Robert J. Blendon, a Harvard professor who specializes in public opinion on health care, said it may be difficult for the White House to shift Americans' views about reform, with polls showing they have been relatively static since early fall. Still, he said, the administration has reason to focus on insurance rates, because "the president ran saying, 'I am going to lower your costs,' and most people don't believe there is anything in the bill at the moment that would make that happen." In particular, Blendon said, Obama is trying to overcome that perception by proposing a new Health Insurance Rate Authority. That proposal, however, has encountered skepticism among state insurance commissioners, who regulate the industry. "I do kind of recoil at the word 'authority,' " said Sandy Praeger, chairman of the National Association of Insurance Commissioners' health-care committee and insurance commissioner for Kansas. She said she favors nationwide minimum standards for regulating insurers. But, she said, "I don't know why they need a separate board," adding that she fears that such an authority could lead to federal powers to override state decisions about insurance rates. Already, 28 states require health insurers to get commissioner approval for rate increases in the small, expensive individual insurance market, and a dozen require companies to file notices of planned increases. Praeger said there is a risk that, if the federal government blocked premium increases that insurers needed to remain solvent, some companies could be unable to pay claims. Through the increasing din, insurers have been using their own megaphone to try to counteract the White House's messages, saying they are being vilified. "All health plans are in the same situation in trying to deal with the steadily increasing medical costs in the delivery system, which are not sustainable," an Anthem spokeswoman said last month when the firm agreed to a request by California regulators to postpone its rate increase. Like other insurers, Anthem also said rates are going up for individual insurance

203 because, in the poor economy, healthy people are dropping coverage, leaving a pool of customers who are sicker and more expensive to cover. A few constituencies are seizing on the administration's heated rhetoric. As many as 5,000 activists, organized by Health Care for America Now, a coalition of labor and other liberal groups, are planning to amass in Washington on Tuesday to stage a "Stop Big Insurance" rally outside a policy forum that America's Health Insurance Plans is sponsoring. On Monday morning, before she joined Obama on Air Force One for his speech in suburban Philadelphia, Health and Human Services Secretary Kathleen Sebelius wrote to the chief executives of five large insurers she had summoned to the White House last week. Calling the insurance system "broken," her letter urged the companies to post on their Web sites a 10- point explanation of price increases and their impact. At Arcadia University in Glenside, Pa., on Monday, Obama propelled the message further, citing a recent conference call convened by Goldman Sachs Global Investment Research in which, the president said, an insurance broker said there was so little competition among health insurers that it was worth it for companies to raise premiums, even if they lost customers as a result. He said: We "allow the insurance industry to run wild in the country." Staff writers Dan Eggen and Michael D. Shear and polling analyst Jennifer Agi esta contributed to this report. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/08/AR2010030801703.html?wpisrc=nl_headline

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Are unemployment benefits no longer temporary? By Michael A. Fletcher and Dana Hedgpeth Washington Post Staff Writer Tuesday, March 9, 2010; A01 Millions of Americans have been forced to rely on unemployment payments for extended periods as the nation struggles through its longest period of high joblessness in a generation, and critics are taking aim, saying that the Depression-era program created as a temporary bridge for laid-off workers is turning into an expensive entitlement. About 11.4 million out-of-work people now collect unemployment compensation, at a cost of $10 billion a month. Half of them have been receiving payments for more than six months, the usual insurance limit. But under multiple extensions enacted by the federal government in response to the downturn, workers can collect the payments for as long as 99 weeks in states with the highest unemployment rates -- the longest period since the program's inception. The unemployed say extensions help to tide them over in unusually difficult times when jobs are hard to come by. Although unemployment held steady at 9.7 percent in February, millions of jobs have been lost in the downturn, particularly in the hardest-hit sectors including real estate, construction, manufacturing and financial services. Those jobs are unlikely to return even when the economy recovers, many experts say. But complaints that extending unemployment payments discourages job-seeking have begun to bubble into the political debate. Sen. Jim Bunning (R-Ky.) recently single-handedly held up the latest extension, a bill to keep unemployment benefits in place for 30 more days, saying Congress should find other cuts to cover its $10 billion price tag. Sen. Jon Kyl (R-Ariz.) did not join Bunning's effort, but he defended his colleague's point of view. Kyl told the Senate he questioned why anyone would see unemployment benefits as helpful to the economy, or to the job market. "If anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work," Kyl said. "I am sure most of them would like work and probably have tried to seek it, but you can't argue it is a job enhancer." Andrew Stettner, deputy director of the National Employment Law Center, says there's a good reason people are out of work for so long. There are six unemployed Americans for every available job, he said. "The primary reason people are out of work so long is a lack of jobs," Stettner said. The 14.9 million jobless Americans have been out of work an average of 29.7 weeks, just below January's 30.2-week average. Those levels are the highest since the government began keeping those records in the 1950s, according to Stettner. The ranks of the unemployed include Jerome Boyd, 48, a father of four who lives in Arlington. He was laid off in August from his job as a sous chef at Gaylord National Hotel at National Harbor.

205 He receives $1,200 a month in unemployment benefits, less than half the $3,000 a month he brought home from his job. Now he is often behind paying about $1,500 in rent, a car payment and other expenses. "I'm stealing from Peter to pay Paul," he said, adding: "There's the cable, the phone bill. I owe the bank overdraft fees and the insurance is lapsing a little bit. I can't take my kids shopping for school clothes because I don't have enough to do that." The checks may be meager, but Boyd does not know what he would do without them. "I depend on this money," he said. "I'm wondering every other week if it is going to keep coming in or not. It's stressful, and especially when you're trying to look for a job, too." States determine the amount of the benefits, but they average 36 percent of the average weekly wage, according to the National Employment Law Center. Recipients must look for work. Boyd said he has applied for 20 jobs in the past four months but has gotten only a few calls back. He has, however, looked only for jobs that pay above the minimum wage. "I can't take something that's minimum wage because I just won't be able to pay my bills," he said. "I'd have to work three jobs to pay the bills, and that doesn't make sense." Unemployment benefits were created as part of the Social Security Act of 1935, intended to provide the unemployed some portion of their income while helping the economy weather down times. Nearly two-thirds of the jobless collect unemployment benefits, which go only to those who have earned a certain amount of money in the previous year, and who lost their jobs through no fault of their own. Unemployment compensation is funded largely through employer taxes (a few states require worker contributions). They have been extended in previous periods of unusually high unemployment, then rolled back when the rate declined. Although the availability of long-term unemployment benefits "could dampen people's efforts to look for work," the Congressional Budget Office said in a February report, that concern "is less of a factor when employment opportunities are expected to be limited for some time." The report went on to say that people receiving unemployment benefits tend to plow the money right back into the economy, making them "both timely and cost-effective in spurring economic activity and employment." Today, the unemployed confront a changing workplace. The Obama administration has tried to address that by investing heavily in education, clean energy and scientific research, which officials say will create the jobs of the future. But that takes time, and jobs are being lost faster than new kinds can be created. That places unprecedented pressure on a program created to provide short-term relief while people waited for jobs to return. "It is appropriate and natural for Congress to extend the time limit of unemployment insurance with the job market as bad as it is," said James Sherk, a labor economist at the Heritage Foundation. "But by quadrupling it, it is no longer an unemployment insurance program but a welfare program." Phillip L. Swagel, a former Treasury Department official who is now a business professor at Georgetown University, said that some people might take longer to find a new job as a result of unemployment insurance extensions, but that right now it's a needed benefit. "The reality is that it's hard to find a job even for people who really want one," he said. But as the job market improves, Swagel said, unemployment insurance extensions must be pared back quickly, as they have been in previous downturns. "It's important to let the extensions lapse as the job market recovers -- to avoid having disincentives to work once the job market is better," Swagel said.

206 Jeffrey Carlson of Grand Rapids, Mich., a former insurance salesman and father of six, says he is motivated to find work, despite the $1,650 a month he collects in unemployment benefits. That money does not go far given his rent, child support, utilities and credit card bills. Carlson, 44, said he has applied for numerous jobs with no luck and has spent $40,000 in savings. Carlson, who made $50,000 a year before he was laid off, said watching Bunning and other senators debate whether to extend unemployment benefits was painful and infuriating. "I paid into the system for 25 years and now I need it," he said. "People are being put through the emotional heartache and anxiety of not knowing if it's going to keep coming. There are too many people who need it and are depending on it." Staff researcher Magda Jean-Louis and staff writer V. Dion Haynes contributed to this report. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/08/AR2010030804927.html?wpisrc=nl_headline The price of unemployment

Millions of people are out of work, for longer and longer periods. The average in February was 29.7 weeks and in January 30.2 weeks. Unemployment benefits, which vary from state to state but average 36 percent of the average weekly wage, are costing $10 billion a month.

SOURCE: National Employment Law Project, Bureau of Labor Statistics | Tobey/The Washington Post

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Francia también sucumbe al pesimismo sobre la recuperación El Banco de Francia rebaja las previsiones de crecimiento para el primer trimestre del año EL PAÍS | AGENCIAS - Madrid / París - 08/03/2010 Francia, la única entre las grandes economías de la UE que hasta la fecha no ha dado signos de desfallecer en el camino de la recuperación, hace un alto en el camino. Según ha anunciado hoy el Banco de Francia, la economía francesa crecerá menos de lo previsto en el primer trimestre del año. En términos cuantitativos, la revisión es mínima, apenas una décima desde el 0,5% inicial hasta el 0,4%, pero significativa en cuanto a que confirma que la recuperación de la eurozona no es tan sólida como se preveía y que la crisis de Grecia está haciendo mella en el resto de sus socios del euro. La entidad francesa se acerca así a la previsión de crecimiento publicada a finales del año pasado por el Instituto Nacional de Estadística (INSEE), que apostaba por una subida del PIB entre el 0,3 y el 0,4%. Frente a estos cálculos, el Gobierno, por su parte, mantiene la previsión de un crecimiento del 1,4% en el conjunto del año. Según el organismo, la rebaja, que en cualquier caso tiene lugar después de aumentar sus proyecciones a principios de año, se explica por la caída de la confianza empresarial en el sector industrial, mientras que en el sector servicios subió a 90 puntos, uno más que en el mes anterior. "En febrero, la actividad industrial se expandió más en la mayoría de los sectores, aunque a un ritmo más moderado que durante el mes anterior", asegura el Banco de Francia en un comunicado. Además, con vistas al futuro, añade que espera que la actividad tanto en los negocios de servicios como en el sector de industriales continúe avanzando lentamente a corto plazo. Francia salió de la recesión en el segundo trimestre de 2009, cuando creció un 0,3%, y confirmó esta senda al alza en el tercero con otro 0,3%. En los tres últimos meses del pasado año, aumentó su crecimiento al 0,6%, con lo que se quedó como la única entre las grandes que mejoraba su ritmo de avance. Insuficiente, no obstante, para enjugar la caída acumulada en todo el año, ya que el Producto Interior Bruto decreció un 2,2% durante el pasado ejercicio sufriendo su mayor caída desde la postguerra. Alemania cerró el ejercicio en tablas con un crecimiento nulo tras aumentar su PIB un 0,7% entre julio y septiembre y otro 0,4% en el trimestre precedente, cuando también dijo adiós a la recesión. http://www.elpais.com/articulo/economia/Francia/sucumbe/pesimismo/recuperacion/elpepuec o/20100308elpepueco_2/Tes

208 Opinion

March 8, 2010 OP-ED COLUMNIST An Irish Mirror By PAUL KRUGMAN Everyone has a theory about the financial crisis. These theories range from the absurd to the plausible — from claims that liberal Democrats somehow forced banks to lend to the undeserving poor (even though Republicans controlled Congress) to the belief that exotic financial instruments fostered confusion and fraud. But what do we really know? Well, in a way the sheer scale of the crisis — the way it affected much, though not all, of the world — is helpful, for research if nothing else. We can look at countries that avoided the worst, like Canada, and ask what they did right — such as limiting leverage, protecting consumers and, above all, avoiding getting caught up in an ideology that denies any need for regulation. We can also look at countries whose financial institutions and policies seemed very different from those in the United States, yet which cracked up just as badly, and try to discern common causes. So let’s talk about Ireland. As a new research paper by the Irish economists Gregory Connor, Thomas Flavin and Brian O’Kelly points out, “Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case,” and vice versa. Yet the shape of Ireland’s crisis was very similar: a huge real estate bubble — prices rose more in Dublin than in Los Angeles or Miami — followed by a severe banking bust that was contained only via an expensive bailout. Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance: Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag. So what did we have in common? The authors of the new study suggest four “ ‘deep’ causal factors.” First, there was irrational exuberance: in both countries buyers and lenders convinced themselves that real estate prices, although sky-high by historical standards, would continue to rise. Second, there was a huge inflow of cheap money. In America’s case, much of the cheap money came from China; in Ireland’s case, it came mainly from the rest of the euro zone, where Germany became a gigantic capital exporter. Third, key players had an incentive to take big risks, because it was heads they win, tails someone else loses. In Ireland this moral hazard was largely personal: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

209 But the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’t do their jobs. In Ireland, regulators looked the other way in part because the country was trying to attract foreign business, in part because of cronyism: bankers and property developers had close ties to the ruling party. There was a lot of that here too, but the bigger issue was ideology. Actually, the authors of the Irish paper get this wrong, stressing the way U.S. politicians celebrated the ideal of homeownership; yes, they made speeches along those lines, but this didn’t have much effect on lenders’ incentives. What really mattered was free-market fundamentalism. This is what led Ronald Reagan to declare that deregulation would solve the problems of thrift institutions — the actual result was huge losses, followed by a gigantic taxpayer bailout — and Alan Greenspan to insist that the proliferation of derivatives had actually strengthened the financial system. It was largely thanks to this ideology that regulators ignored the mounting risks. So what can we learn from the way Ireland had a U.S.-type financial crisis with very different institutions? Mainly, that we have to focus as much on the regulators as on the regulations. By all means, let’s limit both leverage and the use of securitization — which were part of what Canada did right. But such measures won’t matter unless they’re enforced by people who see it as their duty to say no to powerful bankers. That’s why we need an independent agency protecting financial consumers — again, something Canada did right — rather than leaving the job to agencies that have other priorities. And beyond that, we need a sea change in attitudes, a recognition that letting bankers do what they want is a recipe for disaster. If that doesn’t happen, we will have failed to learn from recent history — and we’ll be doomed to repeat it. http://www.nytimes.com/2010/03/08/opinion/08krugman.html?th&emc=th

March 7, 2010, 5:06 pm Competitive Deflation Rebecca Wilder is right: Latvia’s model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It’s impossible that the whole of the Eurozone will drop wages to increase export income. And let’s not forget that all this deflation raises both the real value of euro-denominated debt and real interest rates. It’s the euro version of Andrew Mellon: liquidate Lativa, liquidate Greece, liquidate Spain, purge the rottenness …. http://krugman.blogs.nytimes.com/2010/03/07/competitive-deflation/

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March 7, 2010, 4:59 pm Supply, Demand, and Unemployment Bureau of Labor Statistics I hear through the grapevine that the usual suspects at the WSJ have put out something along the lines of “Krugman says that unemployment benefits won’t raise unemployment, but in his textbook he says they will, neener neener.” Are they really that stupid? Probably not — but they you think that you, the reader, are that stupid. But anyway, maybe this is a good time to explain the difference between determinants of the NAIRU — the minimum rate of unemployment consistent with a stable inflation rate — and the determinants of the unemployment rate at a point in time. So: there are limits to how hot you can run the economy without inflationary problems. This is usually expressed in terms of a non-accelerating-inflation unemployment rate; yes, there are some questions about whether the concept is quite right, especially at very low inflation, but that’s another issue. Everyone agrees that really generous unemployment benefits, by reducing the incentive to seek jobs, can raise the NAIRU; that is, set limits to how far down you can push unemployment without running into inflation problems. But in case you haven’t noticed, that’s not the problem constraining job growth in America right now. Wage growth is declining, not rising, and so is overall inflation. A wage-price spiral looks like a distant dream. What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant. That’s why comments by the likes of Sen. Kyl are so boneheaded — anyone who thinks that high unemployment in the first quarter of 2010 has anything to do with workers getting excessively generous benefits must not get out much. And the truth is that unemployment benefits are a good, quick, administratively easy way to increase demand, which is what we really need. So right now they have the effect of reducing unemployment. http://krugman.blogs.nytimes.com/2010/03/07/supply-demand-and-unemployment/

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08.03.2010 Schäuble proposes European Monetary Fund

It’s happening. European government are sufficiently scared that they produce some governance reform ideas. Germany’s Wolfgang Schauble has picked up on Daniel Gros and Thomas Mayer’s idea of a European Monetary Fund. The first details were revealed by the German finance minister Wolfgang Schäuble, who told the Welt am Sontag that the eurozone needs a European IMF and that he will make concrete proposal soon. Schäuble, incidentally, also said that support for Greece would not necessarily contradict the bail out clause in the Maastricht Treaty as the measures were intended to prevent financial instability of the eurozone as a whole. FT Deutschland has some more details. The plan proposes liquidity support for countries under financial difficulties under strict conditions. Whether help is granted, or not, would be decided by unanimity of the eurogroup under exclusion of the respective country. Insolvency should not be excluded per se. Members would be obliged not to call for help of the IMF. Preemptive measures include tougher rules for the Stability and Growth Pact. Ideas include cutting off countries that fail to curb deficit spending from EU cohesion funds, temporarily removing their right to vote in EU ministerial meetings and suspension from the eurozone. Also included are much more intrusive economic surveillance, and even management, for those economies that fail the rules of the EU stability and growth pact. Schäuble´s proposal finds support across party lines in Germany, reports Spiegel Online. It is supported by the EU Commission. Greek central bank governor Georgios Provopoulos meanwhile is sceptical. He told FT Deutschland that respect of the current Stability Pact and consequential consolidation would make such a proposal unnecessary. In the FT Quentin Peel notes that such an arrangement could hardly be set up in time to help Greece as this would require treaty change. The changes would amount to easily the most radical overhaul of the Maastricht Treaty (and let’s recall how long it took for the Constitutional/Lisbon Treaty to be negotiated and ratified.

212 Other institutional options have also been put forward: Jean Claude Juncker suggested on Friday to create a European rating agency under the supervision of the ECB, as a counterbalance for the private Ango-Saxon rating agencies, reports Les Echos. Belgian prime minister Yves Leterme suggested in the FT Deutschland and Le Monde a common treasury or European debt agency. This institution would issue and mangage the debt of eurozone countries. Support for Greece Lukewarm in Germany After meeting the Greek prime minister George Papandreou, Angela Merkel told the press that the question of a bailout “absolutely doesn´t arise” . Strong words in France Strongest support for Greece showed Nicolas Sarkozy, who said the eurozone is ready to rescue Greece should the government struggle to fund its deficit. “We must support Greece, because they are making an effort,” Sarkozy called on the solidarity of eurozone members saying that: “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.” For further sound bites see Le Monde. George Papandreou said all his county expects is to borrow at similar or identical rates as other eurozone countries, Les Echos quotes. Greek wage cut programme could provoke recession An article in Kathimerini breaks down in more details what is behind the €4.8bn saving package including a long list of wage and pension cuts that awaits the public sector. The article goes on arguing that such austerity measures risk causing a recession. Better would be to complement the austerity programme with growth stimulating measures. Volcker believes in euro survival Paul Volcker is confident that the euro will survive the first major crisis, according to Bloomberg. A “combination of very strong measures and availability of money” may help solve the Greek problem and stop contagion spreading to other euro nations, he said on a lecture in Berlin. Munchau on why the euro is likely to fall In his FT column, Wolfgang Munchau argues the case why the euro has further to fall. He makes a sectoral balances arguments, the result of the strong commitment by the EU to consolidate budgets, down to 3% of GDP, or in Germany’s case beyond. The consequences will be either a deterioration in private balances – which in the case of southern European countries could be quite dramatic – or an improvement in the current account balances. The first would imply, the latter require a weaker euro. http://www.eurointelligence.com/article.581+M553bed2d2ad.0.html#

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03/08/2010 11:51 AM Greek Debt Crisis Proposal for European Monetary Fund Wins EU Support German Finance Minister Wolfgang Schäuble has suggested setting up a European monetary fund to enable the euro zone to tackle debt crises such as that seen in Greece without resorting to the IMF. EU Monetary Affairs Commissioner Olli Rehn has welcomed the idea. German Finance Minister Wolfgang Schäuble has won support from EU Economic and Monetary Affairs Commissioner Olli Rehn for a proposal to set up a European monetary fund to tackle debt crises such as the one in Greece. "We are working closely with Germany, France and the other EU member states on this issue," Rehn told the Financial Times Deutschland in an article published on Monday. "The Commission is prepared to propose such a European instrument that gets the support of the members of the euro zone." Any aid provided by the funds would need to be "combined with strict conditions," he said. Greece has run up a budget deficit more than four times higher than the EU's limit of 3 percent of GDP, sparking market fears that it could default on its debt and threaten Europe's 11-year-old monetary union. The country has announced major spending cuts and tax hikes to reduce its budget deficit. The crisis has caused the euro currency to depreciate by around 10 percent against the dollar since the end of last year. No Outside Help Schäuble told Welt am Sonntag newspaper on Sunday that he would soon be making proposals for an institution to help the euro zone deal with debt crises. He said he was opposed to a bailout of Greece by the International Monetary Fund, which supports countries that run into payments difficulties and often demands tough market reforms in return. Countries such as Latvia and Hungary have received aid from the IMF but no euro zone member states have been bailed out by the Washington-based institution. Germany and other euro zone countries have said Europe should handle the Greek crisis without outside help. "The euro zone aims to be able to solve its problems itself," Schäuble said. "Accepting financial help from the International Monetary Fund would in my opinion be an admission that the euro zone countries cannot solve their problems alone." Asked if Europe needed its own European monetary fund, Schäuble said: "We should calmly discuss what consequences should be drawn from the Greek crisis. We shouldn't rule out any proposals, including the establishment of a European monetary fund. We don't plan a rival institution to the International Monetary Fund, but for the inner stability of the euro zone we need an institution that has the experience of the IMF, and corresponding powers. I will shortly be making proposals on this." Other members of Chancellor Angela Merkel's center-right coalition welcomed Schäuble's proposal, as did the opposition center-left Social Democrats, who said it was their idea. Greece Won't Need Help, Says Central Bank Chief

214 Meanwhile, the governor of the Greek central bank, George Provopoulos, said Greece would not need foreign help to deal with its problems. Provopoulos told the Financial Times Deutschland that strong demand for a 10-year, €5 billion ($6.8 billion) bond Greece sold last Thursday showed Athens was capable of raising the funds it needs on the financial markets. "A scenario in which help is necessary will not become reality," Provopoulos said in the interview, which was published on Monday. But he added that if Greece needed foreign help, it should come from Europe rather than the IMF. "Greece is part of the euro family and if help were necessary, that should be the euro zone's job," he said. Greece last week presented a €4.8 billion ($6.52 billion) austerity package to reduce its deficit. It blamed market speculators, who are betting on a possible Greek default, for pushing up the cost of its borrowing. Sarkozy Pledges Backing French President Nicolas Sarkozy on Sunday promised Greece that euro zone countries would help it overcome its financial problems, and vowed a crackdown on financial speculators. He was speaking after talks with Greek Prime Minister George Papandreou, who has been touring European capitals in an attempt to get declarations of support that will reassure markets. Sarkozy ruled out any immediate financial backing but stressed that his economy minister was drawing up possible aid plans. Merkel had said on Friday that the stability of euro zone was not currently at risk from the Greek debt crisis, so direct aid to Athens was unnecessary. Speaking at a joint news conference with Papandreou after the two held talks, she called on Athens to implement reforms quickly. "Greece has not asked for financial aid. The euro zone is stable at the moment. And therefore this question (of aid) does not present itself," Merkel said. There is strong public resistance in Germany to a bailout of Greece, and the crisis has triggered a media-driven war of words between the two countries over the last month. Merkel also called for a crackdown on speculators. "It shouldn't be possible that speculators profit from the difficult situation in Greece and that's why we've got a joint responsibility. We've got to put a stop to the speculators' game together with other nations." cro -- with wire reports URL: • http://www.spiegel.de/international/europe/0,1518,682296,00.html RELATED SPIEGEL ONLINE LINKS: • Greece Hits Bottom: A Clash of Cultures on the Aegean (03/05/2010) http://www.spiegel.de/international/europe/0,1518,682030,00.html • Interview with Greek Crime Writer Petros Markaris: 'The Greeks Must Suffer' (03/04/2010) http://www.spiegel.de/international/europe/0,1518,681705,00.html • PIIGS to the Slaughter: Can the Euro Zone Cope with a National Bankruptcy? (02/22/2010) http://www.spiegel.de/international/europe/0,1518,679502,00.html • The World from Berlin: German Attacks on Greece 'Doubly Harmful' (02/25/2010) http://www.spiegel.de/international/europe/0,1518,680283,00.html

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La Belgique propose la création d'une agence européenne de la dette [ 08/03/10 ] La Belgique a proposé vendredi la création d'une agence européenne de la dette ; le Luxembourg, celle d'une agence de notation européenne. Sur le même sujet Grèce : Paris et Berlin d'accord sur la lutte anti-spéculateurs En pleine tension entre Athènes et Berlin sur la gestion de la dette grecque, deux Premiers ministres, l'un du Luxembourg, Jean-Claude Juncker, l'autre de Belgique, Yves Leterme, ont formulé, chacun vendredi, une proposition pour éviter à l'avenir ce genre de crise. L e premier s'est prononcé en faveur de la création d'une agence de notation européenne, placée sous l'égide de la Banque centrale européenne, afin de faire contrepoids aux agences privées anglo-saxonnes qui font la loi sur les marchés, en dépit de leur incapacité à dépister les signes avant-coureurs de la crise financière. Le deuxième, Yves Leterme, a relancé l'idée d'une mutualisation des dettes européennes. Dans une tribune publiée notamment par le « Financial Times » Deutschland et « Le Monde », il propose de créer « un Trésor commun à la zone euro ou une Agence européenne de la dette ». Cette dernière, explique-t-il, serait une institution de l'Union européenne, chargée d'émettre et de gérer la dette gouvernementale de la zone euro. « Elle reprendrait les titres de la dette existants et en émettrait de nouveaux », créant progressivement « un véritable marché européen unique pour la dette gouvernementale ». Tous pour un... Au-delà du symbole politique, le principal avantage de cette formule tient en une phrase : les Etats membres de la zone euro garantissent tous ensemble la dette de chacun. L'émission de tels emprunts ferait ainsi profiter les Etats les plus fragiles de taux plus faibles grâce à la réputation des plus solides, comme l'Allemagne. Yves Leterme précise que chaque Etat membre continuerait à payer des taux d'intérêt différents pour la dette existante, mais que les nouvelles émissions bénéficieraient du taux d'intérêt uniforme. Le premier ministre belge reconnaît lui-même qu'une telle idée « ne sera pas partagée avec le même enthousiasme par chacun des pays de la zone euro ». L'idée d'émettre des euro-obligations a d'ailleurs été évoquée ces dernières semaines sans trouver d'écho dans les principales capitales européennes. Sauf en Italie, où le ministre des Finances, Giulio Tremonti, s'est prononcé en faveur de l'émission d'euro-obligations. L'Allemagne, en revanche, s'y est toujours opposée pour une raison simple : « Elle dispose déjà toute seule des taux préférentiels pour emprunter sur les marchés », note le ministre belge des Finances, Didier Reynders. En revanche, le ministère allemand des Finances se dit « ouvert sur le principe » d'une agence de notation européenne. Toutefois, « il faudrait s'assurer que ses notations soient acceptées par le marché », indique-t-on.

216 L'Espagne, qui préside actuellement l'Union et fait partie des Etats qui bénéficieraient de l'agence de dette européenne, se contente d'indiquer que ce n'est pas un sujet traité à ce jour dans le cadre des réunions des ministres des Finances. La Commission européenne se montre également prudente, jugeant la proposition prématurée. « Je n'exclus pas la création d'un ministère des Finances commun ou d'une agence européenne de la dette, mais cela suppose qu'avant cela, nous ayons beaucoup progressé sur la voie de la coordination des politiques économiques », a ainsi affirmé vendredi l'un de ses porte-parole. CATHERINE CHATIGNOUX AVEC NOS CORRESPONDANTS À ROME, BERLIN ET MADRID., Les Echos http://www.lesechos.fr/info/inter/020399864412.htm?xtor=RSS-2059

EURO ET GRÈCE : COMMENT SORTIR DE LA CRISE ? Pour une agence européenne de la dette, par Yves Leterme LE MONDE | 05.03.10 | 13h15 • Mis à jour le 05.03.10 | 13h15 es tensions récentes sur les marchés concernant la dette souveraine de l'euro soulèvent les inconvénients d'une union monétaire dépourvue de gouvernement économique. Des exigences de compétitivité divergentes mènent à des déséquilibres internes à la zone euro et à des doutes de la part des marchés financiers quant à la solvabilité de certains pays. La création d'un gouvernement économique ne faisait pas partie du projet ambitieux que fut le lancement de l'euro. La réponse apportée à titre provisoire fut la création du pacte de stabilité et de croissance. Je propose de franchir une étape supplémentaire : créer un Trésor commun à la zone euro ou une Agence européenne de la dette (AED). L'AED serait une institution de l'UE chargée d'émettre et de gérer la dette gouvernementale de la zone euro, sous l'autorité des ministres des finances de l'Eurogroupe et de la Banque centrale européenne (BCE). La Banque européenne d'investissement remplirait le rôle de secrétariat de l'AED. Elle reprendrait les titres de la dette existants et en émettrait de nouveaux dans la mesure des accords conclus au sein de l'Ecofin et de l'Eurogroupe. Ces fonds seraient transférés aux Etats membres. Pour ce qui est de la dette existante, l'AED opérerait une différence au sein des débiteurs et chaque Etat membre continuerait de payer des taux d'intérêt différents, qui seraient le reflet de leur propre rapport de solvabilité. Les nouvelles émissions bénéficieraient d'un taux d'intérêt uniforme. A mesure que l'ancienne dette évoluera et sera remplacée par de nouveaux titres, la dette du gouvernement de la zone euro prendrait la forme d'une dette unifiée, ce qui sous-entend que chaque Etat membre garantirait de manière implicite la dette de tous les autres. Quels avantages nous offriraient la mise en place d'une telle agence ? D'abord, l'AED serait un instrument permettant d'améliorer la mise en oeuvre du pacte de stabilité et de croissance. Après la passation d'un accord concernant l'objectif de déficit d'un Etat membre au niveau de l'Eurogroupe et de l'Ecofin, l'AED ne prêterait et n'emprunterait qu'à hauteur du déficit approuvé. Si le pays en question devait ne pas respecter son engagement envers le pacte, il devrait assumer la lourde tâche de se tourner lui-même vers le marché financier, où l'attendraient des taux d'intérêt plus élevés du fait de son profil à risque plus élevé découlant de son non-respect du pacte. Cela donnerait lieu à une réelle pénalité pour non-respect du pacte.

217 Dans un deuxième temps, cela permettrait la création d'un véritable marché européen unique pour la dette gouvernementale. Cet énorme marché permettrait d'enregistrer des gains significatifs en termes de liquidité et d'engranger des bénéfices, non seulement pour les prêteurs mais aussi pour les gouvernements, car débouchant sur des taux d'intérêt réels plus bas. Les Etats membres les plus petits, qui doivent le plus faire face au problème du manque de liquidité, en bénéficieraient le plus, mais les grands Etats tireraient aussi profit de ces faibles taux d'intérêt. Troisièmement, l'AED constituerait un symbole financier et politique visible d'un marché européen unifié des obligations publiques. Cela pourrait, à son tour, renforcer le poids de l'euro au niveau mondial, à une période où les principaux pays excédentaires sont à la recherche de solutions alternatives pour leurs actifs en dollars. Quatrièmement, la taille de la dette à gérer atteindrait dès lors une masse critique et l'AED pourrait ainsi jouer un rôle à l'égard de la structure du taux d'intérêt au sein de la zone euro et de la gestion du taux de change des principales devises mondiales. Voyons plus loin encore et greffons deux rôles supplémentaires à l'AED : un organe de financement de grands projets d'infrastructure transeuropéens et un instrument permettant de mener une politique budgétaire anticyclique. Cela donnerait à l'UE les vrais "moyens d'action" indépendants qui lui font actuellement défaut, tout en prenant en considération les contraintes budgétaires des Etats membres. Nous avons conscience que l'idée d'une AED ne sera pas partagée avec le même enthousiasme par chacun des pays de la zone euro ni par certains pays extérieurs à la zone. Une telle institution signifierait le transfert de compétences nationales importantes vers une institution communautaire. L'AED va à l'encontre du principe de "no bail out" (pas de sauvetage financier), entériné par le traité de Maastricht. Cependant, même sans l'AED, la solidarité entre Etats membres de la zone euro pourrait leur être imposée par les marchés financiers. Optons donc pour un meilleur contrôle de ce processus en ayant recours à l'AED afin de mieux mettre en oeuvre les programmes de stabilité. Ma proposition d'une Agence européenne de la dette constitue un projet tant économique que politique pour l'Europe. Elle plaide pour une intégration plus approfondie de l'UE sur la base du principal succès économique de l'Europe, à savoir l'euro. Elle apporte des réponses spécifiques aux questions européennes typiques : quel degré de subsidiarité, quel niveau de cohésion et de coopération entre les Etats membres et quels règlements interinstitutionnels il convient d'appliquer. Conformément à la tradition de la construction européenne, nous percevons déjà quelles pourraient être les réponses : au bout du compte, comme pour chaque nouvelle étape dans l'intégration européenne, les avantages économiques et le volontarisme politique iront de pair.

Yves Leterme est le premier ministre belge. http://www.lemonde.fr/opinions/article/2010/03/05/pour-une-agence-europeenne-de-la-dette- par-yves-leterme_1314894_3232.html

218 Grèce : Paris et Berlin d'accord sur la lutte anti- spéculateurs [ 08/03/10 ] Paris et Berlin ont apporté durant le week-end un soutien politique appuyé au Premier ministre grec qui a cependant répété qu'il pourrait avoir besoin du soutien de ses partenaires. Une initiative devrait être prise contre la spéculation. Après le président de l'Eurogroupe, Jean-Claude Juncker, et la chancelière allemande, Angela Merkel, vendredi, le président français a apporté hier soir, à l'Elysée, un soutien appuyé et chaleureux à la Grèce et à son Premier ministre, Georges Papandréou. Faisant référence au plan d'austérité de 4,8 milliards d'euros annoncé la semaine dernière , Nicolas Sarkozy a déclaré : « La Grèce a agi avec courage et détermination en conséquence de quoi elle peut compter sur le plein soutien de la France », ajoutant peu après « les Etats de la zone euro doivent être prêts à prendre leur responsabilité ». Quant à savoir quel type d'aide la Grèce pourrait recevoir, George Papandréou a été on ne peut plus clair : « Nous ne demandons pas un prêt, nous voulons seulement pouvoir emprunter à un taux similaire, sinon identique, aux autres pays de la zone euro », a t-il expliqué, soulignant que pour lever les 5 milliards d'euros de dette, jeudi dernier, il lui faudrait rembourser 750 millions d'euros de plus que si c'était l'Allemagne qui avait emprunté . « Ce n'est pas viable pour notre économie. Nous voulons lever des fonds aux mêmes conditions que nos partenaires ». a t-il ajouté, laissant entendre que seule la spéculation était à l'origine des taux élevés (6,38 %, le double de la l'Allemagne) demandés à la Grèce. Une demande bien accueillie par Nicolas Sarkozy qui a indiqué sans les détailler que des mesures existaient pour soulager la Grèce. Il a ajouté que la Grèce, l'Allemagne et la France prendraient une initiative concertée pour lutter contre la spéculation. Coopérations bilatérales Angela Merkel s'en était pris vendredi aux spéculateurs et aux dérivés de crédit (CDS) à travers lesquels ils cherchent à profiter des difficultés de la Grèce. Elle veut en limiter l'usage et veut saisir la Commission européenne et « solliciter nos partenaires américains, car la spéculation est mondiale ». Le gendarme du secteur financier allemand, le BaFin conseille d'établir un registre central européen d'enregistrement des CDS. Angela Merkel avait cependant mis l'accent sur l'amélioration de la situation après le plan d'austérité grec : « la stabilité de la zone euro est assurée , la question d'une aide financière à la Grèce n'est pas posée et je suis même optimiste sur le fait qu'elle ne sera pas posée ». Un peu plus tôt, Jean- Claude Juncker, Premier ministre luxembourgeois et président de l'Eurogroupe, avait lui aussi estimé qu'un plan d'aide concrète à Athènes « ne devrait pas être nécessaire ». Athènes doit cependant encore emprunter autour de 20 milliards d'euros d'ici à la fin mai et rien ne dit qu'elle pourra le faire aux conditions souhaitées. La chancelière allemande a proposé ses services pour moderniser l' économie grecque. Une commission va être constituée pour réfléchir à des coopérations bilatérales dans les domaines de l'environnement, de l'énergie, de la recherche et de la politique d'immigration. De son côté, le ministre allemand des Finances, Wolfgang Schäuble, a repris une suggestion du Premier ministre grec et d'autres responsables européens en proposant hier dans le quotidien « Welt am Sonntag » la création d'une institution européenne sur le modèle du FMI, qui posséderait « des pouvoirs d'intervention analogues ». CATHERINE CHATIGNOUX ET KARL DE MEYER, Les Echos http://www.lesechos.fr/journal20100308/lec1_international/020401832386.htm

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Volcker Says Euro to Survive as Greek Budget Crisis Manageable By Rainer Buergin and Philipp Encz

March 8 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said European officials are lucky that the euro region’s first major crisis was sparked by one of its smaller members and he’s confident the currency will survive. “I’m still a believer in the euro,” Volcker said in an interview in Berlin March 6. The lack of a unified government to back up the European Central Bank is a “structural crack” and “maybe fortunately it’s tested with a country as small as Greece, which doesn’t present an insuperable financing problem.” The euro has dropped 8 percent in the past three months as Greece’s soaring budget deficit sparked concern it could default and cause the euro region to break up. The euro’s founding treaty sets out no rules on how a struggling member nation could be rescued and didn’t establish a single finance ministry, prompting billionaire investor George Soros to say on Feb. 28 that the currency “may not survive” the crisis. The lack of a unified fiscal policy has sparked a divergence of bond yields across the euro region as Greece’s crisis worsened. The extra yield investors demand to hold Greek 10-year debt instead of German equivalents jumped to 396 basis points in January, the highest since 1998. The average gap over the past decade was 34 basis points. The Spanish and Portuguese spreads are about five times their respective 10-year averages. German Finance Minister Wolfgang Schaeuble said in an interview with Welt am Sonntag published yesterday he recognizes that the euro region needs to improve its economic governance and said he’s open to the idea of a European Monetary Fund. ‘Good Sign’ Greece, which announced a further round of deficit cutting measures last week, managed to sell 5 billion euros ($6.8 billion) of new 10-year bonds on March 4, which Volcker called “a good sign.” At 12.7 percent of gross domestic product, Greece’s deficit was the highest in the 27-nation European Union last year. A “combination of very strong measures and availability of money” may help solve the Greek problem and stop contagion spreading to other euro nations, said Volcker, who was in the

220 German capital to give a speech to the American Academy in Berlin, a transatlantic research institute. Academics and investors have pointed to the lack of European political union as an inbuilt weakness of the euro since it was created in 1999. Volcker said most U.S. economists were skeptical the euro would survive when the currency was introduced in 1999 because of its “peculiar arrangement.” “I would say about 99 out of 100 American economists said it was not a good idea, but I was the one who did,” he said. Safeguarding the Euro Harvard University Professor Martin Feldstein, who warned in 1997 that European monetary union would spark greater political conflict, said Feb. 12 that the euro “isn’t working.” Soros said 10 days later that if EU members don’t take the next step toward political union, the common currency may disintegrate. While EU leaders on Feb. 11 pledged to safeguard financial stability in the euro area as a whole, no mechanism has been set up for doing that, Soros said. Greece’s debt crisis has put the euro on its longest losing streak against the dollar since November 2008. Greek Prime Minister George Papandreou is on a tour of global capitals after his government passed a 4.8 billion euro austerity package March 5. French President Nicolas Sarkozy said in Paris yesterday the euro region is ready to rescue Greece should the government struggle to fund its budget deficit, which were among the strongest comments by an EU leader to signal the bloc is ready to rescue Greece. German Chancellor Angela Merkel struck a cooler tone two days earlier, when she said that the question of a bailout “absolutely doesn’t arise.” Volcker used his speech to lay out the reasoning behind the so-called Volcker Rule that underpins the legislation sent by President Barack Obama to Congress last week. He also pointed to the “abuse” of derivatives to massage Greece’s budget deficit as a reason to tighten regulation of the securities. “Surely the recent revelations about the use (and abuse) of complex derivatives in obscuring the extent of Greek financial obligations reinforces the need for greater transparency and less complexity,” Volcker said in his speech on March 6. To contact the reporters http://www.bloomberg.com/apps/news?pid=20601085&sid=aPL3XPHQijo0

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Bond Risk Falls to 6-Week Low on Greece, Dubai: Credit Markets By John Detrixhe and Shannon D. Harrington

March 8 (Bloomberg) -- The cost to protect against corporate defaults fell to the lowest in more than six weeks as optimism builds that Greece’s budget crisis will be contained and Dubai is moving closer to restructuring its debt. The Markit iTraxx Crossover Index of 50 companies in Europe with mostly high-yield debt ratings dropped 10 basis points to 415 basis points in London, the lowest since Jan. 19, JPMorgan Chase & Co. prices show. Asia-Pacific credit indexes also fell. Investors are growing less skittish after Greece sold 5 billion euros ($6.8 billion) of notes last week and passed 4.8 billion euros of spending cuts, reducing the risk of default. German Chancellor Angela Merkel called the latest measures a “courageous step” and French President Nicolas Sarkozy said the euro region is ready to rescue the country. “The EU and Germany have stepped in and said, ‘We’re going to support Greece,’” said Joel Levington, director of corporate credit for Brookfield Investment Management Inc. in New York, with $24 billion in assets under management. “It seems like that’s being managed prudently.” Investor perceptions of risk fell as Dubai World, the state-owned holding company renegotiating about $26 billion of debt, may seek permission to delay loan repayments when it presents a plan to creditors this month, said bankers familiar with the talks. The company said in November it planned to postpone repaying loans until May, sparking the biggest plunge in developing-nation stocks. Credit-default swaps linked to Dubai fell 20 basis points to 487 basis points, the lowest in five weeks, according to prices provided by CMA DataVision in London. Spreads Narrow The extra yield investors demand to own company bonds rather than government debt fell 2 basis points on March 5 to 163 basis points, or 1.63 percentage point, the lowest since Jan. 21, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Spreads narrowed 5 basis points for the week, the biggest drop since the period ended Jan. 8. Average yields are 4.06 percent, the data show. Elsewhere in credit markets, mutual funds that buy high- yield bonds had $479 million of inflows, the second week of increases, research firm EPFR Global said. Investors plowed a record $2.6 billion into global bond funds in the week ended March 3, moving out of money

222 markets to seek higher returns, the Cambridge, Massachusetts-based data company said in a report. Trading Surge Corporate bond trading in the U.S. surged to a two-month high. An average $21.1 billion of debt securities traded daily on Trace last week, the most since the period ending Jan. 8, according to the Financial Industry Regulatory Authority. The average was $18.5 billion a day during the previous week. Trace is Finra’s bond-price reporting system. American International Group Inc.’s aircraft-leasing unit is seeking to add a $550 million term loan to bank financing, boosting its first debt sale through capital markets since AIG’s 2008 U.S. bailout to $1.3 billion, according to a person familiar with the negotiations. Bank of America Corp. and Goldman Sachs are arranging the financing for International Lease Finance Corp. A group of Tribune Co. creditors sued the banks behind the publisher’s 2007 leveraged buyout, claiming the $8 billion in loans they arranged doomed the media company to bankruptcy. The banks knew the buyout “would render Tribune insolvent,” attorneys for bondholders owed $1.2 billion wrote in their complaint. Spokesmen for JPMorgan and Citigroup Inc. declined to comment, while representatives of Bank of America Merrill Lynch and Morgan Stanley didn’t return telephone calls. Loans Climb The S&P/LSTA US Leveraged Loan 100 Index climbed 0.7 cent to 89.66 cents on the dollar last week, the highest since Feb. 3. The debt has risen from a record low of 59.2 cents on the dollar on Dec. 17, 2008. The gap between yields on the five-year debt of Fannie Mae, the mortgage-finance company under government control, and similar-maturity Treasuries widened for a sixth day, climbing less than 0.01 percentage point on March 5 to about 0.18 percentage point, Bloomberg data show. Financial Services Committee Chairman Barney Frank said Fannie Mae and Freddie Mac bondholders shouldn’t assume the U.S. will make them whole on their investments as Congress addresses the companies’ future. The Massachusetts Democrat later clarified his comments, saying he wouldn’t interfere with a Treasury Department agreement that runs through 2012 to inject capital into the companies as needed. The number of companies globally that were rated B- or lower rose to 523, or 9.3 percent of the total, at the end of last year as speculative-grade issuers were downgraded, Standard & Poor’s analysts led by Diane Vazza said in a March 5 report. That compares with 8.4 percent in 2008 and 5.8 percent in 2007, S&P said. High-Yield Spreads Spreads on speculative-grade debt narrowed 29 basis points last week to 637 basis points, the tightest since Jan. 22, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. High-yield, high-risk companies are rated lower than Baa3 by Moody’s Investors Service and below BBB- by S&P. Alfa Bank, Russia’s biggest private lender, plans to sell five-year dollar bonds this week, yielding between 8.25 percent and 8.5 percent, according to a person familiar with the matter. The bank hired JPMorgan Chase & Co. and UBS AG to manage the transaction. Signs that the U.S. recovery is on track have helped investors look past Greece’s budget

223 struggles. U.S. employers in February cut fewer jobs than economists had forecast, even as East Coast snowstorms forced some to temporarily close, a government report showed. Of the 469 companies in the Standard & Poor’s 500 index that reported earnings since Jan. 11, three- quarters beat analysts’ expectations, Bloomberg data show. Cash Rich Companies have started exceeding estimates on revenue, not just profits, “indicating that actual revenue growth as opposed to mere cost-cutting is now helping drive profitability,” Morgan Stanley strategists Rizwan Hussain and Adam Richmond wrote in a March 5 note to clients. Cash-to-debt ratios are at record highs for investment- grade companies, the Morgan Stanley strategists said. The smallest percentage of non-financial companies in three years, 39 percent, increased leverage in the fourth quarter, they said. The improving economic and earnings trends may help credit spreads narrow this week, Barclays Capital credit trader Jason Quinn and Citigroup strategist Mikhail Foux said March 5. Foux, in a note to clients, said investors should be cautious as “we do not feel that the sovereign story has fully played out.” ‘Initial Signs’ Investors aren’t likely to enter the market as quickly as they exited, Quinn, the co-head of high-grade and high-yield flow trading at Barclays Capital in New York, said in an interview. “That’s going to happen slowly,” he said. “When investors pull back from the market, it’s often in response to something they weren’t expecting and tends to happen quickly. Coming back in usually takes a bit of time, but we’re definitely seeing the initial signs.” Concern that Greece’s budget woes would spread to other countries had pushed credit-default swap indexes, which measure corporate credit risk, to at least three-month highs. They’ve retraced more than half of that increase. The Markit CDX North America Investment-Grade Index has fallen almost 21 basis points since Feb. 8 to 85.4 basis points, the lowest since Jan. 20, CMA DataVision prices show. Default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years. Goldman Sachs Offering Companies globally issued $42.1 billion of bonds last week, compared with $50.2 billion in the previous period, according to data compiled by Bloomberg. Sales total $490.6 billion for the year, down 34 percent from the $745 billion raised through March 5, 2009. Issuance in Europe dropped 36 percent to 8.9 billion euros ($12.1 billion), the second-slowest week this year, the data show. Goldman Sachs led $34.5 billion of investment-grade offerings in the last two weeks, compared with $6.8 billion in the previous period, according to data compiled by Bloomberg. Goldman Sachs, the most profitable securities firm in Wall Street history, sold $2 billion of dollar-denominated debt due 2020 on March 1 as U.S. banks seek to replace $309 billion of government-guaranteed debt with longer-dated maturities. The New York-based bank last sold 10-year, dollar-denominated notes in May. http://www.bloomberg.com/apps/news?pid=20601087&sid=acPq3RB0FueA&pos=4#

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Trade Deficits and Fiat Currencies by Robert P. Murphy on March 8, 2010 There is a connection between fiat currencies and trade deficits, and many cynics have argued that the US dollar's status as global reserve currency allowed Americans to consume more than they produced for decades. However, this "deficit without tears" argument is sometimes overstated. To gain a deeper understanding of both monetary theory and international trade, it's useful to probe the issue more carefully. Does Fiat Money Cause Trade Deficits? In his book, The Creature from Jekyll Island, G. Edward Griffin is rightfully suspicious of the American trade deficit and the US dollar's special role in the world since World War II. He explains, When the dollar was separated entirely from gold in 1971, it ceased being the official IMF world currency and finally had to compete with other currencies.… From that point forward, its value increasingly became discounted. Nevertheless, it was still the preferred medium of exchange. Also, the U.S. was one of the safest places in the world to invest one's money. But, to do so, one first had to convert his native currency into dollars. These facts gave the U.S. dollar greater value on international markets than it otherwise would have merited. So, in spite of the fact that the Federal Reserve was creating huge amounts of money during this time, the demand for it by foreigners was seemingly limitless. The result is that America has continued to finance its trade deficit with fiat money — counterfeit, if you will — a feat which no other nation in the world could hope to accomplish. (p. 93) Griffin then explains the benefits to Americans from this arrangement. After all, it's not too shabby to import cars, clothes, and fancy electronics in exchange for green pieces of paper. Yet all is not bliss: There is a dark side to the exchange, however. As long as the dollar remains in high esteem as a trade currency, America can continue to spend more than it earns. But when the day arrives — as it certainly must — when the dollar tumbles and foreigners no longer want it, the free ride will be over. When that happens, hundreds of billions of dollars that are now resting in foreign countries will quickly come back to our shores as people everywhere in the world attempt to convert them into yet more real estate, factories, and tangible products.… As this flood of dollars bids up prices, we will finally experience the [price] inflation that should have been caused in years past. (p. 94, emphasis in original) So far, I am largely in agreement with Griffin. But then he oversteps, or at least appears to, when he concludes, The chickens will come home to roost. But, when they do, it will not be because of the trade deficit. It will be because we were able to finance the trade deficit with fiat money created by the Federal Reserve. If it were not for that, the trade deficit could not have happened. (p. 94, emphasis in original)

225 It's not clear whether Griffin thinks the trade deficit would have been literally zero if the United States had used gold as money throughout the 20th century, or (more likely) if Griffin merely means that in practice the trade deficit would have been much smaller. Regardless of Griffin's particular stance, there are definitely some members of the sound- money community who believe that trade deficits would literally be impossible if all countries were on a gold standard. That's incorrect, as I'll argue in the next section. After that, I will reconcile my own demonstration with Griffin's quite valid linking of the fiat US dollar with unsustainable American trade deficits. Gold Doesn't Prevent Trade Deficits One quick way to see a puzzle in Griffin's analysis above is that the reasons for the appeal of the US dollar would only be enhanced by a return to gold. Griffin says that foreigners still esteemed the dollar over other currencies, and that the US was the safest place to invest money. If the Treasury or Fed credibly announced that henceforth the dollar would once again be redeemable for a fixed weight of gold, surely investors would flock to it even more so. It would be much safer to buy a government or even corporate bond issued in the United States knowing that the gold standard would restrain further dollar creation. When economists compute the trade balance (or more accurately the current account), they don't include the sale of financial assets. So if foreign investors want to spend more (once we convert to a common denominator) on American assets than US investors want to spend on foreign assets, the trade balance is negative. The capital-account surplus is counterbalanced by a current-account deficit.

For example, suppose Americans buy $9.5 trillion in stocks, bonds, and other financial assets from outside the United States, while non-Americans acquire ownership of $10 trillion worth of stocks, bonds, and other financial assets from within the United States. This means the foreigners have on net gained $500 billion of American wealth. Surely the foreigners need to do something in return, and indeed they do: they send Americans $500 billion worth of cars, TVs, iPods, etc. Tying the dollar to gold, or, better yet, abolishing the government's involvement in money and banking completely, would make the United States an even stronger magnet for foreign investment. It's possible that the absolute size of the trade deficit would fall (as we will explain in the next section), but it wouldn't disappear. In fact, if the US government not only returned the dollar to gold, but also eliminated the IRS and slashed its budget, it's possible that the US trade deficit would mushroom. This would make perfect sense, as capital from around the world would flow to the new haven where its (after-tax) returns would be much higher. In this scenario, aliens in space would see tractors, computers, factory parts, bulldozers, and crude oil flowing from all corners of the earth to the United States. If those aliens understood trade accounting, they would compute this massive net inflow of goods as an unprecedented trade deficit. But of course that is exactly what should happen if the United States (or any country) adopted free-market reforms and thereby became a much more hospitable arena for economic activity. Why Griffin Is Basically Correct Even though a few of Griffin's sentences might lead one to draw faulty conclusions, nonetheless Griffin's analysis is basically correct. All we really did in the above section was

226 show that a large trade deficit can be consistent with a healthy, productive economy. That's far different from saying a trade deficit is proof of a solid arrangement. Specifically, the problem occurs because foreigners can invest in "American assets" to fuel either production or consumption. It's true, if the US government enacted the reforms discussed above, then foreigners would invest heavily in American industry. Corporations would float new bonds and issue new stock, and with the influx of funds they could rapidly expand their operations. In terms of physical goods, we would see heavy equipment and raw materials flowing from other countries into the United States, and these inflows of capital goods would constitute a large part of the rising trade deficit. Unfortunately, there is another possibility. If the Federal Reserve creates hundreds of billions in new dollars out of thin air, and the foreign "investors" are other central banks that gobble up the dollars because their own rules treat them as reserves, then this increase in the foreign demand for "American assets" is of a much-different character. In particular, the low US interest rates that accompany such a gusher of new dollars will encourage domestic consumption and will discourage foreigners in the private sector from investing in the United States. The rest of the world will acquire American assets all right, but they will be more heavily tilted toward debt (rather than equity in growing companies). The physical goods flowing into the United States will be consumer goods such as TVs and iPods. Griffin is perfectly correct that this type of mushrooming trade deficit is indeed unsustainable. Unlike the importation of tractors and crude oil, the influx of consumer electronics doesn't allow the US economy to produce more in the future.

$20 $17 The increase in foreign claims on US income streams therefore isn't a constant or shrinking portion of the growing American pie, but rather is a growing portion of a constant pie. It can be sustainable for the absolute dollar amount of US corporations' outstanding bonds to increase over time, so long as earnings and profits increase proportionately. But it is not sustainable if households and the government experience a rising debt-to-income level. Conclusion There is a definite connection between fiat currencies and trade deficits. Critics of the Federal Reserve are right to blame it for distorting trade flows and setting the US economy up for an inflationary crash. However, a trade deficit per se is not a sign of a bad economy. Indeed the trade deficit might blossom if the US ever returned to the gold standard, though it would be due to a productive net inflow of producer goods. Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog. http://mises.org/daily/4130

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The Global Debt Crisis Mises Daily: Monday, March 08, 2010 by Marius Gustavson

With all the attention being focused on whether or not there will be a sustainable recovery in 2010, the potential for a wave of sovereign-debt crises following the wake of the global recession has just recently started to appear on people's radar screens. Yet, such a wave should not be surprising. As historical research conducted by University of Maryland economist Carmen Reinhart and Harvard University economist Kenneth Rogoff shows, financial crises are usually followed by government-debt crises. This starts as private debt is shifted onto the balance sheet of the government, through bailouts and purchases of toxic debt. The government-debt problem is then made worse as the economic downturn leads to an increase in expenditures in the form of unemployment benefits and stimulus spending, coupled with a decrease in tax revenues. Not only does this historical trend align with the American experience in the aftermath of the financial crisis, but it is being replicated in Europe and Asia too. It makes us painfully aware of some of the costs of Keynesian fiscal stimulus, and it clearly displays how a short-run fix turns out to be a long-term problem. The Keynesian long run will dawn upon us much sooner than mainstream economists believe. So far the looming sovereign-debt crisis — i.e., the series of fiscal crises around the world leading to calls for restructuring of public debt and to the potential of outright defaults — has made itself felt most strongly along the periphery of the world economy, not the least along the rim of the European Union. It has been at the forefront of political events in Greece. CNBC recently published a list of the top ten government-debt issuers most likely to default, that is, countries with the highest sovereign-credit risk. Topping the list is, perhaps not surprisingly, Hugo Chavez's Venezuela. Further down the list we find (in descending order of how likely they are to default), Ukraine, Argentina (where the Kirchner government recently

228 made a move against its own central bank, and is on a fast path toward the third debt crisis in two decades), Pakistan, Latvia, Dubai, Iceland, Lithuania, California (which, alarmingly, has a 19-percent likelihood of defaulting, according to this ranking), and, of course, Greece, which has been at the center of media attention for the last few weeks. Smells Like Bacon The Greek debt crisis has led many observers to believe a eurozone-wide contagion is in the making, including all of the PIGS — Portugal, Italy, Greece and Spain — and it could spread to the northwestern periphery as well. As Ian Bremmer and Nouriel Roubini recently commented in the Wall Street Journal: The current crisis in Greece is only the worst example inside the EU. The PIGS … all boast public debt above or headed for 100% of GDP. Though the PIGS acronym was apparently coined by British bankers, Britain, Ireland and Iceland also smell distinctly of bacon. So far the two PIGS most afflicted by the European debt crisis, Greece and Spain, blame mysterious foreign conspirators, rather than home-grown macroeconomic mismanagement. Greek Prime Minister George Papandreou expressed the view that the crisis is "an attack on the euro zone by certain other interests, political or financial," whereas the Spanish government has, reportedly, ordered an investigation into the alleged "collusion" between American investors and the media to hurt the Spanish economy — a policy response that was dubbed "Europe's crisis of ideas" in a recent Wall Street Journal commentary. Along the EU's eastern borders, the Baltic countries were hit hard by the financial crisis and global downturn, as the rapid inflow of "hot money" in the boom years — caused in large part by low interest rates in the eurozone — created a huge potential for currency crises and rising debt in these previously rapidly expanding markets. In the long run, however, several major economies could see their fiscal position severely weakened as well. And the two countries at the center of the financial meltdown, the United States and the United Kingdom, are anything but immune. According to a recently released Global Sovereign Credit Risk Report, the situation has deteriorated significantly. You can see this deterioration by looking at the market for credit default swaps (CDS), a type of credit insurance on securities like government bonds. The report states that both the United States and the United Kingdom "have been among the worst performing sovereign CDS" in Q4 of 2009 and that "concerns are mounting about the increase of debt to GDP ratios in UK and USA, 97% and 75% respectively." The weakening of the British fiscal position has triggered a political debate on the urgent need for fiscal consolidation. A group of 20 economists, including Kenneth Rogoff, published a letter in the Sunday Times warning that in "the absence of a credible plan, there is a risk that a loss of confidence in the UK's economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery." Responding to the arguments made by Rogoff and his cosignatories, another group of economists, including the famous Keynes biographer Lord Skidelsky and US economists Brad DeLong and Joseph Stiglitz, published a letter in the Financial Times. They support the decision of the British finance minister, Alistair Darling (Labour) to delay spending cuts until 2011. The letter argues that the "first priority must be to restore growth." However, by tightening its fiscal policy too late, the government could make things much worse. Public borrowing, needed to finance the unprecedented peacetime deficit, will crowd out private investment, making an economic recovery even harder, thereby further weakening

229 the country's fiscal position. This will in turn put pressure on the central bank to "accommodate" public borrowing (i.e., bond issuing) by printing more money. This is one reason why the pound is weakening. On the suspicion of further depreciation of the pound, foreign holders of British debt will demand even higher yields, pushing long-term funding costs higher, thereby making the debt burden harder to service as interest payments shoot up. This is, in other words, a recipe for fiscal disaster unless drastic measures are taken in the near future. The outlook for America doesn't look too promising either, as the Obama spending spree has led to a record $1.6 trillion deficit and a 2011 budget proposal that would push the US debt- to-GDP ratio to 77 percent. According to IMF estimates, the debt-to-GDP ratios of the United States and the United Kingdom could reach 100 percent by 2014. This out-of-control debt spiral is threatening the US credit rating, as reflected in the official bond ratings by agencies such as Standard and Poor's, Fitch, and Moody's. The latter recently released a warning that the triple-A sovereign-credit rating of the United States could be downgraded: Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating. Both scenarios — increased budget discipline and stronger-than-expected growth — however, seem rather unlikely. Even though Obama recently announced his desire for a three-year freeze of discretionary spending, this will only come after a further spending spree and it will ignore the unsustainable growth of entitlements and military spending. As for the growth projections, again Reinhart and Rogoff warn us: history shows that high levels of public debt are usually accompanied by low growth rates. The Obama growth projections are most likely too optimistic, largely because of a fake recovery based on short- run monetary and fiscal fixes, which do not address the underlying problems of the economy's need to structurally adjust to a postcrisis reality. A Vicious Cycle The misalignment of deficits and a growing national debt burden on the one hand, and lower than expected growth rates on the other, could lead into a vicious cycle, whereby investors become ever more reluctant to put their money into US treasuries — up till now seen as "safe havens" in the global economy. This would push bond yields up, creating even more fiscal pressure, as the cost of servicing debt would be higher. This would make bond holders even more reluctant to invest further in treasuries, and so on. So far, the US government's ability to raise debt has been helped along by the bad news coming out of Europe. As financial historian Niall Ferguson explains: "The worse things get in the Euro-zone, the more the US dollar rallies as nervous investors park their cash in the 'safe haven' of American government debt." The same thing happened during the Great Panic in the fall of 2008, as investors rushed into dollars, i.e., US government securities, since they are usually looked upon as a "safe haven" when things get even worse in other developed countries. The ability to fund the growing national debt has also, of course, been helped along by the "generosity" of the Chinese government, which has invested heavily in US government securities during the last decade, thereby funding large chunks of the annual deficits needed to finance soaring healthcare costs and two expensive foreign wars, not to speak of the explosion

230 in public debt during Obama's first year. However, the Chinese are growing more and more reluctant to put their surplus export revenues into US debt. Not only are they diversifying their portfolio of foreign securities, thereby reducing the purchases of US government debt, they have actually started to sell off some of their currently held securities. Last month, the US treasury department announced that "foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt." Furthermore, this "shift in demand comes as countries retreat from the 'flight to safety' strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest." The grim story of fiscal crises afflicting major economies is something that should not be taken lightly. Furthermore, it could happen sooner than most people think if the governments of the US and other debt-ridden countries don't get their fiscal houses in order. Ferguson recently warned that a "Greek crisis is coming to America," stating that the US fiscal outlook is not sustainable in the long run. A Tricky Balancing Act The above story shows just how precarious the "rescue" programs by the United States and other industrial countries have been in achieving actual, sound economic recovery. Surging debt will create conditions that make it harder for the economy to grow. At the same time, monetary and fiscal stimulus on a level never seen before in peacetime needs to be unwound through monetary and fiscal exit strategies. So far, the proposed exits in the United States — Obama's budget forecast and Bernanke's announced exit measures — don't even come close to tackling the immense troubles ahead. The exit strategies come with several pitfalls. Not the least is that, if enacted too soon, they could set off another downturn, and if enacted too late, they would lead to ever more unmanageable debt burdens, fiscal crises, and low growth. This is the precarious position in which the economy will find itself when put on short-term life-support by the government; economic expectations get intimately tied to government actions. This creates a lose-lose situation in which, whatever the government does, the likelihood of another economic crisis increases by the day. The managing director of the International Monetary Fund, Dominic Strauss-Kahn, said at the recently held World Economic Forum in Davos, Switzerland, "If we exit too late … it's a waste of resources, it's bad policy, it's increasing public debt, we should avoid this … But if you exit too early, then the risks are much bigger" as this could lead to a "double dip" recession. Strauss-Khan has been a leading advocate for massive fiscal stimulus, launching this idea at the World Economic Forum two years ago. However, recent developments have clearly demonstrated that, to quote Niall Ferguson, "there is no such thing as a Keynesian free lunch." In his view, the effects of the stimulus have been much more moderate than expected, and "explosions of public debt incur bills that fall due much sooner than we expect." In other words, the day of reckoning is already upon us, at least for the PIGS, and it is moving closer by the day for the United States and the United Kingdom. If, on the other side, the authorities of major economies decide to start tightening both fiscal and monetary policy, this could very well trigger a new downturn, the much-dreaded double dip. And if that happens, policymakers have exhausted most of their tools besides monetizing public debt through the central bank's printing press. To do so would be to follow the path of

231 countries like Argentina and Weimar Germany. This is a scenario that should be avoided at all costs. A Fake Recovery Most of the measures initiated in response to the crisis, such as the Fed creating a floor for housing prices through its purchase of $1.25 trillion in toxic mortgage-backed securities and agency debt (i.e., Fannie Mae and Freddie Mac bonds), have at best only delayed inevitable corrections. This program is supposed to end in March of this year, and others have already been terminated or are about to be phased out. Several market participants suspect the Fed will extend its mortgage-market support program at the first sign of trouble, though, and Obama is pushing for a new fiscal stimulus. But these measures would just continue to push the readjustment of the economy forward in time, prolonging the economic woes of the country. Michael Pomerleano, visiting scholar at the Asian Development Bank Institute, makes the case for letting markets correct themselves, when he says that the "nationalisation of private debt injects considerable inefficiency into the economic system, inhibiting Schumpeter's process of Creative Destruction that is essential in a market economy and needed to maintain the private sector." We have seen this all before. In the 1990s, the Japanese government socialized private losses through a massive transfer of private debt to the national balance sheet. This happened in the wake of the Japanese asset bubble — another boom fuelled by a tidal wave of easy money from the central bank — and led to a decade of slow growth and a lack of restructuring of the economy. Whether or not the US economy is "turning Japanese" is still an open question, but is becoming ever more likely as fake fixes are delaying painful economic adjustments. Christopher Wood made the following observation in the Wall Street Journal: With the U.S. government stepping in to keep markets from clearing, today's U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump. As the ominous example of Japan shows us, soaring debt levels (resulting from fiscal stimulus and low growth) and financial forbearance (socializing private losses) is not a recipe for economic success. Marius Gustavson is a research fellow at the Reason Foundation, where he examines economic issues, including monetary policy, the recent financial crisis and its aftermath. He also works for the Norwegian think tank Civita, where he published a book-length report on the causes of the financial collapse. Gustavson is currently writing a book on the global recession and working on the "Sound Money Project" organized by the Atlas Economic Research Foundation. Send him mail. See Marius Gustavson's article archives. http://mises.org/daily/4151

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First step towards more integrated eurozone By Quentin Peel in Berlin Published: March 7 2010 20:48 | Last updated: March 7 2010 20:48 The admission by Wolfgang Schäuble, the German finance minister, that he believes that the European Union needs a monetary fund marks the first big step towards designing a more economically integrated monetary zone. That is something France has been urging since the single currency was introduced more than 10 years ago. Mr Schäuble linked the concept, modelled on the International Monetary Fund, with tough action to control speculation in the markets – focusing particularly on short selling and the use of credit default swaps. Eurozone eyes IMF-style fund - Mar-07 Wolfgang Munchau: The euro will keep falling - Mar-07 Daimler chief warns on weaker euro - Mar-07 In depth: Greece debt crisis - Mar-05 Greeks ban hedge funds in bond sale - Mar-05 If Greece falls, euro is pointless -Sarkozy - Mar-06 He has announced plans for national legislation to tighten rules on short selling and a ban on “naked” short selling, by speculators who do not own the assets involved. Action against speculators would be politically popular across Europe. Other ideas circulating in Berlin might be less so. These include: much more intrusive surveillance by the European Commission, and eventually by a European Monetary Fund, of weak eurozone economies; potential intervention in crisis management; and tougher penalties for failure to control debt and deficits. Two options under discussion are suspending payment of EU cohesion funds – a source of subsidies from Brussels for Mediterranean and east European countries – and banning persistent miscreants from voting in EU council meetings. An extreme sanction within the eurozone would be to suspend a member state until its finances were in order. Such reforms might need EU treaty changes, something almost all member states are desperate to avoid given the difficulty they had ratifying the Lisbon reforms. The changes would amount to easily the most radical overhaul of the Maastricht treaty, which laid the foundations of the single currency. Mr Schäuble’s words carry great weight in the German government. He is a former leader of Angela Merkel’s Christian Democratic Union, the second most powerful member of the government and a pro-European. He is also a defender of currency stability and budget discipline. The plan he favours includes much more intrusive economic surveillance, and even management, for those economies that fail to observe the rules of the EU stability and growth

233 pact – including a 3 per cent ceiling on national budget deficits and a limit on government debt of 60 per cent of gross domestic product. What he wants to avoid is any suggestion that the 16 eurozone members could also police the behaviour of budget disciplinarians – such as Germany – and somehow force them to adopt a more expansionary policy. His own government has faced criticism from other countries, including France and the US, for failing to boost its domestic demand. http://www.ft.com/cms/s/0/749db82c-2a1c-11df-b940-00144feabdc0.html

Eurozone eyes IMF-style fund By Quentin Peel in Berlin and Scheherazade Daneshkhu in Paris Published: March 7 2010 20:39 | Last updated: March 7 2010 20:39 Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund, according to senior government officials. Their intention is to set up the rules and tools to prevent any recurrence of instability in the eurozone stemming from the indebtedness of a single member state, such as Greece. First step towards more integrated eurozone - Mar-07 Wolfgang Münchau: The euro will keep falling - Mar-07 Daimler chief warns on weaker euro - Mar-07 Germany: Vision begins to blur - Mar-07 In depth: Greece debt crisis - Mar-05 Greeks ban hedge funds in bond sale - Mar-05 The first details of the plan, including support for an EMF modelled on the International Monetary Fund, were revealed at the weekend by Wolfgang Schäuble, the German finance minister. “I am in favour of stronger co-ordination of economic policies in the EU and in the eurozone,” Mr Schäuble told newspaper Welt am Sonntag. If France and Germany can agree on such proposals – long urged by Paris – they are likely to set the basis for the most radical overhaul of the rules underpinning the euro since the currency was launched in 1999. The German thinking emerged as George Papandreou, the Greek prime minister, flew to Paris to seek the support of Nicolas Sarkozy, French president, for his government’s drastic austerity programme. “We must support Greece, because they are making an effort,” Mr Sarkozy said before the meeting. “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.” His words appeared to underline the greater readiness in France than in Germany to provide some sort of financial support or guarantee for the Greek economy. Angela Merkel, the German chancellor, insisted that no such support had been sought or discussed when she met Mr Papandreou on Friday.

234 Both France and Germany agree Greece should not turn to the IMF for support, so the idea of an EMF has clear attractions for Paris, though it could hardly be set up in time to help Greece. Mr Schäuble said: “We are not planning a competitor . . . to the IMF, but we do need an institution for the internal equilibrium of the eurozone that would have at its disposal both the experience of the IMF, and comparable intervention mechanisms.” According to German thinking, the plan could include tough penalties for eurozone members that fail to curb deficit spending or run up excessive government debt. Ideas include cutting off countries that fail to curb deficit spending from EU cohesion funds, temporarily removing their right to vote in EU ministerial meetings and suspension from the eurozone. Those may prove very difficult for France to swallow, given its own record of greater fiscal laxity than Germany. http://www.ft.com/cms/s/0/fa9877f0-2a26-11df-b940-00144feabdc0.html

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ECONOMÍA GLOBAL La reforma de Obama languidece Los cambios en la supervisión del sistema financiero tropiezan con serios obstáculos en EE UU SANDRO POZZI 07/03/2010 Un año después de vender un cambio radical en la supervisión del sistema financiero, el tiempo se le echa encima a Barack Obama para sacar adelante una de las dos grandes reformas con las que quiere marcar su presidencia. La oposición republicana es feroz en el Senado. Pero la iniciativa del presidente de Estados Unidos tampoco cuenta con el respaldo de los demócratas moderados, lo que le obliga a ser flexible y aceptar unos cambios que favorecerán más de lo que se pensaba o deseaba a los gigantes de Wall Street. Se habla y se dice mucho estos días en Washington. Pero se avanza con dificultad 18 meses después de que el Departamento del Tesoro y la Reserva Federal (Fed) tuvieran que intervenir para salvar el sistema financiero de su peor crisis en ocho décadas. Con cada obstáculo salvado, el plan se aleja más del objetivo inicial de poner coto a los excesos que causaron el terremoto financiero. El temor es que la reforma se limite a un traspaso de poderes y no transforme el statu quo. Es lo que está pasando con el corazón de la propuesta de Obama: la creación de una agencia independiente que proteja al consumidor de abusos en productos financieros como hipotecas y tarjetas de crédito. La Cámara de Representantes le dio su bendición antes de la Navidad, pero en el Senado la cosa es muy diferente y todo apunta a que el concepto original quedará muy tocado. El senador demócrata Christopher Dodd es de los pocos que no sienten la presión electoral, pues no aspira a ser reelegido. Pero la frustración del presidente del Comité de Finanzas del Senado llegó hasta tal extremo que para romper el impasse decidió empezar de nuevo sin escuchar a la Casa Blanca y abandonó la idea de crear una entidad separada. Su plan B pasaba por colocar la agencia de defensa del consumidor bajo el paraguas de un organismo regulador ya existente. Se habla del Departamento del Tesoro, del Fondo de Garantía de Depósitos (FDIC) y de la Reserva Federal. El equipo de Obama ya no insiste en la independencia de la agencia. Lo que está por ver es si aceptará que se ponga bajo el paraguas de la Fed, porque eso iría contra su idea de quitarle responsabilidades en la materia al banco central. La gran dificultad, por tanto, estará en ver la autonomía real con la que contará el nuevo organismo para dictar normas, en definitiva, qué poder tendrá. El grupo de presión Americans for Financial Reform advierte del peligro de que la reforma acabe siendo una víctima de los mismos bancos que causaron la crisis. "La propuesta revisada no ofrece lo que se necesita para proteger a las familias ni al sistema financiero en su conjunto" de los excesos, opinan sus responsables, quienes consideran una ironía que se quiera poner la agencia en manos de la Fed. Y ahí llega el otro punto controvertido. El segundo pilar de la propuesta original de Obama pasaba por reforzar el papel de la Reserva Federal en la supervisión de los riesgos. Pero tanto demócratas como republicanos son muy críticos con el trabajo del banco central previo a la crisis y reprochan a sus dirigentes no haber prevenido el estallido de la burbuja hipotecaria.

236 Hace tres meses la cosa pintaba muy mal para la institución que hoy preside Ben Bernanke. El senador Dodd proponía cortarle las alas para que pudiera concentrarse en la gestión de la política monetaria. Ahora, sin embargo, parece que el profesor de Princeton está logrando recuperar la confianza para que la Reserva Federal emerja como el principal regulador del sistema financiero. Bernanke fue contundente en su primera intervención pública ante el Congreso tras ser reelegido para presidir durante cuatro años más la Fed. Retirar los poderes de supervisión de los que dispone el banco central, dijo, "será un gran error". En este sentido, explicó que la crisis financiera demuestra que los grandes bancos necesitan una "estructura de supervisión consolidada". "No se puede retirar del sistema a la institución con la capacidad, el conocimiento y la preparación técnica para lidiar con los riesgos sistémicos", subrayó Bernanke, mientras intentaba ganarse la confianza de los congresistas diciéndoles que en el seno de la Fed se están haciendo cambios estructurales para mejorar la calidad de la supervisión y evitar así errores pasados. A cambio de más poder, aceptó que la entidad sea auditada. El tercer elemento en el aire se refiere a la idea lanzada por Obama de prohibir que los bancos especulen con fondos de los depósitos garantizados de sus clientes, la llamada Norma Volcker. En lugar de obligar por ley a las entidades bancarias a abandonar sus negocios en los mercados de capitales, el Senado quiere que sean los reguladores los que restrinjan determinadas actividades caso por caso. Bernanke opinó que la medida sería difícil de aplicar y tendría consecuencias no deseadas. Las claves para evitar los problemas vistos durante la crisis, dijo el presidente de la autoridad monetaria, son fortalecer la disciplina de mercado, forzar a los bancos a ampliar su colchón de capital y someter las actividades de riesgo a un mayor control. Cuando se analiza como quedarán las otras partes del sistema regulador, la propuesta parece quedarse corta. Todo apunta a que ésta se quedará en un traspaso de poderes, con la Fed vigilando a las grandes instituciones y cediendo al Tesoro y a la FDIC algunas funciones. El think tank conservador American Enterprise Institute califica de simplista echar la culpa del bloqueo de la reforma financiera a las diferencias partidistas y recuerda que 27 demócratas votaron contra la propuesta del congresista Barney Frank en la Cámara de Representantes. El problema, señalan, es que el paquete legislativo se construyó sobre la idea de que el sistema no estaba regulado, cuando en su opinión fueron los reguladores los que fallaron al identificar los riesgos. Desde los dos partidos confían en llegar a un compromiso pronto. El objetivo del senador Dodd es votar la reforma en comité en marzo. El viernes, tras admitir que la reforma financiera "son aguas difíciles de navegar", vaticinó que habrá un acuerdo en cuestión de días. "La cosa progresa", dijo. El problema es que, si todo va bien, los legisladores tendrían sólo 23 semanas para debatirla en pleno, votarla y fundir el proyecto con el aprobado en la Cámara de Representantes antes de las elecciones de noviembre. Pero antes de eso Dodd necesita apuntalar un texto que pueda salir adelante en el Senado. Aunque supere el examen del Comité de Finanzas, su propuesta será sometida a un enjuague en el pleno y tendrá poco que ver con lo que saldrá del proceso de fusión de los textos de las dos cámaras. Todos coinciden que se necesitan reglas cuanto antes para enviar un mensaje de confianza a los mercados y a la opinión pública. Alan Blinder, profesor en Princeton, decía esta misma semana en un artículo que no hacer nada después de lo sucedido en Wall Street sería "una vergüenza". Lo que se pregunta ahora es si a la vista de lo que hay sobre la mesa, la reforma será viable. "El plan A murió hace

237 mucho tiempo. Al plan B le cuesta respirar. Así que es el momento de preparar un plan C", apuntó Blinder. En Wall Street también se respira un aire de frustración. No ve una discusión clara sobre el reparto de responsabilidades entre organismos del Estado. La manera de salvar la reforma, dicen, pasa por solucionar a las dos cuestiones más urgentes: la supervisión de los riesgos sistémicos y cómo desmantelar de forma ordenada las entidades demasiado grandes para quebrar, un proceso similar al que se está viendo con la aseguradora AIG. Pero, sobre todo, el sector financiero quiere que acabe el debate cuanto antes porque desea dejar de ser el centro de la diana política. A la banca le despista el continuo cambio en las reglas de juego, y sus ejecutivos temen que ante el bloqueo legislativo, la Casa Blanca se vea apremiada a actuar por su cuenta. http://www.elpais.com/articulo/economia/global/reforma/Obama/languidece/elpepueconeg/20 100307elpnegeco_1/Tes

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TRIBUNA: ÁNGEL UBIDE El ajuste fiscal que nos espera ÁNGEL UBIDE 07/03/2010 La deuda pública de los países del G-7, como porcentaje del PIB, superará el 100% en 2010 - niveles no vistos desde 1950, tras la II Guerra Mundial-. El FMI estima que el aumento de la deuda pública de los países avanzados durante el periodo 2007-2014 será de más de 30 puntos del PIB. La magnitud del problema no tiene precedentes en tiempo de paz: la deuda también aumentó considerablemente durante la crisis de 1929, pero desde niveles muy inferiores. La dimensión de la crisis de los últimos dos años fue histórica, así que parece lógico que el esfuerzo fiscal realizado por los gobiernos para evitar una catástrofe económica sea también de dimensiones históricas. Por desgracia, los datos no confirman esta lógica: los cálculos del FMI sugieren que la mitad del aumento del déficit estructural primario (es decir, corregido por los efectos del ciclo y del pago de intereses) entre 2007 y 2010 se debe a medidas fiscales no relacionadas con la crisis, como el aumento del gasto militar en EE UU, de seguridad social en Japón y de educación en el Reino Unido, entre otros. En otras palabras, la recuperación económica, el fin de las medidas anticrisis de carácter extraordinario y la disolución de las medidas de apoyo al sector financiero no serán suficientes para recuperar el equilibrio fiscal. La clave para entender este problema es la pérdida permanente de ingresos fiscales derivados de la caída de las actividades bursátiles, financieras e inmobiliarias que deberán ser compensados con aumentos de impuestos o reducciones del gasto. Si a esto se le añade que el aumento del gasto en pensiones y sanidad debido al envejecimiento de la población ya no es un problema del largo plazo, sino de la próxima década, se entiende la preocupación de los mercados, analistas y gobernantes por la situación fiscal. Debemos, por tanto, prepararnos para un ajuste fiscal en los próximos años de dimensiones importantes, necesario para estabilizar, y si es posible reducir, el nivel de la deuda pública. El impacto sobre el crecimiento de este ajuste, sin embargo, no está claro y dependerá de la composición del mismo. La evidencia empírica sugiere que los ajustes que se realizan en un corto periodo de tiempo y se basan en la reducción de gastos corrientes son mucho más efectivos -y menos dañinos para el crecimiento- que los ajustes que se prolongan durante varios años y se basan en la reducción de la inversión publica o el aumento de los impuestos. La lógica es sencilla. Los ajustes que se extienden durante un largo tiempo prolongan la incertidumbre y ejercen un impacto negativo sobre las expectativas de los agentes económicos. La reducción de la inversión publica, por muy tentadora que sea para los gobernantes, ya que los puentes, caminos y canales no tienen sindicatos ni van a la huelga, acaba afectando negativamente al crecimiento potencial. Los aumentos drásticos de impuestos, a menos que sean desde un nivel reducido de imposición, limitan la capacidad del sector privado de ocupar el espacio liberado por la reducción del gasto público. Los estudios empíricos demuestran que las consolidaciones fiscales que se han ajustado a este patrón se han visto acompañadas, frecuentemente, de crecimiento económico positivo, ya que la reducción de la prima de riesgo y de los tipos de interés -y en muchos casos, la depreciación de la moneda- han compensado el impacto negativo de la contracción del gasto público. El segundo elemento importante a considerar es la mejora del perfil de la deuda futura a través de la reforma de las instituciones del estado del bienestar. Si algo parece claro es que, a menos que las proyecciones demográficas contengan errores de bulto, el estado del bienestar

239 no es sostenible en la mayoría de los países desarrollados. El aumento de la esperanza de vida ha generado un enorme desequilibrio entre los que contribuyen y los que reciben los beneficios. Por ello, aumentar la edad de jubilación y ajustar las prestaciones son reformas absolutamente necesarias en la gran mayoría de los países -reformas que, por cierto, deberían ser positivas para el crecimiento porque, por un lado, contribuyen a estabilizar el perfil de gasto público y reducir los tipos de interés y, por otro, aumentan la renta permanente de los consumidores (ya que trabajarán durante más tiempo) y, por tanto, en teoría, su consumo. El tercer componente del ajuste fiscal será el crecimiento y la inflación. La reducción del déficit estructural es más sencilla durante periodos de alto crecimiento, ya que los ingresos fiscales típicamente sorprenden al alza y los gobiernos no tienen más que resistir la tentación de gastárselos -aunque esto tiene sus limites, ya que es notoriamente difícil para los gobiernos justificar superávit fiscales-. Por tanto, las reformas estructurales que contribuyan al aumento del crecimiento potencial, como la liberalización del mercado laboral, son un componente fundamental de todo ajuste fiscal. ¿Y la inflación? La deflación hay que evitarla a toda costa, ya que aumenta el peso de la deuda. Pero también hay que evitar la tentación de generar inflación, ya que el beneficio es limitado -el FMI estima que un aumento de la inflación al 6% durante los próximos cinco años reduciría en tan sólo un 25% el aumento de la deuda estimado para 2007-2014-, mientras que los costes derivados de tipos de interés y primas de riesgo elevadas son potencialmente enormes. Éste es el panorama que nos espera. Ahora pueden juzgar, como ciudadanos o impositores, si los paquetes de ajuste fiscal que presentarán los distintos gobiernos son adecuados. Si son concentrados en el tiempo, se basan sobre todo en la reducción del gasto corriente, van acompañados de una reforma seria y profunda de las pensiones e incluyen una liberalización convincente del mercado laboral que aumente el crecimiento potencial, el ajuste fiscal será motivo de optimismo. Si no, la agonía se prolongará años y, con todo el mundo desarrollado tratando de resolver el problema al mismo tiempo, las comparaciones serán frecuentes y probablemente costosas para los países que no den la talla. http://www.elpais.com/articulo/primer/plano/ajuste/fiscal/nos/espera/elpepueconeg/20100307 elpneglse_6/Tes

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Laboratorio de ideas breakingviews.com Se acerca la hora de la verdad España no puede posponer más la reestructuración de su sistema bancario FIONA MAHARG-BRAVO 07/03/2010 Los bancos y las cajas de ahorro de España han estado haciendo todo lo que está en su mano para contener la morosidad que se está produciendo como consecuencia del estallido de la burbuja inmobiliaria del país. Se ha prestado mucha atención a los miles de propiedades que pertenecían a promotores inmobiliarios en apuros y con las que se han quedado los bancos a cambio de cancelar sus deudas. Pero un quebradero de cabeza potencialmente mayor es el de los préstamos que los bancos han refinanciado sin tener en cuenta la posibilidad de que no se devuelvan. Puede que, en total, los bancos tengan que hacer provisiones adicionales por valor de casi 23.000 millones de euros durante los próximos años. Eso es el 41% de todo lo que han reservado hasta ahora. Los analistas calculan que los bancos españoles tienen en sus libros de cuentas entre 30.000 y 43.000 millones de euros en propiedades compradas a promotores inmobiliarios. El Banco de España les exige que reserven de entrada un 10% del valor de la propiedad, y hasta un 10% adicional si no se ha vendido al cabo de un año. Pero, dada la persistencia de la crisis, ahora se espera que el banco central eleve esa cifra hasta el 30%. BBVA y Santander ya tienen sus inmuebles provisionados a ese nivel. Pero Credit Suisse calcula que, hasta ahora, el conjunto de bancos españoles ha reservado el 21% del valor de las propiedades. Suponiendo que las pertenencias totales ronden los 35.000 millones de euros, eso representa otros 3.200 millones de euros en provisiones. Pero un problema mayor podría ser el de los préstamos que se han refinanciado, pero que todavía no se han amortizado. Basándose en la información revelada por algunos bancos cotizados, Credit Suisse calcula que dichos préstamos podrían representar el 3,5% de todos los préstamos del sistema bancario español, o 64.000 millones de euros. Una buena parte de estas deudas terminarán por no pagarse mientras la economía española lucha por salir de la recesión este año. Los analistas piensan que las provisiones podrían llegar finalmente al 20% o 40% del total. Si nos ponemos en un punto medio, los bancos tendrán que reservar otros 19.300 millones. Unas provisiones adicionales de 23.000 millones de euros se tragarían dos terceras partes de los 34.000 millones de euros de beneficios pre-provisión que Iberian Equities espera que el sector obtenga este año. Por supuesto, las provisiones pueden ir realizándose a lo largo de dos o tres años, y no todos estos préstamos serán incobrables. Pero los economistas prevén que la tasa de paro ronde el 20% en un futuro próximo. Además, el Banco de España podría eventualmente exigir provisiones aún mayores para las propiedades. España ha estado posponiendo la reestructuración de su sistema bancario, pero pronto se enfrentará a la hora de la verdad. http://www.elpais.com/articulo/primer/plano/acerca/hora/verdad/elpepueconeg/20100307elpn eglse_7/Tes

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Laboratorio de ideas La firma invitada Desempleo juvenil y formación José García Montalvo 07/03/2010 Las cifras del desempleo en España son preocupantes. Podríamos decir que España a comienzos del año 2010 cumple una especie de regla del dos: ha duplicado su tasa de desempleo desde 2007 y duplica la tasa de la zona euro (9,9%). Pero si una tasa global de desempleo del 18,8% es muy elevada, todavía es más preocupante la tasa de desempleo de los jóvenes menores de 25 años, que alcanza el 39,6%. El gobierno ha incluido específicamente el asunto del desempleo juvenil en la mesa del diálogo social e incluso la CEOE se ha descolgado esta semana con una precipitada propuesta de nuevo contrato para jóvenes. El nivel del desempleo de los jóvenes en España es tan llamativo que hasta el New York Times ha publicado un largo artículo sobre este tema. Con todo, el problema más importante no es el nivel de desempleo juvenil hoy sino sus repercusiones futuras. Los jóvenes que acceden al mundo laboral en un momento de recesión económica tienen, a lo largo de su carrera laboral, menores salarios, más periodos de desempleo y mayor sobrecualificación que los que acceden en un momento de expansión. Vale la pena poner las cifras de desempleo juvenil en perspectiva histórica y compararlas con otros países. En primer lugar, el desempleo de los jóvenes españoles siempre aumenta muy rápidamente cuando la economía sufre un parón. Baste recordar que el desempleo de los menores de 25 años subió hasta el entorno del 45% en 1984-85 (como consecuencia de la crisis de principios de los 80) y en 1994-96 (consecuencia de la crisis de 1991-92). Por tanto, el rápido aumento del desempleo juvenil en España en respuesta a una caída del crecimiento económico no es un fenómeno nuevo sino recurrente. Esto quiere decir que tiene unas causas estructurales que persisten en el tiempo. En segundo lugar, algunos analistas señalan como algo asombroso el hecho de que el desempleo juvenil español duplique el desempleo general. Sin embargo, si comparamos la ratio del desempleo juvenil frente al desempleo general en otros países vemos que se cumple otra regla del dos: normalmente los jóvenes tienen una tasa de paro algo más del doble de la tasa general. Éste es el caso del conjunto de países de la OCDE. En la UE el desempleo de los menores de 25 años es del 20.9% mientras el paro general alcanza al 9,9% de la población activa. Sin embargo, en países con un nivel de formación elevado como Noruega y Suecia, la ratio supera ampliamente el doble hasta acercarse al triple. Esta comparación internacional muestra que la tasa española de desempleo juvenil no es particularmente alta respecto al desempleo general. Por tanto el problema no es tanto el desempleo juvenil como el elevado desempleo general y sus causas estructurales. En tercer lugar, se argumenta que la falta de formación es la causa principal del desempleo juvenil. Esta explicación no se corresponde con los datos. Tradicionalmente, entre los jóvenes las tasas de desempleo no disminuyen a medida que aumenta la formación pues las mayores tasas se observan entre los jóvenes que no han completado la enseñanza secundaria (nivel inferior) y los universitarios (nivel superior). Es cierto que para la población en general (entre 16 y 64 años) las tasas de desempleo disminuyen con la formación. Los universitarios son, en conjunto, los que gozan de menores tasas de desempleo. Pero concluir de esta observación que la solución al problema del paro en

242 España es tan simple como aumentar la formación es una visión simplista e ingenua. El economista clásico Say propuso a finales del siglo XVIII el principio de que la oferta crea su propia demanda. La ciencia económica ha avanzado mucho desde entonces pero algunos analistas y políticos parecen pensar la ley de Say cuando hablan de la formación: el aumento de la oferta de universitarios creará su propia demanda, lo que reducirá el desempleo. Desafortunadamente la solución no es tan simple. La oferta de trabajadores cualificados no crea necesariamente su demanda. Todo depende de la calidad de la formación, de su correspondencia con las necesidades del mercado laboral y de la actitud de los formados. Los datos disponibles indican que la calidad de la formación en España es cuestionable. Los resultados de estudios como el PISA muestran que los estudiantes españoles tienen un nivel sustancialmente inferior al que les correspondería por el volumen de recursos que se invierten en educación. La OCDE señala que la rentabilidad absoluta de la educación en España está cayendo de manera significativa desde mediados de los 90. Además la OCDE muestra que la rentabilidad relativa de los más formados también está cayendo frente a otros niveles educativos: en ocho años la ventaja salarial de los universitarios españoles frente a los graduados de secundaria cayó un 40%, la mayor caída de todos los países analizados. En segundo lugar, la formación será un antídoto para el desempleo en la medida en que esté orientada, en habilidades y conocimientos, a las necesidades del mercado laboral. Tampoco se puede decir que la formación en España cumple en la actualidad este segundo requisito. Los datos de la OCDE muestran que España es, con diferencia, el país con mayor nivel de sobrecualificación en su población laboral (más del 25%). Entre los jóvenes la sobrecualificación se acerca al 40%. El informe europeo CHEERS mostraba que a finales de los 90 el 17,9% de los graduados universitarios españoles desarrollaban trabajos para los que no se requería ningún estudio universitario, frente al 7,7% de la media europea. Otro 11,5% de los graduados españoles señalaban que su trabajo requiere un nivel de estudios universitarios inferior al que poseían. Además, en las recesiones se observa que el grado de sobrecualificación aumenta. El motivo es doble: por una parte los trabajadores, ante las dificultades de encontrar un trabajo adecuado a su cualificación, aceptan empleos claramente por debajo de su nivel. Por otra parte, las empresas, que en una situación normal tendrían algunas reticencias a contratar un trabajador excesivamente cualificado para el puesto por la posibilidad de perderlo en poco tiempo, no tienen tantas reticencias cuando el desempleo es muy elevado. Aunque los universitarios tengan un desempleo inferior al resto de los niveles educativos, ¿tendría sentido generar un ejército de trabajadores sobrecualificados donde su formación no tuviera reflejo en su productividad? Y esto sin contar el gran malestar psicológico que produce la sobrecualificación. Finalmente, hay un tercer factor que es la actitud de los formados, condicionada por el contexto social y la impronta de un sistema educativo anquilosado. Los datos del Observatorio de la Inserción Laboral de los Jóvenes españoles (Bancaja e IVIE), que codirijo con el profesor José María Peiró desde el año 1996, muestran que incluso los trabajadores jóvenes tienen una enorme aversión a la movilidad geográfica, una gran preferencia por el trabajo de funcionario y rechazan mayoritariamente el autoempleo y la creación de empresas. La resistencia a la movilidad dificulta la disminución del desempleo y multiplica la sobrecualificación al impedir el ajuste entre la oferta y demanda de trabajadores con alto nivel de cualificación. La preferencia por el trabajo como funcionario y la aversión al autoempleo es especialmente intensa en los niveles superiores de formación. La situación no parece mejorar: hace unas semanas en una oposición para auxiliar administrativo del Ayuntamiento

243 de Madrid en que se requería solo el graduado escolar, se presentaron miles de universitarios. Confirmado: la oferta de trabajadores con una alta cualificación no genera su propia demanda. Por tanto, el "más de lo mismo" en formación no producirá los efectos deseados. Aumentar simplemente los indicadores educativos no será suficiente para mejorar la productividad ni reducir el desempleo estructural. El Pacto por la Educación debería basarse en el conocimiento científico acumulado sobre los efectos de la formación y no en posiciones ideológicas predeterminadas. Por su parte la financiación universitaria debería crear fuertes incentivos que favorezcan a los centros y departamentos que muestren mejores niveles de calidad docente e investigadora, así como adecuación de sus graduados a las necesidades del mercado laboral. Puede hacerse, aunque por lo visto hasta ahora mucho me temo que el resultado final podría volver a ser más de lo mismo. http://www.elpais.com/articulo/primer/plano/Desempleo/juvenil/formacion/elpepueconeg/201 00307elpneglse_10/Tes ç

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TRIBUNA: LA POLÉMICA DE LOS BLINDAJES JAVIER GARCÍA DE LA ENTERRÍA ¿A quién sirven las limitaciones de voto? JAVIER GARCÍA DE LA ENTERRÍA 07/03/2010 La propuesta de prohibir las limitaciones estatutarias del voto que puede emitir un accionista ha dado lugar a un encendido debate, en el que la confusión y falta de rigor técnico se entremezclan a menudo -lo que es peor- con opiniones ostensiblemente parciales e interesadas. Pues bien, aun a riesgo de ser acusado de esto mismo (aunque mis opiniones sobre el tema sean públicas y anteriores a cualquier batalla empresarial en particular), me parece obligado aportar a este debate algunas reflexiones elementales, con el fin -asumo que ingenuo e ilusorio, dados los envites en juego- de tratar de reconducirlo al plano jurídico- mercantil en el que en rigor debería desenvolverse. La posibilidad de que los estatutos de una sociedad anónima limiten el número máximo de votos que puede emitir un accionista en la junta general procede en realidad de la vieja Ley de Sociedades Anónimas de 1951, cuando no existían OPA ni sociedades cotizadas mínimamente parecidas a las actuales. En su origen esta medida se concibió como un instrumento de democratización de las juntas generales y de defensa de las minorías, destinado a limitar la influencia de los socios preponderantes por la vía de forzar a éstos a concertar y consensuar las decisiones societarias con el conjunto de los accionistas. Porque en la medida en que limitan los derechos de voto del accionista que se sitúe por encima del umbral de referencia, el efecto práctico de estas cláusulas no es otro que el de potenciar o incrementar en términos relativos la fuerza de voto del resto de los socios. Pero por encima de estos bienintencionados propósitos, lo cierto es que las limitaciones del voto sólo adquirieron vigencia práctica -y con fines frontalmente contrarios a los ingenuamente pretendidos por el legislador- cuando el desarrollo de las OPA y de las operaciones de toma de control llevaron a las sociedades (rectius: a los directivos de las sociedades carentes de socios mayoritarios) a rastrear en los textos jurídicos posibles medidas e instrumentos que pudieran emplearse con fines de blindaje y de defensa frente a las OPA hostiles. Algunas de estas medidas tuvieron un uso efímero y fueron rápidamente desechadas (piénsese en los requisitos de antigüedad como accionista para poder ser designado administrador, hoy abandonados). Pero las limitaciones del voto han seguido manteniendo cierta relevancia en la práctica de nuestras sociedades cotizadas, seguramente porque los elevados fines normativos que en su momento las justificaron, pese a tener más de espejismo que de realidad, siguen dotándolas de una cómoda -aunque por lo general falsa y vacua- legitimación teórica. Por muchas razones, pero sobre todo por la manifiesta discordancia entre sus supuestos fines normativos y el uso práctico que de ellas tiende a hacerse, la doctrina mercantil lleva años manifestándose con sorprendente unanimidad en contra de estas limitaciones. De ello es muestra la Propuesta de Código de Sociedades Mercantiles de 2002, que se decanta por su prohibición expresa para las sociedades cotizadas. Pero también la práctica de nuestro mercado pone de manifiesto la progresiva tendencia de muchas sociedades a eliminar estas limitaciones de forma voluntaria, como consecuencia en gran medida de las recomendaciones de buen gobierno corporativo y de la generalizada oposición a las mismas por parte de inversores institucionales y minoritarios (curiosamente, los supuestos beneficiarios de las

245 limitaciones del voto, en el discurso falaz e interesado que suele acompañar a estas cláusulas). Según datos de la CNMV, si en el año 2003 eran 23 las sociedades cotizadas que incluían limitaciones del voto en sus estatutos, a finales del 2008 sólo 14 (de las cuales seis del Ibex) las mantenían. Que las limitaciones del voto poco tienen que ver hoy en día con los seráficos fines contemplados por el legislador en 1951 es algo que se advierte sin dificultad. Por un lado, la protección de los intereses de los accionistas minoritarios frente a las operaciones de toma y cambio de control (si es que tal protección fuera realmente necesaria) encuentra hoy su sede natural en el régimen de OPA y, más en concreto, en la obligación de formular una OPA por el 100% del capital que se impone a quien adquiera más del 30% de los derechos de voto de una sociedad o designe a más de la mitad de sus consejeros. Por debajo de estos umbrales, pues, no existe razón material alguna para restringir o condicionar todavía más la facultad de los accionistas de fijar su participación en el porcentaje que estimen adecuado y para privarles, de superar un límite arbitrario y convencional, de la plenitud de sus derechos políticos. Pero además, si realmente las sociedades estuvieran necesitadas de protección frente a los accionistas que adquieren participaciones significativas pero inferiores al umbral de la OPA obligatoria, no se entiende muy bien por qué esa protección habría de quedar remitida a la opción libérrima de las distintas sociedades, que en la actualidad pueden optar, no sólo por incorporar o no una limitación del voto a sus estatutos, sino también por fijarla en el porcentaje que tengan por conveniente (en la práctica española, entre el 3% y el 25% del capital, aunque lo más habitual sea el 10%). A ello se añade, por otro lado, que los porcentajes de capital en manos de los accionistas minoritarios que participan activamente en las juntas generales rara vez exceden -como es notorio- de cifras infinitesimales. En las sociedades de capital disperso, que no por casualidad son las únicas que en la práctica recurren a las limitaciones del voto, la inmensa mayoría de los votos de los pequeños accionistas son controlados por los administradores a través de las delegaciones de voto, que se nutren tanto de la tradicional apatía y desinterés de aquéllos como de la habitual colaboración prestada a estos efectos por las entidades depositarias de las acciones (¡y a las que no alcanza la limitación!). La consecuencia práctica, en todo caso, es que las limitaciones del voto lo único que refuerzan en la actualidad es, no el derecho de voto de los accionistas minoritarios, en contra de los bienintencionados fines que a mediados del siglo XX animaron al legislador, sino el dominio y control que los administradores suelen tener sobre las juntas generales y, por extensión, sobre el proceso de toma de decisiones de la sociedad. Por lo demás, dentro del surtido conjunto de argumentos que han sido empleados en favor del mantenimiento de las limitaciones de voto tampoco han faltado las apelaciones nacionalistas, que subrayan los aparentes peligros de dejar a las compañías españolas inermes y en inferioridad de condiciones frente a sus competidores extranjeros. En realidad, a diferencia de otras normas (como la Ley de 1995 que estableció un control público sobre las empresas privatizadas a través de la impropiamente conocida como golden share, que fue derogada hace unos años tras su declaración de incompatibilidad con el Derecho de la Unión Europea), semejantes consideraciones son del todo ajenas -lo hemos visto- a los fines originarios perseguidos por el legislador con las limitaciones del voto. Obviaremos también la abierta inconsistencia de este argumento con la manida justificación teórica de estas cláusulas estatutarias, como supuesto mecanismo de protección de las minorías, y hasta con el uso práctico que las mismas están encontrando en nuestra realidad societaria, en la que la nacionalidad del accionista no parece concebirse como un presupuesto para su aplicación. Las limitaciones del voto, además, en ningún caso impiden la formulación de una OPA sobre la sociedad (que se lo digan a Endesa, que fue objeto de tres OPA sucesivas pese a tener una),

246 no sólo porque las OPA pueden -y suelen- condicionarse en su efectividad a la eliminación de cualquier blindaje estatutario, sino también porque a partir de ciertos porcentajes del capital la limitación tampoco priva al oferente de la posibilidad de hacerse a pesar de todo con el control absoluto de la sociedad. Y por último, aunque se aceptara -que no es mi caso- que semejantes invocaciones patrióticas y mercantilistas puedan fundamentar cualquier tipo de norma jurídica, se convendrá también en que ésta debería revestir entonces un carácter general y no quedar a expensas de las decisiones que libremente tome cada sociedad (o sus administradores, para ser más precisos), como ocurre ahora con las limitaciones del voto. La absoluta inconveniencia de permitir que las sociedades bursátiles puedan limitar el voto de los accionistas halla una clara confirmación en la experiencia de otros ordenamientos extranjeros, como el alemán o el italiano, que tampoco se caracterizan -hay que decirlo- por tener unos mercados de control particularmente abiertos. Y es que en ambos países las limitaciones del voto han sido prohibidas por el legislador en los últimos años, aunque no para todas las sociedades, sino específicamente para aquellas que coticen en Bolsa. http://www.elpais.com/articulo/empresas/sectores/quien/sirven/limitaciones/voto/elpepuecone g/20100307elpnegemp_6/Tes

TRIBUNA: LA POLÉMICA DE LOS BLINDAJES RAFAEL MATEU DE ROS Accionistas, consejeros, conflictos y limitaciones RAFAEL MATEU DE ROS 07/03/2010 Se ha afirmado que entre los factores desencadenantes de la crisis financiera y económica figuran las desviaciones en la aplicación del modelo de gobierno corporativo de segunda generación definido a nivel europeo e internacional en los últimos diez años. Se ha dicho también, por otro lado, que en cierta medida la crisis se ha debido a las debilidades e insuficiencias que ese modelo arrastraba en sí mismo y se ha propuesto, por ello, someterlo a una profunda revisión. No se trata de opiniones contradictorias. Es verdad que el sistema -por citar el más cercano, el definido en España por el Código de Buen Gobierno de 2006- se viene cumpliendo más en sus aspectos formales (reglamentos, procedimientos, informes...) que en las realidades en las que debe traducirse ese modelo, como, por ejemplo, en la independencia efectiva de los consejeros calificados de tales o en la presencia mínima de ejecutivos en los consejos de administración. Pero también es cierto el fallo del sistema consistente en ponderar tanto la importancia de la organización y el funcionamiento del consejo en detrimento del análisis de las relaciones y los equilibrios de poder entre sociedades, consejeros y accionistas que es, en el fondo, donde radica la clave del buen gobierno corporativo. La visibilidad, tantas veces excesiva, de consejeros y ejecutivos ha eclipsado el peso que los accionistas -únicos y verdaderos dueños de la empresa- deben tener en el sistema de buen gobierno. Es el momento de insistir en que son los accionistas -directamente o a través de las personas que les representen- quienes ostentan la cualidad de administradores "natos" o "naturales" de las sociedades, por impopular que esta declaración en pro de los "consejeros dominicales" me siga convirtiendo en los foros, dedicados precisamente a favorecer movimientos en el sentido contrario. Pero éste es también el tiempo de establecer diferencias

247 entre unos y otros accionistas. Frente al tradicional concepto uniforme, y casi anónimo, del accionariado societario, la realidad demuestra la necesidad de definir líneas de distinción entre accionistas significativos, accionistas institucionales -por cuenta propia y por cuenta ajena- y accionistas minoritarios. También la diferencia entre accionistas estables y accionistas a corto plazo y la posición específica de los accionistas cuyos derechos de voto penden de obligaciones y garantías reales o personales con terceros. De la misma forma que la ley regula los derechos de los accionistas y modula su ejercicio en función de cuotas del capital con derecho a voto, la tipología de accionistas debe reflejar la posición diferencial en que los mismos se encuentran en relación con aspectos como la vocación de permanencia de su inversión o sus niveles de apalancamiento. En uno de sus últimos números, The Economist (20 de febrero de 2010) previene so+bre los riesgos del overcoming short-termism en el accionariado de las grandes sociedades y recuerda la existencia de límites al poder político de los accionistas cortoplacistas como el régimen de dual classes shareholders o los staggered boards, a lo que podemos añadir los proyectos de proxy voting en EE UU que condicionan la participación de los accionistas en los consejos de administración a declaraciones forºmales de estabilidad y de compromiso con el interés social. Así, los accionistas significativos y los grandes inversores institucionales tienen un deber de fidelidad al interés social, que dimana de la esencia misma del contrato de sociedad, y que se traduce en obligaciones concretas vinculadas de forma automática a su condición: adherirse al sistema de gobierno corporativo de cada entidad, supeditar el ejercicio de sus derechos al interés social como derechos que son de la posición de "socio" y no intereses extrasocietarios del accionista, no interferir en la gestión social, no pretender operaciones vinculadas que escapen al marco de control establecido... En este contexto, adquieren una nueva dimensión cuestiones tan de actualidad como el acceso al consejo de administración por el sistema de representación proporcional o las limitaciones del derecho de voto. El derecho de los accionistas significativos a participar en la gestión de la sociedad desde dentro o desde fuera del órgano de administración (existen también fórmulas eficaces para lo segundo) es una facultad inderogable de los grandes accionistas y representa ya una tendencia imparable en el desarrollo del buen gobierno corporativo. Lo que sucede es que la regulación de la ley española (artículo 137 LSA) es deficiente por varios motivos: concede a la minoría un derecho propio a designar al consejero en la junta (¡sólo si hay vacantes en el consejo!), pero sin intervención inicial de la mayoría (en vez de una facultad de propuesta a la junta general, como sería lo normal), permite en teoría que ejerzan ese derecho accionistas en situación de conflicto de competencia o de interés con la sociedad (lo que contradice otros preceptos de la misma ley) y, para colmo, no impide, al menos formalmente, que sea designado consejero una persona inhábil por ley o estatutos para ocupar el cargo de consejero o un candidato elegido sin participación de la comisión de nombramientos y retribuciones. Tan disparatada regulación ha situado el sistema de representación proporcional en estado de bloqueo institucional, en el que permanecerá hasta que el legislador aborde un planteamiento razonable y homologable. La complejidad del régimen de los derechos y deberes de los accionistas aconseja huir de improvisaciones y de demagogias. La limitación del derecho de voto es otro buen ejemplo. Como posibilidad estatutaria abierta e irrestricta (artículo 105.1 LSA), la limitación del voto resulta criticable y acertó el código unificado al recomendar, no sin matices y excepciones, su prohibición futura. Sin embargo, en cuanto afinamos el análisis, aparecen situaciones en la que la limitación del voto encuentra justificación y sectores -tan relevantes como la banca- en los que la propia ley contempla rigurosas limitaciones no sólo al voto sino incluso a la adquisición de participaciones. Es el caso de las sociedades cotizadas en las que coexisten

248 varios accionistas de referencia y ninguno de control ni con vocación o capacidad de alcanzarlo. En ese escenario, las limitaciones de voto, debidamente reguladas en los estatutos aprobados por la junta general, pueden operar como eficaces mecanismos de tutela de los intereses de los minoritarios. Y, lo más importante, la acerba crítica a las limitaciones de voto fundada en que representan un obstáculo a las tomas de control societario no han tenido en cuenta, asombrosamente, que muchos de los estatutos sociales que contienen dichas limitaciones prevén la neutralización de las mismas en caso de OPA, dato que los articulistas y editorialistas defensores de la prohibición parecen haber olvidado. Si las limitaciones no rigen en caso de que uno o varios accionistas aspiren de verdad a controlar la sociedad, ¿dónde está el blindaje de los consejeros y directivos que tantas veces se denuncia? En fin, la enmienda presentada in extremis a un proyecto de ley dedicado a otra materia no se corresponde con un proceso normal, y jurídicamente bien construido, de reforma de una de las leyes básicas del Derecho español como es la LSA, omite la consideración de las situaciones en las que las limitaciones pueden resultar legítimas, resulta anacrónica en el contexto del Derecho comunitario y, en fin, ni siquiera la justificación técnica de la enmienda está bien planteada. http://www.elpais.com/articulo/empresas/sectores/Accionistas/consejeros/conflictos/limitacio nes/elpepueconeg/20100307elpnegemp_5/Tes

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Rivero deja Gecina para volver a casa El ex presidente de la inmobiliaria francesa se centrará en la promoción de pisos LUIS DONCEL 07/03/2010 Joaquín Rivero es un experto en salir ileso de sus peleas empresariales. Lleva años haciéndolo. Pero esta vez ha sido diferente. Tras constatar sus diferencias con los nuevos responsables de la empresa francesa que hasta hace poco dirigía con mano de hierro, Rivero anunció hace dos semanas que dejaba la presidencia no ejecutiva de Gecina. Continúa, con un 16,1%, como su primer accionista individual. Ahora espera que la paz en el consejo de administración propicie su revalorización en Bolsa y vuelve a refugiarse en España. Desde Bami, la pequeña inmobiliaria con la que empezó, se propone volver a la promoción de viviendas en el mercado nacional. "En Gecina hemos vivido tres años de continua incertidumbre. Primero, con la OPA de Sanahuja. Luego llegó la acusación del regulador francés de que Bautista Soler y yo estábamos concertados. Más tarde surgió la incertidumbre sobre el acuerdo de separación de Metrovacesa. Al quedar en manos de la banca, no se sabía qué iban a querer los nuevos dueños. Los inversores pensaban que llevamos tres años dándonos de tortas. Y empezó la caída de la cotización", dice Joaquín Rivero. Tras rozar los 150 euros a principios de 2007, la acción de Gecina se desplomó hasta el mínimo de 26 euros en marzo del año pasado. Desde entonces ha emprendido una fuerte recuperación que la ha colocado esta semana en torno a los 77 euros. Rivero se va de Gecina, pero quiere hacerlo con elegancia. No deja de hablar del nuevo equipo -"joven, profesional, con ganas, con contactos en Francia..."- que va a dirigir la compañía. Acto seguido deja entrever a qué se deben tantos halagos a los nuevos directivos. "Ya no pienso en Gecina como la cabecera del grupo que dirijo. Hace cinco años la vi como el inicio de la diversificación por países de Metrovacesa; luego, como la cabecera que podía tener para seguir esa política. Ahora, sólo como una inversión financiera. Necesita mucha paz, y mi salida va a mejorar el título". No tiene tantos remilgos hacia Rivero el nuevo consejero delegado de Gecina. Durante la presentación de resultados del pasado miércoles, Christophe Clamageran certificó la salida de España del grupo. Le preguntaron por los 107,8 millones de euros pagados hace un año por el 49% de la española Bami, controlada por Rivero, que entonces aún era el presidente de Gecina. Y entonces disparó: "Operaciones amistosas como ésta no tendrán cabida tras la separación en la gestión y la propiedad. Ahora existe una buena separación de poder entre cargos ejecutivos y no ejecutivos". Rivero trata de esquivar el tiro que le llega desde París. ¿Cómo responde a las críticas que le han llegado por mezclar intereses? "Hay que distinguirlas. Por ejemplo, la asociación de accionistas minoritarios que nos ha acusado es en realidad una señora que tiene un bufete que se llama Adam. No tiene un solo asociado". ¿Y las demás críticas? "Están influidos por la crisis española. Y entienden que es muy fuerte y no debemos estar en este mercado. Yo entiendo justamente lo contrario. Es imposible conciliar las dos posturas". Rivero asegura que le atrae volver a España y empezar con una empresa como Bami, "muchísimo más pequeña, pero con muchas capacidades de crear valor". Fuentes cercanas al

250 empresario jerezano niegan que esté negociando la recompra de la mitad que controla Gecina, pero no descartan que lo pueda hacer a corto plazo. Rivero habla maravillas de la situación en la que deja a la empresa que ha dirigido el último lustro. "Tenemos una progresión de resultados recurrentes continuos, un cash flow excelente, progresión en los alquileres. Gecina se queda en una forma excelente". No le gusta tanto recordar que en 2009 tuvo unas pérdidas netas de 773,7 millones de euros, un 11% menos que el año anterior. "Las cuentas son positivas, pero cuando se aplica el cambio del valor de los activos es cuando aparece el negativo. Pero la valoración de los activos dejó de caer en el tercer trimestre". Entonces, ¿este año tendrá beneficio neto? "Sí, sí, sí. Además del recurrente, tendrá beneficios por revalorizaciones", responde convencido. Sorprende la deportividad con la que Rivero se ha tomado la disparidad de opiniones en el seno de la empresa que dirigía. Sobre todo si se recuerda que es el mismo hombre que protagonizó una lucha encarnizada con la familia Sanahuja por Metrovacesa, que entonces era la mayor inmobiliaria de España, presidida en esos años por Rivero. "Es una situación muy diferente. Aquí no ha entrado un señor que va a hacer lo que le dé la gana. El señor Sanahuja lanzó una OPA al 49%. Le dije que si la aumentaba al 100%, me iba al minuto. Pero que no me iba a quedar con la mitad de lo que tengo en sus manos. Como mayoritario no me daba confianza porque lo conocía bien. Un señor que quería seguir con la promoción de viviendas cuando ya decíamos que era cuestión de tiempo que explotara. Un señor que va a Londres y compra una torre que le ha salido ruinosa. Luego va a Alemania. Y luego, a Turquía, donde si le dejan compra medio país. Le pasó lo que le tenía que pasar", recuerda. Rivero, de 65 años, dice que no tiene la misma energía que cuando, desde la pequeña Bami, alcanzó la presidencia de Metrovacesa. Pero que le quedan fuerzas para nuevos proyectos. "Tengo ganas de hacer cosas con un buen rendimiento o cosas nuevas. Nada más. Por ejemplo, tengo planes para hacer fondos. Hay oportunidades para eso. En un fondo se puede ganar más que en una compañía". Rivero también cita como ejemplo ilusionante la empresa comercializadora de pisos que empezó en septiembre y que "sorprendentemente" ya tiene beneficios. Hace un par de años dijo que España había vivido una década de cine gracias a los promotores. Después de que en este tiempo un millón de trabajadores de la construcción se haya ido al paro y de que el desplome de los ingresos inmobiliarios haya contribuido a disparar el agujero en las finanzas públicas, ¿matizaría estas palabras? "Al contrario. Las incrementaría. España vivió una fiesta continua. Ahora hay que limpiar los platos, porque de fiesta no se puede estar siempre. Estaba claro que el país vivía del inmobiliario. Yo pensé que iba a estallar antes. Pero lo decía y no me creían. El hijo de Sanahuja me decía: 'Estás equivocado. Esto es una historia distinta, va a seguir así siempre". Ahora, seis años de oportunidades "La economía funcionó durante años gracias al sector inmobiliario. Era el carbón de la máquina. Sabía que era imposible que continuara. Pensaba que explotaría dos años antes de lo que al final hizo. Eso sí, cuando explotó, a mí no me cogió con un solar ni con una promoción", asegura Joaquín Rivero. El ex presidente de Metrovacesa y de Gecina considera que vivimos justo la situación contraria. Que ahora es necesario echar más carbón a la máquina. "¿Quién vende viviendas ahora? Los que han bajado precios y obtienen financiación. Sigue existiendo una demanda importante. Si compras suelo barato y puedes financiar la promoción, no vas a tener ningún problema. Lo comprobamos día a día", añade. Rivero asegura que los precios han bajado mucho más de lo que marcan las estadísticas. "Cajas y bancos venden con descuentos del

251 40%. Y lo que se pone en el mercado se coloca. No hay entidad financiera que no venda mil viviendas al año. Hay que saber que mientras haya un millón de viviendas sin vender, la posibilidad de que suban los precios es prácticamente nula", añade. "Si compras cuando los precios están arriba y vendes abajo, pierdes mucho dinero. Pero si lo haces al revés, puedes ganar mucho. Yo tomo la determinación de venir a España porque ahora es cuando hay oportunidades. De aquí a los próximos seis o siete años habrá más posibilidades de crear valor". http://www.elpais.com/articulo/empresas/sectores/Rivero/deja/Gecina/volver/casa/elpepuecon eg/20100307elpnegemp_7/Tes

252 Rajiv Sethi thoughts on economics, finance, crime and identity... Saturday, March 06, 2010 Defenders and Demonizers of Credit Default Swaps The recent difficulties faced by Greece (and some other eurozone states) in rolling over their national debt has let some to blame hedge fund involvement in the market for credit default swaps. These contracts can be used to insure bondholders against the risk of default, but when purchased naked (without holding the underlying bonds), they can serve as highly leveraged speculative bets on a rise in the cost of borrowing faced by the sovereign states. A cogent case for prohibiting the use of credit default swaps to make directional bets has been made recently by Wolfgang Münchau in the Financial Times: I generally do not like to propose bans. But I cannot understand why we are still allowing the trade in credit default swaps without ownership of the underlying securities. Especially in the eurozone, currently subject to a series of speculative attacks, a generalised ban on so- called naked CDSs should be a no-brainer... A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit. Even hardened speculators agree on this point. Especially because naked CDSs constitute a large part of all CDS transactions, the case for banning them is about as a strong as that for banning bank robberies. Economically, CDSs are insurance for the simple reason that they insure the buyer against the default of an underlying security. A universally accepted aspect of insurance regulation is that you can only insure what you actually own. Insurance is not meant as a gamble, but an instrument to allow the buyer to reduce incalculable risks. Not even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss... I do not want to exaggerate the case for a ban. This speculation is neither the underlying cause of the global financial crisis, nor of the eurozone’s underlying economic tensions. But naked CDSs have played an important and direct role in destabilising the financial system. They still do. And banks, whose shareholders and employees have benefited from public rescue programmes, are now using CDSs to speculate against governments. Felix Salmon objects to this reasoning, arguing that trade in naked credit default swaps adds liquidity to the market, which in turn makes borrowing easier in times of stress: One of the big problems with debt markets is that, especially during times of stress, they become very illiquid. Many bankers have spent many hours trying to explain to emerging- market finance ministers that just because their bonds are trading at a certain level in the secondary market, that doesn’t mean they can issue new bonds at that level, or even at all. But it turns out that a liquid CDS market is a great way of enabling countries to access the primary markets even when the secondary markets are full of uncertainty and turmoil. Which is yet another reason to laud the notorious buyers of naked CDS protection, rather than demonizing them. Sam Jones also rises in defense of naked CDS contracts, though for somewhat different reasons:

253 Here’s the rub: there is a palpable social and economic benefit to naked CDS positions. And what’s more, that benefit has perhaps never been more strongly borne out than as in the recent case of Greece. First, some context via a trip back in time: back to 2004, when the Euro was a more lustrous specie than it is today, and when credit default swaps were breaking into the mainstream... some hedge funds in those more moderate times spotted an opportunity for a trade... buy default protection against the eurozone’s weakest member states, the bonds of which had no place trading so close to German bonds. Buy Italy, buy Spain, buy Greece. And do so, naturellement, au naturale... What they saw happening was an inevitable re-risking of the eurozone. Italy could not possibly be priced so close to Germany indefinitely, and at some point, during the lifetime of their ten year CDS contract, spreads on Italian bonds would widen... The result would be –- if done well — a perfect sovereign basis trade. And because the CDS contracts required so little initial outlay, it could be done on a huge scale, to significant profit... In 2008 and 2009... the logic of the trade returned with more heft... Last year, big hedge funds were significant buyers of CDS protection on risky EU states: in particular, they bought CDS against Greece in anticipation of a budget blowup that would send the yields on Greek bonds soaring at some point in the next few months... What, though, to return to the point of this post, of the broader economic and social benefit beyond well-heeled Mayfair and leafy Connecticut? Firstly, any naked CDS buying... occurred, by hedge funds at least, well before the current crisis. Hedge funds have not been the most significant buyers of CDS in recent weeks... Ergo, there is no speculative, opportunistic “attack” underway to try and push Greece further into catastrophe... Secondly... hedge funds, completing their clever trade, have been buyers of Greek government debt, or else insurers of other holders as CDS writers. In a market where one of Greece’s principal market makers -– Deutsche Bank –- says it will not buy Greek bonds, and where European politicians are having to force their own national banks to do so in order to try and avert the threat of a Greek bond auction failing, the boon from hedge funds looking to hoover-up Greek debt is undeniable. And the only reason they are in the market to buy is because of naked CDS positions they laid on many months -– and in some cases years -– ago. So the argument here is that while hedge funds may have raised the cost of borrowing for Greece in 2008-09, their current actions are making borrowing easier and less costly. Leaving aside the question of whether naked CDS trading has been good or bad for Greece, it is worth asking whether there exist mechanisms through which such contracts can ever have destabilizing effects. I believe that they can, for reasons that Salmon and Jones would do well to consider. Any entity (private or public) that faces a maturity mismatch between its expected revenues and debt obligations anticipates having to to roll over its debt periodically. Such an entity could be solvent (in the sense that the present value of its revenue stream exceeds that of its liabilities) and yet face a run on its liquid assets if investors are sufficiently pessimistic about its ability to refinance its debt. More importantly, it may face a present value reversal if the rate of interest that it must pay to borrow rises too much. In this case expectations of default can become self-fulfilling. This is the central insight in Diamond and Dybvig's classic paper on bank runs, and is a key rationale for deposit insurance. William Dudley highlighted the importance of such effects in a speech last November: If a firm engages in maturity transformation so that its assets mature more slowly than its liabilities, it does not have the option of simply allowing its assets to mature when funding

254 dries up. If the liabilities cannot be rolled over, liquidity buffers will soon be weakened. Maturity transformation means that if funding is not forthcoming, the firm will have to sell assets. Although this is easy if the assets are high-quality and liquid, it is hard if the assets are lower quality. In that case, the forced asset sales are likely to lead to losses, which deplete capital and raise concerns about insolvency. Dudley is speaking here of financial firms, but his arguments hold also for governments that do not have the capacity to issue fiat money. This is the case for state and local governments in the US, as well as individual countries in the eurozone. The main "assets" held by such entities are claims on future tax revenues, which are obviously not marketable. In this case, expectations of default can become self-fulfilling even when solvency would not be a concern if expectations were less pessimistic. What does this have to do with naked credit default swaps? As John Geanakoplos notes in his paper on The Leverage Cycle, such contracts allow pessimists to leverage (much more so than they could if they were to short bonds instead). The resulting increase in the cost of borrowing, which will rise in tandem with higher CDS spreads, can make the difference between solvency and insolvency. And recognition of this process can tempt those who are not otherwise pessimistic to bet on default, as long as they are confident that enough of their peers will also do so. This clearly creates an incentive for coordinated manipulation. Whether or not these considerations are relevant in accounting for the troubles faced by Greece is an empirical question. But it does seem to be within the realm of possibility. At least the Chairman of the Federal Reserve appears to think so: Addressing concerns that financial firms have been engaging in trades to bet on a Greek default, Bernanke said that "using these instruments in a way that intentionally destabilizes a company or a country is counterproductive, and I'm sure the SEC will be looking into that." Felix Salmon hopes that Bernanke "was just being polite to his Congressional overlords, rather than buying in to this theory." I hope, instead, that he is taking the theory seriously. ---

Update (3/7). Felix Salmon has another post dismantling a New York Times report on the issue. The Times is an easy target, and it is true that their reporting has been riddled with errors and inconsistencies, including a bizarre failure to distinguish between the systemic effects of selling credit default swaps without adequate capital reserves (as AIG did), and those of large scale naked CDS purchases (as hedge funds are alleged to have made). But what I would like to see from Salmon is a clearer distinction between the use of CDS contracts for hedging (which even Münchau would probably agree has beneficial effects on the ease and cost of borrowing) and their use for speculation (which need not). The Sam Jones post does this, and makes clear that if current hedge fund activity is holding down CDS spreads, then prior activity must have had the opposite effect. One may then ask whether Grecce (and its fellow PIGS) would be in such a precarious position without this prior activity: this is an empirical question that has yet to be convincingly answered. Posted by Rajiv at 3/06/2010 09:45:00 PM http://rajivsethi.blogspot.com/2010/03/defenders-and-demonizers-of-credit.html

255

05.03.2010 “Greek crisis over” – Our ability to delude ourselves has reached the next level

We get the sense that the EU wants to declare the Greek crisis as over, game, set and match. No aid needed. Greece has helped itself. Or as Jean-Claude Trichet said yesterday: the austerity is proof that the institutions of the euro area are functioning. We are not convinced. The Greek debt agency is no doubt nifty, and the austerity package is indeed very austere. But unfortunately, this may not be enough to do the trick. Here is the news: Greece won a crucial vote of confidence from financial markets when investors snapped up a government bond issue on Thursday, reports the FT. Athens sold €5bn in 10-year bonds and received orders for three times that amount. However, the interest rate the country has been forced to pay to attract investors is 6.25%, 2 pp more than Portugal and one of the highest since Greece joined the euro in 2001. Currency strategists said such punitive rates were not sustainable. Not yet the end of the Greek crisis Le Monde says the successful debt issue is not the end of the Greek crisis. In Greece, the government considers the financial aid just as important to the resolution of the problem as its own contribution in the form of an austerity programme. If they do not get the money from the Europeans, they will get it from the IMF. ECB leaves rate unchanged.. The ECB, meanwhile, left interest rates unchanged. Jean Claude Trichet was optimistic that financial markets were returning to normal but was less upbeat about eurozone growth prospects. The recovery was on track but “is likely to remain uneven”, the FT quoted him. ... and presses Greece not to call the IMF Trichet pressed Greece not to appeal for IMF help, keeping the pressure on Greece to cut its deficit and on European governments to step in if Greece can’t do it, Bloomberg reports. Gilles Moec from Deutsche Bank said Trichet was very keen on saying that Europe has its

256 own system of safeguards. He went almost as far as saying Europe has something in the pipeline.” Kathimerini quotes Trichet saying that the scenario in which Greece were to exit from the eurozone is absurd. He also pointedly refused to say a single word, despite several prompt, about whether the EU should drive out the rating agencies, by starting to rate bonds themselves. It is not that often that you get a cold No Comment from him, which suggests to us that there has been a lively discussion on the issue, and that nothing is resolved. How hedge funds made profits with CDS The FT takes a closer look on how the hedge funds trading in credit default swaps could have exacerbated the Greek debt crisis. Hedge funds bought CDS protection months before when CDS were still cheap, expecting a deterioration of the Greek financial situation. “If such a situation were to occur – as it did – the hedge funds would then be in a position to write credit insurance at a significant premium to panicking banks, or else buy up Greek bonds being dumped in the market for a decent yield. In the event, the trade paid handsomely.” Campaigning for Draghi The Italian MP Sandro Gozi is launching a campaign to gain national support for Mario Draghi as candidate for the next president of the ECB. Gozi told the FT that it is about to make clear that “this is an issue not just for one party but for the national interest”. He said Italy was losing influence in Europe because it fauls to secure important posts but acknoledges that if Germany were to insist on Axel Weber’s appointment there is little Italy could do to stop it. Yves Leterme calles for a European Debt Agency Writing in Financial Times Deutschland, Yves Leterme, the Belgian prime minister, called for the establishment of a European Debt Agency, which would have the task to issue new debt jointly for the eurozone. The EDA would only issue debt that fall within the ceiling of the stability pact, so governments would have to finance any excesses independently. Bonds issued by the EDA would be guaranteed by the eurozone. Institutionally, he wants to put the EDA under the finance ministers, and administered by the European Investment Bank. (What he did not say is that this would almost certainly require a new European Treaty). Has Japan lessons for China? Michae Petis has an interesting blog entry about some of the lesson Japan holds for others. First he disputes the notion that Japan did not rebalance. It did, but not in the way that was envisaged. Japan’s savings rate went down, and consumption growth became 1-2%, which is higher than GDP growth, so unlike Germany Japan is contributing to global economic growth. But Japan remains dependent on exports as it always has been. Petis argues China will also rebalance no doubt, but the question is how this will happen. He says there is no question’s that in China consumption will rise, but it may well be that, like in Japan, it will rise only moderately. http://www.eurointelligence.com/article.581+M5826fdca246.0.html#

257

Athens dinner that led to political indigestion By Sam Jones, Hedge Fund Correspondent Published: March 4 2010 19:44 | Last updated: March 4 2010 19:44 On January 28, a cloudy, drizzly day in Athens, Goldman Sachs played host to a hotchpotch group of 10 clients at the Grande Bretagne, a palatial belle epoque hotel overlooking Syntagma square and the old royal palace, now the home of the Vouli, the Greek parliament.

At dinner on the rooftop – with an unimpeded panorama of the Acropolis as the backdrop – the clients; 10 bankers, asset managers and hedge fund analysts, ruminated on the future of the Greek economy – and of course, how to make money from it. Events since – a vicious collapse of confidence in the Greek debt market – have made some of those present, millions. But there has been a price. The dinner and the two-day schedule of meetings it bisected, is now one of a handful of events at the centre of a growing political backlash against some of the biggest and most powerful traders in the debt markets. Hedge funds and more broadly financial “speculators” are finding themselves under attack from politicians and regulators on both sides of the Atlantic, who accuse them – including some of those whom Goldman chaperoned around Athens in late January – of exacerbating the Greek credit crisis in an effort to spin a quick buck. It is a charge that sticks not least because of the size and pedigree of some of the names involved. By far the most significant of the 10 analysts present on the January tour were two from Paulson & Co – the $32bn US hedge fund that shot to prominence for its spectacular bets against the US mortgage market in 2008. The problem though, is that far from being short Greece, and hoping to push it towards collapse, hedge funds like Paulson have spent the past few months going long.

258 Hedge funds have played a calculated trade that began not in January, but many months previously. Rather than destabilising the Greek government, say several large hedge fund managers, their trades have been supporting it – and some of Europe’s largest banks to boot. Lex: Currency ‘collusion’ - Mar-04 Regulators launch probe into euro trades - Mar-03 Hedge funds raise bets against euro - Mar-02 Hedge funds prosper from Greek debt - Feb-28 Analysis: Athenian arrangers - Feb-16 In depth: Hedge funds - Feb-24 The trade began in scale in 2009, when hedge funds bought up large amounts of CDS protection against Greek debt, in anticipation that markets would soon wake up to Greece’s debt problems and hence look to the CDS market to hedge the risks. Until recently, the cost of buying such protection was very cheap, with few in the market seeing a sovereign default as a likely event. Indeed, until the banking crisis hit in 2008, 10- year CDS protection on Greek government debt could be purchased for as little as 20 basis points – 0.2 per cent of the amount insured – per annum. The hedge funds buying up the CDS protection, however, did so without owning the underlying bonds. This so-called “naked” CDS trading is a particular issue regulators are keen to look into. The funds buying up Greek CDS in 2009 were not expecting to profit from an actual Greek default. “This is all about the banks,” a fund that participated in the trade, but which declined to be named, said. “The point is that they’ve been desperate to hedge their huge exposures to Greek bonds. It’s their desperation that’s pushing up spreads. Whereas we’re in the market as sellers. We’re pushing things down.” Hedge funds anticipated that if the Greek government’s financial situation deteriorated – as they expected – then the owners of the approximately $300bn of outstanding Greek bonds, would be desperate for credit protection, or else would look to sell their holdings. Having already locked in credit protection cheaply, if such a situation were to occur – as it did – the hedge funds would then be in a position to write credit insurance at a significant premium to panicking banks, or else buy up Greek bonds being dumped in the market for a decent yield. In the event, the trade paid handsomely. Insiders say bank-run hedging operations, known as CVA desks, which are classed as risk management units rather than proprietary traders, have been the biggest recent buyers of CDS on Greece and have been the main cause of Greek spreads widening. According to Michael Hampden-Turner, an analyst at Citigroup, CDS spreads on Greece would be much higher were it not for the large numbers of hedge funds selling insurance to the banks. The reduced basis – the spread between bond yields and the cost of CDS – in the Greek sovereign bond market, unusually trades at a discount. Normally CDS trade at a premium to the bonds they reference. This implies, according to Mr Hampden-Turner, that a large number of traders have been in the market to sell credit insurance – which has kept the CDS price below where it should be, relative to Greek bond yields. “Rather than suggesting that ‘speculators’ have been pushing bonds wider, it is almost suggestive of the opposite,” says Mr Hampden-Turner. The problem for the funds

259 involved though, is that politicians seem to have little time for the details of the complicated CDS market. With sensitive discussions on new regulations for the industry wending their way through Brussels, the dangers of a political backlash are genuine. While hedge fund managers have long schooled themselves in the art of being ahead of the curve in spotting market risks – and converting them into opportunities – the same cannot be said for their political nous. Learning how to engage, or who to speak to, is proving tricky for an industry that has cloaked itself in secrecy for much of its existence.

Managers assess the impact of tighter regulations

At a conference in London this week, one hot topic for discussion among hedge fund managers was the risk of a clampdown on trading in credit default swaps, writes David Oakley in London. A second key point of debate, however, was what hedge funds will do if they are no longer able to buy and sell sovereign CDS – and how that might affect the price of other assets? Hedge fund managers say one simple alternative trade to shorting Greece, where a near collapse in the debt markets has prompted moves to tighten regulations on CDS trading, is to short the eurozone as a whole. This could be done by selling the euro against the dollar in the foreign exchange spot markets or buying a put in the options and futures markets, which gives the buyer the right to sell the euro at a certain price. If the euro falls, then the buyer is in the money and makes a profit. Shorting the euro has become very popular in recent weeks as some hedge funds have decided against trading the Greek CDS market because of worries over a regulatory clampdown. For example, speculators on the Chicago Mercantile Exchange have chalked up record short positions in the euro, which have grown sharply in recent weeks. Another alternative trade is to sell Greek government bonds or to use the asset swap markets, considered by traders to be the most efficient way of shorting Athens. In other words, an investor who buys a bond receives the fixed interest rate coupons on the bond and the redemption value, when it is held to maturity. To create an asset-swap, the equivalent of these coupons is sold on or, in swaps language, they “pay fixed based on swaps rates” and in return receive floating rates, meaning they would benefit if there is a bond sell-off. http://www.ft.com/cms/s/0/56cde15a-27bf-11df-863d-00144feabdc0.html#

260 vox Research-based policy analysis and commentary from leading economists Age, wage, and productivity

Jan van Ours 5 March 2010 Ageing populations are a concern for many developed countries, with increasing dependence on the working population expected. Despite this, there is relatively little research on how productivity changes with age. This column argues that while older people do not run as fast, there is no evidence of a mental productivity decline and little evidence of an increasing pay- productivity gap. The negative effects of ageing on productivity should not be exaggerated. Over the coming decades, European countries will experience a steep increase in the share of elderly people and a steep decline in the share of people of prime working-age. The number of workers retiring each year will increase and eventually exceed the number of new labour market entrants. The ratio of older inactive persons per worker could rise to almost one older inactive person for every worker by 2050 (OECD 2006). Population ageing occurs because birth rates are low and people are living longer. Since 1960 life expectancy at age 65 has increased from 13 to 17 years for men and from 15 to 20 years for women. Not only is the labour force ageing, the length of working lives has been declining because workers are retiring earlier than they used to. With an ageing labour force, the labour market position of older workers is a matter of policy concern. Currently, in many countries older workers are not very likely to lose their job but once they have lost their job they need a long time to find a new one. This situation is often attributed to the gap between wage and productivity, i.e. older workers having a wage that is higher than their productivity. At their current employer, older workers are protected by employment protection legislation including seniority rules. But once older workers become unemployed, employers are reluctant to hire them. Surprisingly little is known about this relationship. Most employers – and probably most employees – seem to believe in a rule of thumb that average labour productivity declines after some age between 40 and 50. This assumption is so common that few attempts have been made to gather supporting evidence: “why bother to prove the obvious?” (Johnson 1993). It is not easy to establish the relationship between age and productivity. Productivity is difficult to measure at the level of the individual since it is usually a group phenomenon. Since a group of workers usually consists of workers of different ages the relationship between age and productivity is not straightforward. Physical productivity Only on rare occasions is it possible to establish the productivity of individuals. A well- known example is physical productivity in sports contests. In recent research I have analysed the results from an amateur 10km run in the Netherlands (Van Ours 2010). The data refer to the period 1998-2008. The upper part of Figure 1 gives an overview of the observations showing a tendency for the speed to go down with age but at any given age there is a huge variation in average speed. The lower part of Figure 1 presents the average speed by age group showing the average speed goes down from more than 15 kilometres per hour (km/h) for runners younger than 25 to about 13 km/h for participants aged 40. After 40, the average

261 speed hardly drops. Taking into account differences in running ability, the average drop in running speed is 0.6% per year for men and 0.4% per year for women. So, physical productivity declines with ageing – but not a lot. Figure 1. Running 10 km, 1998-2008 a. All data

b. Average speed per age

Cognitive abilities Productivity may change over the life cycle because cognitive abilities change with age. To get some idea about this relationship I have studied how publishing in economics journals by members of the Department of Economics of the Tilburg School of Economics is related to their age (Van Ours 2010). To establish a publication score, impact factors of journals are used. The top part of Figure 2 gives a graphical representation of the available information. As shown there is a lot of variation in publications. There are many years for which individual economists have no publication at all. But there are also several observations of individuals who had a publication value of more than 20 within one year. The bottom part of Figure 2 shows average publication scores by year. Apart from publications being a bit lower below age 35 there is no obvious age pattern in these annual publication scores. From an analysis in

262 which time-invariant individual characteristics are taken into account it appears that productivity in publishing increases with age up to age 50 and stays constant after that. Figure 2. Publishing in economics journals, 1977-2008 a. All data

b. Average publication score by age

Firm level relationship between age, wage and productivity Recent studies on the relationship between age, wage, and productivity using matched worker-firm panel data are inconclusive about whether or not there is a pay-productivity gap for older workers. To study the age related pay-productivity gap, Lenny Stoeldraijer and I have used matched worker-firm data from Dutch manufacturing firms over the period 2000- 2005 measuring productivity as value added per worker (van Ours and Stoeldraijer 2010). The results from a pooled time series – cross-section analysis are shown in Figure 3a. This graph indicates that from age 40 onwards productivity goes down while wage costs do not. But this analysis is incomplete. • First, it may be that there are time-invariant differences in productivity between firms with a young workforce and firms with an older workforce that are unrelated to the age structure of these firms. • Second, it may be that changes in age composition are not exogenous to changes in productivity.

263 It could be that there is a negative productivity shock, which induces firm to fire young workers, causing the average age of the workforce to increase. The negative productivity shock might then seem to be due to the increase in average age of the workforce whereas in fact there is an exogenous explanation for this correlation. As shown in Figure 3b, after accounting for time-invariant differences between firms and accounting for potential endogeneity the pattern of the squeezed productivity-pay gap disappears. In fact at higher ages productivity seems to increase more than wage costs. Nevertheless, the patterns in Figure 3b are estimates with a lot of imprecision so the main conclusion from this graph is that the age profiles for productivity and wage costs are not so different. Figure 3. Age profiles of productivity and wage costs (in 1000 Euros per worker) – Manufacturing a. Pooled time series – cross section

b. After accounting for time-invariant differences between firms and potential Endogeneity of the age structure

So what?

264 To the extent that running performance represents physical productivity Figure 1 presents evidence of a productivity decline after age 40. To the extent that publishing in economics journals represents mental productivity Figure 2 shows that there is no evidence of a productivity decline, even after age 50. Figure 3 shows that when measured at the firm level there is little evidence of an increasing pay-productivity gap at higher ages of the workforce. These empirical findings are limited to the extent that they are based on Dutch data focusing on single dimensions of productivity. Running is used as an example of physical fitness, publishing as an example of mental ability. Both samples used in the analysis concern small groups that are most likely not representative for the Dutch labour force. Despite the limitations of the empirical analysis some conclusions can be drawn. My main conclusion is that the potential negative effects of ageing on productivity should not be underestimated; they should not be exaggerated either. Moreover, there is no need to worry too much about age-related productivity declines or an age related pay-productivity gap – pay and productivity seem to go hand-in-hand as workers grow older. Maybe increasing firm-specific knowledge and experience is responsible for this.

Nevertheless, the labour market position of older workers will remain an area of policy concern. It remains the case that once older workers become unemployed they lose the firm- specific human capital and older unemployed are less likely to find new work. References Johnson, Paul (1993), “Ageing and European economic demography”, in: Johnson, Paul and Klaus F Zimmermann (eds), Labour markets in an ageing Europe, Cambridge University Press, Cambridge. OECD (2006), “Live longer, work longer”, Paris. Van Ours, Jan C (2010), “Will you still need me when I’m 64?”, De Economist, forthcoming. Van Ours, Jan C and L. Stoeldraijer (2010), “Age, wage and productivity”, CEPR Discussion paper 7713. http://www.voxeu.org/index.php?q=node/4713

265 Opinion

March 5, 2010 OP-ED COLUMNIST Senator Bunning’s Universe By PAUL KRUGMAN So the Bunning blockade is over. For days, Senator Jim Bunning of Kentucky exploited Senate rules to block a one-month extension of unemployment benefits. In the end, he gave in, although not soon enough to prevent an interruption of payments to around 100,000 workers. But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally. Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay. But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second- ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.” In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe. And the difference between the two universes isn’t just intellectual, it’s also moral. Bill Clinton famously told a suffering constituent, “I feel your pain.” But the thing is, he did and does — while many other politicians clearly don’t. Or perhaps it would be fairer to say that the parties feel the pain of different people. During the debate over unemployment benefits, Senator Jeff Merkley, a Democrat of Oregon, made a plea for action on behalf of those in need. In response, Mr. Bunning blurted out an expletive. That was undignified — but not that different, in substance, from the position of leading Republicans. Consider, in particular, the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year. Republicans will block that bill, said Mr. Kyl, unless they get a “path forward fairly soon” on the estate tax.

266 Now, the House has already passed a bill that, by exempting the assets of couples up to $7 million, would leave 99.75 percent of estates tax-free. But that doesn’t seem to be enough for Mr. Kyl; he’s willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent. That’s a very clear statement of priorities. So, as I said, the parties now live in different universes, both intellectually and morally. We can ask how that happened; there, too, the parties live in different worlds. Republicans would say that it’s because Democrats have moved sharply left: a Republican National Committee fund-raising plan acquired by Politico suggests motivating donors by promising to “save the country from trending toward socialism.” I’d say that it’s because Republicans have moved hard to the right, furiously rejecting ideas they used to support. Indeed, the Obama health care plan strongly resembles past G.O.P. plans. But again, I don’t live in their universe. More important, however, what are the implications of this total divergence in views? The answer, of course, is that bipartisanship is now a foolish dream. How can the parties agree on policy when they have utterly different visions of how the economy works, when one party feels for the unemployed, while the other weeps over affluent victims of the “death tax”? Which brings us to the central political issue right now: health care reform. If Congress enacts reform in the next few weeks — and the odds are growing that it will — it will do so without any Republican votes. Some people will decry this, insisting that President Obama should have tried harder to gain bipartisan support. But that isn’t going to happen, on health care or anything else, for years to come. Someday, somehow, we as a nation will once again find ourselves living on the same planet. But for now, we aren’t. And that’s just the way it is. http://www.nytimes.com/2010/03/05/opinion/05krugman.html?th&emc=th

267 Global Business

March 4, 2010 Market Defies Fear of Real Estate Bubble in China By DAVID BARBOZA

Photographs by Ryan Pyle for The New York Times Luxury riverfront apartments are selling fast in the financial district of Shanghai, for prices that are making Beijing nervous.

SHANGHAI — The spacious duplex comes with crocodile-skin bedposts, hand-carved bronze doors inlaid with Swarovski crystals — and a $45 million price tag. It is still on the market, but Charles Tong, the developer of Tomson Riviera, a luxury riverfront complex in the heart of the financial district here, says he is having no trouble finding takers for similarly priced units. “We’re selling three to four apartments every month,” said Mr. Tong, seated in a white Versace easy chair. “Now, people here want something more luxurious; they’d like a new lifestyle.” Everyone agrees China is in the middle of a spectacular real estate boom. The question is whether it is in the middle of a rapidly growing real estate bubble. When other recent booms collapsed — in the United States, for instance — they depressed entire economies. In China’s case, a bursting bubble could affect much of the world. China is the fastest-growing large economy and, so far, a main engine pulling the world out of recession. Beijing is clearly concerned. Authorities have recently moved to rein in the easy credit that has helped finance China’s hyperdevelopment, including making it more difficult for home buyers to take out a second mortgage.

268 Last year, a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable. And with prices soaring, developers are scrambling to build more mansions, villas and high-rise apartments with names like Rich Gate, Park Avenue and Palais de Fortune. Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere. In the city of Tianjin, in north China, developers have created a $3 billion “floating city,” a series of islands built on a natural reservoir, featuring villas, shopping malls, a water amusement park and what they say will be the world’s largest indoor ski resort. “This is wild,” said Andy Xie, a former Morgan Stanley economist who is now an independent analyst. “By all the traditional measures, like rental yield, this is a bubble.” Speculators are snapping up properties on the expectation that prices will continue to rise, as prices have nearly every year for more than a decade. And powerful developers are working with local governments to transform old cities into urban dreamscapes. But Shanghai, China’s wealthiest and most dazzling city, is the epicenter of the boom. Prices here have risen more than 150 percent since 2003, pushing the price of a typical 1,100-square- foot apartment up to $200,000, according to real estate experts. (Shanghai residents typically earn less than $5,000 a year.) A buying frenzy has gripped the city, leading to billion-dollar land auctions and long waiting lists. “The speed you buy a house here is faster than you buy vegetables,” said Andy Xiang, an advertising executive who recently put down a large cash down payment to get the right to pay $1.3 million for an apartment in the city’s exclusive Xintiandi area. Few residences, though, are as upscale as Tomson Riviera, which consists of four golden-hued towers overlooking the Huangpu River, with a central garden mapped out in the shape of a dragon. The apartment complex’s entrance has original artworks by Salvador Dalí and well- known Chinese artists. The apartments, a few of which have been decorated by Armani and Fendi, as well as Versace, lease for $7,000 to $17,000 a month — to high-level executives from companies like General Motors. Those who buy an apartment here tend to be extremely wealthy, like Liu Yiqian, an eccentric Shanghai entrepreneur whom Forbes magazine says is worth about $540 million. Mr. Liu, 47, got his start driving a taxicab in Shanghai but eventually made a fortune investing in the stock market. In an interview this week, he acknowledged owning hundreds of apartments in Shanghai (he said he could not remember exactly how many), including a 6,000- square-foot apartment in Tomson Riviera, which he bought in 2008 for about $11.5 million. “I invest in properties,” Mr. Liu said, noting that he also collects art, antiques and jade. “I think in Shanghai in five to seven years the real estate prices will be even higher.” As they try to modulate the market, local and central governments here are walking a thin line. Land sales were a major source of government revenue, raising about $234 billion last year, an amount equal to over a third of the cost of China’s half-trillion-dollar stimulus program. Whether the country is in the middle of a bubble has become the subject of a debate. Some economists, like Nicholas R. Lardy at the Peterson Institute for International Economics in

269 Washington, say the housing boom is being propelled by a huge urbanization push that is creating premium-priced houses. Other analysts say prices are being propped up by greedy developers and government policies that are making housing increasingly unaffordable for the masses migrating to big cities. Despite the fear of a bubble here, Mr. Tong said his prices were just right, particularly because of so much hidden wealth in China. The publicly listed company is controlled by his family. “I have a friend,” he said. “She makes maternity clothes. Her company has 20 percent of the world’s market share, and they’re not even a listed company.” Still, Tomson’s prices are soaring. The most recent apartment sold for about $2,300 a square foot. The average luxury apartment in Manhattan sold for just under $1,900 a square foot in the fourth quarter of 2009, according to Prudential Douglas Elliman real estate. Indeed, for the price of a Tomson apartment in Shanghai, a buyer could easily purchase a 6,000-square-foot home in Los Angeles built by Frank Lloyd Wright and now for sale ($10.5 million), or a 52-acre site with a 22-room residence in New Canaan, Conn. ($24 million). But a sales agent at Tomson Riviera says this is the future financial capital of the world, not the dying one. “Look at this bronze door,” said Wang Yaodong. “That costs $50,000! Look at these Gaggenau appliances. They were made in Germany.” The glasses were imported from Belgium, the Jacuzzi from Italy. And don’t worry about losing your key, he said, “This lock can read the palm of your hand.” http://www.nytimes.com/2010/03/05/business/global/05yuan.html?th&emc=th

270 Global Business

March 4, 2010 I.M.F. Help for Greece Is a Risky Prospect By SEWELL CHAN and LIZ ALDERMAN Greece skirted disaster this week by persuading investors and politicians that it is finally on track to fix its finances. But even before the dust settles, the government is setting the stage for a potential conflict with Germany, France and other European governments that may raise doubts about the sustainability of the euro project. In the last two days, Greece’s finance minister has threatened to turn to the International Monetary Fund for a bailout if Chancellor Angela Merkel of Germany and other European politicians resist pledging aid to help Greece cope with its newfound frugality. Asking the fund for help could create a new round of financial and political turmoil by sending the message that Europe cannot resolve its own problems, analysts said. “It would be damaging for the euro zone going forward because it would sow seeds of doubt about whether this is really a currency union, or just a group of countries that share a currency,” said Simon Tilford, the chief economist of the Center for European Reform in London. Policy makers and leaders of many countries that use the euro see Greece’s troubles as a problem within the family. They want a homegrown political solution to show that Europe can fix internal economic crises without outside help. Turning to the I.M.F., which often helps struggling emerging-market nations, is seen as a stigma that is to be avoided, a concern underscored by the European Central Bank’s president, Jean-Claude Trichet, on Wednesday. “I do not trust that it would be appropriate to have the introduction of the I.M.F. as a supplier of help,” he said. No member of the euro zone has had to borrow from the I.M.F. since the official use of the common currency began in 1999, and no major industrialized country in Europe has done so since Britain in 1976. But from Greece’s perspective, the I.M.F. would force the government to swallow nearly the same bitter medicine that Germany, France and others have required — but at least Athens would receive guaranteed financial aid from the I.M.F. in return. In addition, it is not clear that Germany and other European governments seeking to contain the crisis have the resources or expertise to monitor Greece and other profligate euro members for the many years that it will take for the troubles to blow over. And if Greece has to refinance more and more of its debt in the coming months, the crisis could intensify. “It’s a black eye for the euro zone if one of their members has to turn to the I.M.F. for support,” Randall W. Stone, a political scientist at the University of Rochester, said. “That’s embarrassing. On the other hand, it’s potentially more damaging to create a precedent for the rich European countries to bail out the poorer ones when they get into financial trouble.” Greece’s game of brinkmanship may well bring the I.M.F. to its doorstep. “I think the I.M.F. is going to get called in before the end of the day,” Kenneth S. Rogoff, a Harvard economist

271 and former I.M.F. chief economist, said in a phone interview from Germany. “Greece’s austerity plan is like a New Year’s resolution. It’s not going to be easy to enforce.” For Greek leaders facing wide civil unrest, including the unions’ occupation of the country’s finance ministry on Thursday, the threat of turning to the I.M.F. can serve useful ends. “People like to blame the I.M.F. for the policies they impose, but in many cases these are policies the governments know they have to push through,” said James Raymond Vreeland, a political scientist at Georgetown University. “They use the leverage of the I.M.F. so it’s a little more politically palatable.” But even setting aside the symbolic implications, some experts believe that an I.M.F. bailout would deeply rattle the markets. Despite the reassuring bond sale on Thursday, investors could quickly drive up Greece’s borrowing costs if they come to believe an I.M.F. intervention is likely, said Michael L. Mussa, a former I.M.F. research director who is now a senior fellow at the Peterson Institute for International Economics. “The market is expecting other Europeans to do something,” Mr. Mussa said. “If that expectation is disappointed, I don’t see how they’re going to resolve the crisis.” The biggest challenge is in Germany, which has historically tended to enforce fiscal and economic rectitude on its neighbors. Many German taxpayers are vehemently opposed to paying for the profligacy of their free-spending neighbors in Greece and other southern European countries that let their deficits soar sky-high instead of taming them when times were good. At the same time, German banks also underwrite much of the Continent’s debt and exert considerable influence in domestic politics, according to Mark S. Copelovitch, a political scientist at the University of Wisconsin, Madison. Germany “doesn’t want its banking sector to go under because Greece has defaulted,” he said. Yet nightly broadcasts of widespread strikes in Greece, and accusations by some in Athens that Germany owes Greece for inadequate reparations paid out after the Second World War, have some Germans thinking that intervention by the I.M.F. may be worth the trouble. “In Germany, the public might favor an I.M.F. intervention if it reduced Greece’s reliance on German funds,” said Justin Vaïsse, a senior fellow at the Brookings Institution. European power struggles are also at stake. Simon Johnson, an economist at the Massachusetts Institute of Technology and a former I.M.F. chief economist, said that Germany has long sought to have a German lead the European Central Bank, and an I.M.F. intervention could be seen as tarnishing Germany’s credibility. Nicolas Sarkozy, the French president, views Dominique Strauss-Kahn, the I.M.F. leader and a former French finance minister, as a political rival, and would be loath to give him a perceived victory. For weeks, the I.M.F. has tried to say as little as possible about Greece other than to state that it stands ready to help. Mr. Stone said that strategy seems the wisest for now. “The only thing worse than announcing an I.M.F. program is announcing that maybe you’re going to have one,” he said. http://www.nytimes.com/2010/03/05/business/global/05imf.html?th&emc=th

272 Business March 4, 2010, 6:43 am Why, Exactly, Are Big Banks Bad? By SIMON JOHNSON Simon Johnson is a professor at M.I.T.’s Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. Just over 100 years ago, as the 19th century drew to a close, big business in America was synonymous with productivity, quality and success. “Economies of scale” meant that big railroads and big oil companies could move cargo and supply energy cheaper than their smaller competitors and, consequently, became even larger. But there also proved to be a dark side to size, and in the first decade of the 20th century mainstream opinion turned sharply against big business for three reasons. First, the economic advantages of bigness were not as great as claimed. In many cases big firms did well because they used unfair tactics to crush their competition. John D. Rockefeller became the poster child for these problems.

The original J.P. — that is, John Pierpont — Morgan. Second, even well-run businesses became immensely powerful politically as they grew. J.P. Morgan was without doubt the greatest financier of his day. But when he put together Northern Securities — a vast railroad monopoly — he became a menace to public welfare, and more generally his grip on corporations throughout the land was, by 1910, widely considered excessive. Third, there was a blatant attempt to use the political power of big banks to shape the financial playing field in ways that would help them (and their close allies) and hurt the remainder of the private sector — including farmers, small businesses and everyone else. Senator Nelson Aldrich’s push to create a central bank after 1907 — to be underwritten by the government but controlled by big banks — ultimately backfired. The Federal Reserve, while far from perfect, was created with far greater public control and more safeguards than Wall Street had in mind. The fact that Nelson Aldrich’s daughter was married to John D. Rockefeller’s son was not lost on anyone. A hundred years later, we have come full circle, as the mainstream consensus again weighs what to do with today’s overly powerful banks. There are differences, of course. We no longer fear individuals; it’s the organizations they run that can make us or break us.

273 And, strangely, it is not the power of big finance to control everything that has us worried — except maybe in some movies. Rather it’s the ability of major banks to generate the conditions that make major international financial crises possible — with the incentive to take risks that, when things go well, result in huge upside for bankers and, when things go badly, massive downside for the rest of us. Even the supporters of our existing financial structure — men like former Treasury Secretary Henry M. Paulson Jr. (in his book “On The Brink“); the White House economic adviser, Lawrence H. Summers (in his 2000 Ely Lecture); and JPMorgan Chase’s chief executive, Jamie Dimon — concede that big crises occur every five years or so. What hit us in 2008-9 was not a “once per century” event. Rather it was the latest, and scariest, in a series of regular global crises going back at least to the 1970s. At the heart of this pattern of behavior is a perception of invincibility among the folks who run our biggest banks — and following our most recent crisis they act more assured than ever that the government will provide a backstop. At the same time, everyone agrees that such “too big to fail” arrangements cannot continue. Even the Federal Reserve, which has fallen on hard and embarrassing times since it was captured by Big Finance during the 1990s, now has its leading officials give speeches to this effect. We like to think we live in a more professional and technocratic age than a century ago, so the central pretense of current reform efforts is that we can design a “resolution authority” of some kind that would allow the government to take big banks into a form of bankruptcy or liquidation. But this notion of a resolution authority that can handle massive banks is a complete unicorn, a mythical beast with magical powers that does not really exist. A United States-run resolution authority does nothing to help handle the failure of international banks; there is no cross-border resolution authority, nor will there be one anytime soon. If a Citibank or a JPMorgan Chase or a Goldman Sachs were to fail, our government would be in exactly the same awkward position as it was in September and October 2008. Big banks cannot be reined in through some clever tweaking of the rules. The issue before us is intensely political, just as it was in the first decade of the 20th century. There is again a confrontation between concentrated financial power and our democracy. One side will win and the other side will lose. The banks start with a definite edge. The public relations machines of today’s bankers may be even more effective than those of Morgan and Rockefeller, although the campaign contributions and control of the Senate exercised by those titans was immense. The Senate legislation expected this week or next will achieve nothing, except make the stakes clearer and the motivations more transparent. If the banks win this round, as seems likely, they will become even larger — and more dangerous. At current scale, our megabanks bring no social benefits and great social risks. Just as it did 100 years ago, the consensus on big banks has to change. In this instance, either we break them up, or they will soon break us all. http://economix.blogs.nytimes.com/2010/03/04/why-exactly-are-big-banks-bad/

274 Global Business

March 4, 2010 For Greece, Bond Sale Is a Step Back From Disaster By LANDON THOMAS Jr. and DAVID JOLLY LONDON — After pledging to mend its profligate ways, Greece took a crucial step on Thursday toward raising the billions needed to pay its bills and contain the crisis threatening the euro. Even as members of a large labor union occupied the offices of the Finance Ministry in Athens early on Thursday to protest proposed budget cuts, the Greek government won a vote of confidence for its plans in the credit markets. With many investors expecting Greece’s richer neighbors to come to the nation’s aid, Athens easily sold 5 billion euros ($6.8 billion) of 10-year bonds. The sale went far better than expected, as investors sought to buy three times the amount of bonds being offered. Still, in order to lure buyers, Greece agreed to pay an annual interest rate of 6.37 percent, twice the rate on comparable German bonds. Athens seized the opportunity to raise the money after announcing on Wednesday that it would cut spending and raise taxes, a move that eased concern over its runaway budget deficit. “This was a very, very good deal,” said Petros Christodoulou, the head of Greece’s debt management agency. “We had some very tough measures that were shocking to a number of Greeks, but that is what it took to regain credibility in the markets.” The news from Greece eased pressure on several other indebted European nations. Spain, whose debts have become a major concern, completed a 4.5 billion euro bond issue on Thursday. The Spanish and Greek offerings represent the first major calls on the bond market by southern European nations since concern over those countries’ gaping budget deficits gripped the world’s markets. Two weeks ago, amid the tumult, a bond sale by Portugal foundered. On Thursday, Lisbon refused to back down from its own austerity plan, despite a nationwide strike by civil servants. The strong and swift responses of Athens and Lisbon suggest that once-reluctant governments are now heeding market warnings and taking the political risks necessary to carry out tough fiscal measures. The Greek prime minister, George A. Papandreou, was to meet Friday with the chancellor of Germany, Angela Merkel, who has been cautious in public about approving any bailout for Greece. In a continuation of more than a week of demonstrations in Athens, over 100 protesters from Pame, a powerful labor union affiliated with the Communist Party, occupied the main offices of the Finance Ministry early on Thursday and remained there several hours.

275 The Greek civil servants’ union and the country’s main labor union, which has about two million members, announced a four-hour work stoppage to begin at noon on Friday. The civil servants’ union was also considering moving forward a 24-hour strike scheduled for March 16 to sometime next week to increase pressure on the government. Despite these public furies, Mr. Papandreou is betting that most Greeks will support his austerity measures, as opinion polls suggest. He is also wagering that union unrest will diminish over time as it becomes clear that the government will not backtrack from its commitments. Mr. Papandreou’s policy announcements — particularly the ones aimed at the pay of public sector workers — have surprised not just investors but also skeptics in Greece, who felt that his socialist instincts would keep him from venturing into certain areas. Analysts said that proposals to cut civil service pay and raise consumption taxes put Mr. Papandreou far ahead of his left-leaning party. But they also seem to command the support of a country eager not to be condemned to being the permanently sick man of Europe. “It was the fear of Greece becoming bankrupt on his watch,” said Yannis Stournaras, an economist in Athens who has advised socialist governments in the past. The Greek government was careful to market the deal toward investors not looking for a short- term profit. It remained unclear to what extent these investors would continue to invest in the coming months. Mr. Christodoulou said 97 percent of the bonds in the issue sold on Thursday were allocated to what he called “real money investors” — institutions with a long-term outlook, like pension funds and insurance companies — and not to more speculative investors like hedge funds, which have drawn criticism for their aggressive trading in the market for credit-default swaps. The Greek government intends to use the proceeds of the bond sale to pay debt coming due in the next few months. Mr. Christodoulou did not rule out the possibility that Greece would come to the market again. Even with the success of the bond sale, the challenges for Greece remain daunting. The government must raise an additional 20 billion euros in the next two months. http://www.nytimes.com/2010/03/05/business/global/05greece.html?ref=global

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La crisis financiera internacional El BCE empieza a retirar las facilidades de crédito pese a la crisis griega Trichet critica al FMI y afirma que una eventual salida del país de la eurozona es una "hipótesis absurda" EL PAÍS | AGENCIAS - Madrid / Francfort - 04/03/2010 Las turbulencias que ha causado la crisis griega en los mercados y su impacto en el resto de la zona euro no han persuadido al BCE de posponer su estrategia de salida de la crisis. Según ha informado hoy el presidente del instituto emisor, el organismo devuelve las condiciones anteriores a la crisis a los préstamos de tres meses del interbancario al liberar su precio, mientras mantiene las facilidades en los préstamos a seis y doce meses. "Hemos decidido que las medidas no convencionales que están en marcha son las adecuadas", ha afirmado el presidente del Banco Central Europeo, Jean- Claude Trichet tras reiterar que el objetivo del instituto emisor es "acompañar el regreso paulatino y gradual de los mercados a la normalidad sin tocar la política monetaria". Además, sobre el caso concreto de Grecia, Trichet ha afirmado que una eventual salida del país de la eurozona es una "hipótesis absurda". El Consejo de Gobierno del Banco Central Europeo (BCE) ha decidido hoy mantener los tipos de interés de la zona euro en el 1% , el nivel más bajo en la historia de la institución, con el objetivo de apoyar la recuperación económica de la eurozona, que en el último trimestre de 2009 ralentizó su crecimiento al 0,1%. El BCE está intentando retirar la liquidez excesiva en los mercados financieros sin ahuyentar a los inversores preocupados de que el déficit de Grecia afecte la recuperación de la eurozona. Los líderes de la UE están intentando demostrar que pueden obligar a Grecia a sanear su presupuesto sin dar al país ayuda financiera. En concreto, el Producto Interior Bruto (PIB) de la zona euro registró un crecimiento de una décima en el cuarto trimestre de 2009 respecto a los tres meses anteriores, cuando creció un 0,4%, mientras que en términos interanuales acumuló un retroceso del 2,1%. Por su parte, la inflación anual de la eurozona correspondiente al pasado mes de febrero se situó en el 0,9%, una décima por debajo del nivel del mes anterior, mientras que la tasa de paro de la región se mantuvo en enero en el 9,9%, frente al 8,5% registrado hace un año. Para Trichet, los tipos de interés se mantienen en un nivel "apropiado", aunque ha advertido de que el ritmo de recuperación económica "en curso" en la zona euro será "irregular" por lo que la institución cifra en un rango de entre el 0,4% y el 1,2% el crecimiento del PIB previsto para 2010, mientras que para el próximo año podría situarse entre el 0,5% y el 2,5%. En ambos casos mejor que sus anteriores previsiones, sobre todo en lo que se refiere al próximo ejercicio. La Reserva Federal ya empezó el pasado 18 de febrero a retirar algunos de los estímulos y encareció las condiciones de liquidez para la banca. En otro orden de cosas, el máximo responsable de política monetaria de la eurozona ha considerado un "completo error" la sugerencia del economista jefe del FMI, Olivier Blanchard, quien el pasado 12 de febrero propuso a los bancos centrales elevar el objetivo de inflación más allá del 2% para contar con más margen de maniobra en futuras crisis. "Tal

277 sugerencia demuestra poca atención a los numerosos trabajos de investigación y análisis que defienden la idoneidad del objetivo del 2%", ha dicho Trichet, quien advirtió de que una modificación de tales objetivos de inflación sería "contraproducente", ya que enviaría a los mercados el mensaje de que "cualquier cambio es posible, lo que resulta extremadamente peligroso". http://www.elpais.com/articulo/economia/BCE/empieza/retirar/facilidades/credito/pese/crisis/ griega/elpepueco/20100304elpepueco_7/Tes

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March 4, 2010 White House Offers Bill to Restrict Big Banks’ Actions By SEWELL CHAN WASHINGTON — The Obama administration put forward legislation on Wednesday to rein in the size and scope of the nation’s largest banks. But the proposal faces strong resistance in Congress, where lawmakers have shown little appetite for adding to the prolonged debate on overhauling financial regulations.

Joshua Roberts/Bloomberg News Paul A. Volcker, former chairman of the Federal Reserve, has endorsed a ban on some risky investments and trades by banks. The legislation would ban banks that take federally insured deposits from investing in hedge funds or private equity funds and from making trades that are for the benefit of the banks, not their customers, a practice known as proprietary trading. Goldman Sachs and Morgan Stanley would probably be the Wall Street firms most affected by the ban, known informally as the Volcker Rule, but they might be able to shed their status as bank holding companies, to avoid some of the restrictions. The legislation also would ban any bank from acquiring another bank if the merged company would have more than 10 percent of all liabilities in the financial system. When President Obama presented the Volcker Rule, named for its champion, Paul A. Volcker, the former Federal Reserve chairman, on Jan. 21, he argued that banks that benefit from the government safety net should not take undue risks. Mr. Volcker said through a spokesman on Wednesday, “I have not seen the final version, but from what I understand, it is good, tough language.” The Volcker Rule counts among its supporters five former Treasury secretaries, elder statesmen like William H. Donaldson and John S. Reed and prominent investors like George Soros. But when Mr. Volcker and the deputy Treasury secretary, Neal S. Wolin, presented the plan to the Senate last month, they were met with a frosty reception. Senators said the rule would not have prevented the financial crisis or saved companies like Bear Stearns, Lehman Brothers and the American International Group. They said the idea, as outlined by President Obama, was vague and difficult to enforce. And representatives of Goldman Sachs and JPMorgan Chase testified that limits on risk-taking could be achieved by other means.

279 Another concern is that the rule would encourage banks to take flight to other countries with fewer restrictions on speculative trading. After meeting in Brussels, European finance ministers said in a policy paper on Feb. 10 that while they “support the overarching aim of reducing the buildup of risks in the financial system,” any new policy should “avoid pushing risks to other parts of the financial system.” As proposed by the Treasury Department, the Volcker Rule would define proprietary trading as the purchase and sale of stocks, bonds, commodities and derivatives for the institution’s or company’s own trading book, and not on behalf of a customer. The legislation would also seek to restrict proprietary trading by nonbank financial institutions by directing the Federal Reserve to set “capital and quantitative limits” on such trading. Congress is considering proposals that would give the Fed supervision over the largest and most interconnected financial institutions, not just the bank holding companies and state-chartered member banks it now oversees. The second part of the legislation would prohibit financial institutions from assuming, by acquisition, more than 10 percent of all liabilities in the financial system. The idea is an outgrowth of a cap, in place since 1994, on the share of deposits that any one institution can hold. “The existing cap on deposit concentrations has become less effective as large banking firms have increasingly relied on other sources of funding and has given these firms an incentive to shift towards riskier sources of funding,” the Treasury said in a statement. It continued: “We need to update existing concentration limits to check future growth of our largest financial institutions and to make the system safer.” Two experts on finance expressed skepticism about the feasibility of the proposal after being shown it. “The law is sufficiently ambiguous as to be practically unenforceable, so that it appears to be more about grandstanding to score political points than an attempt to really improve the regulatory toolkit,” said Anil K. Kashyap, an economist at the Booth School of Business at the University of Chicago. Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at the Boston University School of Law, said the language “raises more questions than it answers.” He added: “This is the price the administration must pay apparently for inserting a game- changing proposal at the end of the legislative process. It would have been much better had this been part of the opening salvo rather than a last-minute call.” Michael S. Barr, the assistant Treasury for financial institutions, said in an interview that the legislative proposals should be understood as part of a broader regulatory package put forward last June. “Certain proprietary trading activities that are risky and conducted only for the trading book of the firm shouldn’t be subsidized by deposit insurance,” he said. As for the definitions of proprietary trading, Mr. Barr said: “Will it require the exercise of regulatory judgment? Yet it will, but that’s consistent with existing banking regulation.” Jockeying over other elements of overhauling financial regulations continued Wednesday. The Treasury secretary, Timothy F. Geithner, and a senior White House adviser, Valerie Jarrett, told representatives of AARP, the A.F.L.-C.I.O., and consumer and civil rights groups that Mr. Obama was committed to creating an agency to protect consumers from abusive financial products, with an independent director and budget and the power to write and enforce rules.

James Kanter contributed reporting from Brussels and Louis Uchitelle from New York. http://www.nytimes.com/2010/03/04/business/04regulate.html?th&emc=th

280 04.03.2010 Greece is now putting pressure on the eurozone – if you don’t help, we will turn to the IMF

This is now the most interesting, and potentially dangerous moment of the Greek crisis. After George Panpandreou effectively did everything the ECB and the European Commission have told him, the ball has left Athens, and is now in the court of the euro area. And it has to be played very quickly, for otherwise Papandreou will turn to the IMF, as he already indicated. His travel schedule leaves no doubt about the time. Tomorrow in Berlin and Paris, on Wednesday in Washington. Bloomberg has a story that Germany remains unwilling to promise aid. It cites Angela Merkel’s cool reaction to Papandreou’s plans, including the announcement that tomorrow’s meeting will not even address the issue of aid and financial commitments. It quoted German sources as saying that Germany can, and will not, commit. (We disagree: German can and will. This is just the attempt to emit two conflicting message, one to the outside world, one for domestic consumption) Kathimerini, in its news coverage of the crisis, produced a detailed account of the measures taken. They include: Increate in VAT rates from 19 to 21%, plus 1pt increases in the two smaller bands; increase in excise duties on fuels, increase in duties on cigarettes and alcohol; excise taxes on luxury goods, including cars costing more than €17,000, boats, helicopters, precious stones, precious metals and leather; repeal of the excise duty exemption for certain energy categories; 30% cut of Christmas, and easter bonuses; 12% cut in allowances for public sector workers; reduction in performance incentives and other work-related allowances, freeze in public sector pensions, and all pensions over which the government has direct and indirect control; 5% cut of a public investment programme, plus cut in the education programmes. We could go on. The list comprises many more items. The European Commission said Papandreou had now done what is necessary. Juncker also supports the plan. Olli Rehn spoke of a turning point in the crisis. The markets reacted positively to the news. The euro was back up at close $1.37

281 Fierce public reaction The FT reports: “...several hundred Greek pensioners broke through a police cordon to demonstrate outside the prime minister’s office while the cabinet meeting was under way. ‚What are we supposed to live on? We can’t even seek help from our children because they’re facing unemployment,’ said Stathis Anemoyiannis, a retired civil servant. Adedy, the federation of public sector unions, announced another 24-hour walk-out for March 15. Separately, customs and tax workers, teachers, and staff at state hospitals said they would hold strikes this month.“These are the toughest measures to be imposed since the second world war… they are one-sided and they will plunge the country further into recession,” said Spyros Papasypros, Adedy’s president. Greek and euro trades officially investigated The FT reports that the European Commission has invited banks and investors to discussion this week about regulatory actions regarding naked CDS and other instruments that have been used in the speculation against Greece. Furthermore, the US Department of Justice is taking a close at trading against the euro, following reports that a group of hedge funds had met in New York to devise a common trading strategy. Italy’s president favours a European Monetary Fund President Giorgio Napolitano of Italy came out in support of the idea for a European Monetary Fund. He said the eurozone was lacking a mechanism in its common arsenal, a mechanism to deal with acute crises. The Greek crisis demonstrated the need for other tools in crisis management, Kathimerini reports German nominal wages fall in 2009 So much for nominal wage rigidities. We have been used to real wage cuts, but in Germany during last year nominal wages have fallen for the first time since 1949, according to the Federal Statistics Office. They were down 0.4%. Nominal wages in industry fell by 3.6%, due to short-time work. This means that Germany’s competitive position within the euro area has increased further last year – and with the most recent 0 per cent pay round, there are no signs that Germany-versus-rest-of-eurozone gap is stabilising, let alone closing. Waiting for Trichet Ed Hugh has an interesting curtain raiser for today’s ECB meeting, in which he argues that this is going to be one of the more interesting meetings in the ECB’s history, not because anyone expects any interest rates decisions (nobody does, in fact), but because everyone wants to know what the ECB thinks about the economic recovery, and how Greece effects its own policy manoeuvre. He makes the interesting observation that ECB board members have been collectively and unusually silent, and have made fewer speeches in the last three months than in any three-month period during the crisis. “So why the comparative silence? The ECB is not normally reticent in coming forward to guide market expectations. Could the communication pause reflect growing uncertainty among board members about what to do next?”

Merkel and economic governance Peter Ehrlich has an interesting comment on the confusion Angela Merkel has created by her endorsement of a common economic governance for the euro area. This does not indicate a shift in the position. She has rejected the proposal in Barroso’s 2020 agenda for a closer

282 policy co-ordination mechanism, and shows no signs of acceptance any dilution or re- interpretation of the stability and growth pact. She remains, what the French call “Madame Non”. What she meant by economic governance is a more prominent role of the European Council in question of policy co-ordiation – i.e. at the level of heads of governments and state as long as Germany has a veto. Against a new Glass-Steagall Writing in VoxEU, Hans Werner Sinn says a return of the Glass-Steagall Act has been suggested by US policymakers and commentators as a way to reduce risk in financial markets. He argues that the legacy of separate commercial and investment banks actually made the crisis worse. Europe should not follow these proposals but should instead concentrate on strengthening the capital reserves of its banks. http://www.eurointelligence.com/article.581+M56afdac3dfe.0.html#

Greece prepared to turn to IMF By Kerin Hope in Athens, Gerrit Wiesmann in Berlin and Nikki Tait in Brussels Published: March 3 2010 10:39 | Last updated: March 4 2010 08:17

Pensioners in Athens demonstrate against the new austerity measures announced on Wednesday

Greece is prepared to turn to the International Monetary Fund for help if its European neighbours fail to provide the financial assistance it wants after announcing the toughest spending cuts in decades. George Papandreou, Greek prime minister, will on Friday tackle Germany’s chancellor Angela Merkel during talks in Berlin before heading to Paris to meet Nicolas Sarkozy and

283 then to Washington next week to see Barack Obama on an international mission to drum up support for the crisis-hit country. His government is braced for another wave of strikes after it imposed a freeze on pensions on Wednesday, further cuts in public sector pay and increases in value-added tax and duties on fuel, alcohol and cigarettes. Mr Papandreou said that the latest austerity package, the third in three months, fulfilled Greece’s commitment to its eurozone partners to bring its soaring deficit under control. The country’s debt crisis has caused turmoil in bond markets, with investors worried that it could spread to other weak eurozone members. “We have shown we can take difficult decisions. We are waiting for European support – the other side of the agreement,” Mr Papandreou said. In depth: Greece debt crisis - Mar-03 Editorial: Athens’ political economy - Mar-03 Regulators launch probe into euro trades - Mar-03 Markets Insight: Seeking political leadership - Mar-03 Athens hopes cuts will restore confidence - Mar-03 EU hits its own financial reality - Mar-03 During a cabinet meeting, he told ministers that Greece could turn to the IMF for an emergency loan if its EU partners were unable to deliver adequate assistance, a senior government official said. Other eurozone countries have been adamantly opposed to IMF involvement. Germany welcomed Greece’s decision to tighten fiscal policy but stressed financial aid would not be on the table when Mr Papandreou visited Berlin. Ms Merkel said the meeting “isn’t about aid commitments but about good relations between Greece and Germany”. Officials in Berlin said that Germany considered Greece to be “liquid till the end of March” with the real test of confidence coming in late April or May when it has to roll over about €22bn of debt. The European Commission responded to calls for tighter scrutiny of credit derivatives after the sell-off in Greek financial markets. It has summoned banks and regulators to a meeting this week to discuss regulation of sovereign credit default swaps , a form of insurance against the risk of default on government bonds. Fierce reaction to budget measures The announcement of an across-the-board pension freeze and a 30 per cent cut in annual Christmas and Easter bonuses paid to public sector workers triggered fierce reaction. Several hundred pensioners broke through a police cordon to demonstrate outside the prime minister’s office while the cabinet meeting was under way. “What are we supposed to live on? We can’t even seek help from our children because they’re facing unemployment,” said Stathis Anemoyiannis, a retired civil servant.

284 Adedy, the federation of public sector unions, announced another 24-hour walk-out for March 15. Separately, customs and tax workers, teachers, and staff at state hospitals said they would hold strikes this month. “These are the toughest measures to be imposed since the second world war… they are one-sided and they will plunge the country further into recession,” said Spyros Papasypros, Adedy’s president. ”Full and timely implementation of fiscal measures, along with decisive structural reforms... is paramount,” Mr Juncker said. ”It is as well important for the overall financial stability of the euro area.” The Commission endorsed the new Greek measures, saying the country was now on track to meet ambitious targets for budget deficit reduction this year and could count on EU solidarity. ”Greece’s ambitious programme to correct its fiscal imbalances is now on track,” José Manuel Barroso, European Commission president, said in a statement. In an almost identical statement, Jean-Claude Juncker, chairman of the eurogroup of finance ministers, also praised the new plan. ”Full and timely implementation of fiscal measures, along with decisive structural reforms... is paramount,” Mr Juncker said. ”It is as well important for the overall financial stability of the euro area.” Olli Rehn, the EU’s economics and monetary affairs commissioner, said he believed the Greek measures were – or could become – a turning point in the crisis. He said that he was particularly encouraged by Greece’s move to tackle expenditure side. The commissioner, who was in Athens on Monday, added that he had “a very strong sense of the determination and unity in the Greek government to reform the country”. Wednesday’s announcement comes as Greece prepares to return to international markets to roll over about €10bn of debt due to expire in April. The US Department of Justice is taking a closer look at trading against the euro. It has told hedge funds to preserve trading records and e-mails about euro-related derivative trades. Additional reporting by Stephanie Kirchgaessner in Washington http://www.ft.com/cms/s/0/f3f19f0c-26ad-11df-bd0c-00144feabdc0.html

285 March 4, 2010 Let's Bring Back the Robber Barons By Daniel Henninger

Faced with high, painful unemployment as far as the eye can see, the government naturally is here to help. The Senate passed a $15 billion "jobs bill." Its proudest piece is a tax credit for employers who hire a person out of work at least 60 days. The employer won't have to pay the 6.2% Social Security payroll tax for what remains of this year. If the worker stays on the job at least a year, the government will give the employer $1,000. As to the earlier $787 billion stimulus bill, Vice President Joe Biden praised it in Orlando this week as an engine of job creation, while he stood before a pile of broken concrete and asphalt. The subject was highways. Finally, Barack Obama's government now may force companies to raise wages and benefits by squeezing their federal contracts if they don't. Maybe there's a better way. *** Let's bring back the robber barons. "Robber baron" became a term of derision to generations of American students after many earnest teachers made them read Matthew Josephson's long tome of the same name about the men whose enterprise drove the American industrial age from 1861 to 1901. Josephson's cast of pillaging villains was comprehensive: Rockefeller, Carnegie, Vanderbilt, Morgan, Astor, Jay Gould, James J. Hill. His table of contents alone shaped impressions of those times: "Carnegie as 'business pirate'.'' "Henry Frick, baron of coke." "Terrorism in Oil." "The sack of California." I say, bring 'em back, and the sooner the better. What we need, a lot more than a $1,000 tax credit, are industries no one has thought of before. We need vision, vitality and commercial moxie. This government is draining it away. The antidote to Josephson's book is a small classic by Hillsdale College historian Burton W. Folsom called "The Myth of the Robber Barons: A New Look at the Rise of Big Business in America" (Young America's Foundation). Prof. Folsom's core insight is to divide the men of that age into market entrepreneurs and political entrepreneurs. Market entrepreneurs like Rockefeller, Vanderbilt and Hill built businesses on product and price. Hill was the railroad magnate who finished his transcontinental line without a public land grant. Rockefeller took on and beat the world's dominant oil power at the time, Russia. Rockefeller innovated his way to energy primacy for the U.S. Political entrepreneurs, by contrast, made money back then by gaming the political system. Steamship builder Robert Fulton acquired a 30-year monopoly on Hudson River steamship traffic from, no surprise, the New York legislature. Cornelius Vanderbilt, with the slogan "New Jersey must be free," broke Fulton's government-granted monopoly.

286 If the Obama model takes hold, we will enter the Golden Age of the Political Entrepreneur. The green jobs industry that sits at the center of the Obama master plan for the American future depends on public subsidies for wind and solar technologies plus taxes on carbon to suppress it as a competitor. Politically connected entrepreneurs will spend their energies running a mad labyrinth of bureaucracies, congressional committees and Beltway door openers. Our best market entrepreneurs, instead of exhausting themselves on their new ideas, will run to ground gaming Barack Obama's ideas. If the goal is job growth, we need to admit one fact: Political entrepreneurs create fewer jobs than do market entrepreneurs. We need new mass markets, really big markets of the sort Ford, Rockefeller and Carnegie created. Great employment markets are discoverable only by people who create opportunities or see them in the cracks of what already exists- a Federal Express or Wal-Mart. Either you believe that the philosopher kings of the Obama administration can figure out this sort of thing, or you don't. I don't. FDIC chief Sheila Bair whacked bank bonuses Tuesday. People on the East Coast spend too much time around the finance and insurance industries. If the price of rediscovering the American job machine is some people across the land getting really rich, it's a small price. One of the richest now is Larry Ellison, the 1977 founder of Oracle Corp. (49,000 employees), whose tastes run to huge boats, bigger houses and paying Elton John to play for his friends at the Cow Palace. Someone in our politics has to find the courage to say, So what? If the next Ellison and Oracle ripples into American life as many new jobs and family incomes, I'm happy to be grossed out by parties and boats. The alternative is a nation of Pecksniffs, choking on virtue. We live in a world of rising competitors-foreign robber barons-who don't much care about our endless quest for health-care justice. The U.S. on its current path to a stage- managed economy floating in a lake of taxes will keep down the greatest population of intellectual and managerial firepower the world has seen. The rest of the world admits that, with the recent exception of the Chinese, who think we're ready to be taken. We have young people impatient for the chance to do what Carnegie, Rockefeller and Hill did. Let them. Daniel Henninger is deputy editor of the Wall Street Journal's editorial page. http://www.realclearmarkets.com/articles/2010/03/04/bring_back_the_robber_barons_9 8370.html

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Doctor Doom Chile's Post-Earthquake Economic Strength Nouriel Roubini, Bertrand Delgado and Juan Lorenzo Maldonado 03.04.10, 12:01 AM ET Despite a major earthquake and electoral squabbles, the financial picture is looking bright in South America. Here's our outlook for the continent's biggest economies. Chile On Feb. 27 Chile was hit by a massive 8.8 magnitude earthquake, one of the strongest in a century worldwide. The human toll has been relatively mild, with around 800 deaths, as the epicenter was far from populated areas and building codes and standards are very strict. However, the damage to the country's infrastructure is significant, and President Michelle Bachelet has called a state of emergency. The physical destruction includes damage to the country's roads, ports, commercial buildings and housing. Chile's sound macroeconomic policies under the Bachelet administration have created a savings fund, currently around $15 billion, which will allow the new government to face this tragedy with resolve and immediacy. Upon the news that several mines belonging to both state-owned Codelco and privately owned companies had closed, international copper prices surged on March 1 during early trading in London, and receded after Codelco announced that it would be able to meet contractual obligations with production from unaffected mines. The halt in production was a result of power outages caused by the earthquake, rather than physical damage to mining sites. Chile's copper mines are located mostly in the northern part of the country, so affected mines and ports in the south should have a limited impact on copper delivery. Meanwhile the Chilean peso (CLP) slipped by more than 1% in early trading on Monday, only to regain more than 1.5% from the day's low at market close the same day. The local currency appreciated even further on Tuesday. The rapid correction of the CLP may reflect expectations that the Chilean government will make use of its savings fund held abroad to purchase local currency to finance the immediate needs of affected populations, generating an increase in demand for the CLP. However, the CLP faces weakening risks as the economy will likely lose momentum in the near term and the central bank will postpone the tightening cycle. Although difficult to assess at this moment, the economic impact of the earthquake could be high in the near term (the first quarter and the beginning of the second quarter), especially because of disruptions in the retail, industry, agriculture and service sectors. However, reconstruction efforts should compensate for economic losses from the second quarter or second half of 2010 onward, leaving growth expectations for 2010 fairly intact. Still, further information about the costs of reconstructing the country will be needed before growth forecasts can be accurately adjusted. Meanwhile, inflation pressures are likely to increase as scarcity becomes an issue; however, this will be temporary. The central bank has stated that it will maintain an accommodative monetary policy stance for a prolonged period to support businesses and investment, as expected, meaning that the central bank might initiate the

288 hiking cycle in the second half of 2010 rather than the second quarter, depending on how economic conditions evolve. Brazil The results of the Brazilian central bank's Weekly Focus Survey released on Feb. 26 pointed to further deterioration in inflation expectations for year-end 2010, as measured by the IPCA consumer price benchmark, to 4.91% from 4.86% the previous week. However, inflation expectations for 12 months ahead and year-end 2011 stayed unchanged at about 4.5%. The midpoint of the central bank's target range is 4.5% (+-2%). As in the previous survey, the monetary policy rate is expected to end this year at 11.25%; however, expectations for year- end 2011 were lifted to 11.25% from 11%. GDP forecasts for 2010 and 2011 stayed unchanged at 5.5% and 4.5%, respectively. On the Brazilian real (BRL), analysts kept their forecast for year-end 2010 at 1.8 per USD, but foresaw the BRL weakening by the end of 2011 to 1.87, below the previous week's forecast of BRL1.83. The 2010 forecast for the IGP-M, Brazil's broadest inflation index, deteriorated sharply to 5.86% from 5.3% in the previous survey and 4.8% at the end of January. This inflation reading, however, also showed that inflation expectations for 2010 were stable at 4.5%. The markets' yield curve on future interest rate contracts is pricing in just over 330 basis points (bps) in hikes, a total rise of more than 12% by year-end 2010, starting in March with a hike of close to 40 bps. Back in mid-January the markets were anticipating almost 400 bps in hikes.

There have been some mixed signals from authorities: The central bank president, Henrique Meirelles, has stated that the monetary authority is ready to act and implement unpopular monetary measures if necessary to maintain stability in the financial system, while the finance minister, Guido Mantega, has said that an imminent interest rate hike is not in the works because there are neither demand- nor supply-side inflation pressures. Overall, actual inflation and expectations, particularly for this year, continued deteriorating and moving away from the central bank's target. This price behavior, together with positive labor market conditions and economic acceleration, is in line with our prediction that the central bank will initiate the hiking cycle in April, raising the monetary policy rate 50 bps to 9.25%. We expect the central bank to hike rates by 250 bps to 11.25% by the end of 2010. Our view factors in stabilization in prices once seasonal effects from adverse weather conditions, increased public tariffs and back-to-school costs wear off.. The markets appear to be expecting hikes of 25 bps in March and 50 bps in April. Colombia President Uribe will soon become the "former president" of Colombia, as the Constitutional Court on Feb. 26 denied him the possibility of running for a third term, with seven votes against and two in favor. Uribe accepted the court ruling and will leave power with a 70% approval rate. Following this democratic process, Juan Manuel Santos announced his candidacy for the presidency, representing the Partido de la U, the U Party. Santos is perceived by the population as a natural successor to Uribe as he worked closely with the president as defense minister, contributing to the successful security policies that made Uribe so popular. According to an Ipsos Napoleon Franco survey released by Semana.com on Mar. 1, the first poll taken after the court's decision, Santos is the favorite to win, with the support of over 20% of respondents. Gustavo Petro, from the leftist opposition party Polo Democratico, followed with 11%, while both Sergio Fajardo, the independent former mayor

289 of Medellin, and German Vargas Lleras, a former senator from the pro-Uribe Cambio Radical Party, claimed the support of 9% of the respondents. In our view these pre-election developments are positive with regard to Colombia's democratic process, the rule of law and institutional development. However, given that Santos has not attained more than 50% of the votes in pre-election polls, a second round will likely take place, increasing political noise. Elections are scheduled for May 30, with a second round to take place in June. Overall, we maintain the view that the next president is likely to maintain market-friendly and popular security policies, but not before a tough political battle to claim office. Argentina President Cristina Fernandez de Kirchner has announced two presidential decrees ordering the central bank to transfer $6.5 billion from international reserves to the treasury to pay down debt. Before the president made these decrees known to the legislature, both were already implemented without giving the opposition time to stop them in court. The two decrees replaced the controversial decree to create the Bicentennial Fund. The treasury will use $2.2 billion to pay back multilateral lenders and $4.4 billion to pay private holders' debt. Paying down multilateral debt will not have much opposition and is actually allowed by the central bank charter, which was changed in 2006 to pay off the IMF. The second transfer has not faced any opposition at the central bank: The new management transferred the money right away. The move drove Argentine bonds up 4%, improved the prices of government securities and moderately reduced the country's risk, which dropped 33 points. In our view this is palliative for the markets in the short term as it reduces financing risks for 2010. Moreover, if the SEC approves the debt exchange with holdouts, this should add to positive market dynamics in the near term. However, high fiscal spending, elevated inflation, unreliable data, uncertain economic policy, institutional deterioration and the policy choice to keep the local currency weak pose risks to the Argentina story. It remains to be seen if markets will finance Argentina's loose macroeconomic policy and approve of the potential return of the president's husband, Nestor Kirchner, to Casa Rosada as the president himself once again. Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), writes a weekly column for Forbes. Bertrand Delgado is a senior research analyst and Juan Lorenzo Maldonado a research analyst at RGE. http://www.forbes.com/2010/03/03/chile-argentina-brazil-colombia-opinions-columnists- nouriel-roubini-bertran-delgado-juan-lorenzo- maldonado.html?boxes=opinionschannellighttop

290

David Callaway

March 4, 2010, 12:01 a.m. EST Sure sign the Greek crisis is over

Commentary: First, blame all the hedge funds By David Callaway, MarketWatch SAN FRANCISCO (MarketWatch) -- Blame, in all its forms, is a lagging indicator. So when politicians and regulators start assigning it, the storm is usually over, as it certainly is now with the Greek debt crisis. Just as U.S. politicians blamed hedge funds for going after Wall Street investment banks by shorting their stocks during the financial crisis in 2008, European politicians and regulatory officials now point at the same cast of characters for destabilizing Greece, and more importantly, the euro currency. It's not collusion among hedge funds at sinister dinner parties that's at the heart of the problem, though. It's simply the availability of unregulated or poorly regulated derivatives that allow smart traders to sow panic and create profit. Credit default swaps are the common denominator. It was George Soros himself who eloquently spelled out in a piece in The Wall Street Journal last year how certain hedge funds were able to cause chaos in the shares of banks such as Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley (NYSE:MS) . They were able to amass large holdings of credit default swaps, which were originally designed for owners of corporate debt as an insurance policy against default. At some point, gains in CDS levels would trigger concern at a ratings agency, like Moody's or Standard & Poor's, which would in turn lead to a run on the company's shares. So buy the swaps, sell the shares. Simple. A similar opportunity presented itself in Europe late last year when Greece began to suffer debt problems. Traders could buy swaps on Greek debt, or even the debt of other troubled nations such as Portugal, Ireland, Italy or Spain -- all of which together are referred to in politically incorrect trader parlance as the PIIGS. By sowing panic in the CDS markets, traders could then bet against the euro, which would ultimately take a hit if healthy nations needed to bail out the troubled ones. Buy PIIGS swaps, bet against the euro. Or even buy commodities or some equities and bet against the euro. These are opportunities that traders look for every day. That many of them noticed it and swung for the fences all at once is not collusion, it's just the sign of a huge softball coming right down the line.

291 Now regulators are reaching out to hedge funds looking for signs of misconduct. Several funds were contacted this week and told to hang on to their euro trading records. See MarketWatch story on hedge funds. It's Adair Turner, chairman of the U.K.'s Financial Services Authority, who has made the most sense so far, however. He's suggested that instead of trading vehicles, credit default insurance on sovereign debt should only be sold to entities that actually hold the debt. If this had been the case on Wall Street two years ago, Bear Stearns and Lehman Brothers might still be around. Regulators can never expect to stay ahead of Wall Street, the City of London or any financial innovation areas. But they can do a better job to create transparency in markets and reduce these surges of opportunism when they are found to be harmful. The decision to put a limitation on shorting stocks in the U.S. last week, while widely derided as anti-market, is one example of this. The markets need opportunity to thrive, but not at the expense of the health of the system, especially a system as important as the euro bloc. Thankfully, if we've reached the level at which it's time to blame the hedge funds and probe their actions, the money is already made and the crisis is nearing an end. The debate will soon move back into the realm of curtailing obscene profits, at least until the next crisis -- and opportunity -- arises. Bonus taxes anyone? http://www.marketwatch.com/story/story/print?guid=818BBBDF-B5BD-4872-A38F- B00D64CFDD5A

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IBD Editorials Chinese Can't Dump Our Debt Too Soon By MIKE COSGROVE Posted 03/03/2010 06:47 PM ET The Chinese can save both themselves and U.S. taxpayers by selling a large portion of their U.S. Treasury holdings this year. In fact, this economic missile may be the only way to save taxpayers in 2010. Foreigners hold about $3.6 trillion in U.S. Treasuries, and foreign central banks hold two- thirds of that. The good news is that the Chinese and Japanese, combined, hold at least $1.5 trillion, or 12% of Treasury debt outstanding. The Chinese and Japanese are our friends for two reasons: (1) Their net purchases help keep bond yields low, and (2) Chinese warnings about not buying more Treasuries or in fact selling Treasuries can send shock waves through capital markets. Congress and the Obama administration don't seem overly concerned with huge federal deficits. But the administration does understand the crisis that would be created in capital markets were the Chinese to become net Treasury sellers, even for a short period of time. The Chinese can act as a constraint on the reckless federal spending of Congress and the administration. In fact, the Chinese may be the only realistic constraint in 2010. The administration seems to have ignored the voting results from Virginia, New Jersey and Massachusetts. Some analysts say the Chinese won't be net sellers of Treasuries. What is to prevent the Chinese from shorting the U.S. equity market before they announce they are going to be net sellers of Treasuries? The Chinese can lecture the administration about excessive federal outlays, but nothing would be more effective than dumping Treasuries, even for a short time. Such action would panic investors, and as a result the administration may well agree to constrain spending to placate the Chinese. No one wants havoc in the capital markets, but the Chinese can do U.S. taxpayers a major favor by dumping Treasuries just as soon as the Chinese can buy their put options on U.S. equities. U.S. equities will quickly recover their lost ground and much more if the administration would agree to constrain federal outlays. Excessive federal spending and regulatory involvement in the economy are holding back equity gains. The sooner the Chinese dump Treasuries, the better. It is a message that all members of Congress, as well as the Obama administration, need to hear. The Chinese needed to take such action during the Bush years, but that is water under the bridge. The Chinese can see how the Japanese ruined their economy by growing public debt outstanding to over 225% of GDP in 2010 from 68% in 1991, according to IMF data. The U.S. outstanding public debt to GDP ratio was also 68% in 1991. In 2008 it was 70%. At the end of this year it will be about 94%.

293 The current Congress and administration seem intent on repeating the mistakes of Japan that in the end will also ruin the U.S. economy. The Chinese need the U.S. economy to thrive and buy the large volume of Chinese exports, thereby sustaining growth in the Chinese economy. A strong U.S. economy is in the interest of the Chinese, who would face major social and political issues should the U.S. economy falter and Chinese unemployment rates increase significantly. No one wants the U.S. to be the next Greece, and the sooner the Congress and administration are forced to start making cuts in government spending the better. State and local governments need to take the same action. Large deficits and increases in outstanding public debt in mature economies like the U.S. and Japan only act to slow economic growth as the resulting tax burdens cripple incentives for innovation and expansion. The Chinese may be our salvation in 2010. Cosgrove, principal at Econoclast, a Dallas-based capital markets firm, is a professor at the University of Dallas http://www.investors.com/NewsAndAnalysis/Article.aspx?id=522831

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Wednesday February 24, 2010 New Business March 3, 2010, 8:34PM EST text size: Housing: Hope on the Horizon Cash-rich builders are buying land again, betting on a turn in the market for new homes By Peter Coy and John Gittelsohn You would think the nation's biggest homebuilders would be writhing in pain right about now. Sales of new single-family homes sank in January to the lowest seasonally adjusted rate in nearly five decades of record keeping and are now off 78% from the housing market's frothy peak in 2005. Yet in a housing industry as vast and varied as America's, the data often fail to keep up with reality. It turns out that big publicly traded builders, thanks to cost-cutting, asset sales, bond issues, and tax breaks, aren't in grim shape. Their shares have nearly doubled over the past year and they're back in the game of competing for land, reflecting confidence that after years of falling prices, rising foreclosures, and busted dreams, better days are ahead. The number of lots owned or controlled by a dozen of the biggest builders rose slightly in the second half of 2009 after years of decline as renewed buying offset heavy tax-related selling of unwanted parcels, according to a Bloomberg analysis of company reports. In crash-prone markets such as Southern California and Florida, prices of some construction-ready lots are up 50% or more from their 2009 lows. "There is definitely a shortage of land, and you cannot turn the switch on overnight," says Douglas C. Yearley Jr., executive-vice president of luxury builder Toll Brothers (TOL). "That will cause builders to aggressively buy the land they can." Land buying began to pick up last year after finished lots hit the market at below the cost of improvements, and housing prices stabilized. Builders could finally turn out homes with some assurance of making a profit, says Scott D. Clark, the CEO of Americap Development Partners, a residential land developer in San Ramon, Calif. Greater affordability and tax incentives should help in the short term. What's more, the big builders believe population growth will eventually require a burst of construction. Warren Buffett agrees. In his Feb. 27 letter to shareholders of Berkshire Hathaway (BRK/A), which owns manufactured-housing maker Clayton Homes, he predicted that "within a year or so residential housing problems should largely be behind us." Bargain Buying The builders are staying disciplined for now, selectively scooping up bargains while buying just what they need to meet expected demand for the next few years. "There isn't one public homebuilder that's stupid. They're all well-seasoned. They've shrunk down to the size they need to be, and now they're reacting accordingly" to opportunities for growth, says James T. "Nate" Nathan, the president of Scottsdale (Ariz.)-based land broker Nathan & Associates. It's tough to say how much land prices have risen because each market is different. Last year, DMB Associates, a developer in Scottsdale, and its partners bought back about 400 lots in DMB's Verrado master-planned community in Buckeye, Ariz., that builders had acquired and then defaulted on. They spent about $15,000 per lot, then quickly resold 300 of the lots to other builders for an average $40,000 per lot. Nationally, though, increases have been considerably smaller than that.

295 The uptick in prices matters because land is the main factor in real estate's roller-coaster cycle. When housing prices boomed in the middle of the last decade, it wasn't the structures that were suddenly deemed more valuable but the land. Economist Morris A. Davis of the University of Wisconsin-Madison School of Business estimates that the price of U.S. land used for houses and apartments nearly tripled from the beginning of 2000 to the end of 2005. Prices more than tripled over the period in Washington, Miami, Tampa, San Diego, Los Angeles, and Phoenix, and better than quadrupled in two inland California markets, Sacramento and San Bernardino, Davis estimates. He figures that national land prices fell nearly two-thirds through early 2009 before bouncing back more than 20% in the rest of '09. (To calculate the implied value of land, he takes the fluctuating market value of residential properties and subtracts the relatively stable replacement cost of the structures on them.) The sharp decline in land prices was especially hard on the small builders that account for about 70% of the market. The National Association of Home Builders says its membership has fallen by about 20%, or 45,000. Many that remain have slashed staff. Jerry Howard, CEO of the NAHB, says banks are refusing to extend credit to small builders and stiffening the terms on existing credit. In contrast, most of the big builders whose shares are publicly traded are battle-hardened and ready to grow again. Writedowns and write-offs by 13 of the largest public builders exceeded $32 billion through December, according to Fitch Ratings. In contrast to small builders, which rely almost entirely on banks for financing, several big builders were able to raise funds by issuing bonds. Tax-Refund Windfall An additional boost came last year when Congress passed a law allowing companies to get refunds on past years' tax payments by applying their recent losses to earnings dating back five years. Many sold land at big losses to boost their refunds. The result was a windfall of $2.3 billion for the builders as a group, including $800 million for No. 1 Pulte Homes (PHM). The result of those balance-sheet heroics? Builders have more than $12 billion in cash they can use to replenish their land inventory. Pulte and D.R. Horton (DHI) each had $1.9 billion in cash and near-term equivalents at the end of December, Toll Brothers had $1.6 billion at the end of January, Lennar (LEN) had $1.3 billion, and KB Home (KBH) had $1.2 billion at the end of November. Some of that cash is going for parcels that weaker builders lost through default or short sales. On Feb. 25, Starwood Land Ventures of Bradenton, Fla., announced it received "interest from nearly every major homebuilder in Florida" for about 5,400 residential lots it bought in the bankruptcy auction of Hollywood (Fla.)-based TOUSA, one of the few big builders that bit the dust. Lennar was first in line, agreeing with Starwood to acquire or get purchase options on more than 2,700 of the TOUSA lots across Florida. The price wasn't disclosed, but Lennar said it expects to earn gross margins of 20% or better on the deal. In Loveland, Colo., land broker Craig Harrison of Harrison Resource Corp. says he's "in shock and awe" at the amount of interest he's getting from builders and investors for 5,000 acres of land across northern Colorado that recently went on the market for $177 million. Builders are buying land in part because the parcels they have aren't in the places where they need them. Property on the outer fringes of metro areas is still out of favor, says Daniel Oppenheim, a Credit Suisse (CS) homebuilding analyst. Prices have risen the most for closer- in lots that already have sewer lines, water, electricity, and sidewalks, because builders can throw up houses on them quickly and sign deals by Apr. 30 to qualify for federal homebuyer tax credits. Builders that aren't focused on a quick sales pop are choosing to buy cheaper

296 "paper lots" that lack infrastructure, says Jody Kahn, vice-president of regional markets for Irvine (Calif.)-based John Burns Real Estate Consulting. Interest in unfinished land usually comes later in the housing cycle, says Thomas E. Lucas, senior vice-president of operations for DMB in Scottsdale. "We didn't think we'd sell raw land for three to four years," Lucas says. That's a striking vote of confidence considering the threats to housing from high unemployment, rising mortgage rates, and foreclosures. Everything seems to happen faster these days—including the housing cycle, which is heading up before it has hit bottom. Coy is Bloomberg BusinessWeek's Economics editor. Gittlesohn is a reporter for Bloomberg News. http://www.businessweek.com/magazine/content/10_11/b4170020655634.htm

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Great Recession Did Not Have To Be Great March 3, 2010 - 1:50 pm Whether the 2007-09 slump was the worst since the 1930s or is merely tied with the 1973-74 debacle is an open debate. The economy appears to be weakening again, fueling fears of a double dip. I am certain, though, that the 2007-09 Great Recession didn’t need to be so great. It could have been, should have been, no worse than the 1990-91 recession. Since World War II, the U.S. has suffered 12 recessions. The two worst, not including the most recent, were in 1973-74 and 1982-83. Both lasted 16 months and saw unemployment go over 10%. The 1973-74 recession was psychologically worse because it happened during a 48% stock market drop, the first OPEC embargo, and the resignations of Spiro Agnew and Richard Nixon. America was spinning out of control in 1973-74--an echo heard today. The 1982-83 recession had the virtue of being somewhat planned, the result of Fed Chairman Paul Volcker’s successful attempt to kill inflation. The 1990-91 recession in America lasted 8 months and saw unemployment go to 7.8%. That’s the recession we should have had in 2007-09. The causes of 1990-91 and 2007-09 were similar: Real estate collapse, stock market turbulence, financial engineering turkeys come home to roost, loan failures, taxes going up, a Middle Eastern war, a spike in oil prices and everybody de-leveraging at once. The early '90s slump could have easily started in 1987, after Black Monday’s worldwide drop in stocks on Oct. 22. For the month, stocks fell 46% in Hong Kong, 41% in Australia, 26% in the U.K. and 23% in the U.S. This might have set off a panic lasting many weeks, but it didn’t. The 1987 panic was confined to a few days. Here’s one possible (and admittedly shallow) explanation: No cable business networks! Here’s a better explanation: After Black Monday, President Ronald Reagan did not get on television and tell the American people not to panic, as George W. Bush foolishly did in September 2008. Reagan was a child of the Great Depression, after all. He had seen worse. Sweating on TV wasn’t his style, anyway. The 1990-91 recession caught a lucky break in timing. It happened when Americans had more faith in both markets and institutions. Ronald Reagan retired in 1989 with 56% approval ratings; George W. Bush left office 20 points lower. President Obama has suffered the worst poll drop of any first-year president; Congress is headed for the single digits. CEOs of banks and businesses, too, are held in lower esteem than at any time since the 1970s. So why was the American recession of 1990-91 merely an average recession while the 2007- 2009 slump was severe and possibly a prelude to a double dip. The answer is, public policy was smarter in the late 1980s and early 1990s than now. We were led by better people, many of them children of the Depression or veterans of World War II or people who had exhibited steady hands in the Cold War. There was no advisor to a U.S. president with giant nanny state ambitions saying, “you never want a serious crisis to go to waste.” Most of all, the U.S. government did not add to the uncertainties that paralyze investment and consumption during any recession. The waning days of George W. Bush and the first 14 months of Barack Obama have done little else but pile on the uncertainties. The third of the U.S. economy that is health care and energy have no idea what new regulations and taxes await. This confusion spills over into the rest of the economy, especially smaller businesses

298 that can least afford to pay higher taxes, higher wages, higher gas prices, pricey dinners with lobbyists, and so on. President Obama says he is a “fierce, free-market advocate” and “fundamentally business friendly,” but does anyone think he is serious? While it’s not fair to call Obama a socialist, it is fair to suggest he believes in private enterprise that is subordinate to government. The late economist Jude Wanniski used to say that all economic growth is the result of risk taking. That explains the difference between the 1990-91 recession and the Great Recession from which we are emerging. Rules affect risk taking. Right now, the rules ... from health and environmental regulation to taxes to contract law ... are uncertain. The government is like a referee who says he wants a good game but also wants to jigger the rulebook and manage the outcome. http://blogs.forbes.com/digitalrules/2010/03/great-recession-did-not-have-to-be-great/

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Op-ed

How Best to Boost US Exports by C. Fred Bergsten, Peterson Institute for International Economics Op-ed in the Washington Post February 3, 2010 © Washington Post

President Obama has smartly suggested that a new export strategy could support 2 million very good American jobs, more than created by his stimulus initiative. The United States already sells about $1.5 trillion worth of goods and services annually to the rest of the world, which creates about 10 million high-paying jobs. Every $1 billion of additional exports will produce about 7,000 very good jobs. Robust export expansion would also reduce our large trade deficits and resultant need to borrow abroad to finance them. Last week the president suggested an ambitious but realistic goal of doubling exports over the next five years. An effective US export strategy must focus on four variables: the exchange rate of the dollar, trade agreements, our own export controls, and tax policy. An effective US export strategy must focus on four variables: the exchange rate of the dollar, trade agreements, our own export controls, and tax policy. First, the exchange rate. This is the most important factor in determining US export competitiveness. Every increase of 1 percent in the dollar, averaged against other major currencies, reduces our exports by about $20 billion annually and destroys about 150,000 jobs. The recurrent overvaluations of the past 30 years, when the dollar became overpriced by 30 to 40 percent, contributed significantly to the decline in manufacturing jobs and was the major cause of the huge current account deficits of most of that period. The policy goal should be a competitive exchange rate that produces a sustainable trade balance, rather than a "strong dollar." This would help both sides of the trade account, strengthening the ability of US firms and workers to compete with imports as well as to export. Fortunately, the decline of the dollar since 2002 has virtually restored equilibrium in its value against most other industrial countries' currencies. We do not want an undervalued rate, but it will be essential to avoid any renewed general rise of the dollar. The remaining large misalignment is the undervaluation of at least 25 percent of China's renminbi and the currencies of several important economies surrounding it (Hong Kong, Malaysia, Singapore, Taiwan). Correction of all the Asian undervaluations would cut the global US deficit by about $100 billion and generate at least 700,000 jobs. If China continues

300 to block any rise of the renminbi, the administration should label it a currency manipulator and escalate pressure, including by taking China to the World Trade Organization. Second, trade agreements. Such agreements increase US imports, but virtually all of them substantially favor the United States in job terms because the partner countries maintain much higher trade barriers than we do. The most obvious cases are the pending free trade agreements with Colombia and Panama, whose sales to the United States are already virtually free of duties but whose own tariffs limit our sales to them. Implementation of the Colombia agreement and the pending pact with Korea would save about 300,000 US jobs, one recent study concluded. The administration should propose that Congress promptly pass all three agreements as part of its new jobs program. More broadly, major countries are busily signing trade agreements that exclude the United States. East Asia's large and rapidly growing countries are creating a regional bloc that will discriminate against our exports and will increasingly force US companies to source their Asian sales from their Asian plants rather than from factories here. The European Union is working out preferential deals with Asian powerhouses, including India and South Korea. Obama has entered into negotiations for a Trans-Pacific Partnership with seven Asia Pacific nations, a group that could shortly expand to include a critical mass of countries in that region and eventually evolve into the Free Trade Area of the Asia Pacific that President George W. Bush proposed in 2006. The administration should aim to conclude these talks when the United States hosts the annual summit of the Asia-Pacific Economic Cooperation forum in 2011. Third, address the disincentives to US exports embodied in our own regulations. Export controls maintained for alleged national security and foreign policy purposes were choking off $25 billion to $40 billion of annual US sales in the early 1990s and might be more substantial today. These restrictions are under review and, consistent with legitimate security concerns, their substantial liberalization should be part of Obama's initiative. Fourth, tax policy. At a minimum, the administration should abandon its plan to increase taxes on the overseas activities of US firms because their foreign investments clearly increase US exports. Several modest tax reforms could enhance our international competitiveness, including to attract direct investment here by foreign companies that would then access many of their global markets from the United States and create jobs here. The administration and Congress must avoid hurting US competitiveness when they inevitably move to raise tax revenue substantially over the next few years to help curb the budget deficit. Increases in corporate income tax rates would jeopardize exports by raising US production costs. By contrast, a value-added tax or national retail sales tax, or better yet a gasoline or carbon tax, could be fully rebated at the border on exports (and imposed at the border on imports) and thus avoid such harm. Positive export and job expansion would be fostered by replacing some or all of our current income tax system with these alternative devices.

RELATED LINKS Book: Long-Term International Economic Position of the United States April 2009 Working Paper 09-2: Policy Liberalization and US Merchandise Trade Growth, 1980–2006 May 2009 Policy Brief 09-2: Buy American: Bad for Jobs, Worse for Reputation February 2009

301 Paper: Report to the President-Elect and the 111th Congress on A New Trade Policy for the United States December 17, 2008 Policy Brief 08-5: World Trade at Risk May 2008 Book: American Trade Politics, 4th Edition June 2005 Op-ed: The Payoff from Globalization June 7, 2005 Article: A Renaissance for United States Trade Policy? November-December 2002 Speech: US Trade Policy in 2005 February 15, 2005 Policy Brief 03-8: More Pain, More Gain: Politics and Economics of Eliminating Tariffs June 2003 Op-ed: A Competitive Approach to Free Trade December 4, 2002 Op-ed: When the Dollar Bill Comes Due April 27, 2005 Policy Brief 01-2: A Prescription to Relieve Worker Anxiety March 2001 http://www.piie.com/publications/opeds/oped.cfm?ResearchID=1481

302 Felix Salmon A complex alchemy Did Rubin really say that? MAR 3, 2010 20:04 EST technocrats This Huffpo article has no byline, and the quote is mostly an indirect one, but if Bob Rubin said anything like this he deserves all the pillorying that he’s getting, and more: Much of the blame for the current crisis falls on the shoulders of the fiscal policy decisions of the Bush administration, Rubin said, under which “we lost a decade to some extent.” Rubin, here, is conflating three different issues to make himself look good. It’s true that the Bush administration made bad decisions from a fiscal-policy perspective, cutting taxes massively just as it was about to spend trillions on going to war. And it’s also true that the Bush decade was a lost one. But it’s simply not true that the Bush administration can or should shoulder the blame for the crisis. Frankly, Rubin himself is much more blameworthy in that regard than Bush or any of his appointees. There’s a lot of blame to go around when it comes to this crisis, of course. But let’s see who deserves huge chunks of it: • Traders at investment banks, who levered up and started making so much money that they ended up ousting the investment bankers who had historically run them. • Arbitrageurs who made enormous sums of money by making leveraged bets that something with a 95% chance of happening was, indeed, going to happen. • Senior management at investment banks, who urged their traders to take on ever more risk and leverage. • Senior US politicians who urged the deregulation of the derivatives industry over the objections of, among others, Brooksley Born. • Senior US politicians who were responsible for dismantling Glass-Steagal. • Senior US politicians who ran US fiscal policy for the benefit of Wall Street, while asking for nothing but cheap debt in return. • Bankers-turned-politicians-turned-banker s who institutionalized the revolving door between Wall Street and Washington, making it clear that if you did the banking industry’s bidding during your tenure in DC, you’d be rewarded on the other side with a highly remunerative job. • Senior executives at big commercial banks who had no idea what risks they were running. • Senior executives at big commercial banks who urged their fixed-income departments to take on ever-increasing amounts of risk. • Board members at big commercial banks who failed to implement any kind of succession strategy should their CEO suddenly have to leave.

303 • Grandees who bullied lesser mortals into doing what they wanted just because everybody assumed they knew what they were talking about and because they were paid eight-figure salaries to just sit around and be grand. • People so blind to their own weaknesses that even after the crisis happened, they refused to admit any responsibility for it at all. You’re probably getting the picture by now: Robert Rubin, Goldman Sachs arbitrageur and chairman, US treasury secretary, and Citigroup grandee, was the Forrest Gump of this crisis, turning up in all the key places at all the key times. The fact that he’s still trying to deflect blame off himself and onto the hapless George W Bush is simply pathetic. There’s more than enough bad stuff to pin on Bush that he really shouldn’t blame the crisis on him as well. Especially not when he’s so personally culpable for the crisis. Indeed, there’s probably no one individual, with the possible exception of Alan Greenspan, who deserves more blame for this crisis than Rubin does. Let’s not lose sight of that. Update: The byline was originally left off by mistake: credit for the HuffPo article goes to Grace Kiser. http://blogs.reuters.com/felix-salmon/2010/03/04/did-rubin-really-say-that/

304 - The Big Picture - http://www.ritholtz.com/blog - Do-Nothing Fed Regulator = Huge Bank Victory Posted By Barry Ritholtz On March 3, 2010 @ 10:25 pm In Bailouts, Regulation | 23 Comments

“We have the track record of them failing to take action when they should have and potentially could have averted this foreclosure crisis.” -John Taylor, CEO of National Community Reinvestment Coalition

I cannot figure out the thought process behind putting a consumer protection agency into the hands of the Fed. This is the same regulatory body that gave a total pass to the non-bank lenders at the heart of the sub-prime, APR, and exotic loan issues. Bloomberg sums it up perfectly with their headline: Consumer Agency Within Fed Seen as Victory for Banks. [1] Here’s your excerpt:

“If the Fed doesn’t start to use that authority to roll out the rules, then we’ll give it to somebody who will,” Frank said. The Fed drafted tougher mortgage lending rules in 2007 and completed them in 2008. The rules prevented mortgages for borrowers with no documented income, required lenders to write loans borrowers could repay and made escrow accounts mandatory for high-cost mortgages. The Fed also toughened restrictions on prepayment penalties. Separately, the Fed has forced credit-card companies to improve disclosure and has increased its scrutiny of possible discrimination in lending. The central bank referred 17 cases to the Justice Department in the three-year period ending 2009, up from nine the prior three years. The Fed’s actions came too late, consumer advocates say.”

>Source: Consumer Agency Within Fed Seen as Victory for Banks [1] Craig Torres and Yalman Onaran Bloomberg, March 3 2010 http://www.bloomberg.com/apps/news?pid=20601109&sid=ax0g_Lb2rqqo&

Article printed from The Big Picture: http://www.ritholtz.com/blog URL to article: http://www.ritholtz.com/blog/2010/03/do-nothing-fed-regulator-huge-bank-victory/ URLs in this post: [1] Consumer Agency Within Fed Seen as Victory for Banks.: http://www.bloomberg.com/apps/news?pid=20601109&sid=ax0g_Lb2rqqo&

305 Read it here first: St. Louis Fed Tracks Nascent Expansion Posted By Invictus On March 3, 2010 @ 2:15 pm In Cycles, Economy, Employment, Research | 24 Comments The St. Louis Fed has made it official, at least through their lens. The recession ended in June 2009. As you read here first in January [1], late last year the St. Louis Fed discontinued the use of recession shading (thereby signalling its end) in its graphs as of mid-2009. They have now retooled their Tracking the Recession page to Tracking the Economy [2], and the default graphs are indexed to 100 in July 2009 (the economy’s apparent trough). The accompanying note states (emphasis mine):

The horizontal axis reports the months before and after the most recent business cycle turning point. In the recession chart of Figure 1, corresponds to December 2007 while in the expansion chart month zero corresponds to July 2009.

We’ll eventually see if the NBER agrees with their assessment. There seems to be widespread consensus that the recession ended in mid-2009 (even perma- bear David Rosenberg has acknowledged as much in recent notes), and perhaps, on a technical basis, it did. However, with employment and income gains virtually nonexistant, it’s certainly a tough sell to the American public.

Article printed from The Big Picture: http://www.ritholtz.com/blog URL to article: http://www.ritholtz.com/blog/2010/03/st-louis-fed-now-tracks- nascent-expansion/

306

Consumer Agency Within Fed Seen as Victory for Banks (Update1) By Craig Torres and Yalman Onaran

March 3 (Bloomberg) -- For consumer advocates, housing a new agency to protect Americans from financial-product abuse within the Federal Reserve would be a defeat after lobbying for an independent body. For banks, it would represent a victory. Barney Frank, Chairman of the House Financial Services Committee, called a Senate plan to house the proposed Consumer Financial Protection Agency at the Fed “a joke.” Shielding consumers from harmful financial products is “the most conspicuous failure by the Fed,” Frank said in an interview yesterday. Banks say placing the agency with the Fed alleviates their concern that an independent entity would ignore the health of the financial system. Consumer advocates say it’s a mistake because the Fed didn’t succeed in curbing abuses during the subprime lending boom that contributed to the worst financial crisis since the Great Depression. “We have all sorts of individual agencies that protect Americans, and none of them is subservient to the regulator that is in charge of looking out for the industry,” said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. “This agency has to be independent so that it can fix the problems the banking regulators failed to fix.” The Obama administration’s proposal for a consumer protection agency is part of the biggest overhaul of financial regulation since the 1930s. Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat. Joining in Criticism Frank, who oversaw legislation passed by the House in December that would create an independent agency, said the chamber wouldn’t accept the proposed deal. Senators joined in the criticism yesterday. Jeff Merkley of Oregon said the Fed had an “abysmal” record on consumer protection. Richard Shelby, the top Republican on the Banking Committee, said the entity shouldn’t be autonomous within the Fed. “If you have something at the Federal Reserve, the Board of Governors ought to have the control,” he said.

307 Fed spokeswoman Susan Stawick declined to comment yesterday. The Fed has an “innate conflict of interest” in trying to protect consumers while fulfilling its mission of safeguarding the rest of the financial system, billionaire George Soros said at a conference in New York today. “When Barney Frank called it a joke, I think he’s right,” Soros said. Banking Knowledge Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products. “Regulation of the products should be connected to the regulation of the bank,” said Scott Talbott, senior vice president of government relations for the Financial Services Roundtable, which represents the largest financial institutions. The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts. The American Bankers Association, the largest trade group representing banks, organized hundreds of meetings with its members and Congressmen and spearheaded a campaign that encouraged almost 300,000 letters to be sent to Capitol Hill, all in opposition to the CFPA. ABA spokesman John Hall said the organization wouldn’t comment on the Fed idea until the proposal became official. Subprime Mortgages Consumer advocates say the Fed didn’t use its authority to put in place stronger protections for home buyers as the subprime mortgage market began to expand earlier this decade. The Fed has the broadest authority of any regulator to write rules on lending practices and disclosure. The Fed’s specific enforcement authority is limited to 800 state member banks. It wields much more clout as the supervisor of bank holding companies, such as Bank of America Corp., some of which had subprime mortgage lending subsidiaries. Some $600 billion in subprime mortgages were originated in 2006, up from $310 billion in 2003, according to Inside Mortgage Finance, a trade publication. The Fed began to hold hearings around the country in 2006, and consumer advocates provided details of abuse, transcripts from the meetings show. ‘Yelling at Them’ “We were yelling at them in 2001 and 2002” to use their authority, says Michael Calhoun, president of the Center for Responsible Lending in Durham, North Carolina, and the current chairman of the Fed Board’s Consumer Advisory Council. “It wasn’t like people didn’t know this stuff was going on.” Edward Gramlich, a Fed Governor from 1997 to 2005, proposed that the Fed use its bank holding company authority to examine subprime lending subsidiaries. The proposal was opposed by then- Chairman Alan Greenspan, he said, and never went to the Board of Governors. Gramlich died in September 2007. Greenspan in the past has declined to comment. Among the subprime casualties on Wall Street: Bear Stearns Cos., acquired by JPMorgan Chase & Co. with help from the Fed, Merrill Lynch & Co., taken over by Bank of America, and Lehman Brothers Holdings Inc., which went bankrupt.

308 Fed Chairman Ben S. Bernanke began to step up restrictions on subprime lending only after Congress threatened to strip the Fed of its authority. In a June 2007 hearing, Frank told then- governor Randall Kroszner: “Use it or lose it.” Using Authority “If the Fed doesn’t start to use that authority to roll out the rules, then we’ll give it to somebody who will,” Frank said. The Fed drafted tougher mortgage lending rules in 2007 and completed them in 2008. The rules prevented mortgages for borrowers with no documented income, required lenders to write loans borrowers could repay and made escrow accounts mandatory for high-cost mortgages. The Fed also toughened restrictions on prepayment penalties. Separately, the Fed has forced credit-card companies to improve disclosure and has increased its scrutiny of possible discrimination in lending. The central bank referred 17 cases to the Justice Department in the three-year period ending 2009, up from nine the prior three years. The Fed’s actions came too late, consumer advocates say. Subprime mortgage delinquencies rose to 25 percent of the total at the end of 2009, from 10 percent at the end of 2004, according to Mortgage Bankers Association data. Total home loans in foreclosure rose to 4.6 percent from 1.2 percent. Track Record “We have the track record of them failing to take action when they should have and potentially could have averted this foreclosure crisis,” said John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington, a group of 600 organizations promoting fair lending. The action the Fed does take against banks is often kept secret. “When examiners identify banks with weak and ineffective compliance programs, they document the weaknesses in the examination report and take appropriate supervisory action,” Fed governor Elizabeth Duke, who served as chairman of the American Bankers Association from 2004 to 2005, testified before the House Financial Services Committee last March. Because “most banks voluntarily address any violations and weaknesses,” she said, “we find public formal actions are not typically necessary.” http://www.bloomberg.com/apps/news?pid=20601109&sid=ax0g_Lb2rqqo&#

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March 3, 2010, 7:03 p.m. EST Detailed 'Volcker rule' targets all financial institutions White House sends Congress more on former Fed chief's proposal By Ronald D. Orol, MarketWatch WASHINGTON (MarketWatch) -- The Obama administration is recommending new capital and liquidity requirements for major financial firms engaged in proprietary trading, not just those institutions that own commercial banks, the White House said Wednesday. The new requirements are part of more details the White House sent to Capitol Hill Wednesday about a proposal it introduced in January -- dubbed the "Volcker rule" after former Federal Reserve Chairman Paul Volcker, who chairs Obama's economic-advisory panel and was a key backer of the measures. According to the detailed proposal, institutions that engage in proprietary trading for their own account of stocks, bonds, options, commodities or derivatives would be subject to additional capital and leverage limits, and also need to disclose more information about their activities to the public. "These firms will be under tough, consolidated supervision, more stringent capital and liquidity requirements, and be required to provide more information to the market about their risks," the White House said in a summary of the proposal. The proposed Volcker rule seeks to limit how big a firm can grow through acquisitions, along with the trading activities of the nation's largest financial institutions. It would prohibit institutions that own commercial banks from owning or sponsoring hedge funds and buyout shops. It also prohibits financial firms that own commercial banks from engaging in proprietary trading for their own accounts. Institutions that own commercial banks could still engage in proprietary trading for their customers. Some large financial firms such as Goldman Sachs Group Inc. (NYSE:GS) may have considered divesting their commercial-banking units, if Congress had followed the proposal as it originally was introduced in January. That proposal would have required some big banks to divest proprietary-trading banking units if they wanted to continue to operate commercial banks. Based on this expanded proposal, financial institutions such as Goldman Sachs would be subject to additional capital restrictions with or without commercial-banking units. The Treasury proposal defines proprietary trading as purchasing, selling, or acquiring and disposing of stocks, bonds, options, commodities, derivatives or other financial instruments for the institution's own trading book, and not on behalf of a customer. The White House also proposes creating a nationwide cap on certain risky investments that would be based, in part, on a 10% cap on nationwide deposits that was put in place in 1994. Congress prohibits banks from acquiring institutions that would result in the acquiring bank holding more than 10% of U.S. bank deposits.

310 The new proposal seeks to prohibit a financial firm from acquiring another bank if the combined corporation's total assets exceed 10% of the total liabilities of all financial companies at the end of the prior year. Based on this expanded proposal, firms such as Goldman Sachs would be subject to additional capital restrictions with or without commercial-banking units. Senate Banking Committee Chairman Christopher Dodd, D-Conn., received the additional details of the proposal Wednesday and is considering them, according to a Senate Banking Committee spokeswoman. The Senate Banking Committee is considering whether to add the elements of the proposal to broad bank regulation under consideration on Capitol Hill. Most Democrats and Republican senators on the panel have generally been averse about including the measure in broad bank- reform legislation they have been squabbling over in recent months. Instead, a number of senators would prefer to make sure bank regulators have the authority to write rules based on the principles of the proposal, if they believe regulations are warranted. However, others argue that bank regulators already had the authority to write rules based on the Volcker proposal. Most Senate Banking Committee members say that they would like to learn more about it -- perhaps with additional hearings -- before considering statutes prohibiting the practice. "The Volcker rule may be something as a banking committee we want to dig deeper into and see if it makes sense," said Sen. Mike Johanns, R-Neb. "It may have some merit, but an absolute prohibition is something we have to be very careful about." http://www.marketwatch.com/story/volcker-rule-targets-all-financial-institutions-2010- 03-03

311 http://www.telegraph.co.uk/ We have to learn from Japan's lost years The turbulence in the currency markets is a welcome warning sign By Edmund Conway Published: 6:31AM GMT 04 Mar 2010

Tokyo's stock market is worth barely a quarter of the value at its peak in 1989 Photo: Reuters Here in Japan, one of the first things everyone wants to discuss, once they find out that you're from the UK, is the prospect of a hung parliament. The second is the collapse of the pound. The third is the disaster in Greece. They ask their questions in a sympathetic tone – not to mock or crow, but to make a simple point: we know where you're heading, because we've been there ourselves. When Japan's crisis started just over 20 years ago, the general assumption was that prices would fall for a few months. A year on, and they were still going down. Everyone was convinced that at some point things would turn around, but they never did. Today, Tokyo's stock market is worth barely a quarter of the value at its peak in 1989. Related Articles • Nile Gardiner: Don’t cry for Argentina, Hillary • Adam Posen: Japan expert is new man on the MPC • Rates may sink to lowest since 1694 • Mortgages and bank accounts to be given health-style warnings • UK's debt will quadruple unless drastic steps are taken, says S&P • Is this the death of the dollar? There are some key differences. In Japan, the pain and drama were spread out over months and years, leaving investors in a strange, Zen-like mood of disappointment. In the UK, the shocks have come hard and fast, the latest being this week's drama over the possible election results and a terrifying fall in the pound. But Britain's problems still resemble Japan's in so many ways: a fiscal crisis, a rapidly ageing population, a government unable to make decisive reforms to its broken financial sector.

312 Japan, in other words, has become a test case for how our economy might go. The same British and American economists who used to fly in to lecture the Japanese on how to run their economy now come to learn what is in store for their own nations. I came here on a similar pilgrimage – only to find that everyone is keener to talk about the crisis back home. This is hardly a surprise, for events have certainly been dramatic. The currency and debt markets have had such a jittery week that it has looked as if Britain could topple into the abyss it has skirted so close to throughout this crisis. By itself, the pound's fall on Monday to below $1.50 was unremarkable – it has been far lower before, and the speed of the fall, although rapid, fulfils the textbook definition of a currency crisis. But such comparisons to previous currency movements are misleading. The fall in the pound in the past couple of years was a blessing rather than a disaster – to the extent that a senior official in the Ministry of Finance here actually congratulated me when I told him how far the pound had fallen. It reflected the way that investors were effectively re- pricing the UK. We can think of the level of a currency as a measure of how attractive markets think that particular country is: the general assumption over the past decade was that Britain was in great health, so the markets deemed that the pound should be strong; when that illusion was shattered, the markets responded by lowering the value of the pound by a quarter. There is a vast difference, however, between this kind of devaluation – an even-headed reassessment by international markets of your competitiveness, which has already boosted Britain's fortunes by fattening margins and supporting exports – and what happened this week. The pound's lurch downwards reflected not economic considerations, but a chill fear that government and policymakers have simply lost control – or have no idea. As we near election day, expect further turbulence in the currency markets. One thing you can be fairly sure of is that there will not be a full-blown crisis, with the Government finding it impossible to sell any of its debt, before the dust has settled after polling day. Instead, the markets will deliver their verdict on the new government once it becomes clear whether its budget plans will actually get a handle on the deficit. Contrary to some recent reporting, a hung parliament would not rule out such an outcome. Clearly, the stronger and more decisive the government, the better. But one shouldn't presume that a coalition government could not cut the deficit. Indeed, history suggests that governments of national purpose are often best suited to doing just that. The only catch is that they usually only do so after there has been a genuine crisis to push them into it. So, as we have known for many months, it is the markets rather than the electorate that will ultimately have the greater say over Britain's fate. And if you resent this idea, it's worth remembering what happened in Japan. Due to a peculiarity of the savings system, the government was able to go on borrowing and spending for two decades, because its debt was bought almost entirely by its own citizens. The result is that it has been able to stave off the pain of budget cuts – but at the cost of two lost decades, and the rising likelihood that Japan will face a crisis of debt and demography that is truly inescapable. Britain, whose bond prices are buffeted about by investors from around the world, cannot do this. The pound's behaviour this week was a reminder that the time for borrowing is over, and that the time to pay our debts has come. Instead of panicking or moaning, we should be thankful we have been given due warning. http://www.telegraph.co.uk/finance/comment/edmundconway/7365421/We-have- to-learn-from-Japans-lost-years.html

313

Greece Sells Bonds as Deficit Cuts Fuel Protest (Update1) By Caroline Hyde and Tony Czuczka

March 4 (Bloomberg) -- Greece began selling 5 billion euros ($6.8 billion) of 10-year bonds after Prime Minister George Papandreou’s promises to reduce Europe’s largest budget deficit by cutting wages and spending prompted protesters to occupy the finance ministry. The government is offering a premium to sell the new notes, pricing them at a spread of 300 basis points more than the mid- swap rate, or a yield of 6.39 percent. That compares with the 6.1 percent interest on Greece’s existing benchmark issue due July 2019, according to data compiled by Bloomberg. The bond sale marks a test of investor response to Papandreou’s austerity measures. German Chancellor Angela Merkel snubbed his bid for assistance after he announced his third package of deficit cuts this year, saying a meeting in Berlin tomorrow won’t be “about aid commitments.” “Sentiment toward Greece has improved after the budget announcements and they’re taking advantage of that, while the pricing is pretty much in line with what we expected,” said Michiel De Bruin, who helps manage $28 billion of assets as head of euro government bonds at F&C Investments in Amsterdam, and expects to invest in the deal. The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, rose 4 basis points to 2.90 percentage points at 11:26 a.m. in London after yesterday’s 19 basis point drop. German Opposition While Papandreou is risking a backlash at home to meet European Union demands for more cuts, Merkel is facing domestic opposition to tapping taxpayers to extend a financial lifeline to Greece. “There would be no understanding in Germany for bailing out Greece,” Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin, said by phone. “It’s a bit of catch-22 situation: if you give in to Greece and you put 5 billion or perhaps even 10 billion into some kind of rescue package or into some guarantees, then the German government would look irresponsible. However, if it doesn’t, then European Union leaders might put a lot of pressure on Merkel and say, look, we have to bail out Greece.” The EU is devising a plan to grant Greece about 25 billion euros in emergency aid should the need arise, German lawmakers have said, enough to cover the maturing debt. One option could involve using state-owned lenders such as Germany’s KfW Group to buy its bonds.

314 Athens Protests In Athens, about 200 members of the PAME union, aligned with the Communist Party, were reported at the finance ministry and protesters also took over the nearby General Accounting Office, according to a police spokeswoman. Another group blocked a central road, snarling traffic. The demonstrations followed the Cabinet’s backing yesterday of 4.8 billion euros ($6.6 billion) of cuts and Papandreou’s statement that Greece was prepared to turn to the International Monetary Fund as a last resort. “We have fulfilled to the utmost all that we must from our side; now it’s Europe’s turn,” Papandreou told his ministers yesterday, according to an e-mailed transcript. “It is a historic moment for the European Union.” Papandreou’s Cabinet endorsed a package of revenue-raising and budget-cutting steps, including higher fuel, tobacco and sales taxes and a cut of 30 percent in three bonus payments to civil servants on top of a wage and benefits freeze. ‘Coordinated Action’ For now, European governments have not stepped up since a statement at a Feb. 11 EU summit promised “determined and coordinated action” to support Greece. “There’s no need for such a thing at this point in time,” French Finance Minister Christine Lagarde said late yesterday on Sky television. “If it was required, the partners in the club would be available to restore stability.” After meeting Merkel in Berlin, the Greek leader is due in Paris two days later for talks with French President Nicolas Sarkozy. Merkel’s comments were the clearest signal yet that Germany isn’t convinced. “I expressly want to say that Friday isn’t about aid commitments, but about good relations between Germany and Greece,” Merkel said yesterday in an interview with N-TV, according to a transcript provided by her office. Greece’s steps are “an important signal” toward restoring confidence in the euro. Papandreou Package Greece has pledged to trim a deficit of 12.7 percent of gross domestic product to 8.7 percent this year. Concern that Greece won’t be able to tame the shortfall saw the euro lose almost 5 percent against the dollar this year. With today’s sale, the government wants to avoid a repeat of its sale of five-year notes in January, when the debt tumbled on the first day of trading. Greece faces more than 20 billion euros in debt redemptions in April and May. Greece has blamed market speculators for fueling the decline in its securities. European officials have warned hedge funds that they shouldn’t try to profit from the woes of the region’s nations. U.S. authorities have told some hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests. Banks and regulators across Europe were summoned by the European Commission to discuss regulation of the market for sovereign credit-default swaps in the wake of the Greek debt crisis. To contact the reporters on this story: Caroline Hyde in London at [email protected]; Tony Czuczka in Berlin at [email protected] Last Updated: March 4, 2010 06:42 EST http://www.bloomberg.com/apps/news?pid=20601087&sid=a78cuOabXEcU&pos=2

315

Greece's fiscal crisis Now comes the pain Mar 4th 2010 | ATHENS From The Economist print edition Greece’s new austerity measures may prove to be enough—if they are fully implemented

GEORGE PAPACONSTANTINOU, the overworked Greek finance minister, likens the effort to steer Greece away from economic disaster to “changing the course of the Titanic.” Until this week it looked as if the country was headed for an iceberg labelled default. Two austerity packages had failed to convince Greece’s European partners—or the financial markets—that measures to cut the budget deficit this year from 12.7% of GDP to 8.7% would work. Critics in Brussels said that Greece’s Socialist government was relying too heavily on pledges to cut tax evasion and soak the rich, rather than slash spending, especially on public-sector pay and pensions. The markets pushed spreads on Greek bonds over their German equivalents to record highs. Greece’s ten-year bonds were offering mouth-watering yields of some 6%, twice the German level. On March 3rd, however, the mood changed. George Papandreou, the prime minister, at last threw his full weight behind austerity. His government announced some severe measures: a rise in the top rate of value-added tax, from 19% to 21%, more increases in excise tax on fuel, tobacco and alcohol, a freeze on pensions and an unprecedented 30% cut in civil servants’ Christmas, Easter and summer bonuses. This last is equivalent to a cut of one month’s pay for Greece’s 700,000-strong public-sector workforce. Mr Papandreou had shrugged off earlier warnings from Brussels (and Berlin) that more had to be done. He changed tack after blunt remarks by Olli Rehn, the new European economics commissioner who visited Athens this week, that extra measures were needed to meet this year’s deficit target. Mr Papandreou claimed that Greece had now taken enough “painful but necessary measures” to qualify for support from its European partners, but without specifying what form that might take. Greece desperately needs €20 billion ($27 billion) in the next two months to roll over expiring debt. If it can get it, more than half this year’s borrowing requirement of €53 billion will have been covered and the markets’ pressure will ease, say bankers. One way forward might be to persuade other euro-area countries to buy Greek bonds, perhaps by providing guarantees for

316 euro-area investors. “We want to be able to borrow at the same rates as other euro-zone countries,” Mr Papandreou said, perhaps optimistically given Greece’s record of huge budget deficits and deceitful accounting. On the other hand, as he has also pointed out, Greece cannot afford to go on borrowing indefinitely at 350 basis points over Germany. The gains from austerity measures could be swallowed up by such a high debt premium. Imminent visits by Mr Papandreou to Berlin, Paris and Washington, DC, could help to resolve Greece’s debt problem. The German chancellor, Angela Merkel, has considered the possibility of Germany providing bilateral help to Greece, though she insists she is not yet ready to talk about aid with Mr Papandreou. Germans still fret about moral hazard: a bail-out would mean that Greece gets away with years of irresponsible fiscal policy and could set a bad precedent for other euro delinquents. The German constitutional court ruled two decades ago that the Maastricht treaty was acceptable only if its no bail-out provisions were respected—so any bail-out would have to be disguised to avoid legal challenges. Yet German banks are on the hook for so much Greek (and other Mediterranean) debt that some kind of taxpayer support may be unavoidable. France’s president, Nicolas Sarkozy, seems readier to help—though Greece may come under pressure to buy more expensive French frigates for its navy. This is not a deal that Mr Papandreou likes, since Recep Tayyip Erdogan, Turkey’s prime minister, has just proposed that the two formerly hostile neighbours should make a joint agreement to cut defence spending. To strengthen his hand with the rest of the euro zone, Mr Papandreou is threatening to turn to the IMF for a standby loan. The conditions are unlikely to be much harsher than the latest austerity measures, say Greek officials. But this could also be too optimistic. The IMF would probably tell Greece to sack thousands of public-sector workers and cut pensions sharply. Even so, as one Greek official notes, “at least with the fund you can stop worrying about where to get the money to finance the debt.” Greek trade unions are predictably furious over the bonus cuts, which come on top of a 4% pay cut they have already swallowed. Strikes will spread. Some strikers are unpopular, for example the taxi-drivers who have been protesting over being obliged to give passengers receipts. There is more sympathy for pensioners, who face a double blow from a freeze in pensions and the impact of tax rises. Militant pensioners unexpectedly broke through a police cordon blocking the road to Mr Papandreou’s office as he was announcing the new measures. They will soon be on the march again, says their union. “You cannot make ends meet on 400 euros a month,” declared one retired plumber. So Mr Papandreou’s approval ratings have held up, with more than 60% of Greeks accepting that tougher measures are needed. Fears loom over the timetable set in Brussels for implementing the new plans. Greece will shortly complete an overhaul of its tax legislation and come up with proposals to reform state pensions, which now eat up over 11% of GDP. A shortage of competent bureaucrats makes it harder to ensure that any new targets are met. If Greece is to stay on course, Mr Papaconstantinou and his team will have to keep putting in long hours. http://www.economist.com/opinion/displayStory.cfm?story_id=15603267&source=features_box_main

317 Swap Vigilantes Take Heat for Euro Shortcomings: Mark Gilbert Commentary by Mark Gilbert March 4 (Bloomberg) -- Make way, bond vigilantes. A new posse is in town, using the credit- default swaps market to punish indebted governments for their deficit-swelling subterfuges. And, as usual, the first reaction of the guilty is to blame speculators, rather than their own shortcomings. The European Commission is calling banks and regulators to a meeting this week to discuss sovereign-default swaps. The derivatives offer investors protection against a country failing to pay its debts, or depending where you stand, allow malicious hedge funds to trash a nation’s creditworthiness. U.S. authorities, meantime, have asked hedge funds not to destroy records of trades they make involving the euro, according to a person with knowledge of the requests. The common currency has lost almost 5 percent of its value against the dollar this year as Greece’s economic woes undermined investor confidence in the European monetary union (or malevolent infidels savaged an innocent bystander, depending on your view). This circling of the regulatory wagons is a replay of what we saw in the equity markets in 2008. Then, pesky speculators were blamed for driving down bank stocks, prompting bans on short sellers, who bet that a share price will decline by selling securities they don’t own in anticipation of buying them back later at a lower price. Wrong Reaction Those kneejerk supervisory reactions are wrong. Bank shares were collapsing because balance sheets were full of toxic rubbish. This led financial firms around the world to write down their assets by $1.7 trillion so far. Investors pushed up the cost of buying Greek debt insurance in recent weeks because of genuine concern that the government might default, unable to borrow in capital markets and left to flounder by its peers in the euro area. Now, as then, the wrong response is to strangle the operation of free markets with ill-advised bans and restrictions designed to prevent economic Darwinism from cleansing the gene pool. Banks deserved to watch their share prices plummet in 2008. And Greece has only itself to blame for the collapse in confidence in its creditworthiness that drove its default swaps to a record 428 basis points on Feb. 4, meaning it cost $428,000 a year to insure $10 million of debt for five years. Greece lied and cheated its way into euro membership and has been economical with the truth about its budget deficit ever since. The nation yesterday effectively relinquished control of its fiscal policies to the EU, pledging to save 4.8 billion euros ($6.6 billion) as it tries to get its shortfall down from 12.7 percent of gross domestic product. Motivated Rescuers Greece is hoping a newfound enthusiasm for spending cuts and higher taxes will persuade its neighbors to fund a bailout package lickety-split. Investors may be reluctant to lend the country the 20 billion euros it needs to repay bondholders in April and May. Some euro members know that they might be next in the firing line, having committed similar crimes against the euro’s supposed 3 percent deficit limit. That helps explain the EU’s

318 willingness to countenance a rescue package, as well as its enthusiasm for a curb on sovereign-default swaps. “We’re working on the fundamentals of derivatives, to understand who does what, and in CDS we’re looking at the aspect that relates to states,” Michel Barnier, the European Union’s financial services commissioner, told Bloomberg News this week. Unintended Consequences Be careful what you wish for. International banks that have money at risk to governments -- either because of cross-border trades, involvement in government-bond auction programs or other parts of the financial plumbing that connects global markets -- use sovereign swaps to cover their backs. It is almost impossible to distinguish between the types of hedging that even the most fervent regulator would approve of and the financial betting that some would prefer to outlaw. By trying to prohibit the latter, supervisors might smother the former, and the law of unintended consequences could kick in with force. “A ban on naked sovereign shorts would curtail legitimate hedging, and probably lead to greater government-bond selling,” Citigroup Inc. analysts led by Michael Hampden-Turner in London wrote in a research note published Feb. 2. To a regional regulator given a hammer by scared governments, everything starts to look like a nail. The euro would be better served by its members focusing on enforcing the existing rules of the common-currency club, rather than inventing new ones that may undermine their funding abilities. (Mark Gilbert, author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at [email protected] http://www.bloomberg.com/apps/news?pid=20601039&sid=azKm32HtJkqk#

319 Updated: New York, Mar 04 08:33 London, Mar 04 13:33 Tokyo, Mar 04 22:33

JPMorgan Tops Goldman in Investment Banking as Fees Swell 13% By Yalman Onaran

March 4 (Bloomberg) -- As 2009 began, the world’s banks and brokers were in a deep hole. They had recorded some $1 trillion in credit losses and writedowns of their mortgage holdings in the financial crisis of 2007 and 2008, and markets were still reeling. To recapitalize, they issued stock -- a lot of it. More than half of the new shares sold worldwide in the first six months of 2009 were those of banks and brokers. That kept investment bankers busy marketing their own -- and each others’ -- shares, while their clients hunkered down waiting for the storm to pass, Bloomberg Markets reports in its April issue. The sky cleared in the second half, making 2009 a year of recovery. By year’s end, the Standard & Poor’s 500 Index had shot up 65 percent from its March 9 low, which helped trigger a flood of new stock and bond issues and merger activity. Total investment-banking fees for all firms rose 13 percent in 2009, to $59.8 billion from $53.1 billion, still well shy of the record $86.9 billion reached in 2007, according to data compiled by Bloomberg Markets for its sixth annual ranking of the best-paid investment banks. The world’s No. 1 investment bank in 2009 was JPMorgan Chase & Co., which took in $4.97 billion, a 16 percent increase over 2008, when it was also the leader. JPMorgan was also No. 1 in fees from equity and debt sales. Goldman Sachs Group Inc. was No. 2 in total fees and No. 1 in mergers and acquisitions, having advised drugmaker Schering-Plough Corp. on its completed $47 billion sale to Merck & Co., among other transactions. “JPMorgan and Goldman Sachs have the field to themselves because they’ve emerged as the victors, at least in clients’ perceptions,” says Bruce Foerster, president of Miami-based advisory firm South Beach Capital Markets. Stars Are Aligned Executives and bankers expect the recovery to gain momentum in 2010. “All the stars are lined up for a resurgence, but a return of stock market volatility will ruin the party,” says Robert Kindler, global head of mergers advice at Morgan Stanley. Kindler’s anxiety about the possibility of a big market correction is shared by investment-banking heads at Barclays Plc, Credit Suisse Group AG, UBS AG and Goldman.

320 The Dow Jones Industrial Average took an 800-point plunge from Jan. 19 to Feb. 8. It has since recovered more than half of the drop. Kindler says that if the markets stabilize, the value of merger deals could rise as much as 20 percent in 2010. If they don’t, M&A volume could decline from last year. James Amine, Credit Suisse’s co-head of investment banking, says he sees a possible 30 percent jump in the sale of new shares, bonds, syndicated loans and securitizations. Off the Bottom “Are we off the bottom?” asks David Solomon, global co-head of investment banking at Goldman Sachs. “Yes, it seems that way. Are we heading back to the top this year? While we may not yet be, we saw a lot of activity in capital markets and M&A in the second half of 2009, and that momentum is continuing into 2010.” For the biggest banks, 2009 was a year of humility. In the U.S., top executives and millionaire traders were denounced by the Obama administration, Congress and the media for refusing to give up their bonuses. Goldman spent 2009 defending its role in the 2008 bailout of insurance giant American International Group Inc. The Federal Reserve Bank of New York and its former head, Treasury Secretary Timothy F. Geithner, are being called on to answer questions by Neil Barofsky, special inspector general for the Troubled Asset Relief Program, for ordering that Goldman and other banks be paid 100 percent of what they were owed on credit-default swaps they bought from AIG and then concealing the names of the recipients. Morgan Stanley Comeback While their chief executives spent time testifying in Washington, investment bankers were taking advantage of the resurgence in deals. Morgan Stanley, whose investment-banking fees dropped by more than half in 2008 as questions arose about its viability, made a powerful comeback last year, taking in $4.33 billion in total fees, a 43 percent increase, although still nowhere near the $6.36 billion it generated in 2007. No. 6 Credit Suisse climbed two rungs as its fees surged 29 percent. No. 5 Citigroup, the recipient of the largest government bailout, fell in the rankings for a second year; its $3.86 billion in fees was just a 2 percent increase from what it reaped in 2008. JPMorgan’s huge size and deep pockets -- it has $2 trillion in assets -- allowed it to provide companies with M&A advice and equity and debt underwriting and then lend them the money to do the deals. Fewer Merger Deals “Clients will always look to do business with investment banks that they are confident can provide all these services and the capital they need in good times and bad,” says Douglas Braunstein, JPMorgan’s investment-banking chief. Overall, there were fewer merger deals and initial share offerings in 2009 than the year before, and it will be years, bankers predict, before they match the peak of 2007. The drop in M&A and IPOs was offset by a surge in bond and secondary stock sales. Bond markets fared well when corporations shut off from direct bank lending turned to debt issuance. Stock sales jumped as both financial and nonfinancial companies used share sales to recapitalize. The largest banks face other head winds besides skittish markets. Government-enforced pay caps on the biggest earners at commercial and investment banks could accelerate a brain drain to smaller firms that has been under way for more than two years. If the Federal Reserve raises interest rates to ward off inflation, that could crimp economic growth and raise the cost of financing acquisitions and the issuance of new debt.

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Equity vs. M&A The merger market remained in a slump in 2009. For the first time in the six years since Bloomberg began tracking fees in 2004, banks made more money in equity-underwriting deals than they did by arranging acquisitions: $21.7 billion versus $19.3 billion. The year was marked by two stages, says Purna Saggurti, global co-head of corporate and investment banking at Bank of America Merrill Lynch, which ranks No. 4 in the Bloomberg 20, with $4 billion in fees, and No. 5 in merger fees. The first few months were about survival, as credit dried up, share prices languished and bankruptcies surged, he says. With the turnaround of markets in April after the S&P 500 hit a 13-year low of 677 in March, the mood shifted. As the year progressed, corporations, led by financial institutions, were able to recapitalize by selling stock to someone other than the government. Only at the very end of 2009 and the beginning of 2010 did industrial and other companies turn their gaze toward expansion opportunities, Saggurti says. Growth Via Acquisition Given the slow growth in developed economies -- expected to be 2.1 percent this year, according to the International Monetary Fund -- acquisitions will be the chief strategy for companies looking for a way to boost revenue, says Peter J. Solomon of New York-based investment-banking boutique Peter J. Solomon Co. “Companies that have survived the debacle have to figure out what they can do to increase market share, and that’s when acquisitions come into play,” Solomon says. Private-equity firms, a major source of investment bank revenue in the past decade, are no longer the big players in the M&A market. In 2007, private-equity transactions made up 19 percent of all merger activity, according to Bloomberg data. Last year, they accounted for 5 percent. A recovery to 2007 levels might take as long as five years, Morgan Stanley’s Kindler says. Still, there’s a clear revival in the ability of outfits such as Blackstone Group LP and KKR & Co. to buy and sell companies. Downsizing Private Equity “We shouldn’t write off private equity,” Saggurti says. “Maybe we won’t have $40 billion deals, but they’ll still pull off $5 billion to $10 billion deals. They just can’t be as competitive for the big deals.” The overall investment-banking market’s recovery has been fueled by CEOs who now see a future for their businesses and by investors who have regained their appetite for risk, bankers say. JPMorgan’s Braunstein says the renewed confidence will show itself in a spate of new IPOs. Among the largest will be share sales of government-controlled companies in emerging markets, says Raj Dhanda, head of global capital markets at Morgan Stanley. Beijing-based Agricultural Bank of China plans an IPO this year that could raise $29 billion, an official at the China Banking Regulatory Commission says. Poland may raise $10 billion from selling stakes of state-owned companies, including Warsaw- based PZU SA, the country’s biggest insurer.

322 Second Half Comeback Debt markets followed the same pattern as equities and M&A in 2009. In the first half, there was demand only for investment-grade securities from the largest corporations. The lucrative market for new high-yield corporate issues was close to dead. Junk bonds made a strong comeback in the second half, surging to a record, as appetite for risk started to return. That trend is continuing in 2010, Dhanda says. Structured products, including collateralized-debt obligations -- bundles of subprime mortgage loans and other debt -- made up almost 40 percent of all debt issued in 2006. In 2009, they accounted for 10 percent. “That market is back, but not in the same way,” says Hugh “Skip” McGee, Barclays Capital’s head of global investment banking. “So we’ll see far fewer esoteric CDOs. Plain vanilla securitization of car loans and credit card debt is what is back.” In January, Wells Fargo & Co. arranged a $275 million CDO backed by commercial loans, a sign of thawing markets. Market Dips Yet all this progress could come to a quick end if the global economy suffers a new shock that results in heavy market losses. It’s already been shaken by market dips in January and February that were triggered when China ordered its banks to tighten lending standards and U.S. President Barack Obama called for limits on risk taking by banks. Growing anxiety about the debt woes of European Union countries including Greece, Ireland, Portugal and Spain added to the jitters. As of this week, it looked like the EU would come to the aid of Greece, which disclosed in October it was running up a budget deficit of more than 12 percent of GDP. “Capital markets and merger activity go hand in hand with economic growth,” says David Hendler, head of U.S. financial services research at CreditSights Inc. “So as China tries to cool off and Western economies recover slowly, those activities cannot surge. And if there’s an economic or market dip, then the expectations of 10 to 20 percent expansion in investment banking won’t be attainable either.” Stock Market Jitters A heavy market sell-off would hit the prospects first for new IPOs and then mergers, McGee says. Firms that are selling shares for the first time are more sensitive to market levels as they try to maximize what they can raise, bankers say. While strong companies looking to buy competitors for strategic reasons pay less attention to stock price gyrations, a sharp reduction in their market value makes all-stock deals less appealing to both sides. “Great stories will still get done, but some on the margins will be halted,” McGee says. McGee used to be in charge of investment banking at Lehman Brothers Holdings Inc., whose September 2008 bankruptcy resounded around the world. Barclays bought Lehman’s U.S. operations. Lehman was No. 9 in the 2007 Bloomberg 20 ranking, while Barclays, the U.K.’s second-largest bank by market value, was 18th. The combination helped Barclays move up to Lehman’s No. 9 spot in 2009. Like JPMorgan, Barclays attracts clients with its big store of assets: $2.5 trillion. When Pfizer Inc. was bidding to take over Wyeth, five banks advising the acquirer had to commit $4.5 billion each for financing. Lehman couldn’t have done that, McGee says. Barclays could, thanks to the fact that its balance sheet is triple the size that Lehman’s was.

323 Sinking Citigroup No bank that’s still operating has fallen farther in the investment-banking pantheon than Citigroup, which was No. 1 in the Bloomberg 20 ranking from 2004 through 2007 and fell to No. 2 in 2008. It’s now No. 5. The $3.86 billion in total fees it captured in 2009 is a little more than half of the record $6.88 billion it garnered in 2007. Citigroup took a $45 billion bailout from the government’s Troubled Asset Relief Program, $20 billion of which it has paid back. The U.S. government owns 27 percent of Citigroup shares, which dropped more than 90 percent in the last 30 months. The bank lost $7.6 billion in the fourth quarter of 2009. “Citi will carry the burden the longest,” South Beach Capital’s Foerster says. “Their reputation has been the most battered, and no glue is left to hold the employees together.” Lost Market Share Bank of America Corp. has also lost market share despite its takeover of Merrill Lynch & Co. In 2007, the two banks’ combined portion of the M&A market was 23 percent. Last year, the merged entity managed just 16 percent. Similar losses occurred in debt and equity underwriting. “Integration can take 5 to 10 years, and that’s going to be a drag on Bank of America,” Foerster says. UBS has also fallen back. The Zurich-based bank lost $57 billion on investments tied to the U.S. mortgage market, the biggest amount among European banks, and received a 6 billion Swiss franc ($5.6 billion) capital injection from the Swiss government. Its 2008 net loss of 21 billion francs was the biggest in the country’s corporate history. UBS’s $2.5 billion in total 2009 fees represents a 20 percent drop from 2008. The bank fell four places in the Bloomberg 20 to No. 8. James Neissa, co-head of investment banking at UBS, says the bank, which in 2000 bought U.S. brokerage Paine Webber Group Inc., lost some clients because they doubted its viability. Turning Around UBS Now that it has put its losses and other troubles behind it, Neissa says, UBS can use its balance sheet again to back its investment bankers. “We’ll be allocating more of our capital to creating long- term revenue streams,” he says. “And frankly, the buyout market is one perfect way of doing that. We’ll participate in that market more than before.” As the big banks adjust to the “new normal,” they’ve watched a steady stream of their clients take their business to boutique firms. There were 601 firms that made a fee from M&A advice in 2001; last year, that number rose to 921. The top 10 banks in the Bloomberg 20 have seen their portion of the merger market dwindle in the past nine years to 64 percent from 74 percent, according to Bloomberg data. The top 10’s share of stock underwriting has dropped to 72 percent from 80 percent. Their piece of the bond market fell to 51 percent from 64 percent. 275,000 Layoffs The bankers themselves have followed the business to the smaller firms, some of them among the 275,000 employees the 20 largest banks have let go since 2007, according to Bloomberg data. Political pressure to reduce high-paid bankers’ compensation has helped the boutiques

324 lure some new hires, Solomon says. He increased Peter J. Solomon’s banker rolls by 41 percent in 2009 as a result of such opportunities, he says. “Sectors such as M&A advisory don’t require significant capital, and bankers may find working for a financial boutique more attractive,” Sanford C. Bernstein & Co. analyst Brad Hintz says. The big banks are doing their best to defend their turf. “We provide holistic solutions for our clients, ranging from advisory services to capital raising, to financing,” Bank of America’s Saggurti says. “Most boutiques can’t compete with that.” There’s no escaping that the carnage of the past three years has shrunk banks’ fees along with their balance sheets. Investment banks emerged from their last slump in 2002 to 2003 and rallied into four years of spectacular growth. No one is predicting that kind of rebound this time. The big banks are taking it one year at a time. To contact the reporter on this story: Yalman Onaran in New York at [email protected] Last Updated: March 4, 2010 00:01 EST http://www.bloomberg.com/apps/news?pid=20601087&sid=amySc2iSiW9c

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TRIBUNA: ROBERT TORNABELL Modelos europeos de reforma laboral Los trabajadores no crearon esta crisis, pero el ajuste se está realizando a su costa. Ahora se hace inevitable un cambio en el mercado de trabajo. ¿Qué modelos han funcionado en Alemania, Holanda y Dinamarca? ROBERT TORNABELL 04/03/2010 España está sometida a un peligroso círculo vicioso. Si no convencemos a los mercados internacionales de que nuestra economía es competitiva -y eso hasta ahora parece incierto-, lo más probable es que surjan recelos sobre el grado de sostenibilidad de nuestros presupuestos generales y la posibilidad real de que podamos llegar al año 2013 con un déficit público de sólo el 3% sobre el PIB. El primer aviso lo tuvimos el pasado 28 de febrero, según la nota que publicó la mayor agencia de rating que califica la deuda pública española. Fue una advertencia seria. Y la nota iba acompañada de una amenaza virtual. Los que tienen en sus manos la clasificación de la deuda soberana de los países pueden verse obligados a bajar la calificación de la española, y eso podría conducirnos a que sea más difícil colocarla en esos exigentes mercados y a tener que pagar por ella tipos de interés que a su vez empeorarán el ya excesivo déficit público del 10,4% sobre el PIB. Actualmente, la deuda soberana de España rinde más de 80 puntos básicos sobre la alemana, a pesar de que en proporción al PIB nuestra deuda es del 54%, muy por debajo del 73% de Alemania. La nota publicada en Londres es en cierto modo demoledora, pues considera que entre los años 1995 a 2007 más de la mitad del incremento de los ingresos fiscales procedió del sector de la construcción en general. Y puesto que éstos han desaparecido y lo seguirán haciendo en los próximos años, entraremos en el círculo vicioso de que los menores ingresos fiscales tendrán que financiarse con deuda a tipos de interés superiores, que a su vez provocarán más déficit público y éste la necesidad de emitir más deuda, y así sucesivamente. Las recomendaciones son las usuales. Mayor austeridad, reforma estructural del mercado de trabajo y no confiar demasiado en la contribución al PIB de las exportaciones, pues éstas pueden llegar a tener una aportación inferior al 25%. Entremos por consiguiente en la reforma de nuestro mercado de trabajo y hagámoslo también teniendo la perspectiva que nos brindan los modelos que han tenido éxito en Europa. Puesto que el crecimiento del déficit público está ligado, de una parte, al aumento de los ingresos, y, de otra, a la reducción de los gastos necesarios para cubrir los subsidios por desempleo, sólo una verdadera reforma laboral podrá romper la posibilidad de que se produzca el mencionado círculo vicioso. La reforma laboral, que se ha mezclado con un proceloso plan de reforma de las pensiones, el posible retraso de la edad de jubilación y una serie de cambios, podría contribuir a reducir el paro y preparar la plataforma para la creación de empleo neto. El gobernador del Banco de España ha venido insistiendo en la necesidad de avanzar hacia convenios que se desliguen de los convenios colectivos y tengan en cuenta la situación real de las empresas. Lo esencial sería que los trabajadores de cualquier empresa pudieran acordar con sus empresarios lo que sea más conveniente y pueda favorecer la mejora de la productividad y la ganancia de cuotas de competitividad internacional. En este sentido, los sindicatos han dado prueba de su buena voluntad para alcanzar pactos que reconduzcan el mercado y sienten las bases para la creación de empleo. No obstante, una cosa son las buenas intenciones de la patronal y otra la realidad de muchas empresas. Las encuestas

326 revelan que se están produciendo despidos calculados de manera precisa para no romper los límites de los ERE y de esta forma adelgazar la estructura de las plantillas sin provocar conflictos. El gobernador del Banco de España apoyó en el Círculo Financiero de Vigo la denominada "propuesta de los 100", en el sentido de conseguir un contrato fijo y una indemnización que aumentaría en función de los años de antigüedad. De esta manera se evitaría que se perpetuara la división del mercado de trabajo entre trabajadores fijos y eventuales. Los trabajadores no crearon esta crisis, pero el ajuste se está realizando a su costa. ¿Qué modelos ha diseñado con éxito Alemania, Holanda y Dinamarca? Alemania introdujo el "trabajo corto" o Kurzarbeit. Las empresas que tengan dificultades pueden pedir al Gobierno subsidios para que sus trabajadores trabajen menos horas, pero no pierdan el puesto en la plantilla, sus habilidades y destrezas y, lo que no es menos importante, su sentido de pertenencia a un proyecto. Han de estar dentro del sistema de la Seguridad Social y pueden perder hasta un 10% de su salario. Por las horas que dejan de trabajar - sin perder el empleo, insistimos- perciben el 67% de su salario normal si tienen un hijo o dependiente y un 60% los que no los tengan. Inicialmente esta fórmula se planteó para seis meses, pero con la crisis el Gobierno aumentó el sistema hasta un año y medio, al tiempo que ampliaba los programas de formación y entrenamiento. Porque de lo que se trata es de que estos trabajadores estén preparados para cuando llegue el relanzamiento y Alemania vuelva a recuperar sus mercados internacionales. Para ello sus empresas precisan la mejor plantilla, motivada por un sentido de pertenencia y con mejores conocimientos sobre las nuevas tecnologías. Gracias a este tipo de contratos, un millón de trabajadores conservan hoy sus puestos y su moral de trabajo y se han evitado otros tantos despidos. Holanda se dio cuenta muy pronto de las ventajas de esta fórmula y la introdujo rápidamente, ahorrándose el despido de dos millones de trabajadores. En 2009 consiguió frenar el paro en sólo el 3,6%, frente al 8% de Alemania. Lo que se pretende es que no sea necesario contratar después de la recuperación a los de mejor cualificación. Los tendrán ya en plantilla y sólo bastará con "reactivarlos". En plena crisis, Dinamarca consiguió reducir el paro al 3,5% gracias a lo que reconoce como sistema flexible de seguridad o "flexiseguro". Inicialmente era sólo un modelo de dos patas. De una parte, las empresas podían libremente despedir y contratar trabajadores, porque existía la segunda pata de un generoso sistema social que actuaba de red protectora. Pero la introducción del sistema, incluso en la década de los noventa, no fue fácil porque el paro registrado llegó al 8%. Entonces, los daneses se dieron cuenta de que era necesario introducir un tercer punto de apoyo: políticas activas para desarrollar el mercado de trabajo. Esto es fácil de proponer y difícil de conseguir, y sólo a partir de 2006, tras 20 años, se consiguió que el modelo fuera estable. En principio, el modelo danés podría parecer muy inestable y dependiente del sistema de seguro por desempleo para amortiguar las fluctuaciones. Pero al final, y como consecuencia de la estructura de la industria del país -posiblemente no exportable sin reformas a España-, hizo posible que se alcanzara el nivel deseado. Un país que tiene miles de empresas pequeñas y una edad de jubilación relativamente temprana creó oportunidades para que el modelo se afianzase. Cuando se examinan las curvas de paro, empleo y las de los que buscan nuevos empleos se observa que la volatilidad ha tendido a desaparecer, incluso frente a esta dura crisis.

327 Para concluir, una reforma del mercado de trabajo no puede producirse en el vacío. Depende de la cultura sindical, de la organización de las empresas y del apropiado sentido de la realidad. Si los agentes sociales no son conscientes de que el gasto público no puede seguir creciendo por encima de las posibilidades de recaudación de la hacienda pública, las reformas tendrán una vida muy corta. Porque el margen de maniobra ya no está ni en las manos del Gobierno ni en la de los agentes sociales. Nos viene dado por las condiciones que exigen los mercados de capitales para seguir financiando nuestro déficit público a tipos de interés soportables. Un aumento de los tipos de interés del 1%, cuando tengamos un volumen de deuda equivalente al 74% del PIB, representará sobrecargar el déficit público con más de 7.000 millones de euros. Cuando se vive en una situación de emergencia nacional, sólo la visión de conjunto puede permitir adentrarse en reformas del mercado de trabajo que puedan ser viables y duraderas. Todo lo demás será la lucha estéril por ganar posiciones en las que todos podemos perder. http://www.elpais.com/articulo/opinion/Modelos/europeos/reforma/laboral/elpepuopi/201003 04elpepiopi_12/Tes

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Research-based policy analysis and commentary from leading economists A new Glass-Steagall Act?

Hans-Werner Sinn 4 March 2010

A return of the Glass-Steagall Act has been suggested by US policymakers and commentators as a way to reduce risk in financial markets. This column argues that the legacy of separate commercial and investment banks actually made the crisis worse. Europe should not follow these proposals but should instead concentrate on strengthening the capital reserves of its banks. The hurricane of the global financial crisis has been withstood – but it has left behind a swath of destruction in the US. The US devoted $1.3 trillion to rescue banks and $800 billion for economic stimulus packages. Private real-estate financing has completely collapsed – 95% of loans for private real-estate in 2009 were channelled through government institutions. More than 200 banks went bankrupt during the crisis. The US debt-to-GDP ratio will approach the 100% mark this year and will probably exceed it in 2011 or early 2012. Now that the storm has subsided, it is time to clear away the debris from the shattered financial system. After initial hesitation, US president Barack Obama now seems ready to take action and is supporting the proposals of former Fed chairman Paul Volcker (Obama 2010). Volcker has proposed reactivating the American system of separate investment and commercial banks that was created by the Glass-Steagall Act. The Act was established in 1933, shortly after the worst phase of the Great Depression, and it forbade commercial banks from acting as investment banks. The commercial banks were allowed to lend deposited savings to private households, businesses, and other banks, but they were not allowed to buy securities or to assist in their exchange. The purchase of stocks was forbidden, as was the acquisition of securitised financial products. Even the purchase of corporate bonds and private debentures was limited to a negligible minimum. The goal of the legislation was to protect savers from risky financial transactions. When the Glass-Steagall Act was repealed in 1999, some commercial banks made hesitant attempts at investment banking, which gave rise to suspicions that this could have been a reason for the financial crisis. But this is far from the truth. In reality the system of bank separation remained fairly intact up to the outbreak of the crisis. As is well-known, the crisis was triggered in 2008 by the unexpected failure of the government to rescue Lehman Brothers. That destroyed banks’ trust in each other and froze up the interbank market. Deposited savings could no longer be channelled to investors but stayed with the commercial banks. The result was a crash of the real economy. If the US had not had a separation of banks, the economy would have been less susceptible to a breakdown of the interbank market, since the commercial banks could have routed at least part of deposited savings to businesses via the purchase of stocks or bonds.

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What motivated Obama and Volcker? The answer lies in an event on 22 September 2008 that took the financial world by surprise, i.e. the conversion of Goldman Sachs and Morgan Stanley, the last surviving large investment banks, into normal commercial banks. Behind this conversion was the desire of the two banks to attain access to cheap credit from the Fed and the protection of Federal Deposit Insurance Corporation (FDIC). The government actually wanted to exclude the investment banks from receiving special help, but they got around this by quickly changing their legal status. Now Obama is trying to square up accounts. This is understandable but dangerous for Europe because, unlike the US, it has a universal banking system. If Obama succeeds in anchoring a separation of commercial and investment banks worldwide at the G20 negotiations, this would mean a destruction of the European banking world, whereas in the US the repercussions of the reform would be limited. Hopefully Obama’s advisers were not inspired by this prospect. Crisis prevention will certainly not come from a return to a system of bank separation. It is true that the reduced likelihood of government help will induce investment banks to act more cautiously. But this plus point does not offset the increased susceptibility to crisis from the division of banking functions. Moreover, it is doubtful whether the likelihood of government rescue will really be reduced. The state will have to rescue large investment banks even if they do not manage customer savings since no one would accept a repeat of the Lehman Brothers disaster. The banks’ cavalier risk taking that led to the crisis was due to their inadequate capital reserves. People are tempted to gamble if their own capital is hardly involved, because they can pocket the gains and only have to shoulder a small portion of the losses themselves, regardless of whether the state helps or not. The incentive to gamble can only be suppressed by drastically increasing capital reserve requirements. Europe should not follow the US proposals at the next G20 summit but should concentrate fully and entirely on strengthening the capital reserves of the banks. Editor’s note: Note that this was first published as "Keine gute Idee", Wirtschaftswoche, No.6, 8 February 2010; republished in English with permission. References Obama, Barack (2010), “The “Volcker Rule” for Financial Institutions”, 21 January http://www.voxeu.org/index.php?q=node/4710

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Eurozone: Q1 2010 Outlook

By Elisa Parisi-Capone 2/9/2010 | Last Updated Editor's Note: The data used in the following analysis is current as of January 30, 2010.

Real GDP (% change y/y) 2008 2009 2010 0.7 -3.9 0.9 CPI (% change y/y) 2009 2010 0.3 1.2 The eurozone’s recovery lags other big regions owing to large internal imbalances and the adjustment of external imbalances. Weak domestic demand will constrain growth in H1 2010 and a less dynamic external environment will dampen activity in H2. Assuming no region-wide spillovers from the Greek debt crisis, a sustained recovery is likely starting in 2011. Overview Global Overview: Q1 2010 Outlook

By Christian Menegatti, Rachel Ziemba and Nouriel Roubini 2/9/2010 | Last Updated Editor's Note: The data used in the following analysis is current as of January 30, 2010. Real GDP (% change y/y) 2008 2009 2010 3.0 -1.0 3.6 CPI (% change y/y) 2009 2010 1.8 3.1 The global economy began to grow again in H2 2009, but the path of the recovery is still uncertain and fragile. While 2009 brought signs of stabilization in growth rates and industrial production for many economies, the path to a self-sustaining recovery is not yet clearly shaped and non-stimulus induced private domestic demand remains weak. RGE now expects that the global economy will grow [...] China: Derivatives Regulation

Appears in: Asia/Pacific, Finance and Banking, Markets, China, North East Asia, Derivatives, Financial Systems and Regulation, Options and Futures

Will Chinese State-Owned Enterprises Break Their Derivatives Contracts?

Overview:

If China is to develop a deeper, more liquid domestic bond market it will also need to develop its derivatives market. However, in October 2008 several state-owned enterprises lost billions of dollars in derivatives contracts sold from offshore banks. They claimed to have been defrauded, and the government appeared to back them. This may complicate the China Banking Regulatory Commission’s efforts to develop a domestic derivatives market, which has sought since at least 2004. Foreign banks dominated the nascent derivatives market, but regulators shut down the market for derivatives sold from offshore operations in August 2009.

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04.03.2010 Greek Competitiveness Is Not the Issue, Fiscal Discipline Is By: Erik Jones

With all due respect to my colleagues in the economics profession, they have jumped the gun on Greek competitiveness within the eurozone. The simple fact of the matter is that Greece is having a fiscal crisis. It would have had that crisis whether or not it was in the eurozone. Greece is not having a crisis of competitiveness. Hence joining the eurozone was not the problem; leaving it is not the solution. Let's start with some data - all of which is taken from the Annual Macroeconomic Database of the European Commission and is freely available on-line. The most damning data against Greece is the movement in real compensation per employee. If we set the year 2000 equal to 100, then by 2009 Greece was at 122 while Germany was at 102. This would suggest that Greek real wages have risen by 20 percent more than Germany - and they have - but that tells us very little about competitiveness. What matters in terms of a head-to-head competition is how Greece and Germany compare in the cost of labor per unit of output and not the real compensation of employees. Moreover, we should look at their performance across the European marketplace as a whole. By that measure, if we set the year 2000 equal to 100, then by 2009 Greece was at 98 while Germany was at 95. Germany is still doing better than Greece, but only by a little and both have improved against the rest of Europe. Then again, these labor cost data reflect the whole of the economy. If we look at just manufacturing data, the story might be different - and it is. Using national accounts data for relative real unit labor costs in manufacturing, Greece goes from 100 in the year 2000 to 87 in 2008. Over the same period, Germany goes from 100 to 90. It is hard to see how Germany comes off better in the comparison. Greek manufacturing has been able to hold onto the same share of total employment and total value added throughout its participation in the Euro. It has held onto its share of the total eurozone export market as well. Other countries have lost market share and manufacturing employment in significant volumes - the UK chief among them - but tiny

332 Greece has not. Even if Greece is not suffering in terms of manufacturing, the high real incomes that Greek employers are doling out must surely be hitting the bottom line in the service sector, shouldn't they? Again, that's hard to see in the data. Total compensation per employee was 53.8 percent in Greece and 57 per cent in Germany. In all this data, there is nothing to suggest that a devaluation would improve Greece's situation. A devaluation might provide some relief for Greece's massive current account deficit, but only by crushing the incomes (and therefore expenditure on imports) of the Greek population as a whole. The problem with Greece is fiscal. The Greek government took advantage of its increased creditworthiness as a member of the eurozone to get heavily into debt. By the same token, large institutional investors in the eurozone took advantage of the higher interest rates that the Greek government was willing to pay for its debt to increase their returns on sovereign investments without diversifying away from their home currency. The Greek government satisfied its expanding need for liquidity; the institutional investors their hunt for yield. Any attempt to push Greece out of the eurozone now would make both parties go 'cold turkey'. For both sides of the transaction, it would be a horrible shock. Ironically, this is not a situation that most of my professional colleagues anticipated correctly. Very few paid attention to the growing diversity of current account positions when the single currency was launched and most worried that the stability and growth pact would constrain fiscal autonomy more than they recognized how much the risk of fiscal profligacy had been enhanced. Despite having looked in the opposite direction, their prescriptions sound hauntingly familiar. Europe needs common fiscal institutions and more political union, they argue. Perhaps we should check in with California to see how well that is working out. What Europe really needs is for Greece to gets its fiscal house in order - full stop. Once that happens, it might also be a good idea for some of the eurozone's larger economies to stop trying to run massive current account surpluses that leave their financial institutions saddled with too much savings that they will have to invest abroad and that they would prefer to keep in euros at high yields. In drug policy, Europeans like to pride themselves on being tougher on the dealer than on the user; they should recognize that for politicians, not just in Greece but everywhere, liquidity is a drug. Finally, if there is a lesson to be drawn from the debate that has erupted around Greece it is that no country wants to bail out another. 'Competitiveness' is just an excuse for this lack of solidarity; it's a way of saying that the poor or debt-laden should work harder. The author is Professor of European Studies at SAIS Bologna Center, Johns Hopkins University http://www.eurointelligence.com/article.581+M57277b85036.0.html#

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TRIBUNA: FERNANDO AZPEITIA / JOSÉ A. HERCE Las pensiones en una España envejecida La prolongación de la edad de jubilación es inevitable, pero no suficiente. Las asignaciones pagadas por nuestro sistema público son más "generosas" proporcionalmente que en Alemania, Reino Unido y Holanda FERNANDO AZPEITIA / JOSÉ A. HERCE 03/03/2010 El llamado envejecimiento de la población en las sociedades avanzadas viene determinado por dos tendencias demográficas que se han combinado poderosamente en las últimas décadas: una reducción de la tasa de natalidad que impide la reposición completa de quienes van atravesando la barrera de las edades laborales y una mayor duración de la vida, lo que es, sin duda, una buena noticia. Pero, el envejecimiento es, en realidad, un fenómeno aparente en buena medida basado en la rigidez con la que desde todas las instancias y ópticas abordamos el tránsito de las cohortes, que una vez fueron jóvenes, a las "grandes edades" a partir de la barrera etaria de los 65 años, fijada hace más de un siglo y que en absoluto significa hoy lo que entonces ni lo que significará dentro de unas décadas. Este punto de vista se completa con otro adicional. El de que, más que problemas, el envejecimiento representa retos, algunos de formidable entidad, eso sí, que hay que afrontar con determinación, con realismo, con la mejor información, a tiempo y dentro de un concierto de intereses inevitablemente diversos que habrá que conciliar. No es el mero número de personas de edad más o menos avanzada, ni necesariamente su proporción en relación al número de personas de edades más jóvenes, lo que acaba creando los problemas que hoy asociamos al envejecimiento, sino la "mochila" de "derechos" y "obligaciones" que asociamos a cada edad, en ocasiones contra el sentido común, de manera inercial, por simples convencionalismos o incapacidad para disociar lo que, en definitiva, es un problema de gestión de dicha mochila de un fenómeno bien natural y, como decíamos, bien positivo, como es el tránsito de las generaciones hacia edades cada vez más avanzadas. Mientras que los individuos sigan entrando cada vez más tarde a la actividad económica, salgan cada vez antes de ésta y vivan cada vez más tiempo, será cada vez más difícil resolver el problema de las pensiones y todos los demás problemas asociados a los grandes programas del Estado del bienestar, como la sanidad y la dependencia. Esta aritmética vital incoherente y las tendencias demográficas esperadas en España para las próximas décadas llevan a constatar una y otra vez que nuestro sistema público de pensiones, en su definición actual, no está adaptado a estos formidables cambios demográficos y que, en el medio plazo, sufrirá problemas crecientes de suficiencia financiera si no se realizan reformas en línea con las adoptadas en diferentes países de nuestro entorno en los que sí se han comprendido bien las implicaciones de las tendencias demográficas mencionadas. En este sentido, la prolongación de la vida laboral, ya sea desincentivando la jubilación anticipada (en la actualidad la edad de jubilación efectiva en España se sitúa en torno a los 63 años) o a través del retraso de la edad legal de jubilación, claramente más allá de los 65 años, es una medida más que indicada, ya que actuando sobre un solo parámetro del sistema, la edad de jubilación, se consigue incrementar a la vez el número de años de cotización y reducir el número de años "pensionables". De esta forma, se incrementan los ingresos y se reducen los costes del sistema de pensiones sin que se produzca una reducción

334 de la pensión anual a percibir por los futuros pensionistas, aunque obviamente se reduce el número de años de su disfrute. La aplicación progresiva de esta medida es inevitable para no frustrar las expectativas de quienes más cerca se encuentran de la jubilación en estos momentos, careciendo de margen de maniobra, pero exige que dicha medida se introduzca cuanto antes. Para lograr revertir por completo las complicadas perspectivas futuras en materia de gastos e ingresos del sistema de pensiones, sin embargo, la prolongación de la vida laboral debería ser mucho mayor de los dos años que se debaten actualmente. No parece que estemos preparados para ello y, con toda seguridad, no convendría llegar al límite. De forma que habría que adoptar medidas complementarias, como la que también se plantea de aumentar el periodo de cómputo de las pensiones por encima de los 15 años actuales, eventualmente a toda la vida laboral. En el fondo, se trata de lograr una mayor proporcionalidad entre las pensiones a percibir y el esfuerzo de cotización realizado por cada trabajador, con la necesaria gradualidad y sin menoscabo severo de la necesaria solidaridad. Sin duda, una reforma del sistema español de pensiones públicas en estas líneas haría de él un sistema menos rentable para los actuales cotizantes por debajo de una cierta edad (digamos los 45 años) y para todos los futuros cotizantes, pero lo haría más seguro. Todos los análisis comparativos, por otra parte, apuntan a que nuestro sistema público de pensiones es ciertamente "generoso" en comparación con los sistemas públicos de pensiones de países de nuestro entorno, si nos atenemos a la proporción del último salario previo a la jubilación que representa la pensión del sistema. En España esta proporción supera el 80%, mientras que en Alemania se sitúa apenas por encima del 50%, en el Reino Unido algo arriba del 40% y en Holanda cerca del 30%. Estos países, obviamente, tienen sistemas complementarios de capitalización muy desarrollados. Pero el reto que supone el envejecimiento para el sistema de pensiones no se solucionará si además de los diferentes ajustes y medidas que se puedan establecer para garantizar su sostenibilidad en el medio y largo plazo, no se consigue concienciar a la sociedad española de la necesidad ahorrar más a largo plazo durante la vida activa, bien de forma individual o participando en planes de pensiones. Para ello, es necesario mejorar la educación de los ciudadanos relativa a la problemática de las pensiones y el envejecimiento, que junto a una mayor cultura financiera, permita lograr una mayor concienciación entre la población de la necesidad de financiar vidas más largas tras la jubilación, a partir de vidas laborales más reducidas. En este sentido, se podría actuar sobre dos vertientes introduciendo nociones y conceptos sobre planificación financiera individual, ahorro, financiación y consumo en los planes de educación básica de las escuelas y sensibilizando a los trabajadores mayores de 40 años respecto a las pensiones que les corresponderían en el futuro bajo las condiciones vigentes del sistema mediante informes periódicos cada vez que cambien dichas condiciones, para que cada trabajador pueda planificar su ahorro-previsión de cara a complementar su pensión de pública jubilación adecuadamente. Hay muchas personas que opinan que no hay que tocar las pensiones públicas, ya que la demografía es incierta y que basta con que se cree empleo y se ajusten ligeramente al alza los impuestos para contrarrestar las tendencias demográficas si éstas llegan a materializarse como nos dicen los demógrafos. Algunas personas, además, opinan que, simplemente, las pensiones futuras no deben tocarse de ninguna manera, pase lo que pase con la demografía, las cotizaciones, o cualesquiera otras circunstancias futuras. Estas posturas no son razonables. La mala noticia es que cuando el número de pensionistas sea el mismo que el de cotizantes (contando incluso con el pleno empleo), lo que podría suceder en 2050 a los ritmos previstos,

335 los tipos de cotización sobre los salarios deberían ser del 50% o mayores, en vez del 28,3% actual, para mantener las pensiones en proporción con los salarios sin incurrir en déficits crecientes. Si no se tocasen las cotizaciones, se acumularía una deuda, sólo de pensiones, equivalente al PIB (el Fondo de Reserva habría desaparecido hacia 2030). En esas condiciones, nadie quería comprar deuda española mucho antes de esa fecha y habría que recortar las pensiones públicas sin margen para haberlas complementado por otras vías. No nos parece que merezca la pena no hacer nada a la espera de si se cumple o no este escenario, es demasiado arriesgado para la cohesión y el dinamismo general de la sociedad. http://www.elpais.com/articulo/opinion/pensiones/Espana/envejecida/elpepiopi/20100303elpe piopi_13/Tes

TRIBUNA: JOSÉ A. HERCE La reforma laboral que viene La reducción del paro tras una recesión es siempre lenta. Nuestra historia nos demuestra que para tener éxito en esa tarea hace falta modificar el mercado de trabajo. Es lo que terminará haciéndose a lo largo de 2010 JOSÉ A. HERCE 04/12/2009 La recesión laboral que está sufriendo la economía española es la peor desde que disponemos de medidas fiables de los flujos del mercado de trabajo a través de la Encuesta de Población Activa. Entre el segundo trimestre de 2007, cuando la serie de desempleados alcanzó un mínimo de 1,76 millones nunca visto desde 1981, y el segundo trimestre de 2009, cuando se alcanzaron los 4,14 millones de desempleados y el récord de la serie, se habían sumado 2,38 millones de efectivos al paro. A toda recesión le sigue una reforma laboral. Desde mediados de los años setenta, se han sucedido varios episodios recesivos en la economía española, que han tenido un correlato muy intenso en el mercado de trabajo. En los 10 años que duró la "crisis del petróleo" el paro pasó de los 600.000 efectivos a mediados de 1976 hasta los 2,8 millones de 1985 (serie revisada de la EPA, metodología 2002). No fue fácil lograr que, en plena expansión de la actividad en la segunda mitad de la década de los ochenta, el paro bajase de manera significativa, lo que sólo se logró en parte entre 1988 y 1991 con un "aterrizaje" de este indicador algo por encima de los 2,2 millones de efectivos. En 1984, se promulgó la primera reforma laboral de cierta entidad de nuestra historia reciente. La Ley 23/1984 de 2 de agosto de reforma del Estatuto de los Trabajadores introdujo el contrato temporal para el fomento del empleo con costes de despido muy reducidos. Un intento en 1988 para introducir nuevas figuras contractuales para los jóvenes acabó en la huelga general del 14 de diciembre. Pocos años después, se produjo la recesión de 1992-93, severa, pero de corta duración. En el plano del empleo, sin embargo, la recesión se prolongó hasta 1994 y el número de parados remontó en casi tres años hasta la cota jamás alcanzada antes de 3,5 millones de parados en el primer trimestre de ese año. Una nueva reforma del mercado de trabajo tuvo lugar en mayo de 1994 (Leyes 10/1994 de Medidas Urgentes de Fomento de la Ocupación y 11/1994 de Reforma del Estatuto de los Trabajadores), sin el acuerdo sindical, pero con escasa reacción por su parte. Esta reforma limitó el contrato de fomento del empleo, pero creó otras figuras de contratación temporal, amplió las causas de despido individual e introdujo la actividad de las

336 agencias privadas de empleo. Una nueva reforma que trataba de completar la anterior tuvo lugar en 1997 (Decretos Ley 8/1997 y 9/1997), fruto de los acuerdos sociales alcanzados entre el Gobierno y los sindicatos, por la que se introdujo un nuevo contrato indefinido con una menor indemnización en caso de despido improcedente para determinados colectivos y se trató de flexibilizar la negociación colectiva. La recesión de 2001-02, por fin, que sufrieron muchos países avanzados, como consecuencia del estallido de la burbuja de las puntocom, desaceleró el crecimiento de la economía española, pero no evitó que aumentase el paro en alguna medida hasta que el relanzamiento de las economías occidentales, el auge de la inmigración y el boom inmobiliario español redujeron el número de desempleados a los 1,76 millones antes comentados en el segundo trimestre de 2007, la cota más baja desde 1981. La economía española ya estaba creando empleo de manera significativa y, hasta 2007, hablar de una nueva reforma del mercado de trabajo parecía a muchos totalmente innecesario. La evidencia anterior nos muestra que la economía española puede reducir el paro después de una recesión, pero cada uno de los episodios anteriores de descenso del desempleo está pautado por una reforma de cierta entidad en el mercado de trabajo español. Una reforma que siempre se ha impuesto por la fuerza de los hechos después de una recesión y de un enorme deterioro de las bases del empleo y del bienestar de los trabajadores. ¿En qué medida se va a reducir el desempleo en nuestra economía en los próximos años? A los mejores ritmos observados, por ejemplo, entre 1994 y 2001, unos 60.000 parados menos al trimestre, en promedio, necesitaríamos nueve o diez años, como mínimo para volver a los dos millones de parados, cota que parece ser nuestro nivel de paro de "equilibrio". ¿Podemos permitirnos un ajuste tan lento? En mi opinión, no sólo no debemos aceptar un ritmo tan lento de corrección del paro, sino que debemos hacer todo lo posible para que la tasa de desempleo estructural de nuestra economía sea mucho más baja. Una vez más, tras años de debate y resistencias al cambio que han impedido un abordaje decidido a la reforma del mercado de trabajo, estoy seguro de que acabaremos teniendo en 2010, una reforma laboral impuesta por la fuerza de una situación intolerable. Todas las reformas anteriores sólo han servido para segmentar enormemente el mercado de trabajo preservando empleos muy protegidos y creando muchos otros muy poco protegidos en una estructura de costes de despido muy dispersa y discriminatoria. La negociación colectiva no se ha flexibilizado hasta lograr que las condiciones se fijen a nivel de empresa. La protección al desempleo sigue pidiendo un cambio que la haga más orientada hacia la empleabilidad de los trabajadores. Las políticas activas para el empleo siguen pesando poco en los presupuestos del Sistema Público de Empleo. La reciente propuesta de los 100 economistas avanzaba recomendaciones sensatas en estos cuatro ámbitos precisamente y debería ser tenida en cuenta. La cuestión clave en este momento es cómo detener la destrucción de empleo. Recientemente, la vicepresidenta segunda del Gobierno ha propuesto la creación de una prestación parcial de desempleo compatible con el empleo a tiempo parcial de trabajadores que de otra forma serían despedidos causando una prestación de desempleo completa. La reducción del tiempo de trabajo vendría acompañada por una reducción equivalente del salario, pero esta última se vería compensada por la prestación parcial de desempleo. Este sistema se conoce como Kurzarbeit (trabajo corto, literalmente) en Alemania y Austria y, de hecho, se practica en España y en muchos otros países en el sector de la automoción, especialmente, bajo la forma de EREs de reducción. Se trata de generalizarlo al conjunto de la economía. Sus beneficios son múltiples: las empresas aligeran sus costes sin prescindir de trabajadores valiosos, los trabajadores no ven reducidos sus ingresos de forma relevante y disponen de más tiempo para

337 aumentar su empleabilidad y el sistema público de empleo ahorra los gastos correspondientes a las prestaciones plenas de desempleo que se evitan con la prestación parcial. El desempleo, al fin, es menor. Posiblemente, este sistema permitiría a muchas empresas sobrevivir a la crisis. Un punto que ninguna reforma del mercado de trabajo debe obviar, para no cerrar en falso como ha sucedido con la saga de reformas españolas, a la postre, es el de los costes del despido. Hay muchas formas de abordar este espinoso tema. Siendo de los más elevados entre los países desarrollados, los costes de despido a los que se enfrentan las empresas españolas deben reducirse en su conjunto. La actual dispersión de esquemas admite mucha racionalización que se puede ver favorecida por la simplificación de figuras contractuales para los nuevos trabajadores que vayan sustituyendo vegetativamente a los contratos indefinidos convencionales de mayor coste sin que los trabajadores establecidos tengan merma de sus derechos y mejorando, incluso, la protección de los trabajadores más desprotegidos. Pero ayudaría mucho a este debate el que se pensase en trasladar la indemnización por despido a un esquema de seguro obligatorio ajeno a las empresas que hiciese innecesaria para los trabajadores la permanencia a toda costa en el puesto de trabajo, por temor a perder los derechos adquiridos, y permitiese a las empresas ajustar sus plantillas más eficientemente. http://www.elpais.com/articulo/opinion/reforma/laboral/viene/elpepiopi/20091204elpepiopi_1 1/Tes

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New formula to give fresh look at U.S. poverty By Amy Goldstein Washington Post Staff Writer Wednesday, March 3, 2010; A02 The Obama administration Tuesday embraced an alternative way of defining what it means to be poor, stepping gingerly into a long-running debate over whether to revise the method that has been used to measure poverty for decades. Under a "Supplemental Poverty Measure" announced by the Commerce Department, the government is augmenting, but not replacing, the formula that determines how many people are considered to be in poverty, taking into account a wider range of expenses and income to try to create a truer portrait of which Americans are financially fragile. The old definition, developed in the mid-1960s using data from a decade earlier, was based on the cost of food and a family's cash income. The new one, acknowledging that food has become a smaller share of poor families' costs, will also consider expenses such as housing, utilities, child care and medical treatment. In gauging people's resources, the new method will include financial help from housing and food subsidies, in addition to money from jobs and cash assistance programs. The way poverty is defined is at once arcane and politically volatile, because the number of people who are considered poor has broad implications for the nation's economic self-image and the way billions of federal dollars are distributed for Medicaid, welfare, food stamps and other aid programs. While they are adopting a second formula, administration officials are largely sidestepping that political minefield by deciding to retain the old one as the basis for the official federal poverty line -- the threshold underlying eligibility rules for assistance programs. Instead, the second formula "provides us a different angle on who is in economic need," said Rebecca M. Blank, Commerce's undersecretary for economic affairs, who had advocated for more than a decade before joining the administration for a different way of thinking about who is poor. The formula is to be used by the government for the first time next year in an annual Census Bureau report that includes the poverty rate. The rate will be calculated by both methods. "It's been hard to make progress this far," said Arloc Sherman, a senior researcher at the left- leaning Center on Budget and Policy Priorities, one of the constituencies across the ideological spectrum that have griped for years that the poverty definition was out of date. The alternative definition is derived largely from a recommendation on how to measure poverty that the National Academy of Sciences issued 15 years ago. Blank, whose responsibilities include the Census Bureau, was part of the academy panel that made the recommendation. She said in an interview that federal officials have not tried yet to calculate whether the new definition will increase or decrease the number of Americans who qualify as poor.

339 Two years, ago, New York City became the nation's first jurisdiction to adopt its own way of measuring poverty, also based on the academy's work. A report issued Tuesday by New York's Center for Economic Opportunity shows that its new approach produces a higher poverty rate. For 2008, the report found, the city's poverty rate was 22 percent under the new formula, compared with slightly less than 18 percent using the official federal definition. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/02/AR2010030202316.html?wpisrc=nl_pmheadline

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Published on openDemocracy (http://www.opendemocracy.net)

The danger of majority tyranny

By Michael Clemence Created 03/02/2010 - 12:40 Author: Thomas W. Bechtler Summary: Switzerland's democracy lies nearer to the dividing line between direct democracy and tyranny of the majority than most. Last year's decision to outlaw minarets reflects the dangers of crossing that line Has the minaret poll in Switzerland helped in creating an atmosphere against all things foreign and “different”? Minarets, headscarves, Jewish cemeteries, German professors, international law – judging from recent debate in Switzerland one might wonder if they are all contrary to Swiss values. Who better to define and postulate what is quintessentially “Swiss” than the people themselves in a referendum, just like the one held on 29 November. But this argument brings a queasy feeling and reminds us that there are limits on popular sovereignty. The “yes”’ to banning minarets [1] has brought these limits to mind, causing a real shock and deep disappointment for many people. I cannot remember any referendum that has divided our country both politically and ethically in a similar manner. In the widely held discussions after the event there were repeated suggestions that political parties had underestimated the fears some Swiss have [2] that Muslims might segregate themselves and not respect Swiss customs and laws. Are such fears real or simply nothing more than a clever fabrication? Obviously the responsibility for our political culture has fallen by the wayside. A solution has been found for a problem that our country is not faced with. The sad game of discrimination has once again been played successfully. And, just as in our national playwright and novelist Max Frisch’s play “The Fire Raisers [3],” normal citizens and “arsonists” have become one, this time through a plebiscite. It is an undisputed fact that Swiss politics are closely linked to the will of the people than almost anywhere else. The fact that the Swiss are able to take an active role in deciding issues is a part of our national identity and is undeniably one of our country’s special qualities. Democratically reached decisions reflect the will of the people in a given moment, though, not necessarily a superior wisdom or power. Democratic decisions can be wrong, unjust and impractical, violate the country’s constitution and even violate basic human rights. They can even relate to issues for which the democratic system is quite simply inadequate.

341 Ironically it was freedom-loving Switzerland,of all countries, that voted for a measure based on religious discrimination that violates both our own constitution and Swiss values and also breaches the European Convention on Human Rights. This is a country renowned for its role in the development of international law, a state whose neutrality has international roots, a nation that stands for tolerance and open-mindedness whose prosperity is based on the global economic network and is home to the International Red Cross! The issue boils down to two different conceptions of democracy. Under an absolutist interpretation, the people decide, no ifs or buts. In a comparison from the world of art, (Brunnellesci [4]), the central perspective converges in a point determining the order of the composition. Anything that may stand in the way of democracy is deemed suspect: judges, elected representatives, even international law. In contrast, representatives of a liberal rule of law tend to set out from the interaction of various elements, as is visible – using the analogy of the arts once again – in the popular artist Alexander Calder’s mobiles [5]. The parts are in a constant balance, jointly ensuring the stability of the whole (“checks and balances”). The democratic principle is essentially the basis for the decisions of democratically elected representatives and of the people in direct democracy decision making. The principle of separation of powers, which forms the basis for judges’ decisions in individual cases, is just as important in a functioning democracy. Human rights and democracy, rule of law and popular sovereignty are not mutually exclusive but rather mutually dependent. International law is also of equal importance. A more stringent formal and substantive examination of the content of referendums – be it through parliament, the Federal Council, the Federal Court or a special body – is in fact urgently needed. Any argument that the European Court of Human Rights has no place assessing an issue decided directly by the Swiss people, ignores the role Switzerland played in developing the Court, and the fact that the court is part of the Council of Europe, a body that Switzerland currently chairs [6]. The debate about the limits of popular sovereignty will surely go on in Switzerland for some time to come. We need to make sure that the discussion is characterized by clarity of analysis, precision in drawing these borders and public education. An absolutized concept of democracy can threaten freedom and is susceptible to misuse. An enlightened people recognizes and acknowledges the limits of its sovereignty and knows that these limitations are what strengthen democracy and freedom. http://www.opendemocracy.net/print/50534

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Obama tries to remain calm during political storm By Eli Saslow Washington Post Staff Writer Thursday, March 4, 2010; A01 The president who so famously rejects drama and derides political theater walked into the East Room at 1:45 p.m. during one of the wildest political stretches in recent memory. In the past few days, a White House spokesman was forced to defend Obama's pugnacious chief of staff and his departed social secretary. A Republican senator held a spending bill hostage, despite protests within his own party. A Democrat considered resigning as chairman of a major House committee, then vowed to stay on, then announced he would take a leave of absence. As this chaos ricocheted through the Capitol, the president entered in a pressed black suit, shoulders straight, eyes calm, voice measured. The chairs inside the East Room were arranged in perfect rows of 10. Doctors wearing long white coats stood with hands clasped behind their backs and flanked Obama onstage. "At stake right now is not just our ability to solve this problem," he said, "but our ability to solve any problem." Also at stake now for Obama is his trademark composure, which will be tested like never before during the next two weeks. With governance already seemingly in disarray, Obama announced that he wants Democrats to push through his health-care reform legislation by calling for a simple-majority vote within the next few weeks. It is a process sure to further inflame the capital, and it raises a question central to Obama's presidency: Will his evenness help ease the disorder around him? Or will the rising tension undo his signature bill? On Wednesday, at least, he seemed to believe that steadiness and cogency still could be effective, despite contrary evidence that continued to mount even as he spoke. The Democratic House leadership tasked with herding the caucus into unity on health-care reform instead became mired in operatic subplots involving ethics investigations, a memorial service and infighting about an empty committee chair. Republicans repeated talking points that simultaneously shot down Obama's health-care plan while still asserting, again and again, that theirs was not "the party of 'no.' " Obama, meanwhile, kept his speech in the East Room to a simple 15 minutes, and he made clear what he wanted in the first sentence. "We began our push to reform health insurance last March with the doctors and nurses who know the system best, and so it is fitting to be joined by all of you," he said, "as we bring this journey to a close." His remarks amounted to an extended exercise in deductive reasoning: We have analyzed health-care reform to death for nine months, he said. Democrats and Republicans both agree the current system does not work. We have to do something. We have tried incorporating Republican ideas. This is what we've got. Pass it.

343 Obama kept his sentences as basic as his logic, and he accentuated each point by jabbing his left fist in the air. The same president who once frustrated Democratic lawmakers by what they perceived as his hands-off approach instead took to the lectern and made his demands. These were his proposals, he said, and he wanted them passed. Now. Then he cracked a few jokes, mentioned his children and shared an anecdote about a breast cancer survivor in Wisconsin. "The American people want to know if it's still possible for Washington to look out for their interests and their future," he said. "They are waiting for us to lead. And as long as I hold this office, I intend to provide that leadership." Question is, can Obama's deliberate style of leadership succeed when all else around him is a jumble of confusion? He will try to reassure Democrats, even as they become increasingly worried about their political futures. He will risk further rankling Republicans, even as their rhetoric about overreaching federal power resonates with a growing percentage of Americans. To succeed, he will have to participate in the realms of Washington politics that he has so regularly disparaged. The next few weeks will be dominated by what Obama has by turns called "partisan bickering," "political point-scoring," "media speculating" and "legislative gridlock" -- all aspects of political life from which he has worked hard to distance himself. But for at least the next two weeks, he will ignore what is politically popular and instead "do everything in my power to make the case for reform," he said. The past few days have provided Obama with a preview of the kind of messiness he is likely to encounter as he readies for a final health-care fight. While he traveled to Savannah, Ga., on Tuesday to speak about the economy and remarked -- as he always does -- that it was nice to escape Washington and spend time with regular people, the city that orbits around him continued to prove itself as irregular as ever. There was Sen. Jim Bunning (Ky.), an outgoing conservative making his stubborn last stand by delaying a $10 billion spending bill for five days. His filibustering resulted in furloughs for federal employees and delayed unemployment benefits for millions of people. Republican colleagues denounced him, and more than 100 protesters gathered to chant and hold signs near his Washington office. Bunning explained his objections loquaciously on the Senate floor but then escaped into a members-only elevator when reporters asked him to comment. There was Robert Gibbs, Obama's press secretary, answering a question about Bunning's filibuster by explaining that "as is true in most things in Washington, it's fits and starts; it's one step forward, one step back, or two steps back." Those probably were the same characteristics of Washington, Gibbs confirmed later, that contributed to Obama's above- average cholesterol level and continued nicotine habit, as was revealed after the president's physical exam last weekend. There was Rep. Charles B. Rangel (D-N.Y.), a 79-year-old dressed in a blue bow tie, explaining Wednesday morning in his gravelly voice that he would resign temporarily as chairman of the House Ways and Means Committee because of an ongoing ethics investigation. Rangel spent most of his statement explaining that he wouldn't answer questions from the media. Then he lingered at the lectern, waiting for questions and answering a few. Hours later, Democrats protested the appointment of Rangel's expected replacement, Rep. Pete Stark (D-Calif.), leaving no clear successor. There was the Republican National Committee, which created a fundraising memo that depicted Obama as the Joker character from "Batman" and dubbed him part of "The Evil Empire." And then, within less than an hour, there was the requisite response from a

344 Democratic National Committee spokesman, who countered that "the Republican Party has been taken over by the fear-mongering lunatic fringe." And then, finally on Wednesday afternoon, there was Obama. He finished his remarks in the East Room, waved at the crowd and then pumped his fist emphatically. "Let's get it done," he concluded, as if it would be just that easy. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/03/AR2010030304221.html?wpisrc=nl_headline

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European Union reacts favorably to $6.5 billion austerity plan from Greece By Associated Press Thursday, March 4, 2010; A16 ATHENS -- With creditors demanding solutions to the Greek debt crisis and the financial world increasingly on edge, Athens on Wednesday moved to freeze pensions, cut civil service salaries and slap new taxes on everything from cigarettes and alcohol to fuel and precious gems. Markets and the European Union reacted well to the $6.5 billion austerity plan. But Greek unions were outraged -- and the country's embattled prime minister, who had likened the situation to a "state of war," is headed to Germany and France seeking more definite expressions of support. Prime Minister George Papandreou warned that unless the new measures won European Union and market backing, bringing down the cost of borrowing for the country, Greece would turn to the International Monetary Fund. Greece is already receiving technical help from the IMF but has not yet appealed for a bailout. The IMF has bailed out E.U. members Hungary, Romania and Latvia, as well as nonmembers Iceland, Ukraine, Belarus and Serbia -- but never one of the countries that uses the euro. The IMF said it approved of the new plan, which is to be voted on Friday in Parliament. The savings, which amount to roughly 2 percent of gross domestic product, would be split evenly between increasing revenue and slashing spending. Tax increases include a 20 percent hike for alcohol, a 65 percent increase on cigarettes and raising the sales tax from 19 percent to 21 percent. Cuts include curbing civil servants' pay, cutting bonuses and stipends, and freezing pensions. Papandreou heads to Berlin on Friday to meet with German Chancellor Angela Merkel -- whose country is highly reluctant to indicate concrete assistance -- and then to Paris for talks with French President Nicolas Sarkozy before flying to Washington to consult with President Obama. Greece had taken an "important step" toward realizing its goal of cutting its budget deficit, Merkel said in Berlin. Greece announced an austerity plan in January, but it won only lukewarm support from the E.U. and didn't calm jittery markets. But the latest batch of budget cuts won early approval from the E.U. and leading credit ratings agencies Moody's Investor Service and Fitch Ratings, both of which had downgraded Greece's credit rating in December. E.U. Economic and Monetary Affairs Commissioner Olli Rehn, who had demanded new measures during a visit to Athens on Monday, described the new plan as a "potential turning point." "I can see that there is a very strong determination and unity to reform the country and put the public finances under control. This can be made a real turning point in the fiscal history and economic development of Greece," he said.

346 Moody's said that the austerity measures were a "clear manifestation" of the government's resolve and that officials should be allowed time to follow through and implement the measures, while Fitch Ratings said that "politically challenging measures like a rise in VAT and further cuts in public sector pay indicate that the Greek authorities are indeed serious about cutting the deficit." While the markets were happy, Greece's labor unions were not. "These measures are terrible. I think the government does not realize how little people in this country are being paid," said Despina Spanou of the civil servants union ADEDY. "We have no other choice other than to step up [our protests]." The union has called its third 24-hour strike for March 16. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/03/AR2010030304063.html?wpisrc=nl_headline

347 March 4, 2010 Traders Seek Out the Next Greece in an Ailing Europe By NELSON D. SCHWARTZ and GRAHAM BOWLEY Is Spain the next Greece? Or Italy? Or Portugal? Even as Greece pledged anew on Wednesday to rein in its runaway budget deficit, briefly easing the anxiety over its perilous finances, traders on both sides of the Atlantic weighed the risks — and potential rewards — posed by the groaning debts of other European governments. While investors welcomed news that Athens would raise taxes and cut spending by $6.5 billion this year, analysts warned the moves might not be enough to avert a bailout for Greece or to contain the crisis shaking Europe and its common currency, the euro. Indeed, some banks and hedge funds have already begun to turn their attention to other indebted nations, particularly Portugal, Spain, Italy and, to a lesser degree, Ireland. The role of such traders has become increasingly controversial in Europe and the United States. The Justice Department’s antitrust division is examining whether at least four hedge funds colluded on a bet against the euro last month.“If the problems of Greece aren’t addressed now, there is a risk the market will focus on the next weakest link in the chain,” said Jim Caron, global head of interest rate strategy at Morgan Stanley. Whatever the outcome in Athens, the debt crisis in Europe threatens to tip the financial, as well as political, balance of power across the Continent. With Germany and France emerging as the most likely rescuers, leaders in Berlin and Paris could end up dictating fiscal policy in Portugal, Ireland, Italy, Greece and Spain. And in the months ahead, fears about the growing debt burden elsewhere in Europe are likely to return, according to investors and strategists. That is particularly worrying given that Western European countries must raise more than half a trillion dollars this year to refinance existing debts and cover their widening budget gaps. The way fear can spread from capital to capital reminds Mr. Caron of how the American financial crisis played out. “What people are doing in the markets is no different from what they did with the banks,” he said. “First it was Bear Stearns, then it was Lehman Brothers and so on. That’s what people are worried about.” France and Germany are emerging as the crucial backers of any lifeline for Greece, but they have slow growth and budget troubles of their own — deficits equaling 6.3 percent of gross domestic product in Germany and 7.5 percent in France. And among voters in both countries, “there is very little appetite for rescues,” said Marco Annunziata, chief economist for Unicredit. The most vulnerable country after Greece, some analysts say, is Spain, which has been mired in a deep recession. Facing an unemployment rate of 20 percent, a budget gap of more than 10 percent of gross domestic product, and an economy expected to shrink by 0.4 percent this year, Madrid has little wiggle room if investors shun an expected 85 billion euros in new bond offerings this year. Spain’s neighbor Portugal is also vulnerable. Large budget and trade deficits, combined with a shortage of domestic savings, leave Portugal dependent on foreign investors. And, as in Greece, there may be little political will to slash spending or raise taxes.

348 That’s in sharp contrast to Ireland, which had been a source of anxiety last year. New austerity measures, including a government hiring freeze and public sector wage cuts, have put it in a stronger position as it raises 19 billion euros this year. The Italian government is also heavily indebted — it has more than $2 trillion in total exposure — but it is also in a slightly stronger position than Spain or Portugal because its economy is expected to grow by 0.9 percent this year and 1.0 percent next year. In addition, its budget is not as far out of whack, with the deficit this year expected to equal 5.4 percent of G.D.P. According to Kenneth J. Heinz of Hedge Fund Research, the big hedge funds are now evaluating the response by other European countries in extending a lifeline to Greece before they probe weaknesses and opportunities in other countries. Hedge funds, banks and other institutions are still wagering on a drop in the euro as well as the British pound. Those trades have been controversial for months in Europe. But the debate shifted to the United States on Wednesday, after it emerged that at least four hedge funds had been asked by the Justice Department to turn over trading records and other documents. That request followed a dinner in New York last month where, among several other subjects, representatives of some of these hedge funds discussed betting against the euro. The funds that received the letters — Greenlight Capital, SAC Capitol Advisors, Paulson & Company and Soros Fund Management — are among the best-known names in the hedge fund universe. Greenlight and SAC declined to comment, as did the Justice Department. Paulson & Company, whose representatives did not attend the dinner, also declined to comment. In a statement, Michael Vachon, a spokesman for Soros Fund Management, denied any wrongdoing and said, “It has become commonplace to direct attention toward George Soros whenever currency markets are in the news.” The dinner, in a private room at the Park Avenue Townhouse restaurant in Manhattan on Feb. 2, involved about 20 people and was characterized as an “ideas round table” by several who attended. But people present at the dinner or knowledgeable about the discussion said the idea of shorting the euro occupied only a few minutes of the conversation. The presentation on the euro, by SAC, lasted less than five minutes, according to these people. Notes provided by one of the firms that attended the dinner summarized the discussion on the euro state: “Greece is important but not that important; instead you have to start thinking about every other country. What’s after Greece? Spain, Ireland, Portugal.” James S. Chanos, a hedge fund investor who has not been making bets on the euro, defended the positions taken by hedge funds, calling the inquiries into their activities “witch hunts.” “Hedge funds and short-sellers are being blamed for the failings of other people,” he said. Nevertheless, the anxiety in Europe is reflected on the Chicago Mercantile Exchange, where trading in futures on the euro soared to a record $60 billion in February — up 71 percent from a year ago. “The Greek story is putting downward pressure on the euro,” said Derek Sammann, a managing director at the CME. According to CME data, hedge funds are in their most bearish position in a decade in shorting the euro, said Mary Ann Bartels of Bank of America Merrill Lynch. “They have been short for a while, but in the past two weeks have really pressed it,” she said. http://www.nytimes.com/2010/03/04/business/global/04bets.html?th&emc=th

349

The Greek Job Satyajit Das Mar 4, 2010 11:29AM Recent revelations that Greece used derivatives to disguise its true level of borrowing have surprised markets. The reaction is reminiscent of Captain Renault (played by Claude Rains) in Casablanca: "I am shocked, shocked to find that gambling is going on in here." Use of derivatives to disguise debt and arbitrage regulations and accounting rules is not new. In the 1990s, Japanese companies and investors pioneered the use of derivatives to hide losses – a practice called "tobashi" (from the Japanese, tobasu, the verb, means "to make fly away"). Derivatives, such as interest rate and currency swaps, are used to alter the nature and currency of the cash flows on existing assets or liabilities. Transactions entail exchanges of one stream of payments for another. At the commencement of the transaction, if the contract is priced at current market rates, then the current (present) vale of the two sets of cash flows should be equal (ignoring any profit). The contract has "zero" value – in effect, no payment is required between the parties. Using artificial "off-market" interest or currency rates, it is possible to create differences in value between payments and receipts. If the value of future payments is higher than future receipts, then one party receives an up-front payment reflecting the now positive value of the contract. In effect, the participant receives a payment today that is repaid by the higher than market payments in the future – identical to the characteristics of a loan. Any number of strategies involving combinations of different derivatives can achieve this effect. Greece may be merely following the precedent of another Club Med member. In 2001, academic Gustavo Piga identified the case of an unnamed European country, that everyone assumed was Italy, using derivatives to provide window dressing to meet its obligations under the European Union (EU) Maastricht treaty. There were accusations and counter accusations. The report vanished from the International Securities Market Association (ISMA) web site. It was alleged that in December 1996, Italy used a currency swap against an existing Yen 200 billion bond ($1.6 billion) to lock in profits from the depreciation of the Yen. The swap was done at off-market rates. Italy set the exchange rate for the swap at the May 1995 level rather than the rate at the time of entering the contract. Under the swap, Italy paid a rate of dollar LIBOR minus 16.77% reflecting the large foreign exchange gain built into the contract for the counterparty. Given that LIBOR rates were around 5.00%, the interest rate paid by Italy was negative. In effect, the swap was really a loan where Italy had accepted an off-market unfavourable exchange rate and received cash in return. The payments were used to reduce Italy’s deficit helping it meet the budget deficit targets of less than 3% of GDP (gross domestic product). Between 1996 and 1997, Italy had cut its budget deficit from 6.7% to 2.7% to meet the EU target. The suspicion was that, well, it hadn’t exactly cut the deficit but, among other things, it had used derivatives to provide window dressing. There were suspicions that other EU countries also used similar structures to fiddle their books to meet the Maastricht criteria.

350 The Greek transactions are believed to be similar cross-currency swaps linked to the country’s foreign currency debt, structured with off-market rates. The swaps are believed to have notional principal of approximately $10 billion with maturities between 15 and 20 years. Other financial products can also be used to reduce the level of reported debt. These include securitisation of future public sector receipts, the use of non-consolidated borrowing institutions, private-public financing arrangement supported indirectly by the State and leasing rather than direct ownership of assets. Greece may have also used some of these arrangements. Although no illegality is involved, the arrangements raise important questions about public finances and financial products. The episodes raise questions of the skills of regulators and reporting agencies in understanding and dealing with financial structures. They highlight inadequacies of public accounting. Reported debt statistics fail to provide adequate information of the level of borrowing, the real cost of debt and also the future repayment commitments. Under international standards, such an off-market swap would have had to be accounted for by public corporations on a mark-to- market requiring greater disclosure of the details, especially the large negative market value (representing future payment obligations) as a future liability. For example, the real effect of the Greek transaction is not clear. Analysts suggest that the cash received from the transactions may have reduced the country’s debt/GDP ratio from 107% in 2001 to 104.9% in 2002 and lowered interest payments from 7.4% in 2001 to 6.4% in 2002. However, the large negative market value of the currency swaps (representing future payment obligations) does not appear to have been reported as a future liability for Greece. Such arrangements provide funding for the sovereign borrower at significantly higher cost than traditional debt. For example, in the Greek swaps, these costs include charges for counterparty credit risk in the swap and hedging costs for the interest rate and currency risk. In addition, the cash bears a higher rate than the normal credit margin on the sovereign’s debt. In part, this reflects the premium for an illiquid loan compared to a more liquid, tradable conventional bond. The true cost to the borrower and profit to the counterparty is also not known, due to the absence of any requirement for detailed disclosure in derivative transactions. Derivative professionals argue that derivatives are used to hedge and manage risk. While they do play this role, derivatives are now used extensively to circumvent investment restrictions, accounting rules, securities and tax legislation. Current proposals to regulate derivatives do not focus on this issue. The policy case for permitting applications of derivatives is not clear. As the Greek Job highlights, simple borrowing and lending can be readily disguised using derivatives exacerbating risks and reducing market transparency. Regulators need to heed Francois de La Rochefoucauld’s warning: "We are so accustomed to disguise ourselves to others that in the end we become disguised to ourselves." An earlier version was published in the Financial Times, London. http://www.roubini.com/globalmacro-monitor/258484/the_greek_job

351 ABC.es - Noticias de España y del mundo Jueves, 4 de Marzo de 2010

¿PIGS? ¿Quién habló de cerdos? TRISTAN GAREL-JONES Miércoles , 03-03-10 Que a España se la coloque junto a otros países de la Europa Mediterránea en el Grupo denominado PIGS (cerdos), además de insultante, es un error técnico grave. Descartemos, de entrada, el lado insultante de la denominación. La lengua inglesa -con más de 600.000 palabras en el Diccionario de Oxford- se presta mucho a una serie de juegos de palabras, dobles sentidos y eslóganes. Los angloparlantes no nos podemos resistir a estos juegos. Desde el mismo Shakespeare, que abre su obra Ricardo III así: «Now is the winter of our discontent / Made glorious summer by this sun of York». «Ahora el invierno de nuestro desagrado / se convierte en glorioso verano gracias a este sol (¿o hijo?) de York.» La prensa y el mundo de la publicidad compiten continuamente con estos juegos. Así, cuando el buen político liberal Paddy Ashdown reveló una relación ilícita con su secretaria, el titular del día siguiente: «Paddy Pantsdown» (Paddy pantalones abajo) hizo gracia hasta a quienes le admiramos. O en otro caso, siguiendo alegaciones de acoso por parte de Gordon Brown hacia sus subordinados, la prensa ha empezado a llamar al Prime Minister-the Prime Monster! ¡Somos incorregibles! Así que al «listillo» de la City o de Wall Street al que se le ocurrió la idea de los PIGS, la respuesta, a la altura de su propia frivolidad, es: ¿cerdos? ¡En España al cerdo lo convertimos en jamón serrano! A nivel más serio, digamos por de pronto que España no es un país visceralmente corrupto. Efectivamente, ha habido (como en todas partes) corrupción. Pero en España se encuentra más bien a nivel ayuntamientos y gobiernos locales (posiblemente porque tengan atribuidas competencias que en realidad están por encima de su grado de competencia). La noción de que el Banco de España (ejemplo mundial de una supervisión rigurosa) o las cifras macroeconómicas emitidas por el Ministerio de Hacienda sean susceptibles de una manipulación fraudulenta por el Estado es totalmente impensable. Además, España cuenta con una serie de Cuerpos Superiores de la Administración (Abogados del Estado, Notarios, Registradores de la Propiedad, Inspectores Técnicos Fiscales) que, aunque algunas veces he oído que son criticados por su exceso de burocracia, juntos forman, por así decirlo, la espina dorsal de un Estado de Derecho. Hoy, España representa el 1.5 por ciento de la capitalización bursátil mundial. El IBEX 35 tiene un valor de mercado de 356.000 millones de euros. Cinco empresas españolas representan nada menos que el 15 por ciento del valor del Euro Stoxx 50. Incluso las Agencias de Rating (que tampoco han salido ilesas de esta crisis en lo que se refiere a su reputación) clasifican muy bien a España - Moody´s Aaa, Fitch AAA, S&P AA-. El sector financiero español tiene una solidez que para sí quisieran otros. Sí está siendo afectado por el colapso inmobiliario, pero, por de pronto, no se quedó expuesto en los «toxic assets», y el contribuyente español no ha tenido que rescatar a grandes nombres del sector bancario como ha ocurrido en los Estados Unidos e Inglaterra. De momento, la factura que se ha pasado a los contribuyentes británicos sube hasta 65.000 millones de libras, mientras que en Estados Unidos la cifra asciende a 73.000 millones de dólares.

352 Si comparamos las cifras del Reino Unido con las de España, vemos que en España la deuda pública representa un 55 por ciento del Producto Interior Bruto en el año 2009, mientras que en el Reino Unido es del 62 por ciento. En el año 2009 el crecimiento de la economía española fue de -3.6 por ciento, mientras que en el Reino Unido la cifra fue de -4.8 por ciento. El déficit presupuestario en España es el 11,4 por ciento del PIB, y en el Reino Unido el 13 por ciento del PIB. ¡Uno se pregunta si la letra «i» en el eslogan PIGS no será por Inglaterra! Las cifras de paro en España son preocupantes, rondan el 19 por ciento, mientras que en el Reino Unido son del 7,8 por ciento. Ahí España cuenta con una ventaja, no contundente pero significativa, que los economistas del mundo financiero no saben medir -la solidaridad familiar-. En mi país los líderes del Partido Conservador hablan ya de «una sociedad rota», España todavía conserva estos valores, que no resuelven la crisis del paro, pero sí deben paliarla algo. Quizá sería positivo si el Gobierno hiciera todo lo posible por apoyar ese tesoro que aún conserva España que es el núcleo familiar. Si hemos establecido que España es un país serio y solvente (véase la colocación de Bonos Soberanos días atrás), que quede claro que esto no disminuye para nada la gravedad de la crisis. Más bien la agudiza. Un país serio no puede permitirse una huida hacia delante. La profundidad del problema puede medirse, más o menos, con una comparación con el Reino Unido. Inglaterra no pertenece a la zona euro. Luego dispone de un tubo de escape (que no es tal cosa) que es la devaluación de la moneda. Pues la libra esterlina se ha devaluado aproximadamente un 25 por ciento en los últimos meses. Esta cifra del 25 por ciento de la devaluada libra da una idea de la envergadura del problema y de las drásticas medidas que hay que tomar para afrontarlo: reducción del déficit presupuestario, flexibilización del mercado laboral, reducción del gasto público, reforma de las pensiones, reconocimiento de la deuda nacional (no la pública) en el exterior, y todo ello con una cifra de parados que no iguala nadie en Europa. Eso supone que las medidas deben tomarse de manera que no sofoquen un futuro crecimiento económico ni la consiguiente creación de empleo. No voy a caer en la descortesía de dar sermones a un país que no es el mío. Tampoco quisiera que las virtudes de la sociedad española que señalo se interpretasen como halago al Gobierno actual. Ni los desafíos que esperan, como aliento a la oposición en sus críticas al Gobierno. Son las virtudes propias de una sociedad de derecho y una democracia europea. El talón de Aquiles de las democracias consiste en que los partidos políticos, tanto de gobierno como de oposición, en su afán de ganar elecciones huyen ante las difíciles decisiones que exige una crisis de esta envergadura. España tiene economistas y pensadores de nivel internacional perfectamente capaces de señalar el camino hacia la salida. El Comisario Joaquín Almunia, don Julio Segura, don Alberto Recarte, por nombrar solo tres de diferentes tendencias. Ojalá España sea capaz de utilizar a fondo sus recursos intelectuales, económicos y sociales. Finalmente, en lo que se refiere a los PIGS, me permito dar un consejo al Gobierno español. En inglés hay un dicho: «Holier than Thou», que traducido querría decir: «Más papistas que el Papa». Pues a esos chiquillos de Wall Street y la City que inventaron lo de los PIGS habría que decirles que no sean «Haughtier than Thou». Quienes no hablan inglés pueden buscar la palabra haughty en el Diccionario de Oxford. (“más cerdos sois vosotros”) http://www.abc.es/20100303/opinion-tercera/pigs-quien-hablo-cerdos-20100303.html

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03.03.2010 Hedge funds step up their bets against the euro

The FT leads the paper with a story that hedge funds are raising their bets against the euro amid growing fears of a regulatory backlash against their trading positions on the specific sovereign debt of Greece and other weak eurozone economies. Many of the world’s biggest hedge funds have become increasingly concerned about fierce criticism by European politicians that their country bets have heightened the crisis of confidence in some markets. Lord Turner, the chairman of the Financial Services Authority, the UK market regulator, on Tuesday became the latest heavyweight figure to add his support to an investigation into speculative positions in financial instruments that gain from a fall in prices of sovereign and corporate debt. Hedge funds have concluded that the political and regulatory risks associated with positions against individual countries in the currency bloc were now too unpalatable. There was more pressure, now coming from the EU. Commissioner Michael Barnier told the press that the European Commission is investigating trading in sovereign credit default swaps. Greece to announce austerity programme today Bloomberg has the story that the Greek government is to announce today €4.8bn of additional deficit cuts. The new measures will include higher tobacco, alcohol and sales taxes and deeper cuts in public workers’ bonus payments. George Papandreou is due to speak to the Greek public today, and to announce concrete measures. In a speech to his PASOK parliamentary group, he said, according to Kathimerini, that we are at war to save the country and he asked everyone not to give up the battle for Greece and it fight as though it was a battle for their own home. The decisions to be announced will hurt, said the prime minister, but what matters is the struggle for survival. The news triggered a fall in funding costs to the lowest level in weeks. Yields on the 10y bond fell 7 basis points to 6.1%, the lowest since Feb. 12. The premium over German bonds fell 15bp to 3.01%, the least in three weeks.

354 ECB softening tone against Greece There has been some movement in the ECB’s hard stance against Greece, the FT reports. Under the current scenario, Greek bonds could become ineligible for use as collateral in ECB liquidity, if Moody’s follows other rating agencies in downgrading Greek assets further. But Ewald Nowotny, Austria’s central bank governor, said it was “unacceptable” that “the fate of Greece, and if you are going to be more dramatic, the fate of Europe depends on the judgement of one rating agency.” Gifts for the Greek government If all Greek could be as generous as Nana Mouskouri, the world famous singer and former MEP, Greece would definitely be out of trouble. Realising in what dire straits her country is, she decided to dedicate her MEP pension to the Greek state as long as the crisis lasts. Luckily, she does not rely on her MEP pension. Nana Mouskouri was the second most successful female singer in the world, right after Madonna, selling 250 million records, writes Spiegel online. Austrian regulator restricts foreign currency loans The Austrian financial regulator is planning to restrict rules to curb foreign currency loans, which are likely to come into action as early as this month, according to Financial Times Deutschland. Foreign currency loans are significantly more popular in Austria than in Germany or elsewhere in the euro area. According to Austria’ s central bank, one third of all private mortgages are financed in yen or Swiss francs. Spanish unemployment up In Spain, the number of unemployed continued to rise in February by 2% mom (or 20%yoy), hitting 19%, as the recession continues to spread throughout the economy. The FT reports that the jobless rate rose 2% in service sectors, while agriculture was hit worst with a rise of 6.5%. The government took solace from a slowing down of unemployment growth. This Feb mom rise was only half of the new unemployed recorded in the same period last year. El Pais has more details. Wolfgang Munchay says it is time to decide In his column in FT Deutschland, Wolfgang Munchau says it is time for Germany’s government to make up its mind about Greece. After George Papandreou declares himself – now expected today – Germany will have to declare quickly whether it considers the latest, significantly improved Greek austerity plan as sufficient. Germany should make such a declaration, but expect many hysterical reactions in a country, in which the media believed, or were led to believe, that the agreement of Feb 11 in the European Council amounted to nothing. Why the government and the private sector cannot both deleverage at the same time This is a terrific commentary on the euro area’s financial balances, and the failure by European governments to focus only on the public sector balances, while totally ignoring the private sector balances. Rob Parenteau, writing in Naked Capitalism, has calculated the details and put it graphically into a map, which the region feasible combination of private and public sector balances. One of his main conclusions is that in Spain “both the public sector and the domestic private sector cannot deleverage at the same time unless Spain produces a nearly unimaginable trade surplus.” He also observed that in Europe, the issue of fiscal retrenchment is discussed as though it had no influence on the private sector balances. There are various logical combinations, he writes, but “if households and businesses in the

355 peripheral nations stubbornly defend their current net saving positions, the attempt at fiscal retrenchment will be thwarted by a deflationary drop in nominal GDP. “ Van Rompuy saves the day In his latest briefing note on www.eurocomment.be, Peter Ludlow offers a very detailed narrative of what actually during the fateful European Council on February 11. On the evening of Feb 11, Merkel rejected the agreement reached by the euro group the previous day. In response, Van Rompuy managed to first delay the summit by two hours, during which time he managed to get the principal actors to accept a compromise. “The key meeting on the morning of 11 February was at 10.30 with Angela Merkel, George Papandreou and Nicolas Sarkozy, plus one official in each case. According to one of those who were present in the room, what was in many respects the most impressive feature of the discussion was Van Rompuy’s evident understanding of his partners’ respective standpoints. ‘He had obviously listened closely to what his colleagues had told him during the previous days and was therefore able to put everybody at ease.’ As a result, a meeting which might so easily have become bad-tempered was, in the words of another participant, ‘a quiet discussion amongst top politicians, each of whom had problems, but all of whom were well aware that they had to arrive at an understanding’. Papandreou explained his predicament and Merkel explained hers, but in neither case was there the slightest hint of recrimination.” http://www.eurointelligence.com/article.581+M5b5ae837605.0.html#

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02.03.2010 Europe in Dire Straits – don’t be Brothers in Arms. By: Henrik Enderlein

On 30th October 1975, the New York Daily News titled: “FORD TO CITY: DROP DEAD” - referring to the refusal of the US-President to provide financial assistance to the New York City government (at that time in serious debt difficulties). Today, this headline is a perfect guide to handling the situation with Greece. Instead of muddling through and changing the basic rules of the euro-area, European leaders should now send a clear message and tell markets that there won’t be a bailout for Greece. For the time being, the recommendation to send a clear “no” to Greece is mainly coming from believers in neo-classical economic orthodoxy. I would argue that believers in stronger political integration and closer economic cooperation should also embrace this position. The EU looks weak if it first signals that Greece is a serious problem and then can’t solve it (or can only solve it by breaking its own rules). The EU looks strong if it can convince markets that the euro-area is sufficiently solid to even accommodate a Greek default. I know there are many arguments against this position – I can think of at least five of them. But here is why I think they are not convincing, except perhaps for the last one. First argument: “A no bailout statement would send Greece into a sovereign default.” No. Greek government debt levels are high, but not outrageously high. Many other countries in the world have much higher debt-to-GDP ratios, and they still have access to fresh capital. Even in the context of a clear “no” from EU leaders Greece would have several choice: it could decide not to implement austerity measures and pay the price for it (high interest rates – as in many other cases across space and time), or it could try to convince markets that it really wants to reduce its debt (convincing arguments would be institutional changes in domestic policy-making, tax increases, or wage-restraint). It could also turn to the IMF – and this is the most likely outcome. The IMF could serve as the ropes tying Greece to the mast. Usually, this recipe works: Do you remember the talks about a Ukrainian default being “imminent” in the

357 spring of 2009? Apparently, not every crisis situation translates into a worst-case scenario. But even a default would not be as devastating as currently suggested. This brings me to the second argument: “Greece is like Lehman.” No. Even in the highly unlikely case of a Greek default, the shockwaves into the financial system would not be as enormous as often argued. A country is not a bank. A bank either stays alive or falls apart. A country has more flexibility: it can default on parts of its debt, it can enter into negotiations with creditors to roll-over its debt, it can seek to restructure the terms of payment. There are numerous examples of governments working closely with private creditors to bridge a period of financial distress. Uruguay did so quite successfully in 2001 in a pre-default restructuring. The often quoted case of Argentina is an outlier: not every default takes several years until a settlement is reached. Also: the Lehman shockwave was large because of Lehman’s role as a sought-after intermediary for a large variety of financial products. By contrast, Greek government debt is a simple asset. No normal investor should have a disproportionally high exposure to Greek debt. This almost by definition implies that the costs of a Greek default would not nearly be as high as in the Lehman case. Third argument: “Contagion”. Beyond the points already made above, there simply is no reason to believe that a no-bailout declaration on Greece would push Portugal, Spain, Ireland, and Italy into defaults. Sure, bond spreads would rise, but if history is of any guidance, this would be a temporary phenomenon. Brazil did not default in 2002 after Argentina defaulted, even though it faced strong pressure from financial markets. It teamed up with the IMF and presented a series of austerity measures that ultimately convinced markets. In 2003 Brazil even exceeded the budgetary surplus target set by the IMF. Fourth argument: “You have to be anti-European to argue against a bailout”. Certainly not – quite on the contrary. The EU, and in particular EMU, would look stronger if they signaled that they could let Greece go. Do the US Federal Government and the dollar look weak as a consequence of California’s debt problems? No, and the reason is President Ford’s declaration cited above. Adopting a forward-looking perspective, the argument gets even stronger: All the Treaty provisions on surveillance and other pre-emptive measures would finally look credible, as hoped by those who prepared the Treaty (which explicitly excludes the bailout-option – even if some lawyers no try to find gaps in that clause). Ultimately, even the euro might gain. Greece represents around 2% of euro-area GDP and financial market participants just have to realize that the euro’s real value is not determined in Athens. Fifth argument: “A Greek default is a black swan event”. This is the only argument that could look convincing – even if I do not think it is compelling. The black swan story goes that a non-bailout declaration would trigger unforeseeable and devastating consequences - so given the risks, muddling through or a bailout are more reasonable choices. What proponents of this view overlook are the hidden risks related to the strategy that EU countries are adopting in the current circumstances. Black swan events can’t be foreseen by definition. So trying to avoid them could make things even worse. Isn’t it possible that the current strategy of EU leaders to issue explicitly confusing remarks puts the euro-area and Greece even more into the spotlight? We just don’t know. But I doubt that clarity would make things worse. One should then also take into account that a Greek bailout would set a dangerous precedent in the EU. I call this the “Berlin fallacy”: the city of Berlin has been in a state of bankruptcy for more than a decade but still can access capital markets with a triple A rating. The reason is that the German Constitution asks the German Federal government to be the ultimate guarantor of debt issued by the German Länder. At the same time, however, the German federal government can’t influence policy-making in the city of Berlin, i.e. the city mayor of Berlin can promise free Kindergarten to Berlin families financing this by debt ultimately backed by

358 tax payers in other parts of Germany. Unintended long-term consequences of short-term political or legal considerations should not be taken out of the equation, even if they are by definition hard to predict. Overall, Europe would look stronger, not weaker, if it sent a clear „no“ to Greece. A currency union that can’t accommodate a default of an economy accounting for 2 percent of its GDP doesn’t look particularly strong. But ultimately, Greece is only the symptom not the reason for the problems in the euro area. For the past ten years the currency union has wrongly signaled to itself that it could be successful without real instruments of economic policy co-ordination and without political union. The discussion on how to better cooperate has to start again – but against the background of a clear stance against Greece. The main signal of the EU should be that either both rights and duties are located at the European level – or that both stay at the national level. If we leave rights in the national context but shift duties to the European level then we weaken economic integration in the EU. By the way: The 1975 sovereign bankruptcy of NYC was avoided. The default declaration was already drafted when a Teachers Union stepped in to provide the necessary guarantees. Even the federal government participated in the rescue but could successfully declare that NYC had saved itself. US economic policy making still benefits from President Ford’s clear message. The author is Associate Dean and Professor of Political Economy Hertie School of Governance, Berlin. http://www.eurointelligence.com/article.581+M57f5781aed9.0.html#

359

02.03.2010 'Swap Tango' – A Derivative Regulation Dance: Part 1 By: Satyajit Das

On 30 July 1998, Alan Greenspan, then Chairman of the Federal Reserve argued that: "Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." In October 2008, the now former Chairman grudgingly acknowledged that he was "partially" wrong to oppose regulation of credit default swaps ("CDS"). "Credit default swaps, I think, have serious problems associated with them," he admitted to a Congressional hearing. His current views on wider derivative regulation remain unknown. Politicians and regulators globally are currently busy drafting laws to regulate derivatives. A common theme underlying the activity is an absence of knowledge of the true operation of the industry and the matters that need to be addressed. As Goethe observed: "There is nothing more frightening than ignorance in action." The author Thomas Pynchon warned: "If they can get you to ask the wrong questions then the answers don’t matter." Simplistic causes and solutions may prevent real issues in relation to derivatives from being debated and dealt with. Size Matters … Based on surveys conducted by the Bank of International Settlements ("BIS"), the global derivative market as at June 2009 totalled US$605 trillion in notional amount. This is a large increase in size from less than US$10 trillion 20 years ago. The bulk of this market is the Over-the-Counter ("OTC") market where derivatives are traded privately and on a bilateral basis between banks and clients. The OTC market contrasts with the exchange traded market where relatively standardised products are traded on formalised, regulated exchanges. The outstanding amount compares to global Gross Domestic Product ("GDP") of around US$ 60 billion. As author Richard Duncan points out in his 2009 book The Corruption of Capitalism, the outstandings in the global derivatives market at its peak in June 2008 (US$760 trillion) was equal to "everything produced on earth during the previous 20 years." Volume estimates are affected by double and triple counting and other statistical problems.

360 There are also significant disagreements about the significance of the size numbers. Derivative professionals argue that derivative notional amounts (the face value of the contract) are a stock measure (like assets and liabilities). GDP is a flow measure (i.e. income). So strictly speaking they are not directly comparable. Derivative professionals also argue that the outstanding value is irrelevant as it is only the notional face value of contracts. They focus on the current value (around US$25 trillion) that can be further reduced after netting between dealers to around US$4-5 trillion. If the US$4 trillion in collateral (cash and government securities) held to secure the current value is considered, then they argue that the exposure is a negligible amount. In effect, there is no risk. The size of the market doesn’t matter. As Laurence J. Peter author of the famous Peter Principal stated: "Facts are stubborn things, but statistics are more pliable." Current value is a calculation of the worth of the derivative contract if terminated today. It provides a useful measure of current price and risk. The notional amount represents the actual amount of underlying assets that the trader is exposed to. The notional face value is the essential starting point of market size and any measure of leverage. The size of the market is inconsistent with the thesis that derivatives are merely a vehicle for hedging and risk management. Current regulatory proposals do not attempt to deal with the size of the derivatives markets. The current debate about "too big to fail" banks may indirectly affect the size issue. Approached to provide government aid to a company that claimed it was to big to fail, Richard Nixon advised: "get smaller!". Derivative regulators would do well to heed Nixon’s advice. Grand Speculations… Proponents argue that derivatives are used principally for hedging and arbitrage. In this way, they perform an economically useful function aiding capital formation and reallocating risk to those willing and better able to bear them. While they can be used for this purpose, derivatives are now used extensively for speculation, that is, manufacturing risk and creating leverage. Stripped of quantitative hyperbole, derivatives enable traders to take the risk of the asset without the need to own and fund it. For example, the purchase of $10 million of shares requires commitment of cash. Instead, the trader can instead enter a total return swap ("TRS") where he receives the return on the share (dividends and increases in price) in return for paying the cost of holding the shares (decreases in price and the funding cost of the dealer). The TRS requires no funding other than any collateral required by the dealer; this is substantially less than the $10 million required to buy the shares. The trader acquires the same exposure as buying the shares but increases its return and risk through leverage. Derivative volumes are inconsistent with pure risk transfer. In the CDS market, volumes were in excess of four times outstanding underlying bonds and loans. In the currency and interest rates, the multiples are higher. Investors searching for return drive speculation. Concerned about stagnant real incomes and inadequate retirement savings, individual investors seek out higher yielding investment structures, often based on derivatives. Pension funds and other institutional investors use derivatives to enhance returns to fully fund and meet their contracted liabilities. In an environment of diminishing returns and fierce competition for attractive investments, fund

361 managers use derivative strategies to enhance returns through readily accessible leverage and capacity to create risk "cocktails". Facing increased pressure on earnings, corporations have increasingly "financialised", resorting to speculative derivative trading to meet profit expectations. This pattern affects small companies as well as large companies. It is also evident in emerging as well as developed economies. In China, India and Korea, companies resorted to aggressive derivative strategies to augment earnings as profit margins on products were relentlessly forced down by competition and buyer pressure. Some strategies have led to significant losses. The competitive advantage, if any, enjoyed by investors and corporations in speculative trading, especially in complex derivatives is unclear. Perhaps it is a lack of "horse sense" as stated by Raymond Nash: "what keeps horses from betting on what people will do." Proponents argue that speculators facilitate markets and bring down trading costs, thereby helping capital formation and reducing cost of capital. There is little direct evidence in support of this proposition. Recent experience suggests that in stressful conditions speculators are users rather than providers of scarce liquidity. Given derivatives are second order instruments deriving its value from underlying assets, the argument regarding liquidity is curious. In many cases, the derivative contract is far more liquid than the underlying debt, shares, currency or commodity. This is consistent with trading in derivatives having a significant non-hedging, speculative element. Speculative activity amplifies rather than reduces volatility and systemic risks. Perversely, this may impede capital formation and also increase the cost of capital for companies. A reduction in speculative activity would also arguable free up capital tied up in trading. This capital could be deployed more effectively within the economy. Control of speculative activity in derivatives is feasible. This would require traders to show an underlying risk as a pre-condition to entering into a derivative contract. In the case of investors, it would also require the derivative contract being covered fully with available cash or other securities. The concept is used extensively in the insurance markets. A similar concept is embedded in the hedge accounting standards currently in use. Current regulatory proposals do not attempt to deal with speculative activity in the derivatives markets. Some U.S. insurance regulators have proposed controls on speculative activity in certain derivatives, such as CDS, by requiring an underlying position. The Obama Administration’s proposed "Volcker Rule" prohibiting major banks engaging in proprietary trading may, if implemented, affect speculative activity in derivatives. Amusingly, dealers now argue that the bulk of trading activity is actually for hedging purposes. It may have something to do with a more elastic definition of "hedging". No evidence was offered. Dealers were probably following Mark Twain’s advice: "Get your facts first, and then distort them as much as you please." In reality, probably no more than 10-20% of activity in the derivative markets is related to hedging. Spoilt for choice… Relatively simple derivative products provide ample scope for risk transfer. Standard forwards or options will generally complete markets and provide the ability to manage risk. The proliferation of complex and opaque products is prima facie puzzling.

362 In the 1950s, two economists, Kenneth Arrow and Gerard Debreu, proposed a theoretically perfect world - known as the Arrow-Debreu theorem. To attain the nirvana of economic equilibrium, the theorem required there to be securities for sale for every possible state of the future – "state securities". There should be contracts to buy or sell everything at any time period in every place until infinity or the end of the world, whichever was first. This utopian worldview provides the justification for allowing any and every type of derivative markets to be created. Dealers argue that such structures are created in response to customer demand and to provide "financial solutions". In my experience, clients rarely ask to be shown a US$/ Yen big figure stop with double-barrier conditional accumulator (with or without Elvis Presley pelvic thrusts). Complex structures are designed and sold (often aggressively) by dealers. The major drivers for complex products are increased risk and leverage. Some structures are also designed to circumvent investment restrictions, bank capital rules, and securities and tax legislation. A key issue is the use of "embedded" leverage. These arrangements are used to provide leverage to investors and corporations whose internal or statutory rules prevent borrowing to finance increased investments. Derivative technology is deployed to increase gains and losses for a particular event (such as a change in market prices of an asset) in accordance with customer requirements to provide the effects of leverage without transgressing their investment mandates. Proposals to control bank leverage, in broad terms, lack understanding of the issues of embedded leverage and its use in financial markets. Complexity is also related to profitability of derivative trading. On 19 March 1999, Alan Greenspan speaking at the Futures Industry Association Conference at Boca Raton, Florida remarked: "… the profitability of derivative products has been a major factor in the dramatic rise in large banks’ noninterest earning and … the significant gain in the overall finance industry’s share of American corporate output… the value added of derivatives themselves derives from their ability to enhance the process of wealth creation." The former Fed Chairman’s statement showed an alarming lack of understanding of one of the sources of derivative trading profits. Many financial products are opaque and priced inefficiently to produce excessive profits – economic rents – for dealers. Efficiency and transparency is not consistent with high profit margins. The majority of derivative transactions are standard and "plain vanilla" earning low margins with dealers relying on volume for profits. The bulk of dealer profitability comes from a few complex products. They also feed trading in standard products as dealers manage and re- allocate their risk from more structured transactions. Complexity is also related to mis-selling of derivative products. Arcane structures create significant information asymmetry. Mis-selling of "unsuitable" derivative products to investors and corporations remains a problem. Expertise of purchasers is sometimes inversely related to the complexity of derivative products. Currently, there are numerous disputes concerning derivative transactions between banks and their clients at various stages of litigation and a significant source of earnings to litigation lawyers. It is difficult to identify the causes – client greed or ignorance versus dealer greed or misrepresentation. Current regulatory proposals do not deal with the issue of complexity in derivative products. Regulators could have forced standardisation and listing of derivative contracts, only allowing

363 them to be traded on exchanges. They have acknowledged, probably correctly, the need to customise products and structures for users and their needs. In relation to product suitability, the BIS have proposed "pharmaceutical" style warning systems, which do not address the problem. Given significant information and knowledge asymmetry between sellers and buyers, the possibility of disallowing certain types of transactions altogether or with certain parties should be considered. Such proposals are likely to be unacceptable as inconsistent with "freedom of choice". "Free market" advocates are likely to side with the view of an anonymous commentator: "Nine out of ten people who change their minds are wrong the second time too."

© 2010 Satyajit Das All Rights reserved. Satyajit Das is the author of the just released Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall). http://www.eurointelligence.com/article.581+M546a7fef8b5.0.html#

04.03.2010 'Swap Tango' – A Derivative Regulation Dance: Part 2 By: Satyajit Das

A question of values … Derivative contracts are valued on a mark-to-market ("MtM") basis. This requires valuation of the contracts based on the current market price. OTC derivatives trade privately. Market prices for specific transactions are not directly available. This means current valuations rely on pricing models. In current accounting argot, most derivatives are Level 2 assets (Mark-to-Model). In practice, this means that they cannot be priced based on quoted trade prices (Level 1) but are valued using observable inputs; for example, comparable assets or instruments or using interest rates, volatility, correlation, credit spreads etc that can be put through an accepted model to establish values. There are significant differences in the complexity of the models and the ability to verify and calibrate inputs. More complex products used sophisticated financial models, often derived from science or statistical methodology. There are frequently differences in choice, exact factorisation and even numerical implementation of the models. Different dealers may use different models. Some required inputs for the models are available from markets sources. The nature of the OTC market and the limited trading in certain instruments mean that key input parameters must frequently be "estimated" or "bootstrapped" from available data. In certain products, the

364 limited number of active dealers means that "market" prices are sometimes no more than the dealer’s own quote being fed back after being collated and "scrubbed" by an external data provider. Model variations and small differences in input can frequently result in large changes in values for some products. The models make numerous assumptions including the ability to borrow at market rates for (theoretically) infinite amounts, unrestricted ability to enter into transactions and abundant trading liquidity. These assumptions are difficult to satisfy in practice. For example, a key assumption of derivative valuation is that a transaction can be hedged with a counterparty or through other means at all times. In late 2008, in the aftermath of the collapse of Lehman Brothers and problems at AIG, market liquidity dried up and made it impossible to source market prices or transact in many instruments. Model based valuations drive pricing of transactions and dealer hedging. They also are used to calculate the risk of the transactions and ultimately to derive the capital required to be held for regulatory and internal purposes. The model-based valuations are also used to determine earnings and ultimately bonus payments for dealer staff. Non-professional dealers rarely have the required sophisticated pricing and valuation systems. They are dependent upon valuation date (predominantly) supplied by dealers or (less frequently) rely on pay-as-you-go pricing services. Investors use the model-based prices to generate values for their fund units. Investors transact at these model-based prices when they invest or redeem investments The accuracy and tractability of derivative valuation, especially for complex products, is questionable. MtM prices may be also prone to manipulation. Recent disclosures about events leading up the government bailout of AIG highlight potential problems. There is limited internal or external (auditors and regulators) oversight of the models. This reflects, in part, the complexity of the models and the scarcity of experienced professionals capable of undertaking such reviews. Widespread reliance on models and MtM methodology is perhaps surprisingly an unquestioned article of faith in financial markets. It allows immediate recognition of gains and losses that will accrue over many years immediately. Interestingly, MtM accounting is generally not available outside of financial instruments. An often neglected element of the Enron scandal was the company’s ability to convince its auditors and the U.S. Securities and Exchange Commission ("SEC’) to allow MtM accounting to be used in the natural gas industry. This allowed the company to record current earnings based on the future value of long term contracts. Current regulatory proposals do not attempt to deal with the pricing, valuation and model issues. As Daniel C. Gelman observed: "Where secrecy reigns, carelessness and ignorance delight to hide." Stand by Me … In derivative contracts, each party takes the credit risk of the other side in terms of performing their obligations. This is known as counterparty risk. The failure of Lehman Brothers and a number of banks during the Global Financial Crisis ("GFC") highlighted the problems of counterparty risk in derivatives.

365 Counterparty risk in derivatives is different from credit risk generally. In a loan, the lender is exposed to the risk of the borrower failing to pay interest or repay the known face value of the loan. In contrast, in most derivative contracts (other than options), the risk is mutual with both parties being exposed to the risk of non-payment by the other. Counterparty risk is complex because the payment obligations as between the parties are contingent. The quantum and the direction of payments depend on market price movements. The potential counterparty risk is not known in advance and is apparent only when actual price movements occur. In practice, this requires parties to estimate the potential exposure using mathematical models based on the expected evolution of the relevant market prices. In the 1980s when the derivative markets developed, counterparties were generally of high credit quality. This had the effect of reducing, though not eliminating, counterparty risk. Over the last two decades, the derivatives market has becoming more democratic. Entities with lower credit ratings have become active users of derivatives. This includes highly leveraged investors, such as hedge funds and private equity funds. Participation of these riskier entities has entailed reliance on credit enhancement techniques. The primary form of credit enhancement was the use of bilateral collateral. This entailed counterparties posting collateral in the form of cash or high quality securities to secure the current value of the contract. The collateral acted as surety against non-performance under the contract. Collateral arrangements were highly customised. For example, AIG’s collateral arrangements required the firm to post collateral only where the exposure under the contracts increased above an agreed level or AIG’s credit rating was reduced below a specified quality. Other credit enhancement techniques used include a right to break that allows either party to terminate the contract under certain credit-related circumstances. Any such termination would be at market values triggering an obligation of one party to pay the other party the current value of the contract. Counterparty risk and credit enhancement techniques are predicated on the same models used for pricing and valuation. Use of bilateral collateral relies on the accuracy of valuations and risk models. It also relies on certain and enforceable legal rights in respect of collateral and proper management of the cash and security lodged. The GFC, especially the bankruptcy filing of Lehman Brothers, provided a test of counterparty risk in derivatives. The quantification and management of such risk proved problematic. The quantum of credit risk from derivatives was higher than model based estimates as market volatility increased and correlations between risk factors moved erratically. Legal enforceability, control and management of collateral also experienced problems. Current regulatory proposals have focused heavily on counterparty risk issues. The central legislative reform proposed is a central clearinghouse - the central counterparty ("CCP"). The BIS also proposed changes in capital requirements against counterparty risk in the light of recent experience. Under the CCP arrangements, (so far unspecified) "standardised" derivative transactions must be transferred to an entity that will guarantee performance. In a curious circularity, standardised means anything that is eligible for and can be "cleared". Interesting inclusions and exclusions – both in terms of products and parties that must trade through the CCP – are to be found. The arrangement centralises contracts in a single entity, the ultimate case of "too big to fail". The CCP will implement risk management systems to manage its exposure under derivative

366 contracts. The CCP will be reliant on risk models and the ability to value contracts. As noted above, there are significant issues in pricing and valuing contracts and, for some products, reliance on complex models. The CCP proposal relies heavily on "self-confidence", which as Samuel Johnson observed is "the first requisite to great undertakings." In relation to the CCP, legislators and regulators are basing their approach on Lillian Hellman’s helpful advise: "It is best to act with confidence, no matter how little right you have to it." One (Not Very Nice) World… The GFC, in line with previous derivative crises including the collapse of Long Term Capital Management ("LTCM"), revealed deep fault lines in financial markets. Derivative markets entail complex chains of risk that link market participants. This is similar to the re-insurance chains that proved problematic in the case of Lloyd’s Insurance market problems. In both markets, the risks are both potentially significant and "long tail", that is, they do not emerge immediately and may take some time to be fully quantified. As in the re-insurance market, the long chain of derivative contracts can create unknown concentration risks. This is exacerbated by the highly concentrated structure of derivatives trading. It is likely that for each product or asset class a few dealers (less than 10-12 and sometimes as few as 4-6) account for the bulk of trading. This means that financial problems or uncertainty about any major dealer could cause the financial system to become gridlocked as uncertainty about counterparty risks restricts normal trading. Current regulatory proposals have not focused on the issue on inter-connected trading and concentration risk. The CCP proposal affects these issues. It is widely believed that the CCP will improve the market structure. In reality, the CCP becomes a node of concentration. In addition, to the extent that products are not routed or counterparties are not obligated to trade through the CCP, the problems remain and may increase. A central problem of the current derivative markets is potential liquidity (cash or funding) risks. Ironically, the problems derive, in substantial part, from the desire to reduce counterparty risk through credit enhancement procedures, such as bilateral collateral. Where derivative contracts are marked-to-market daily and any gain or loss covered by collateral to minimise performance risk, movements in market rates can trigger large cash requirements. These requirements may be unanticipated. If there is a failure to meet a margin call then the position must be closed out and the collateral applied against the loss. This may leave the parties unhedged against underlying risks or on offsetting positions creating the risk of additional losses. For example, ACA Financial Guaranty sold protection totalling US$69 billion while having capital resources of around US$425 million. When ACA was downgraded below "A" credit rating, it was required to post collateral of around US$ 1.7 billion. ACA was unable to meet this requirement. AIG’s CDS contracts were subject to the provision that if the firm was downgraded below AA- then the firm would have to post collateral. In October 2008, when AIG was downgraded below the nominated threshold, this triggered a collateral call rumoured to be around US$14 billion. AIG did not have the cash to meet this call and ultimately required government support. The problems at ACA and AIG are not unique. Current regulatory proposals do not address liquidity risks in derivative markets.

367 Interestingly, the CCP may inadvertently increase liquidity risk as more participants may be subject to margining and unexpected demands on cash resources. The BIS has proposed an extensive regime of liquidity risk management controls that would, in part, cover some liquidity risks. Failed Plumbing… The GFC has exposed some long standing and significant problems with the infrastructure of derivatives markets. In 2006, Alan Greenspan expressed shock and horror at the state of settlements in the credit derivative market. He expressed surprise that banks trading CDS seemed to document trades on scraps of paper. The ex-Chairman, perhaps unfamiliar with the reality of financial markets, had difficulty reconciling a technologically advanced business with this "appalling" operational environment. Derivative systems and trade processing are generally inadequate, with infrastructure lagging well behind innovation. Delays in documenting contracts forced regulators to step in requiring banks to confirm trades more promptly. The accuracy of the mark-to-market values of contracts, particularly of less liquid and infrequently traded reference entities, is not unimpeachable. Where collateral is used, as noted above, monitoring and management of collateral poses significant risks. Current regulatory proposals seek welcome improvements processes and systems for derivative trading. Derivative contracts are documented under the International Swap and Derivatives Association ("ISDA") Master Agreement. The ISDA Agreement has been remarkably successful in standardising documentation of trading. The contract has not been tested under stressful conditions such as those of the GFC. A number of issues have emerged. The bankruptcy of Lehman Brothers and resulting unwinding of complex derivative arrangements has exposed problems of derivative and bankruptcy law, especially in cross-border, multi-jurisdictional transactions. The GFC exposed issues relating to the documentation of specific derivative contracts, such as CDS contracts, and the impact on bankruptcy and resolution of financial distressed firms. Current regulatory proposals do not address any of these documentary issues. Bank regulatory capital has long distinguished between banking (loans or hold-to-maturity assets) and trading books (trading or available-for-sale assets). Differing capital rules between the banking and trading books encouraged regulatory arbitrage, generally using derivative structures to reduce the required level of capital. The BIS has addressed some regulatory anomalies, increasing the capital required against derivative positions. Regulatory initiatives continue to emphasise improved disclosure of derivative contract. There is already significant disclosure, although much of it is incomprehensible and lacks utility. Additional disclosure will not significantly reduce systemic risks of derivatives. On 25 September 2002, speaking at the U.K. Society of Business Economist while in London to collect an honorary knighthood for contribution to economic stability, Alan Greenspan outlined the case for less transparency: "…paradoxically, the full disclosure of what some participants know can undermine incentives to take risk, a precondition to economic growth….to require disclosure of the innovative product either before or after its introduction would eliminate the quasi-monopoly return and discourage future endeavours to innovate….market imperfections would remain unaddressed and the allocation of capital to

368 its most productive uses would be thwarted. Greenspan argued that even "disclosure on a confidential basis solely to regulatory authorities may well inhibit…risk taking." Dealers will undoubtedly resist meaningful disclosure prejudicial to their economic interests. Regulatory initiatives do little to address the quality of regulators and the acuity of oversight. The absence of suitably expert and experienced regulators will undermine regulatory and legislative initiatives. Given the shortage of talent in derivatives generally and the pay grades of regulators, it will be difficult for regulatory agencies to properly supervise dealers and derivative activity. In terms of an old Spanish proverb "Laws, like the spider's web, catch the fly and let the hawk go free." Regulatory Tango… Debate over regulation of financial services has taken on a frenzied tone. Regulators and think tanks are producing voluminous, overlapping and (sometimes) contradictory proposals. Regulatory agencies are jockeying for position, sometimes forming unlikely coalitions to preserve or expand territory. In the U.S. Congress, multiple bills and several committees are jostling to make sense and harmonise complex and irreconcilable draft legislation. Activity and achievement are confused. Banks and their lobbyists do not believe that there is a case for regulation. In William Davenant’s words: "Had laws not been, we never had been blam'd; For not to know we sinn'd is innocence."Banks argue that the complex nature of derivative trading dictates that self- regulation is the only feasible approach. If that fails, then banks seek to minimise scrutiny of major issues, such as the size of the market, speculative activity, pricing issues, complexity and mis-selling of derivatives to unsuitable clients. They argue that existing regulations already adequately cover some issues. Proposed regulations will be masterfully narrowed to minimise impediments to profitable activities. There will be a familiar threat. Lack of international agreement and regulatory uniformity makes compliance impractical. Banks and derivative activity will relocate with losses of jobs and taxes to the host country. Familiar arguments will be heard regarding the loss of competitive advantage, diminished financial innovation, slower capital formation and higher cost of capital. Each is a well-known step in the familiar "regulatory tango".The complexity of the issues means that ultimately no laws may be truly effective. As one famous law maker, Adlai Stevenson, observed "Laws are never as effective as habits."Groucho Marx observed that "[government] is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies." Legislators and regulators are likely to discover the truth of that proposition in their attempts to regulate the derivative market. © 2010 Satyajit Das All Rights reserved. Satyajit Das is the author of the just released Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall). http://www.eurointelligence.com/article.581+M5eceb4d9596.0.html#

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Senators propose consumer-protection regulator within Fed By Binyamin Appelbaum and David Cho Washington Post Staff Writers Wednesday, March 3, 2010; A01 It's an unlikely twist after all the beatings that Democrats and Republicans have laid on the Federal Reserve over the past year. Some lawmakers who set out to improve financial regulation by stripping the Fed of its powers are moving toward the grudging conclusion that the Fed should hold even more power. The central bank was responsible for the health of the nation's largest banks and the safety of American borrowers. Its failures in both roles have been well documented. Even so, key lawmakers on the Senate banking committee are seeking bipartisan support for a plan to house a new consumer-protection regulator inside the Fed. Separate efforts to strip the Fed of its responsibility for overseeing large banks have lost momentum. Adding authority to the Fed has emerged as the only viable option, congressional aides said. Democrats wanted a free-standing consumer-protection agency. Republicans were willing only to tuck a new regulator inside another agency. Democrats suggested the Treasury Department. Republicans said no. The Fed, whose leaders had largely abandoned efforts to retain a role in consumer protection, was left as the last candidate. "A few days ago, the Fed was in some degree of disfavor. The talk was giving it less power, not more," said Sen. Mike Johanns (R-Neb.). "So what an unusual phenomenon has developed over the last few days." The latest proposal, by Sens. Christopher J. Dodd (D-Conn.) Bob Corker (R-Tenn.), was greeted with horror Tuesday by liberal lawmakers and a broad coalition of trade unions and consumer-protection and other advocacy groups. Sen. Byron L. Dorgan (D-N.D.) called it "a terrible idea." Rep. Barney Frank (D-Mass.) said it was "almost a bad joke." Several Democrats on the banking committee also expressed reservations, including Sens. Sherrod Brown of Ohio, Jeff Merkley of Oregon and Charles E. Schumer of New York. "In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle," Schumer said. "I am very leery of any consumer regulator being placed inside the Fed." Dodd, chairman of the banking committee, has been negotiating with Corker to craft a package of financial reforms capable of winning 60 votes in the Senate, where Democrats control 59 seats. The negotiations have stalled for months on the question of how to better protect borrowers from abuse by lenders. The two senators are in broad agreement on a proposal to place a presidential appointee inside the Fed with an independent budget and a mandate to write rules protecting mortgage and credit card borrowers and other bank customers. Those rules would be enforced by existing banking regulators.

370 The key remaining issue is whether the new regulator could impose rules over the objections of banking regulators, who are charged with preserving the safety of financial institutions. Dodd and Corker are also negotiating how broadly the rules would apply to financial institutions that aren't banks. Sen. Evan Bayh (D-Ind.) described the plan Tuesday as "the best hope of actually getting something done." Aides to two Republican senators said they were open to Corker's proposal. The House has passed financial reform legislation, including a free-standing consumer- protection agency, but House Majority Leader Steny H. Hoyer (D-Md.) said Tuesday that he was open to other approaches to protect consumers. Finding common ground has not been easy. Republicans opposed creating a free-standing agency, saying that it would create too much bureaucracy and could expose banks to contradictory instructions from banking and consumer regulators. Republicans also objected to putting the consumer division inside Treasury because it could subject regulators to political influence, some GOP aides said. Many Democrats expressed skepticism for housing the consumer regulator inside an agency primarily devoted to regulating banks, such as the Federal Deposit Insurance Corp., because of concerns that the regulator would prioritize the health of banks over that of customers. Dodd said Tuesday during an interview on MSNBC's "Hardball" that the location of the regulator was less important than the scope of its authority. He said there was no final agreement to place the regulator inside the Fed. "What is most significant is, what powers will it have, and will we be able to do something about what happened to consumers in recent years," Dodd said. Corker's office said in a statement that "talks are continuing to go well." Dodd's embrace of the Corker plan could put the White House in a difficult position. President Obama proposed removing consumer protection from the Fed but keeping the Fed as the primary regulator of the financial system. Now, some Republican senators say they might support keeping the Fed as a banking regulator if it also remains in charge of consumer protection. In effect, that could force the White House to pick between its two stated priorities. Some Republicans say Congress could achieve the long-standing goal of gaining more oversight of the Fed if it takes on new responsibilities for protecting banks and consumers. Lawmakers said work on other parts of the regulatory reform bill was progressing well. Consensus was forming around a proposal to set up a special bankruptcy proceeding for financial companies that are not banks. Additionally, a council of regulators could decide whether the FDIC could take over and liquidate failing firms whose collapse would threaten the entire financial system. http://www.washingtonpost.com/wp- dyn/content/article/2010/03/02/AR2010030204176.html?wpisrc=nl_headline

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Obama says home-retrofitting plan would save energy, create jobs By Michael A. Fletcher Wednesday, March 3, 2010; A03 SAVANNAH, GA. -- President Obama on Tuesday detailed his plan to offer government rebates for home retrofitting, saying the measure would boost employment and save energy. Speaking before a small audience at a technical college, Obama pointed to the program as evidence of his administration's commitment to job creation. "That was my focus last year and that is my focus this year, to lay a foundation for economic growth that will create jobs, that raises incomes, that will foster a secure economic future for middle-class families," he said. Obama called on Congress to pass an administration proposal dubbed "Homestar," which would offer rebates of up to $3,000 for energy-saving home renovations. The idea is based on the popular "Cash for Clunkers" program last year, which offered incentives to trade in older vehicles and buy more energy-efficient ones, providing a boost to auto sales. Congressional Republicans scoffed at Obama's plan, saying that past home-weatherization efforts by the federal government have proved ineffective. House Minority Whip Eric Cantor (R-Va.) pointed to a recent inspector general's report that said that such a program included in the economic stimulus package, at a cost of nearly $5 billion, is falling far short of expectations. The report found that less than 10 percent of the allocated money has been spent, partly because of bureaucratic delays. Consequently, the inspector general said, many fewer jobs were created and just a tiny fraction of the number of homes were renovated than was contemplated in the measure. The administration responded that the Energy Department program is ramping up its operations, and that it targets a different demographic than the Homestar program does. If passed by lawmakers, the latter program is expected to cost about $6 billion and entice as many as 3 million homeowners to initiate the renovations. Obama said the program would achieve multiple goals at once: lowering energy bills for consumers, creating work and reducing the nation's dependence on foreign energy sources. "This is not a Democratic idea or a Republican idea," he said. "It is a common-sense approach that will help jump-start job creation while making our economy stronger." The president spoke during a day-long tour of Savannah businesses, in which he met with business people, enjoyed a heaping plate of Southern cuisine at Mrs. Wilkes' Dining Room, a restaurant, and observed Savannah Technical College students being trained in energy- efficient construction. Obama has taken to the road in recent months to speak to the economic anxiety many Americans are feeling, while seeking to explain and build support for his economic initiatives. In December, he visited Allentown, Pa., and last month he was in Lorain County, Ohio, on what aides are calling "the White House to Main Street" tour.

372 The president is facing increased pressure to show action on job creation as the nation struggles with the highest unemployment levels in a generation. Critics have accused him of focusing too much on his broad health-care reform plan and say the $862 billion economic stimulus plan enacted last year -- which included unprecedented investments in renewable energy -- did not do enough to immediately create jobs. The White House and independent economists have credited the stimulus package with saving or creating 2 million jobs, preventing the unemployment rate from rising even higher, and with helping to stem the recession. But the public has not seen it that way. A series of Washington Post-ABC News polls have found that growing numbers of people -- 53 percent in February -- disapprove of Obama's overall handling of the economy, a sharp reversal from when he took office. A January poll found that 35 percent of Americans thought his policies were improving the economy, while 23 percent thought they were making it worse and 41 percent thought they were having no effect. The White House says the findings are understandable, given the employment picture. Still, the public's restiveness is undermining support for Democrats. In Savannah, Obama defended his economic vision, saying it is focused on encouraging broad growth "that will serve us in the years and the decades to come." http://www.washingtonpost.com/wp- dyn/content/article/2010/03/02/AR2010030203670.html?wpisrc=nl_headline

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02.03.2010 Papandreou to outline the mother of all austerity programmes

Today, George Papandreou will try to persuade his cabinet, and later in the day, or tomorrow morning, the wider Greek public of his latest austerity plan, which according to Kathimerini will include cuts in civil servants pay, including a reduction in the 14 month salary – a privilege enjoyed by the Greek public sector. The paper also reports that the Greek government has already decided to freeze pension payouts in those pension funds, over which it has direct control. The FT writes that measures are expected to include VAT rises, special duties on fuel, tobacco and cigarettes. Commissioner Olli Rehn said Greece must reveal new austerity measures in the coming days. Bloomberg reports says: “Angela Merkel and other EU leaders want Greece to do more so they can justify any aid package to taxpayers and political opponents who say that it shouldn’t be bailed out after living beyond its means. Failure to satisfy Rehn’s demand before the Berlin talks may dash hopes of a German-led lifeline, spurring investors to reverse yesterday’s rally in Greek bonds.” Prime minister George Papandreou is to meet Angela Merkel on March 5.

European policy makers step up pressure to ban CDS Meanwhile, euro area policy makers stepped up warnings of regulatory action against speculative use of credit default swaps, reports the FT. Jean-Pierre Jouyet, the head of France’s financial markets regulator, called for an international agreement to suspend CDS trading during severe turbulence, as well as general short-selling. Jouyet also said that questions needed to be asked about the use of CDS for anything other than covering risk, implying a ban on so-called naked CDS. Bafin, the German financial regulator has been trying to find evidence that Greek debt has been target of speculators by analysing CDS trading data. In an interview with Handelsblatt, Jean Claude Junker warned that “We have the torture equipment in the cellar, and we will show them if needed.”

374 The case against banning CDS Gillian Tett and others argue that CDS is the new bogeyman for Europe. But they argue that it is no clear cut evidence that CDS trade is driven by speculators and that it is difficult to draw the line between speculative trade and genuine hedge against risk. There is little evidence that CDS lead the bond yields as the CDS, in the Greek crisis is was the other way around. Finally, British regulators seem to have no significant concern about market manipulation in sovereign CDS, which does not stop continental European regulators to worry that CDS trade could “amplify panic in the eurozone in uncertain months ahead.”

Why it is in Germany’s interest to help Greece Les Echos cites Patrick Artus saying that Germany has all interests to help Greece. Its export led growth strategy benefited German industry indirectly at the expense of others. To become more competitive, Germany cut its wages, accentuating its dependence on exports, especially to European countries such as Greece. Germany’s refusal to help Greece would thus be suicidal. What Germany really thinks Today’s front page comment in Frankfurter Allgemeine is a depressingly accurate description of the current German state of mind when it comes to the relation with the euro area. The commentator, Werner Mussler, accuses Jean-Claude Juncker of a power play to abuse the crisis as a means to strengthen the eurogroup. In particular he criticises attempts by Juncker and others to reign in Germany’s competitive advantage. (Like so many German economic commentators, Mussler has no concept that an imbalance between two countries is caused by both countries, not just those with the deficit).

Rasmussen for an EU-wide anti crisis policy Poul Nyrup Rasmussen writes in FT Deutschland about a new agreed by European Socialists to help countries in trouble. This plan is not about Greece, but about future anti-crisis mechanisms. Under their proposal, all euro area members would construct an anti-crisis fund under the umbrella of the European Investment Bank. This fund could then be used to counter speculative attacks, for example through credit default swaps. Each country should be eligible to receive protection provided if fulfills a number of conditions – which are still open for discussion. About Britain No longer a blogger, but Willem Buiter has lost none of his bite. Writing in the FT, he says the only difference between Greece and the UK is not so much economic, but political. Both countries need about 8 to 9% of structural fiscal tightening. The only difference is that Britain’s electoral dictatorship could deliver this, at least in theory if there is a clear-cut majority at the next elections (and it looks increasingly improbable according to the latest polls, which favour a hung parliament). He said the best theoretical solution would a government of national unity now – or an agreed pre-commitment by all parties of total fiscal tightening post-election, with difference only in the balance of expenditure and taxation. http://www.eurointelligence.com/article.581+M576229450c2.0.html#

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Britain’s lack of credibility hurts sterling Willem Buiter Published: March 1 2010 20:16 | Last updated: March 1 2010 20:16 Sterling has been weak and jittery recently, falling below $1.50 on Monday. Even with the euro weakening amid the sovereign debt tsunami about to engulf Greece – barring a rescue – the pound has dropped against the single currency. There are good reasons for the weakness and volatility of sterling. Among industrial countries, Britain’s economic fundamentals are uniquely awful. As regards public debt and deficits, Britain’s true fiscal circumstances are about as bad as Greece’s reported situation, once we allow for the understatement of UK public debt through the off-balance-sheet accounting tricks of the past decade (the private finance initiative, unfunded public sector pensions, student loans and other Enron-like constructs). The fiscal weakness of the UK is largely government-inflicted, rather than a result of the financial crisis and global contraction. During the long boom preceding the crisis, fiscal policy was relentlessly pro-cyclical, with public spending rising steadily as a share of gross domestic product. The size of the bank bail-out reflected failures of UK regulation that permitted the financial system’s balance sheet to pass 400 per cent of GDP. Britain has four, inconsistent, features. It is a small, open economy, with a large, internationally exposed financial sector, its own minor-league currency and limited fiscal spare capacity. This makes it uniquely vulnerable. Its central bank is limited in the liquidity support it can give banks with short-term foreign-currency liabilities. Its fiscal authorities may discover that major banks are not just too big to fail but also too big to save. The markets have recognised this, become nervous and started testing it. When a government has credibility – its promises and commitments are believed by its citizens and by the markets – the best policy is not an immediate fiscal tightening. A credible government would implement an immediate fiscal stimulus of, say, 2 per cent of GDP and commit itself to sufficient future tightening to restore fiscal sustainability. Unfortunately, thanks to a decade of fiscal mismanagement, the British government has little credibility. Public finances during the last boom are the obvious guide to expectations about the likely future fiscal behaviour of a Labour government. The cynical manipulation of Gordon Brown’s “golden rule” (over the economic cycle borrowing only to invest) and the decision to jettison it and the sustainable investment rule (net debt not to exceed 40 per cent of GDP) as soon as they threatened to become binding constraints will cause the markets to act like St Thomas towards promises of future fiscal tightening: seeing is believing. The Conservatives are untried and untested. So the markets will also demand their pound of flesh in the form of immediate fiscal tightening if the Tories form the next government. The crucial difference between Britain and Greece is in the political economy of fiscal tightening. Both need 8 to 9 per cent of GDP-worth of permanent fiscal tightening. Greece cannot deliver that without external support because its society and polity are deeply divided; its institutions of governance are weak and its government incapable of swift, dramatic actions.

376 The UK authorities, by contrast, should be capable of imposing a timely burden-sharing solution. This is an advantage of the UK’s “elected dictatorship” constitution: with a powerless second chamber, a first-past-the-post electoral system and no tradition of judiciary interference in economic affairs, there are no checks and balances constraining the executive when a single party has a parliamentary majority. Without a hung parliament, it is all but certain that the next government will impose early spending cuts and tax increases of sufficient size to calm the markets. All bets are off, however, should there be a hung parliament. The British political class would have to learn the art of coalition politics. Fiscal tightening could be postponed. The markets would attack both sterling and gilts, threatening the triple A rating. Even this should be survivable, although it could cause Britain to relapse into recession. A commitment now to a three-party government of national unity could stabilise matters immediately. Failing that, all three parties could agree the size of post-election tightening now, with only the mix of tax rises and spending cuts to be decided after the election. I am not holding my breath. The writer is Citigroup chief economist http://www.ft.com/cms/s/0/d58ada72-256a-11df-9cdb-00144feab49a.html

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EU Sets Clock Ticking on Greece as Merkel Talks Near (Update2) By Simon Kennedy and Jonathan Stearns

March 2 (Bloomberg) -- The European Union set the clock ticking on Greece’s attempts to cut the bloc’s largest budget deficit. As Prime Minister George Papandreou prepares to meet Germany’s Angela Merkel on March 5, EU Monetary Affairs Commissioner Olli Rehn yesterday said Greece must reveal new measures “in the coming days” to allay officials’ concerns that the current austerity plan falls short. Merkel and other EU leaders want Greece to do more so they can justify any aid package to taxpayers and political opponents who say that Greece shouldn’t be bailed out after living beyond its means. Failure to satisfy Rehn’s demand before the Berlin talks may dash hopes of a German-led lifeline, spurring investors to reverse a rally in Greek bonds. “All the trump cards are with Berlin this week,” said Julian Callow, chief European economist at Barclays Capital in London. “Clearly Greece has a huge financing need in the months ahead and so it will have to do more” before the Merkel meeting. Papandreou addresses his governing Pasok party at 5 p.m. local time today and the cabinet meets tomorrow to discuss further “decisions on the economy,” the government said. “It is Greece’s job to do what it has announced, which is to implement the deficit reduction goal,” said Merkel yesterday. Greek Options Greek bonds gained for a third day today and the yield on the benchmark 10-year security fell 14 basis points to 6.11 percent, the lowest since Feb. 11, as investors speculated a deal to help Greece is close. Papandreou’s efforts to give the EU what it wants are being complicated by strikes, a deteriorating economic outlook and higher borrowing costs. Options outlined by the EU include another increase in the fuel levy, raising sales tax and a luxury tax on cars and yachts. It could also raise duties on alcohol and tobacco products again and abolish the “14th wage”, a payment received twice a year that’s equivalent to one month’s wage. Labor Minister Andreas Loverdos said yesterday that Greece will extend a freeze on public-sector pay increases to pensions.

378 Bond Sale? “The announcement of cuts is necessary to pave the way to financial assistance,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam. “Everyone is being tough on Greece and now it has to outline the extra cuts and commit to them.” While the head of Greece’s debt management agency said in an interview today that the country will sell bonds when market conditions are “favorable,” the government needs to cover more than 20 billion euros ($27 billion) of bonds and notes maturing in April and May. Finance Minister George Papaconstantinou said yesterday the government will “do anything” to meet its targets, which include lowering the deficit beneath the EU limit of 3 percent of gross domestic product by 2012. This year, the government wants to cut the deficit by 4 percentage points to 8.7 percent. The EU should nevertheless be wary of making Greece do too much too soon, David Mackie, chief European economist at JPMorgan Chase & Co., said in a Feb. 26 research report. He calculates that new cuts amounting to another 2 percentage points of GDP would leave the total at 7 percentage points, which is “getting to the intolerable end of the spectrum.” Default Risk “It appears that the Greek government has reasonably broad support across the political spectrum and with the population as a whole,” Mackie said. “Too much pressure from the rest of the EU could change this and introduce a political crisis, the consequence of which would be hard to gauge.” The government has already raised the retirement age and frozen salary increases for public- sector workers. The yield on Greece’s 10-year debt has stabilized after surging more than two percentage points in three months to as high as 7.15 percent at the end of January as some investors speculated the EU will do whatever is necessary to stave off a default. German lawmakers say euro-area officials are devising a plan to grant Greece about 25 billion euros in aid should the need arise. One option could involve using German state-owned lenders such as the KfW Group to buy its bonds. “We have a number of options before us, including public and public-private ones,” French Finance Minister Christine Lagarde told reporters near Paris yesterday. “All of this is on the condition that Greece meets its commitments.” To contact the reporters on this story: Jonathan Stearns in Athens at [email protected]; Simon Kennedy in Paris at [email protected]. http://www.bloomberg.com/apps/news?pid=20601085&sid=aTZJHx56mY7A

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EU calls on Athens to control debt By Dimitris Kontogiannis in Athens and Ralph Atkins and James Wilson in Frankfurt Published: March 1 2010 12:27 | Last updated: March 1 2010 19:24

Safety net: riot police stand ready at the Greek employment ministry while talks take place with Olli Rehn, the European commissioner, on Monday

The European Union urged Greece on Monday to announce additional austerity measures aimed at cutting its budget deficit, as eurozone political leaders stepped up warnings of regulatory action against financial speculators implicated in the Athens debt crisis. In depth: Greece debt crisis - Feb-25 Greek industry driven back into recession - Mar-01 Hedge funds prosper from Greek debt - Feb-28 Sterling worries test global markets’ confidence - Mar-02 Greeks plan tax rises and spending cuts - Feb-28 Markets poised to punish Spain - Feb-28 Olli Rehn, EU economic and monetary affairs commissioner, speaking after meetings in Athens, said: “This is a crucial moment for the future of your country. No member of the eurozone area can live permanently beyond its means ... Either you keep your debt under control or your debt starts controlling you.” Greek officials said Mr Rehn criticised the government in private for not moving faster to take the necessary measures, which are now likely to be announced as early as Tuesday. Mr Rehn’s comments reflect determination within the eurozone that Greece must take tough action. “The ball is in Greece’s court now,” the German government said.

380 But policymakers appear ever more irritated by the threat of financial markets blowing their strategy off course, leading them to step up warnings of possible regulatory action, for example against some trading in credit default swaps. “If the Greeks hold on to the strict parameters and the markets continue to speculate against Greece, we will not let them just march through,” Jean-Claude Juncker, Luxembourg’s prime minister, told Germany’s Handelsblatt newspaper. “We have the torture equipment in the cellar, and we will show them if needed.” Mr Juncker chairs meetings of eurozone finance ministers. Jean-Pierre Jouyet, the head of France’s financial markets regulator, the AMF, called for an international agreement to give watchdogs powers to suspend CDS trading during severe turbulence, as with short-selling. He also said that questions needed to be asked about the use of CDS for anything other than covering risk, implying a ban on so-called naked CDS. It also emerged that Bafin, Germany’s financial regulator, had been trying to find evidence that Greek debt had been the target of speculators. Bafin had analysed CDS data from the US Depository Trust and Clearing Corporation, the agency said. George Papandreou, the prime minister, appeared to be preparing the public for the fresh measures, saying on television: “Today, we ask Greek men and women to enlist in our common cause to save our country and the overwhelming majority of our citizens are willing to do it despite the price and despite the burden ... Everybody says yes.” Measures are expected to include VAT rises, special duties on fuel, tobacco and cigarettes, and more cuts in civil servants’ pay. http://www.ft.com/cms/s/0/eb4b0e3e-2526-11df-a189-00144feab49a.html

381

Sovereign CDS become Europe’s new bogeyman By David Oakley, Gillian Tett and Jennifer Hughes Published: March 1 2010 18:54 | Last updated: March 1 2010 18:54 When George Soros launched his attack against sterling almost two decades ago, the word “hedge fund” became a convenient and popular bogeyman – at least as far as many British politicians were concerned. FSA plays down prop trading impact - Mar-01 Wolfgang Münchau: Time to outlaw naked CDSs - Feb-28 FT Trading Room: Global exchanges - Feb-15 These days, however, as the eurozone reels in turmoil, it is sovereign credit default swaps that are becoming the new political villain in Europe. This is because the Greek debt crisis has prompted the French and Germans to consider banning their use for speculative bets in the markets.

Greek CDS, which measure the cost to insure debt against default, have hit record highs this year, with politicians blaming hedge funds for driving up the price of this insurance and exacerbating the financial crisis in Athens by panicking investors.

382 The drama has triggered complaints that some ruthless investors are manipulating these markets to deliberately sow panic so that they can benefit through clever trades. This, in turn, has led to European calls for much tighter scrutiny of this market. Last month, Christine Lagarde, the French finance minister, first suggested that policymakers could clamp down on the use of derivatives linked to sovereign risk. Since then, German officials have also raised concerns and there has been talk of an outright ban on so-called “naked shorting” – or investors using CDS to make bets about sovereign defaults, without the need to own an underlying bond. This idea is likely to be debated by regulators and politicians linked to the G20 group of industrialised nations in the months ahead. Handy hedge against country risk Sovereign credit default swaps measure the risk of a government not repaying its debts, writes David Oakley. Until recently many economists thought it highly unlikely that a government would ever default. That all changed following the financial crisis. In 2007 it cost only $5,000 to insure $10m of Greek debt against default annually over five years. This year, it reached $425,000 at one stage. Even today, for economies such as the US, UK and Germany, the likelihood of default is judged to be almost non-existent. That differs from the corporate world, where there is seen to be a genuine default risk. While the sovereign CDS market remains relatively small, it has become useful for banks and investors wanting to hedge their risk to a country. It has not just been speculators driving the market. For example, asset managers might have chosen not to take losses on a Greek bond position, but instead bought protection in the CDS market. In other words, they might have been worried about a sharp fall in the value of their cash bonds but could not find buyers for them, leaving a CDS buy as the only option. A German bank that has set up a repo trade with a Greek bank, might also want to buy Greek CDS to protect its position. In the US, there are also calls for new regulations, which would significantly curb the market for over-the-counter derivatives trading, such as CDS. This is partly a response to the near collapse of AIG, the insurance group, in 2008 because of its exposure to these instruments. Yet, until last year, sovereign CDS tended to command far less attention in the derivatives world than their corporate or mortgage counterparts. This is because the risk of default on industrialised governments was considered minimal, making the need to hedge or speculate less important. Even today, the outstanding volume of sovereign CDS is dramatically smaller than that of mortgage or corporate CDS. However, as concern about sovereign risk has swelled in the past year, hedge funds and banks have become much more active in the sovereign CDS market – and the price of these contracts has correspondingly started to attract more attention.

383 Supporters of the sovereign CDS market insist that this criticism is woefully misplaced – and risks distracting politicians from the real task at hand in the eurozone, which is the need to constrain ballooning budget deficits. One reason for their ire is that it is currently far from clear that most of the activity in the sovereign CDS world is actually driven by hedge funds, or “speculators”. While some hedge funds have certainly used these contracts in the past year to place bets about countries going into default, a large part of the activity in the sovereign CDS sector is being driven by banks trying to buy protection against sovereign default. Banks have not traditionally posted collateral when they cut interest rate deals with governments, since they do not need to do this under rules governed by the market overseer, the International Swaps and Derivatives Association. Thus, as sovereign risk fears have risen, banks have rushed to protect themselves – often by buying insurance from hedge funds. One big difficulty is separating what is a speculative trade from a genuine hedge against risk. Steven Major, head of global fixed income research at HSBC, says: “For this reason, I think plans to regulate CDS are unlikely.” Other bankers say regulators could simply insist a buyer or seller has a position in the underlying reference instrument or bond before being allowed to enter the CDS market. CDS transactions could also be taxed to make it more expensive to buy or sell them. Lawyers say regulators could target certain types of CDS trade as market abuse. Simon Gleeson, partner at Clifford Chance, says: “They’ve built the mechanism [that is, bans on short selling]. It’s a question of whether they’re going to use it in this new war. If we get the facts on the ground, that someone is known to have made huge profits, then it would give the French and German governments the ammunition that makes it highly likely something will happen.” Some bankers also note that the CDS market is very small, relative to the government bond sector. This has meant there has been little evidence of the price of derivatives contracts affecting sovereign debt prices. Certainly, at the height of the Greek crisis at the end of January, CDS did not lead the bond markets. Rather it was the other way round as government bond yields rose faster and higher than CDS. Moreover, while the CDS market used to be relatively murky, the industry has been making some effort to inject more transparency. The Depository Trust and Clearing Corporation, for example, has started publishing data on the level of outstanding trades for different sovereign CDS, which gives some clue to the size of outstanding activity. At the same time, groups such as the UK Financial Services Authority have stepped up their efforts to monitor the CDS sector by tracking trades and price levels. The FSA has never publicly commented on what this surveillance shows. However, British regulators do not have any significant concern at present about market manipulation in the sovereign CDS world.

384 As a result, they have notably not joined in the clamour for a clampdown on sovereign CDS – even though London is considered to be the leading site for sovereign CDS trading, not just in Europe but in the world. Nevertheless, these points are unlikely to calm the fears of some continental European regulators, which worry that sharp swings in CDS prices could amplify panic in the eurozone in the uncertain months ahead. Additional reporting by Aline Vanduyn and James Politi

Lessons from the bank shorting ban

Short sellers became a high-profile – if somewhat popular – casualty of the turmoil surrounding the collapse of Lehman Brothers when regulators unexpectedly banned shorting of financial stocks, writes Jennifer Hughes. The UK’s Financial Services Authority was first, triggering a scramble among its global peers in a form of reverse beggar-thy-neighbour, as regulators rushed to deter the feared hordes of shorts shut out of their preferred haunts. Regulators justified the shock ban in the light of the extreme market moves being seen – likely to be a justification again if regulators were to curb sovereign CDS trading. For banking stocks, the effect of the shorting ban was instant, creating a squeeze that briefly sent their shares rocketing. But investors and traders became confused as advisers struggled to keep up with different rules in different jurisdictions and tweaks to already announced bans. Many of the bans were quietly removed months later. The FSA removed the ban in January, but warned, ominously, that it retained the right to reintroduce the ban without consultation “if necessary”. The message from the whole saga was a new, less consultative era of financial regulation that some participants fear could now manifest itself in the CDS world. http://www.ft.com/cms/s/0/a9e34c46-2561-11df-9cdb-00144feab49a.html

385 GABRIEL GRÉSILLON L'Europe au milieu du gué [ 02/03/10 ] GABRIEL GRÉSILLON EST JOURNALISTE AU SERVICE INTERNATIONAL DES « ECHOS ». Si, comme le symbolise l'idéogramme chinois, il y a dans toute crise une opportunité, encore faut-il, pour sortir par le haut des moments durs, regarder en face l'ampleur des problèmes. Pour les dirigeants européens, les errements financiers de la Grèce devraient donc être l'occasion de ne pas se contenter de demi-conclusions. Ce qui, pour l'heure, n'est pas forcément le cas. Il semble pourtant impératif de ne pas s'arrêter au milieu du gué, car c'est peut-être la survie du projet européen qui est en jeu. Actuellement, le diagnostic des Européens est le suivant : il faut être prêts à aider la Grèce pour le cas où la banqueroute serait imminente, mais cette position de principe ne doit pas être déclinée en chiffres ou en mesures concrètes. Cruel tiraillement. D'un côté, la faillite de la Grèce semble inenvisageable compte tenu de son potentiel dévastateur pour l'ensemble du Vieux Continent, mais, de l'autre, sortir le carnet de chèques dès qu'un pays laxiste - et tricheur -est en difficulté risque d'anéantir la discipline budgétaire en Europe. Ce qui serait tout aussi explosif puisqu'il n'y a pas d'union monétaire sans une stricte orthodoxie financière. Par rapport aux traités européens, qui interdisent quasiment tout sauvetage financier d'un pays membre, il y a donc incontestablement un pas de franchi vers la solidarité. Si le pire devait se préciser, les Européens ne laisseraient pas la Grèce s'effondrer. Mais c'est un pas millimétré, car l'Allemagne, notamment, veille. Outre-Rhin, la campagne médiatique contre la Grèce est virulente. Les Allemands sont farouchement opposés à l'idée de payer pour la Grèce et les journaux s'en donnent à coeur joie : ce n'est pas à la vertu de venir secourir le vice. Position évidemment compréhensible, surtout si l'on se souvient que les Allemands viennent de connaître des années douloureuses d'ajustement économique et se sont serré la ceinture pour restaurer la compétitivité de leur industrie nationale. Au final, les promesses d'aide de l'Europe en sortent fragilisées, car la classe politique allemande surfe sur ce sentiment populaire. Angela Merkel elle-même vitupère autant contre les spéculateurs que contre les pays ne respectant pas la discipline budgétaire. Ce qui devait être perçu comme un geste politique déterminant -l'accord de principe pour aider la Grèce - finit donc par ressembler à un statu quo à courte vue. Sur le plan politique, il génère déjà des dérapages malsains et même inquiétants. A Athènes, on s'indigne de la condescendance allemande, et l'on ressort du placard de vieilles affaires de non-dédommagements financiers après la Seconde Guerre mondiale. Par rapport à l'objectif d'une convergence politique en Europe, la guerre des mots de plus en plus nauséabonde qui se joue actuellement entre Berlin et Athènes constitue à l'évidence un réel recul. Sur le plan économique, il est tout aussi légitime de s'inquiéter. Premièrement, peut-on vraiment croire que la spirale de l'inquiétude sera brisée, sur les marchés, sans véritable sauvetage financier ? Chaque jour qui passe semble prouver le contraire. Le moindre diagnostic pessimiste, qu'il émane de la bouche d'un économiste américain, d'un gérant de fonds britannique ou d'une agence de notation, est immédiatement monté en épingle par les grands médias financiers internationaux, dans un jeu de massacre que rien ne semble pouvoir arrêter. Même lorsqu'il ne fait que reprendre des éléments d'information qui étaient déjà

386 connus depuis un mois ! Les promesses des dirigeants politiques de l'Europe pèseront-elles suffisamment face à la machine infernale de la panique et de la spéculation ? Deuxièmement, ne faut-il pas mettre un peu de gris dans l'histoire en noir et blanc qui nous est racontée actuellement ? Que l'Allemagne ait été vertueuse en matière de finances publiques, tandis que la Grèce était laxiste, personne ne peut le nier. Mais qu'en est-il des politiques économiques ? Cette objection est très bien formulée par le directeur de la recherche économique de Natixis, Patrick Artus. Pour ce dernier, l'Allemagne, qui a tout misé sur la compétitivité de son industrie, a indirectement marginalisé les industries d'autres pays européens, ce qui explique en partie la descente aux enfers de certains. L'actuelle non- assistance à pays en danger qui tente l'Allemagne (sans que cela soit dit ouvertement) est donc suicidaire. Car, pour être compétitive, l'Allemagne a coupé dans ses coûts salariaux. Cela a accentué sa dépendance aux exportations, car sa consommation intérieure est loin de suffire. Aujourd'hui, et demain plus encore, Berlin a donc besoin des consommateurs étrangers, notamment européens. Et particulièrement de ceux d'un pays comme la Grèce, où la croissance potentielle est encore solide, contrairement à nombre de « vieux » pays industrialisés. Si l'on cesse de raisonner en pure arithmétique financière pour penser à la croissance économique -qui est en réalité beaucoup plus déterminante pour notre avenir -, la perspective change. Athènes a besoin de Berlin aujourd'hui, mais Berlin a besoin, entre autres, d'Athènes demain. En rester au chacun pour soi n'est donc pas à la hauteur de l'enjeu. Au mieux, cela peut permettre de laisser passer la tempête. Au pis, cela peut la précipiter. L'Europe devrait plutôt comprendre, en mettant le pied dans la monnaie unique, qu'elle faisait le premier pas sur la route de la convergence des politiques économiques. Les principes de saine gestion, pour utiles qu'ils soient, sont à l'évidence insuffisants. Il serait temps de s'atteler à la tâche. Soit l'Europe opère sa révolution culturelle en s'engageant sur cette voie, soit elle prend le risque de reconnaître aux yeux du monde qu'elle a construit un espace économique unique mais hétérogène, plus égoïste que solidaire et, surtout, dépourvu de pilote. http://www.lesechos.fr/info/analyses/020388424189-l-europe-au-milieu-du-gue.htm

387 Economy

March 2, 2010 Vice Chairman of Fed to Retire, Letting Obama Reshape Board By SEWELL CHAN WASHINGTON — The vice chairman of the Federal Reserve announced on Monday that he would retire in June, giving President Obama an expanded opportunity to put his stamp on the central bank as it faces a difficult balance between heading off inflation and addressing high levels of unemployment. The departure of the vice chairman, Donald L. Kohn, a 40-year Fed veteran, means Mr. Obama has three seats to fill on the Fed’s seven-member board of governors at a time when the central bank is weighing how aggressively to reverse the easy-money policy it pursued during the financial crisis and recession. The vacancies are likely to spur debate over the Fed’s priorities. With unemployment near 10 percent and projected to remain high for years to come, there is sure to be pressure on the administration, especially from liberals, to nominate Fed governors willing to adhere not just to the central bank’s mission of price stability but also its mandate of full employment, a goal that has effectively taken a back seat to inflation fighting over much of the last three decades. “Any incumbent president wants to see the economy grow,” said Alan S. Blinder, a professor of economics at Princeton who was vice chairman of the Fed from 1994 to 1996. “It doesn’t matter whether he’s a Republican or a Democrat. So I wouldn’t be surprised if the Obama administration is looking for someone more dovish on inflation.” Mr. Kohn, an influential cen-trist, was appointed by President George W. Bush, as were the two most recent board members to leave, who tended to emphasize inflation fighting. Henry W. Chappell Jr., an economist at the University of South Carolina and an authority on the Federal Open Market Committee, the Fed’s major policy-setting arm, predicted that the administration would choose nominees who hold the Keynesian belief that full employment does not necessarily return on its own after a recession and who are “willing to actively respond to prevailing economic conditions like the recession.” Lawrence H. Summers, the chairman of the National Economic Council, and Timothy F. Geithner, the Treasury secretary, are expected to exert great influence over the selection process. Both of them tend to be identified with their party’s market-oriented center more than with its liberal wing. A third official, Christina D. Romer, the chairwoman of the White House Council of Economic Advisers, has been mentioned as a possible nominee to the Fed. Like the Fed chairman, Ben S. Bernanke, she is an academic economist who has written extensively on the Depression. Unlike Mr. Summers, a former Harvard president who had been mentioned as a possible Fed chairman, she is not widely seen as a polarizing figure. Advocates of making price stability the more dominant of the Fed’s mandates say that only through consistent application of aggressive anti-inflation policies can the economy grow to its maximum potential over the long run. Their view has permeated the central bank and the

388 financial markets for years, and deviations from it, real or perceived, are not well received in those quarters, scholars say. During his tenure at the Fed, Mr. Blinder, who was appointed by President Bill Clinton, found his influence constrained, he has said, in part because of his willingness to raise the question of the balance between inflation and employment growth. The board of governors has historically tended to be somewhat less hawkish on inflation than the presidents of the 12 regional Fed banks, said Michael D. Bordo, an economist at Rutgers. “If you have two or three Obama people and they tend to be more dovish, they would push the conversation in a direction of prolonged ease and act as counterbalances to the inflation hawks, who are pushing for exit sooner rather than later,” Mr. Bordo said. The nominees will be coming into the Fed at a particularly delicate time. “There’s going to be a bit of a brouhaha when the tightening comes,” he said. “Unemployment will stay high, and yet the recession will have passed. When the Fed starts moving, regardless of all the preparation, there is going to be squawking.” Even before Mr. Kohn’s announcement, senior Treasury officials had been vetting prospective candidates for the other vacancies, according to officials involved in the process. The administration is mindful that the nominees could face a grueling Senate confirmation process, and views the opening in Mr. Kohn’s seat as potentially useful in luring a prominent candidate who might otherwise turn down the opportunity, said the officials who asked for anonymity because they were not authorized to discuss the search. Mr. Bernanke won confirmation to a second term in January only after a battle with critics over the Fed’s performance in the run-up to the financial crisis. The officials said that for the vice chairman’s job, they were leaning toward someone with more of an academic or policy background, who might not draw the political fire of a nominee with close ties to Wall Street. Mr. Obama has named one person to the Fed board so far: Daniel K. Tarullo, a law professor who served in the Clinton administration and is an authority on financial regulation. The other two governors are Kevin M. Warsh, a former executive at Morgan Stanley who has been Mr. Bernanke’s liaison to Wall Street, and Elizabeth A. Duke, a former community banker who has focused on the challenges small businesses have had in getting loans. Both were appointed by Mr. Bush.Mr. Kohn’s departure would leave Mr. Bernanke as the only professionally trained economist on the board. Mr. Kohn, 67, who joined the board in August 2002, and became vice chairman in June 2006, was unusual in the Fed’s history, having risen through the staff ranks. Before joining the board, he was a trusted aide to Alan Greenspan during his long tenure as chairman. Later, at Mr. Bernanke’s side throughout the crisis, Mr. Kohn oversaw the stress tests of major financial institutions last year and coordinated the Fed’s response to the crisis with that of other central banks. “The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service,” Mr. Bernanke said. When Mr. Kohn told Mr. Geithner of his decision, the secretary asked, jokingly, if Mr. Kohn could stay on until unemployment fell to 5 percent. Eric Dash contributed reporting from New York and Jeff Zeleny from Washington. http://www.nytimes.com/2010/03/02/business/economy/02fed.html?th&emc=th

389 Press Release

Release Date: March 1, 2010 For immediate release Donald L. Kohn submitted his intent to resign Monday as a member of the Board of Governors of the Federal Reserve System, effective at the expiration of his term as Vice Chairman on June 23, 2010. Kohn, who has been a member of the Board since August 2002 and served as its Vice Chairman since June 2006, submitted his letter to President Obama. "The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service," Federal Reserve Chairman Ben S. Bernanke said. "Most recently, he brought his deep knowledge, experience, and wisdom to bear in helping to coordinate the Federal Reserve's response to the economic and financial crisis. In addition, Don helped lead the stress tests of major financial institutions; he directed the Board's ongoing efforts to increase the transparency of the Federal Reserve; and he has been leading an international effort within the Bank for International Settlements to help central banks focus on key issues and responses to the crisis. On a personal note, I would like to express my deep appreciation for Don's friendship and counsel during some very difficult times. He will be greatly missed." Dr. Kohn was born in November 1942 in Philadelphia, Pennsylvania. He received a B.A. in economics in 1964 from the College of Wooster and a Ph.D. in economics in 1971 from the University of Michigan. Dr. Kohn is a veteran of the Federal Reserve System. Before becoming a member of the Board, he served on its staff as Adviser to the Board for Monetary Policy (2001-02), Secretary of the Federal Open Market Committee (1987-2002), Director of the Division of Monetary Affairs (1987-2001), and Deputy Staff Director for Monetary and Financial Policy (1983-87). He also held several positions in the Board's Division of Research and Statistics: Associate Director (1981-83), Chief of Capital Markets (1978-81), and Economist (1975-78). Dr. Kohn began his career as a Financial Economist at the Federal Reserve Bank of Kansas City (1970-75). Dr. Kohn has written extensively on issues related to monetary policy and its implementation by the Federal Reserve. He was awarded the Distinguished Achievement Award from The Money Marketeers of New York University (2002), the Distinguished Alumni Award from the College of Wooster (1998), and the Honorary Degree, Doctor of Laws, from the College of Wooster (2006). Dr. Kohn is the Chairman of the Committee on the Global Financial System (CGFS), an international central bank panel that monitors and examines broad issues related to financial markets and systems. Dr. Kohn is married and has two adult children and four grandchildren. http://www.federalreserve.gov/newsevents/press/other/20100301a.htm

390 Opinion

March 2, 2010 OP-ED COLUMNIST Greece, Europe and Alexander Hamilton By ROGER COHEN MADRID — Europe has reached an “assumption” moment. The economic woes of southern “Club Med” countries have illustrated the untenable tensions of linking nations of vast economic disparities in a currency zone without a central fiscal authority or unified budget to address imbalances. When the euro entered circulation in 2002, the notion was that the shared currency would propel the European Union toward greater political alignment. It hasn’t happened. On the contrary, resentments have grown, performances diverged. Germany is not keen to throw good money after bad to save debt-ridden Greece. More than two centuries ago, the newborn United States faced a similar crisis of integration. With the Constitution approved, Alexander Hamilton, as treasury secretary to President George Washington, grappled with proving that the government of the 13 states that now existed on paper could function in practice. The economy was a shambles, beset by debt incurred in the fight for liberty. In 1790, Hamilton set about establishing the financial credibility of the federal government. Central to his proposals was that the government would assume the debts of the states. This precipitated the “assumption” crisis because different states had different levels of debts and had proved more or less conscientious in paying them off. James Madison complained that his home state of Virginia and some other Southern states that had paid their wartime debts would be unfairly treated if “having done their duty” they were obliged to “contribute to those states who have not equally done their duty.” You can just hear those words being uttered today by a German burgher or Finnish techie faced by the financial woes of Portugal, Ireland, Greece and Spain — a group that has acquired the acronym “PIGS.” Why should those countries in the 16-member “eurozone” that have “done their duty” by strict European Union fiscal rules help those who followed the risk-abolishing financial advice of former Citigroup chairman Charles Prince: “As long as the music is playing, you've got to get up and dance?” The dance, in the Greek case, involved the masking of its deficit (12.7 percent of gross domestic product) and debt (the country needs a mere $34 billion soon to avoid default) through Wall Street engineered derivatives that disguised loans as currency trades. The dance also saw the PIGS fly on a bubbly gas of low eurozone interest rates, easy E.U. money and fiscal laxity. Until Lehman went poof in the night and the music stopped. “Assumption” was only approved when Hamilton trumped the ire of Madison and Jefferson by agreeing to locate the new federal capital (tentatively planned for New York) at a permanent site on the Potomac River. Through astute political horse-trading, the basis for the financial coherence of the United States was laid.

391 I don’t see any such clever deal that would make of Europe’s crisis an opportunity for a renewed push toward a United States of Europe. The integrative dream has faded. Europe, for the foreseeable future, will remain in the halfway house of monetary union, fiscal divergence and à la carte national politics. The political and economic logic of the single currency remains un-assumed. Greece is a far smaller economy than crisis-hit California, but thanks to Hamilton, California’s travails are absorbed within a huge economy where most taxing and spending is done by the federal government. Athens agonistes has no such cushion. That leaves the question of how Europe will deal with its crisis. Here in Spain unemployment is running at 19 percent and, in southern Andalusia, it’s at 26 percent. Outside one Andalusian village, Pórtugos, I saw a “recreational center” halfway up a mountain, apparently never used, displaying the symbol of the E.U. in recognition of money pumped in to build this useless foible (and enrich a few locals.) Such profligacy for the PIGS is over. For all these countries, austerity looms. Ireland has led the way by slashing public-sector wages by 7 percent. Greece needs to follow suit, but whether labor unions will allow that is unclear. Unless Athens cuts back, it’s not going to persuade people to buy its bonds. A Greek default remains possible as long as Europe has not decided how to treat those that have not “equally done their duty.” The European Commission is awaiting a Greek plan on deficit reduction by mid-March before deciding if some bailout is possible. Default would have the merit of demonstrating the cost of European incoherence, but even little Greece is probably too big to fail. Meanwhile, as the Greek daily Eleftherotypia noted the other day, it’s time “to say goodbye to the Greece you knew”: the Greece of boundless pleasures, forever captured by the great poet Constantine Cavafy, who wrote: And he thinks of Prudence, how it fooled him, how he always believed — what madness — that cheat who said: “Tomorrow. You have plenty of time.” He remembers impulses bridled, the joy he sacrificed. Every chance he lost now mocks his senseless caution. We are a long way here from Hamilton’s (unheeded) admonitions to his countrymen to avoid the perils of debt: The differences between America and Europe go beyond the political to their very nature. ROGER COHEN Greece, Europe and Alexander Hamilton March 2, 2010 http://www.nytimes.com/2010/03/02/opinion/02iht-edcohen.html?th&emc=th

392

01.03.2010 How should the Eurozone handle Greece?

After weeks of contradictory statements on the question how to handle Greece, the Heads of State and Government of the EU member states used their informal European Council meeting on February 11th for a strong political signal that aimed at calming markets and giving political support to the Greek Prime Minister’s budgetary consolidation efforts and structural reform programme. The subsequent meeting of the EU’s Finance Ministers on February 15th meanwhile increased pressure on the Greek government for further consolidation, taking the Excessive Deficit Procedure to its next step in which the Finance Ministers issue precise recommendations for Greece and increase surveillance in the country. The European Council’s announcement that the EU “will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole” was widely interpreted as a bail-out promise. But only a few days after the summit, new doubts arose whether the EU or its larger member states would indeed step in for Greece. So, the options that are discussed still range from default and a Eurozone exit to a strong engagement of the EU and the creation of new crisis management and coordination mechanism for the Eurozone. Despite increasing market instabilities and the rapidly approaching moment of truth when Greece will have to refinance its debt in March/April 2010, policy makers still assess options. This is not surprising, as there is no cheap and safe solution. Any political choice in this current situation has downsides. And no matter how the Greek case is handled, it will be a precedence for the future of EMU governance. We assess four – arguably simplified – policy options and their pros and cons that have been put forward in the discussion. We think that letting Greece default (option I) is neither a likely nor a reasonable scenario given the current set-up of the EU. We would not entirely exclude the possibility that the EU commits serious political mistakes in handling the problem so that Greece has to call in the IMF for help unilaterally (option III), but the most likely scenario from our perspective is that the EU member states will come up with a rescue package for Greece if needed (option II). The argument then is whether this should be done in a concerted action with the IMF or not. Given the current state of governance mechanisms in the EU, the risk of political tensions within the EU and problems of legitimacy of a bail-out, we rather expect an involvement of the IMF. But we suggest that this should be clearly limited in time while, in parallel, the Eurozone should be equipped with its own European Monetary Fund and a default procedure in order to limit moral-hazard problems in future cases.

393 Option I: The default option: Greece gets neither liquidity help, nor credit, nor gifts from the EU partners – and defaults in a disorderly way on its debt in the course of 2010 The pros - Any financial assistance from the EU partners would increase the moral-hazard inherent in the construction of the EMU. In particular, Spain (or Portugal or Ireland) could become a “second Greece” if a lack of reform efforts is “compensated” by a rescue package. - Letting Greece default on its debt could hence set an example for self discipline. Member states are to conduct structural reforms and pursue sound public finances to avoid another default. - Not supporting Greece would be true to the “no-bail-out-clause” of the Maastricht treaty. - It would satisfy public opinion in countries such as Germany where a majority does not want their tax money to be used for a bailout of the Greek in particular after they have used false budget data to get into the Eurozone and to prevent sanctions under the Stability and Growth Pact. The cons - Letting Greece default may provoke self-fulfilling speculation against other vulnerable countries such as Portugal, Ireland and Spain, all of which are vulnerable with double digit budget deficits which need to be financed. In contrast to Greece, Spain is relatively large and a default would send a shock through financial markets, seriously hurt economic growth in Europe and would destabilize the EU politically. - The EU banking sector could be seriously destabilized. Most of Greece’s government debt is held abroad, more than €200bn by European banks. German banks hold about €30bn, French banks something like €55bn. Even worse problems would arise in the case of a Spanish bankruptcy. - A default would severely weaken the Greek government, possibly driving it out of office. It would become harder if not temporarily impossible to implement budgetary consolidation and structural reforms in Greece. - The problem of Greece’s lack of competitiveness would not be solved. The default would not be accompanied by a unilateral currency devaluation unless Greece decides to leave the EMU. While the Euro would probably devalue further, Greece’s weak competitiveness position within the Eurozone would not improve. - A disorderly default could create so much political turmoil in Greece that the country decides at some point to leave the euro, followed by a disorderly depreciation similar to that of Argentina in 2001. - A sovereign default inside the euro area would harm the EU’s image in the world. Our assessment We think that default the most unlikely scenario and we would definitely not recommend testing it. Greece will probably be bailed out because the risks of a banking crisis and a contagion to other highly indebted member states are taken seriously among policy makers. Furthermore, should the EU partners decide not to help Greece (either with or without the IMF – see options IIa and IIb below), Athens itself could still call on the IMF (see option III) to get financial support (even though this does not necessarily prevent a default further down the path). From a systematic point of view, we agree that the possibility to default is the best means to make governments as responsible as possible for their own action, in particular in a currency union. But the close economic and financial linkages between euro area countries make the default option an implausible threat since partners would hurt themselves as well.

394 The Eurozone lacks the governance mechanisms that would enable the EMU members to let a partner down without causing chaos: there is no orderly default mechanism and the costs of a disorderly default are simply too high. The Eurozone needs its own Euro-Monetary Fund (along the lines proposes by Thomas Mayer and Daniel Gros) and – as quick as possible – an orderly default procedure to reduce moral hazard in the Eurozone and make national governments more responsible for their own behavior.

Option IIa and IIb: There will be a rescue package by the EU or some member states. Option IIa discusses a rescue package without the IMF, option IIb a rescue package with the IMF. For both options, we will not discuss the arguments for or against the scenario that the EU actually jumps in, because this – in precisely the opposite logic – would mirror the arguments for and against a sovereign default of Greece listed above. What we discuss here are the options that the EU gets active alone or with the help of the IMF. Option IIa: The EU provides a rescue package alone. This could be a mix of bilateral guarantees and loans, help through the EU structural funds, concerted action to buy bonds, etc. In order to push for further reforms, the existing economic and fiscal surveillance mechanisms would be applied, though further conditionality can be attached to loans. The pros - This would demonstrate the political strength of the Eurozone in dealing with its internal problems. - The IMF would be kept out of the Eurozone which would not only be of symbolic value, but in the eyes of some would prevent the Fund from implementing inadequate policies in the EU (in particular given its weak record of action in fixed currency regimes and the fact that US-preferences, which may not necessarily be in line with continental European considerations, would influence its approach). - If the EU’s strategy works, it would enhance the European coordination of economic policies, probably beyond the crisis situation. - It would increase the pressure on the EU to pursue a double strategy of immediate crisis management for Greece and the development of a framework in which real economic problems underlying the fiscal troubles in the PIIGs could be discussed. The major problem is the divergence of competitiveness in the euro-area which is not only caused by excessive Southern European wage increases and low productivity growth alone, but also by beggar-thy-neighbour policies pursued by some countries with a high external surplus. The cons - The EU does not have technical Know-How, human resources and political independence, in order to grant rescue package with clear and credible conditionality and successful surveillance. In particular, the imposition of conditionality would be very difficult within the EU itself. The partners are politically too close and economically and financially to intertwined to build up credible pressure if reforms are not implemented to a sufficient degree. Furthermore, European political actors tend to have a bias not to point out detected problems brutally as they may be driven by EMU-image saving concerns. - Public opinion might react sensitively, both in Greece and in the supporting countries. The Greek state and society has lived beyond its means as it was able to rely on heavy borrowing at

395 Eurozone low interest rates and also received substantial EU subsidies. The adaptation process that has now started will be unpleasant and there will be obstacles to implement reforms. Public protest could turn against the Greek government and on external creditors imposing hard conditionality on the country. For the EU it may thus be politically useful to take the IMF along as the bad cop. - If a country consortium led by Germany would try to impose conditionality on Greece, strong public and political reactions could be provoked notably with reference to the Wehrmacht occupation from 1941 to 44. This is a strong argument against an aid-package which is predominantly based on bilateral help (hence with a strong role for Germany). - If the „EU-only“-approach fails, the costs are potentially high. The EU will firstly have proven its inability to solve an internal problem. This would weaken the EU in the eyes of its partners politically and could cause market reactions as investors may no longer trust that EMU problems can be solved. The EU would secondly risk that emergency credit is turned into transfers - and that further transfers may be needed in order to prevent an insufficiently reformed Greece to go bankrupt at a later date. Our assessment At the moment, it seems that officials both at the EU and the national level of potential donor countries are very wary to construct a rescue package for Greece without IMF involvement. Especially the argument of a lack of expertise and leverage for pushing Greece into dramatic budget cuts seems to have clout. We therefore believe that an EU-only approach may turn out to be perceived as less attractive than cooperation with the IMF. In our view the European Council’s decision to take along the IMF in the March mission to Athens during which the European Commission, the ECB and the IMF will review Greece’s reform progress will probably turn out to be useful given the additional experience by the ECB and the IMF. But we think the ECB would do a job that is not hers if the Bank continues to fulfill surveillance functions that feed into the political decision making process of the Ecofin in implementing fiscal surveillance according to Art. 126. Given the complexity and opaqueness of the Greek situation and the European Commission’s previous problems in dealing with this, we consider taking the IMF in for surveillance and conditionality is the better solution.

Option IIb: The IMF is called into the Eurozone in order to help sort out Greece’s fiscal problems together with the EU and/or some member states. The existing EU economic and fiscal surveillance mechanisms would be applied, but further conditionality would be attached to the rescue package. The pros - A presence of the IMF in a joint rescue package together with the EU would bring in the necessary technical expertise and more independence which the EU does not currently have. - The ability to impose conditionality would hence be increased if the EU cooperated with the IMF. - EU officials could benefit from learning-by-doing while the IMF provides basic guidance. - This exercise would help the EU to build know-how for running its own EMF, for which the preparations should be launched in parallel. - The IMF is used taking the blame for unpopular policy measures. In Greece, it might shield the EU and Germany from people’s anger. The IMF could also be used as a political scapegoat by Greek policy makers.

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The cons - If fiscal adjustment alone is not sufficient, the involvement of IMF money might complicate debt restructuring for Greece. The high level of Greek government debt and the contraction of GDP that is to follow the austerity measures might well drive the Greek debt-to- GDP-ratio further upwards to a level where it is not sustainable anymore. In other words, it is possible that the Greek financial mess is so severe that measures to cut the deficit will not be sufficient to bring public finances back on track. In this case, debt restructuring should be part of the solution. The IMF however, does neither have the tools to mandate or to implement such a debt restructuring. It might even try to get its money back at the expense of other creditors. Its loans would be outside the EU’s jurisdictions which seriously limit the scope for action. - The IMF’s record for overseeing adjustment processes in countries without flexible exchange rates is rather unimpressive. In Argentina, the IMF’s recipes proved to be unable to stabilize the government debt trend, but only pushed the country deeper into recession which finally led to an overthrow of the government and a messy default. - The IMF is driven by political (mainly US) interests. In the view of some, this may mean that the US may be against pressuring Greece too hard through IMF conditionality, as Greece is a Nato member and both countries cooperate in defense, there is a US military base in Crete. - The IMF presence could be perceived as evidence of the Eurozone’s and the EU’s weakness. Our assessment A combined action by the EU (or some EU members) and the IMF seems to be a likely scenario at the moment. Nervousness about Greece’s manipulation of budget data, the use of opaque financial instruments, etc. have strengthened the perception among civil servants and policy-makers, that effective surveillance is difficult to conduct. Protests on Greece’s streets, the heating up of the domestic political debate and the recent provocation by Greece’s Deputy Prime Minister Pangalos who accused Germany of not having paid adequate war reparations strengthen the case for a “bad cop” from outside the Eurozone. While from a Greek perspective the recent provocation may have been intended as a move to put pressure on the German government to help out Greece, the effect may be precisely the opposite: German readiness to lead an EU consortium to help Greece may in fact reduce due to the new tone introduced into the debate, in particular as German public opinion is hostile against aid packages and highly critical of Greece’s cheating into the EMU. All this may make an involvement of the IMF more likely. In order to overcome the EMU’s credibility problem, the IMF’s presence could be limited in time and the EU could assert its ability to act by deciding upon the creation of the European Monetary Fund and an orderly default procedure at the same time as the aid package for Greece is put together.

Option III: The EU does not grant support to Greece, but Greece calls in the IMF alone The pros - The No-Bail-Out-Clause of the Maastricht treaty would be respected.

397 - There would be no loan- or guarantee-related direct and immediate risks for the other EU governments. - The risk that the Greek crisis lessens the support for European integration would be reduced.

The cons - The IMF’s record for overseeing adjustment processes in countries without flexible exchange rates is rather unimpressive (remember Argentina and see option IIa). - The fact that the EU lets Greece fight for itself would risk a political backlash against European integration in Greece. - Given prior magnitudes of IMF programs, it is very unlikely that the IMF will provide a package large enough to secure all financing needs for Greece this year. The austerity program hence would have to be much harsher than the already planned one. - If a fiscal adjustment is not feasible and debt-to-GDP-ratios reach unsustainable levels, the involvement of IMF money might complicate debt restructuring (see explanation in option IIa). Our assessment There is a possibility for this scenario if for some reason the EU does not come to an agreement over the way how to help Greece. However, in our eyes, severe political mistakes on the side of the EU/Eurozone and its major member states as well as on the Greek side would have to occur in order to provoke such an outcome. The EU’s image would be seriously harmed and questions on inner-European coherence and solidarity would be raised. For Greece, the required austerity measures most likely would be harsher and the following collapse of the Greek economy more protracted, as the IMF has fewer funds available than a joint EU/IMF package. If the worst case scenario hits, namely that despite consolidation efforts Greek debt levels are unsustainable and debt needs restructuring, Greece would then in the end be in the danger of having to default anyway – with all the negative direct effect on its economy and people as well as spill-over effects to the other Eurozone members. Daniela Schwarzer is head of SWP´s EU integration division and Sebastian Dullien is Professor at the University of Applied Sciences in Berlin. Together they run the blog Eurozone Watch. http://www.eurointelligence.com/article.581+M539752bc904.0.html

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A New Index of Financial Conditions James Hamilton Mar 8, 2010 12:39AM What do current financial indicators tell us about where the economy is headed? Macroeconomists have long observed that changes in financial indicators often presage future changes in the economy. For example, a big gap between yields on long-term relative to short-term bonds often signals that faster real economic growth is coming, while an increase in the spread between risky and safer yields is often observed prior to an economic downturn. Stock prices and yield spreads are both used by the Conference Board's index of leading economic indicators. Most recently, researchers have tried to gauge the degree of financial stress using indicators such as the LIBOR-OIS spread ([1], [2]) or deviations of yields from predictions of interest rate models (e.g., the recent paper by Christensen, Lopez, and Rudebusch). There are also a number of composite indexes that various private-sector analysts rely on, such as the Bloomberg financial conditions index.

Source: Hatzius, et. al. Two private-sector analysts (Jan Hatzius of Goldman Sachs and Peter Hooper of Deutsche Bank) have recently teamed up with three academics (Rick Mishkin of Columbia, Kermit Schoenholtz of NYU, and Mark Watson of Princeton) to produce a new financial conditions index that attempts to combine the information of 44 separate series including those mentioned above along with a great number of others. One of the differences between their approach and previous work is that HHMSW seek to isolate the separate information of the

399 financial indicators from aggregate business cycle movements by looking at the residuals from a regression of each indicator on lags of inflation and real GDP growth rates. The researchers then extracted a variable similar to a principal component from the residuals across the 44 indicators. HHMSW demonstrate that the resulting series can be quite helpful for predicting real GDP growth, though there is evidence that these predictive relations may change over time. Of particular interest at the moment is the fact that the HHMSW index, unlike most other indicators, shows a renewed deterioration subsequent to the initial recovery in the first part of 2009, a somewhat surprising result given the current steeply-sloping yield curve, low TED spread, and booming stock market. The surprising contrary inference from the HHMSW index appears to be due to two factors. First, the HHMSW index is based on the deviation of the financial indicators from what one would have predicted given recent economic conditions. Many indicators have not improved as much as one would have expected given the return to GDP growth, and the departure from a typical recovery pattern is viewed by the index as a highly pessimistic development. Second, the HHMSW index makes use not just of the yields themselves but also of the quantities of various assets, and many of these show little improvement so far. For example, issuance of new asset-backed securities remains quite low.

Source: Hatzius, et. al. Will real GDP follow the HHMSW index back down? That's not what I'm expecting. But if it does, it wouldn't be the first time I've been wrong.

Originally published at Econbrowser and reproduced here with the author's permission. http://www.roubini.com/financemarkets- monitor/258503/a_new_index_of_financial_conditions

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2010: BRICs, PIIGS and the G-5 Countries Antonio Carlos Lemgruber Mar 7, 2010 11:24PM After the financial and banking crisis of 2007/2008, the year of 2010 will certainly be dominated by the following global macroeconomic themes: a) the growing importance in the world economy of Brazil, Russia, India and China – the so-called BRIC countries – with excellent perspectives, as far as their impact on world economic growth is concerned; b) the dangerous fiscal and/or balance-of-payments situation of Portugal, Ireland, Italy, Greece and Spain – the so-called PIIGS countries – bringing serious risks for the world economy, including a renewed credit crunch; c) the contradictory economic policies of the G-5 “big” economies ( US, UK, Germany, Japan and France). Our purpose here is precisely to try to comment on what should be the final consequences of such a diversified and complex world economic situation in 2010, which is clearly the result of different economic policy responses undertaken by different countries (including countries which have the same currency, meaning the euro) in the last two years, as a consequence of the major world economic and financial shock of 2007/2008. In many respects, it seems that BRICs, PIIGS and the G-5 countries are facing the same economic dillemas of the thirties after the 1929 great crash. In other words, decisions about monetary and/or fiscal policy since 2008 were quite different in each country and this will certainly happen again in 2010. Independently of their exchange rate regime, countries have demonstrated different opinions about the costs of inflation versus unemployment, as well as about how to deal with such costs and dillemas more or less effectively. Another point to keep in mind is that public debt and monetary expansion problems are not a monopoly of the PIIGS: perhaps with one exception (Germany), all the other 13 countries listed above will have to deal with monetary and fiscal policy decisions in 2010 taking this fact into consideration, that is, high public debt ratios and excessive money growth, and the consequent limitations for the future brought about by this “new” fiscal and monetary reality of laxness created in the last few years. Therefore, the major story of 2010 is that, for different reasons or for the same reasons, BRICS, PIIGS and the G-5 are almost being forced to adopt restrictive monetary and fiscal policies in 2010. This means higher interest rates all over the world, severe cuts in government spending, higher taxation and eventually negative growth in monetary aggregates. Just selecting a few examples from each group – Brazil, Greece and the United States are reaching that specific moment when it becomes impossible to postpone interest rate raises. The fear of inflation begins to overcome and surpass the fear of unemployment. To make things worse, it is well known that at some point raising nominal interest rates begins to provide negative signals for inflation expectations as well as public debtors. In many aspects, looking back to the last few decades of the last century, we might be going back to risks of

401 stagflation just like in the late seventies and early eighties. Even countries with expected high rates of economic growth in 2010, such as Brazil and China, will certainly be affected by this new world economic shock and be provoked by restrictive economic policies. It is clear by now that governments learned the lessons of the twenties and the thirties and know the necessary instruments to avoid depression or hyperinflation. But at the same time, in contrast to some optimistic beliefs held in the last two decades (1993-2007), governments still have great difficulties in managing the inflation-unemployment dilemma under less extreme situations, which very often leads to stop and go policies. One should not be optimistic about the present macroeconomic policy mix in many countries. Brazil is seriously facing the risk of throwing away many pillars of the last 15 years of good stabilization measures. China has an unsustainable situation as far as growth is concerned, including many bubbles, very similar to Japan before 1990. The European situation is dramatic, to the extent that Greeks and Germans should never be part of the same Monetary Union without being one single country. Any solution for Europe will represent a major retrocess, with a probable return to n currencies and possibly the end of the euro (the ones who are betting against the euro face the risk of discovering that such currency might simply disappear at the end of the day). The United States has to begin a period of restrictive fiscal and monetary measures even under a situation of 10% unemployment. It took almost 10 years to adjust the world economy after the Great Depression of 1929. It took more than 20 years to reorganize the world economy after the Great Inflation started in the late sixties of the last century. All this suggests that perhaps we will have to wait a few more years of trials and errors, stop and go policies, before we might go back to something that would look again like the Great Moderation of 1993-2007, without major cyclical swings in the world economy. One thing is certain – 2010 will be another year of living dangerously. http://www.roubini.com/globalmacro-monitor/258501/2010__brics__piigs_and_the_g- 5_countries

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Hanging in the Balance over at the ECB Edward Hugh Mar 7, 2010 6:22PM It's not often that I await the ECB after-meeting press conference statements of Jean Claude Trichet with such an intense feeling of anxiety and bated breath. But this time, as the song goes, it will be different. This time there are plenty of reasons to think that, having been the first off the mark in looking for the exit, Europe's monetary leaders may sound a note of caution at tomorrow's meeting, and indeed indicate there may well be solid grounds for at least taking a time out, if not engaging in a longer process of pausing for extended thought. My advice: if you don't actually have any pressing need to hit the eject button, then don't do it. In the first place we have the latest batch of Eurozone PMI data, which suggest that the process of economic recovery is going to be neither so rapid, nor so straight forward, as was initially thought. And even more to the point, exit from the recession is being more characterised for its unevenness than it is for its uniformity. Growth in February was heavily weighted to the manufacturing rather than the services sector, and in manufacturing there was more dynamic in demand from the ex-Eurozone export area, than from internal orders, suggesting that the 6% drop in the Euro is having a positive impact on external competitiveness, while domestic demand remains weak and lacklustre.

403 In the second place, in addition to the generally weaker condition of the services sector, there are pronounced general weaknesses in some countries: Spain, Greece and Ireland are obvious cases (and Greek manufacturing even managed to lose ground in export markets in February), but output and activity in Portugal and Italy also look quite fragile at this point. In Italy the phasing out of the car scrappage scheme had a strongly negative impact on February sales in the Italian retail sector, with the PMI dropping sharply from 54.4 in January to 44.5, and after three succesive months of increase sales now seem to be solidly back in contraction mode. Even more worryingly, firms operating outside of the autos sector also noted in their responses to the survey that weak consumer sentiment had been a key theme in February.

As Markit Chief Economist, Chris Williamson puts it: “The PMI has portrayed a steadier recovery of the Eurozone economy over the past year than the more volatile official GDP data, and suggests that upward momentum has been sustained so far in the first quarter of 2010. The data are consistent with GDP rising by around 0.4% in Q1. However, not only has the divergence widened between the surging manufacturing and struggling service sectors, but national trends continue to worry. Robust growth in France and Germany contrasts with a deepening downturn in Spain. These divergences raise concerns about the sustainability of the recovery, as well as posing difficult questions for policy-makers.” Slow but solid as the growth in the EuroArea has been, the performance has hardly been spectacular, and we are a long, long way from a "V" shaped rebound. In addition, outside of France there has been little evidence of any sort of solid, home-grown, domestic consumption growth, and the general picture is one of overall fragility, with the continuing danger of relapse back into quarterly contraction. Headaches For ECB Policymakers All of which offers us the background for a fairly extended series of headaches for policymakers over at the ECB. Indeed members of the Governing Council may well be having a hard time of it deciding what their next move should be. Having moved policy steadily up to the door marked "crisis exit this way", they may well be having second thoughts about whether this is exactly the right time to cross the threshold. Indeed as Ralph Atkins noted on the FT Money Supply blog, the European Central Bank has gone strangely quiet. Since the beginning of December ECB board members have collectively made fewer speeches than in any three month period since the global financial crisis erupted in mid-2007. According to the ECB website list, since the start of the year Jean Claude Trichet has made only one full-scale address - in Sydney earlier this month - and even then his remarks were

404 overshadowed by his decision to return early to join eurozone leaders in talks on the Greek crisis. In the first two months of last year, Mr Trichet gave at least nine speeches. So why the comparative silence? The ECB is not normally reticent in coming forward to guide market expectations. Could the communication pause reflect growing uncertainty among board members about what to do next? With Greece and other countries in Southern Europe having so many problems returning to growth no one is very clear anymore what the ECB exit strategy is actually going to be. And obviously, if you aren't clear about something then maybe it is better not to talk about it. And the ever vigilant markets are noticing the change in stance. Previously, the European Central Bank was seen as delaying an increase in interest rates out of concern for some of Europe's weaker economies. But with the German economy now in a stall, and Italy's possibly back in recession, expectations for ECB rate increases have been driven further and further back, and financial markets are not now expecting the first increase in the ECB’s main policy rate until September next year. The recent announcement that Eurozone annual inflation slipped from 1 per cent in January to just 0.9 per cent in February - undershooting to an even greater extent the ECB’s goal of a rate “below but close” to 2 per cent - have only reinforced their view. If there is little inflation danger, and the recovery is week, then what is the point in raising rates? In addition, the prospect of sizeable fiscal tightening in many EMU countries will also act as a disinflationary force in these countries in coming months, pressuring the euro downwards and keeping up the pressure on the ECB to stay on hold until at least next year. Aggressive fiscal tightening by Greece, Spain and Portugal looks likely to plunge all these economies back into even deeper recessions. All else being equal, this calls for a looser monetary policy, as does the need to at least keep the euro where it is, and stimulate export activity to destinations outside the monetary union. Beyond the interest rate issue, Jean-Claude Trichet is also scheduled to announce further steps to gradually return liquidity provision to pre-crisis levels for eurozone banks. “Timely” action, the ECB argues, is justified as financial markets normalise and the risk grows of distorting investor behaviour.

The ECB stopped providing 12-month liquidity in December, and Thursday’s governing council meeting is in theory going to consider toughening the terms of what is planned to be a final six-month liquidity offer, as well as scaling-back the three-month and one-month liquidity offers. The bank will also have to give serious consideration to how to cope with the

405 expiry on July 1 of its first 12- month liquidity offer, which saw €442bn pumped into the system a year earlier – the largest amount ever in a single ECB operation. And Spain's banks don't stop drinking at the fountain. According to the latest data from the bank of Spain, the dependence of Spanish banks on ECB finance hit a new high in January - following the "last" one year offer in December - with €88.6 billion outstanding in longer term financing operations. To date they have only made use of some €77.3 billion of this (see chart below), but they have a further €10.5 billion parked on deposit at the ECB, ready to use as needed. Despite the apparent success of the recent EU delegation to Athens in achieving further cuts from the Greek administration, doubts remain about how 6 minus 2 can sum down to five, or, if you will, how growth and fiscal austerity can come together. And in particular how Greek (or Spanish, or Irish) banks, who in theory will no longer have access to the extensive liquidity provision whose benefits they have been so enjoying of late, will be able to cope. Between public and private sector financing needs, Spain will have to fund borrowing (including rollovers) to the tune of something like 50% of GDP this year. So, as Ralph Atkins puts it, despite the apparent success of the EU Commission in obtaining agreement on a further €4.8 billion package of austerity measures Greece is still far from receiving the all-clear. Ironically, market concerns will in all probability now shift to worries that Athens has gone too far in slashing budgets and raising taxes, and that the fiscal measures announced will simply act as a massive brake on economic activity. The risk is that Greece is now in a vicious circle in which fiscal austerity sends the country ever deeper into recession - and Athens has to react even more aggressively to bring down the public sector deficit as a share of GDP. There will be no easy-to-find Aristotelean mean here I'm afraid. So how will they play it? As I say, at 2:30 tomorrow afternoon I will be all ears, with my eyes totally glued to that ECB webcast. From March 3, 2010

Originally published at Global Economy Matters http://www.roubini.com/euro-monitor/258499/hanging_in_the_balance_over_at_the_ecb

The End Game for Europe: Wage Cutting and the Battle for Exports Rebecca Wilder Mar 7, 2010 5:02PM Yesterday I argued that Latvia's cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia's efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009. But I now see a very scary trend emerging across Europe, the fight for exports.

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To be sure, Latvia's efforts are of note, as the acceleration in hourly labor costs dropped from a 22% pace spanning 2007-2008 to just 2.8% in the first three quarters of 2009 compared to the same period in 2008 (the Eurostat data are truncated at Q3 2009). But look at the similar wage-cutting behavior occurring across the European Union, especially in the Eurozone hopefuls (Latvia, Lithuania, and Estonia are preparing to adopt the euro in coming years). The battle for exports has begun. Compared to the same period in 2008, Q1-Q3 2009 annual hourly labor cost growth is down 4.9% in Lithuania, 0.8% in the U.K., and 0.5% in Estonia. In fact, every country across the 26 countries listed except Belgium, Germany, Greece, and Spain, saw the rate of hourly wage growth decrease since 2008. The currency is pegged, so the only mechanism to increase external competitiveness is through price (wages) declines. To be sure, this growth model cannot work for the Eurozone as a whole. Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income. It's especially bad for countries like Latvia or Hungary, where the lion's-share of trade occurs withing the boundaries of Europe. And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone!

Originally published at News N Economics and reproduced here with the author's permission. http://www.roubini.com/euro- monitor/258495/the_end_game_for_europe__wage_cutting_and_the_battle_for_exports

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February Payrolls: It’s the Economy, Not the Weather

By Arpitha Bykere and Christian Menegatti, 3/5/2010 3:00:00 PM | Last Updated EXECUTIVE SUMMARY Although the official unemployment rate remains unchanged, many job market indicators show that the economy is still shedding jobs and is likely to continue. The recent report showing a downturn in payrolls cannot be explained away by recent bad weather but rather is the result of persistent, poor economic conditions. Meanwhile, jobless claims data continue to support RGE’s view of a “jobless recovery.”

For details of the January payrolls report check out: How Far Is the U.S. Economy from Showing Job Gains?

The Good News The unemployment rate remained unchanged at 9.7%. http://www.roubini.com/analysis/106650.php Some Reflection about the Inflation Process in Argentina Miguel A. Kiguel Mar 4, 2010 5:12PM Argentina’s inflation is now approaching the 20% range, as it has recently accelerated from the mid-teens levels. There is now a heated debated about its causes, the possible paths that inflation can take in the future and the key variables that one needs to monitor in order to try to predict where it can go. In contrast to previous episodes, this inflation process, which started towards the middle of the decade, was not driven by the needs to print money to finance the fiscal deficit. Instead it was a result of a combination of factors. On one side, the economy started to reach full capacity in many sectors and there was starting to appear a large number of bottlenecks. Despite the need to slowdown the growth in aggregate demand, macroeconomic policies continued to have an expansionary bias. On the fiscal side, nominal expenditures where growing at annual rates above 20%, which meant that there was a clear fiscal impulse despite the fiscal surpluses that the Government maintained during those years. The Central Bank did not take upon itself the task of fighting inflation, as monetary growth accompanied the evolution of nominal GDP and in this sense it followed an accommodating monetary policy while providing an expansionary bias by keeping nominal interest rates well below inflation. As a result macroeconomic policies were aiming at lower rates of inflation, but instead they maintained sustained growth in nominal aggregate demand. While there was ample excess capacity (as in the 2002 to 2004 or 2005), this increase in demand was satisfied through a rise

408 in aggregate supply, but once this excess capacity started to disappear most of the pressures fell on inflation. To make matters worse the Government granted large wage increases (of around 20% per annum), as the unions became stronger once the rate of unemployment fell to one digit. Besides, it was a way to show gratitude to the union leaders that were key supporters of the Government. Inflation receded in the second half of 2008, after reaching 25%, thanks to the international financial crisis that affected aggregate demand and caused the first recession in the Kirchner era and the fall in commodity prices that removed some of the pressure on food prices. However, this was a short pause, as inflation started to accelerate again since the last quarter of last year and is now becoming a monster that is difficult to tame. In summary, during these years there has not been an anti-inflation policy. Perhaps the only exception has been Secretary Moreno, who single handed tried through the use of price controls and guidelines to keep a lid on price increases. But the policy inconsistency of the past implied that these attempts to rely on controls and intimidation were short lived and inflation is again on the rise, and this time the risks are higher. The main problems are now the Government needs to resort to the Central Bank to meet the financial requirements and the fiscal deficit as it has no access to the markets, unions remain strong and monetary policy still has a clear expansionary bias. These expansionary policies are in place after four years of double digit rates of inflation and when workers and firms have already incorporated expectations that in the best case scenario inflation will remain at 20%. Inflation inertia is dominating the process, and experience shows that once this type of process starts it is difficult to reverse it. In the meantime the Government is making two big mistakes in its analysis of the causes of the inflation process. First, it argues that this is a realignment of relative prices (namely meat and wheat) instead of realizing that this is a generalized and persistent increase in the price level. What they don’t see (or don’t want to admit) is that most wage and price adjustments are staggered over time and hence there is always one price that explains inflation in a given month. The fact is that all prices and wages are moving upwards, though not all simultaneously. The second and certainly more risky mistake is that the Government has been arguing that “supply constraints” are the main reason for the recent acceleration of inflation, so-called as “relative price adjustments” by the Government. Indeed, there are some “supply constraints” in some durable and non-durable final consumption products, as some food products. Specifically, the indexes of capacity utilization in the durable and non-durable final consumption products have remained in the last two months in the maximum levels of at least the last ten years, suggesting that there is excess demand in those sectors, despite the 2009 recession, in part as a result of a relatively lower investment. This result may not be a surprise, since several of those sectors in last years have been under Government intervention and regulation, such as several food sectors (meat, milk, wheat, etc.) or public utilities (electricity, natural gas, etc.), with regulated prices and exports quotas. Due to the lack of investment incentives, output and installed capacity in those sectors remained relatively stagnant in past years, and even decreased in several cases. While the supply constraints have been a factor affecting inflation, though it is wrong to conclude from this evidence that the Government will be able to deal with this issue through increases in supply. Here, there and everywhere when there are generalized pressures by aggregate demand excesses in the short run the only solution is to restrain demand or to

409 increase imports. Argentina is not likely to follow neither recipe so the effects should be very clear.

Aggregate demand is now growing at around 20/25% per year in nominal terms. The Government believes that the answer is to increase supply, and hence it is meeting with producers to diagnose where the bottlenecks are and to try to provide credit lines to get them to invest and increase production. The argument does not take into account that investment takes time to mature and to have effects on production, nor does it calculate how much investment needs to increase to generate real growth of around 8 percent (certainly much more that the current 22% of GDP).

410 All the risks appear to be on the upside, as the Central Bank seems ready and able to maintain large rates of monetary and credit growth and interest rates that remain negative in real terms, while the Government plans to keep the current high rates of growth in nominal expenditures and to resort to the Central Bank to obtain the necessary financing. This is an explosive mix. Despite all these concerns there is a caveat. It would be prudent for our readers to disregard the uneasiness about inflation presented in this analysis as it was done by a so called neoliberal, orthodox economist, who does not fully understand the virtues of supply side economics, nor Say’s Law in reverse (that demand creates its own supply).

Opinions and comments http://www.roubini.com/latam- monitor/258488/some_reflection_about_the_inflation_process_in_argentina

The Eurozone's 'Bay of PIIGS'

By Arnab Das, Elisa Parisi-Capone, Natalia Gurushina, Katharina Jungen and Jennifer Kapila 3/8/2010 | Last Updated EXECUTIVE SUMMARY

Part I – EZ does it: Greece is the frontline of the battle to restore eurozone (EZ) fiscal solvency and discipline, improve and better align structural policies, reduce EZ divergences and sustain the euro. The battle encompasses Portugal, Ireland, Italy, Greece and Spain— grouped together as the “PIIGS” because they are at risk from the housing bust, the financial crisis or the ensuing deleveraging. RGE ranks 16 EZ members by domestic and external vulnerability, following the methodology in Gros/Mayer (2010). Their external index shows that Greece, Portugal, Ireland, Italy and Spain are the most vulnerable to external shocks, in that [...] http://www.roubini.com/analysis/106879.php

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Does the Obama Administration Even Want to Win in November? Simon Johnson Mar 7, 2010 5:19PM Increasingly, senior administration officials shrug when you mention the November mid-term elections. “We did all we could,” and “it’s not our fault” is the line; their point being that if jobs (miraculously at this point) come back quickly, the Democrats have a fighting chance – but not otherwise. It may be true, at this point, that there is little fiscal policy can do that would have effects fast enough; and monetary policy is out of the administration’s hands. But ever so quietly, you get the impression the Obama team itself is not so very unhappy – they know the jobs will come back by 2012, they feel that Republican control of the House will just energize the Democratic base, and no one will be able to blame the White House for getting nothing done from 2010 on. When you push them on this issue, they snap back, “Well, what do you want us to do? What’s the policy proposal that we are not pursuing?” But this is exactly the wrong way to think about the issue. The point is that the administration has lost control over the narrative. Why have we lost 8 million jobs since December 2007? Why will debt-GDP rise by 40 percentage points relative to what the CBO baseline would have been? Who is responsible for this deep global disaster? The president has only addressed this head-on once – when he launched the Volcker Rules in January. That was a good moment, grabbing attention and focussing it in a productive direction. But it proved fleeting – Secretary Geithner was spinning it away within 7 hours – and there has been no follow-up in terms of clear political messages. There’s no story in the culture about what the big banks did and why. There is no attempt from the top to push through the key message for the day – financial reform – and to explain what this can do and how. The adminstration, in effect, is not even trying. The inner team apparently thinks that 2012 will go just fine – as long as unemployment is down around 6 percent. And, they reason, the people who lose their seats this November won’t be around to complain. Really? If the administration fights hard and loses in November, that is one thing. If it fights on clear issues – forcing the other side to support Too Big To Fail structures – they may still lose, but such a loss will clearly communicate that the political strength of the big banks is now out of control. That is an issue to run on – and win big – in 2012. And if the administration doesn’t even care and hardly tries now, who will come out for them (or send a check) in two years? The Obama team – both political and economic wings – seems to feel that their base has nowhere else to go, and all they need to do is drift towards the right in a moderately confused fashion to assure re-election for the president. Jimmy Carter had the same sort of idea.

Originally published at The Baseline Scenario and reproduced here with the author's permission. http://www.roubini.com/us-monitor/258496/does_the_obama_administration_even_want_to_win_in_november_

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Stuck in Neutral – What Japan’s Rebalancing Can Teach Us Michael Pettis Mar 4, 2010 9:12PM After such a long entry last week I thought I would spare my readers and do something much briefer. A few days ago I read a good article (“Stuck on Neutral”) about Japan in the August 18 issue of the Economist. You can find the article on the Economist website if you are a premium subscriber, but if not, it has been partly reprinted elsewhere. It may seem strange to be reading an August article in March, but in fact I often find myself a year or more behind in my reading. This may seem a little perverse, but it does let me see what the smartest people were thinking at the time while knowing what subsequently happened. Among other things this makes it clear how often informed consensus gets bogged down in the minutiae of everyday events while trying to understand the bigger picture. In the case of this particular article, however, what triggered my interest is that it was about Japan’s post-1989 rebalancing, and among other things discusses why, in spite of every attempt, Japan has not been able supposedly to rebalance the economy and achieve any real growth during the two lost decades after 1990. Private consumption never took off to drive economic growth. Many of these reasons for low consumption we have heard before, and no doubt will hear again, but I am not sure how meaningful they are. According to the article, the Japanese don’t take enough holidays, they are aging, exporters squirrel away profits to replace households as a source of savings, small companies are too inefficient, government supports big business, the Japanese don’t like to borrow, house prices are too high, and so on. Maybe these really are the causes of the failure for the surge in consumption, but many sound like variations on accounting identities, and as such they are as likely to be consequences as causes of low growth. But what interested me is that in spite of the fact that Japan’s economy didn’t grow, and contrary to the article’s claim, some serious rebalancing actually did take place, at least as I understand it. Japanese gross national savings declined from around 35% of GDP in 1990 to around 23% last year. The household savings rate dropped too, from around 10% in the 1990s to around 2%. Neither declined in a straight line, but decline they undoubtedly did. Household consumption, according to the article, nonetheless failed to grow meaningfully – in the past two decades it only grew by 1-2% annually – and this is much lower, presumably, than consumption growth in the 1980s. But it was nonetheless higher than GDP growth, and that is exactly the point: consumption growth may have been low, but it exceeded GDP growth. Rebalancing in the context of Japan (and China) does not mean that consumption growth must surge. It just means that consumption must grow faster than the economy so as to become a bigger share of GDP and a bigger driver of total growth. Put another way, it means that the savings rate must decline. If this is what actually happened, then in fact Japan did partly rebalance.

413 But, mysteriously, in spite of the fact that Japan may have experienced real rebalancing and a real growth in the relative share of household consumption, the Japanese economy stagnated during the past two decades. If you had predicted in 1990 that Japanese household and national savings would have declined so sharply as a share of GDP, and that consumption would have risen, you probably also would have predicted that Japan, after a couple of tough years, would resume rapid growth (or at least growth more in line with other rich economies) as surging private consumption pulled Japanese growth forward and away from its over- reliance on net exports. But you would have been wrong on two counts. First, Japan did not grow very quickly at all. It stagnated as consumption growth actually declined. Second, its reliance on net exports did not decline. The current account surplus remained high as a share of GDP. Why didn’t Japan grow more quickly? One reason may be obvious from the very fact that the current account surplus did not decline. Although Japan certainly rebalanced by some measures, its current account surplus dropped from its peak of 4.2% of GDP in 1986 to 1.5% at its trough in 1996, only to turn around and surge, eventually to reach 4.8% in 2007, dropping to 3.1% in 2008 on the back of the collapse in international trade (and albeit on a much smaller economy as a share of global GDP than in 1990). Since the current account surplus is another name for the excess of savings over investment, obviously this means that national investment declined as sharply as did national savings. The article helpfully provides us with the numbers for both in an accompanying graph, and this confirms that investment indeed dropped, from a peak of around 32-3% in 1990 to around 22% last year. With investment such an important part of Japanese growth prior to the bursting of the bubble, the fact that it declined so dramatically seems to have had a huge impact on Japan’s subsequent lack of growth. So although in some important ways Japan “rebalanced”, for two decades it was nonetheless unable to grow even with a still-very-high and rising trade surplus, largely because investment declined sharply. I am not an expert on Japan by any means, even though in the past two years I have been giving myself a crash course on recent Japanese economic history, but my Asian- development-model story suggests at least one explanation of what happened. After many years of excess investment driving growth, Japan’s rebalancing process, which occurred after corporate, bank and government debt levels prevented the investment party from continuing, locked the country into many years of slow growth because it had to grind through years of debt-fueled overinvestment. In fact Japanese investment jumped in the last two years of the 1980s, after the 1987 stock market crash in the US should have spelled the end of rapid Japanese export-led growth, from an already-high 28% to nearly 33% three years later. In other words Tokyo seems to have responded to the collapse in the US by increasing its already-high level of investment to counteract the impact on the trade surplus. This is what happened in China too, after the 2007-08 banking crisis in the US. This jump in investment seems to have kept Japanese growth going solidly for another two years after the current account surplus began its steep nine-year decline. But growth in investment wasn’t maintained. After 1990, when investment growth could no longer keep up, perhaps because Japanese corporate, banking and government debt levels were becoming a serious constraint, the Japanese economy began a long, slow, painful decline.

414 The government tried to continue subsidizing growth over the subsequent decades by keeping both wage growth and interest rates low, not to mention maintaining the undervalued currency, as we know. This unfortunately may have slowed the growth of both household income and household consumption, while maintaining the high trade surplus. This also may explain why the drop in household savings was partly matched by the rise in corporate savings – households continued seeing transfers of income to the corporate sector. But ultimately in spite of maintaining some of the old trade-related policies that kept manufacturing growth so strong for so long, there was nothing Tokyo could do to combat the effects of the decline in investment. Had they allowed a more rapid rebalancing via higher wages, interest rates and the currency in the first two or three years, perhaps they would have had a tougher time early in the 1990s, and a lot more liquidations, but ultimately they might have pulled out of the slump a lot sooner because they would have transferred income to households more rapidly (although of course had they done this too aggressively, unemployment would have soared and consumption collapsed). So where am I going with all this? I am not completely sure, and no doubt I am oversimplifying the Japanese story. Certainly I am not smart enough to figure out all the inner workings of Japan’s economy. Just trying to keep the accounting identities in line and, making sure that everything that is supposed to balance actually does balance, is tough enough. But this macro approach might have some benefit in that it shows how the overall system can constrain the micro-developments that we all hope for. At the macro level, in other words, it doesn’t matter what individual policies we take to boost consumption if these polices don’t in the aggregate represent a real transfer of income to the household sector, as they did not in Japan. Rebalancing must occur, but as an accounting-identify matter it can occur both through good ways (a surge in consumption) and bad ways (a drop in growth). In Japan it occurred the latter way. Without a serious attempt to redistribute income more rapidly back to households, Japan rebalanced, but not via a surge in consumption. Since it could not maintain investment levels, on which the economy was too dependent, and in fact increasingly dependent after 1987, it rebalanced via a sharp slowdown in growth. Either way achieves rebalancing – which only means that consumption has to grow as a share of GDP – but of course the former is much better than the latter. Japan’s experience suggests one of the risks China faces. It is easy to talk about rebalancing as a solution to the underlying problem China faces, but as the Economist article points out, rebalancing can be “tricky,” and it does not lead automatically to growth – that depends to a significant extent on how quickly consumption grows, and can take many years before that happens. Will China rebalance? Of course it will. It is not a question of if but rather of how. The same was true of Japan. No economy the size of China’s can be so heavily dependent on exports to absorb its excess production, especially once unemployment in the rich countries reaches significant levels. And no large economy can keep investment rates so high – and the allocation process so constrained by governance issues – for very long without running into the problem of capital misallocation. But there are many ways rebalancing can occur. Chinese household consumption will undoubtedly rise as a share of Chinese GDP over the next decade or two, but the process nonetheless can be disappointing for growth. It depends on lots of other moving parts, most importantly perhaps the change in investment and the speed with which income is transferred to households. And the change in investment might depend on debt capacity constraints and the extent of earlier overinvestment.

415 http://www.roubini.com/asia- monitor/258490/stuck_in_neutral_____what_japan___s_rebalancing_can_teach_us

Can Obama Turn America Into Something Like Zimbabwe? Fabius Maximus Mar 2, 2010 2:34PM Summary: Can Obama make America like Zimbabwe? Or is this widespread warning a sign that we’ve become gullible fools? The easy acceptance of this preposterous warning suggests the latter. It’s sad that such a post is necessary. Worse, explaining these facts is unlikely to change the mind of many people believing this nonsense. This is a follow-up to Would a default by the US government help America?, and another in a series looking at the important role of propaganda in modern American politics. Conservatives have warned that President Obama is wrecking America, perhaps deliberately. The early comparisons were mild. “What you’re doing is buying into the notion that if we just print some more money that we don’t have and send it to different states, we’ll create jobs,” he said. “If that’s the case, why isn’t Zimbabwe a rich place?” — Mark Sanford (R, Governor of S. Carolina), CNN, 11 March 2009 In the past year they’ve become explicit. “Bruce, I’m not trying to turn the United States into Zimbabwe. That would be the guy in the White House, whom you seem surprisingly anxious to defend.” — Glenn Reynolds (Law Professor at U of Tennessee), Instapundit, 19 February 2010 — Red emphasis added. That intelligent and educated people make this comparison — either sincerely or as agitprop — shows the sad condition of political debate in the US. By comparison with this ”Tippecanoe and Tyler too” (Wikipedia) looks like The Federalist Papers. This fear of becoming like Zimbabwe has taken root among conservatives, frequently appearing in comments on this website and others. For one sample see this Google search. Let’s count the ways this comparison fails. 1. Obama’s economic policies closely follow those of President Bush. 2. The expansion of the money supply took place under President Bush; it’s been flat under Obama. 3. Conventional economic theory says that expanding the money supply during a depressionary shock is the correct action. 4. There are no significant similarities between Zimbabwe and the USA. 5. There are no significant policy similarities between Zimbabwe and the USA. Below you’ll see a brief analysis of each point. Anyone making this comparison needs to read this: Where to go to learn about economics, and help you understand what’s happening to America and the world.

416 Update: As noted in the comments, this comparison serves to incite fear much as the equally absurd Bush=Hitler did among liberals. (1) Obama’s economic policies closely follow those of President Bush. The recession started in December 2007. In response the Bush Administration and Congress passed… • Economic Stimulus Act (February 2008) — Gave money to households and businesses (not just rebates and rate cuts), expanded the mortgage lending activities of the Federal Housing Administration, Fannie Mae and Freddie Mac (virtual nationalization of the mortgage lending industry, with the government now the nation’s top subprime lender) • Emergency Economic Stabilization Act (October 2008) – A massive bailout of the banking system, which is now condemned by the Tea Party Movement. President Obama’s economic policies continued those of Bush. The bank bailouts continued, without any meaningful reform of bank regulation. As did the stimulus programs. In February 2009, with the recession in its 15th month (by which point most recessions had ended) and the global economy rapidly contracting, Obama signed the American Recovery and Reinvestment Act — bigger and broader than the February 2008 package. The timing shows the political basis of these warnings about Zimbabwe-ifaction. During 2008 many conservatives mocked those economists who warned that we were in a severe downturn. Such as Glenn Reynolds, with his repetition of “Dude, where’s my recession?” (for examples see these links on Google; for analysis see this and this). Bad news for his loyal readers who failed to prepare. With Obama in the White House, the President gets tagged with every bit of bad economic data. Using Instapundit as an example: • “ER, SO IS THIS THE HOPE? OR THE CHANGE? Deficit To Hit All-Time High.“ (1 February 2010, link) • “CHANGE: December home sales down nearly 17%: Home sales plunge nearly 17% in December after tax credit deadline extended.“ (25 January 2010, link) (2) The expansion of the money supply took place under President Bush; it’s been flat under Obama. In February 2009 — after Obama’s inauguration — M2, the broadest measure of the US money supply, was $8.29 trillion. In January 2010 it was $8.45 (not seasonally adjusted; source: Federal Reserve). The same is true for M1, the adjusted monetary base, and the Federal Reserve’s balance sheet. The massive expansion took place in the second half of 2008, during the Bush Administration.

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(3) Conventional economic theory says that expanding the money supply during a depressionary shock is the correct action. By late 2008 the shock to the global economy was as large as that of the early Great Depression. For more about this see… • ”A Tale of Two Depressions“, Barry Eichengreen and Kevin H. O’Rourke, VOX, 1 September 2009 • “The Labor Market during the Great Depression and the Current Recession“, Linda Levine, Congressional Research Service, 19 June 2009 — The similarities are even stronger now, 8 months later. During severe economic downturns people increase their savings. The want cash and its equivalents assets (e.g., bank deposits, money market funds, treasuries). Almost all economists believe that the Federal Reserve’s failure to accommodate this desire for cash contributed greatly to the Great Depression. An analogy is an emergency room doctor failing to give oxygen to a patient. This time the Federal Reserve did better, a major reason this shock did not create a depression. (4) There are no significant similarities between Zimbabwe and the USA. Zimbabwe is a third world state that was never really a nation. The #2 worst failed state on the 2009 Fund for Peace-Foreign Policy Magazine list (Somalia is #1). It has almost nothing in common with the condition of the USA. • Small, aprox 12 million people. vs. our 310 million. • Poor, GDP aprox $100/person vs. our $48 thousand/person • New, government recognized in 1980 vs. our 1788 (one of the oldest government and oldest democracies in the world) Zimbabwe’s hyperinflation is extraordinary, the second largest hyperinflation on record as shown by this table from “On the Measurement of Zimbabwe’s Hyperinflation“, Steve H. Hanke and Alex K. F. Kwok, Cato Journal, Spring/Summer 2009):

418 (5) There are no significant policy similarities between Zimbabwe and the USA. This is too obvious to deserve discussion. Wikipedia has a clear description of the Zimbabwe hyperinflation. As always with Wikipedia, the links are the most useful part.

Originally published at Fabius Maximus and reproduced here with the author's permission. http://www.roubini.com/us- monitor/258478/can_obama_turn_america_into_something_like_zimbabwe_ Worry Not About America Becoming Like Zimbabwe, Worry About Becoming Like Argentina Fabius Maximus Mar 4, 2010 1:50PM People seeking to incite irrational fears — hoping to make us easy to manipulate – warn that America might “turn into” Zimbabwe. That’s nonsense, for reasons described here and here. The real danger: becoming like Argentina. La oligarquia and their working class opponents each sought victory, and together destroyed Argentina. No amount of wealth and power can preserve a nation whose people forget their common citizenship, who divide into groups — each interested in their gains, seeing other groups as their enemies. This need not end in civil war to drive a nation from wealth to poverty. Economic stress breeding factions, factions fighting for power prevent agreement on necessary economic and political reforms, this causes a recession. Repeat until economic collapse forces reform or regime change (for good or ill). Downhill is always the easy path. America is not Argentina. As T E Lawrence said, “analogies in human things {are} fudge.” But there are points of similarity enough for their experience to provide a warning to us. Whatever America’s problems, we have to solve them together. We need leaders like Solon, not General Peron. “Argentina Cries for Itself“, Flora Lewis, New York Times, 15 May 1990 — Excerpt (red emphasis added): At the turn of the century, ”rich as an Argentine” was a Parisian simile for great wealth. Here in the center of the country, surrounded by pampas, there

419 are outsized copies of French mansions. ”All our grandparents were rich,” said a gracious local lady who isn’t. Talk focuses on ”the crisis.” Argentines no longer lift an eyebrow when you ask what’s wrong with their country, why it has failed. They ask the same question, though the answers are diffuse, uncertain, contradictory. If conventional development theory were right, Argentina should be better off and more confident than Canada. It has vast resources, a varied but mostly temperate climate, a very low population density – some 33 million on land 5 times the size of France, though half are around Buenos Aires, an almost exclusively European population with no racial or serious ethnic problems, near-total literacy. … But it has a foreign debt it can’t service of $62 billion, which means it received huge credits and wasted much of them. For the last 60 years at least, with minor interruptions, it has given itself bad Government. So conventional development theory has it wrong to the extent that it doesn’t take enough account of the people, and Argentina went seriously off track with its own bad mistakes. One-third of the nation, echoing Franklin Roosevelt, is and always has been miserable. In an unpopular book called Why Argentina Doesn’t Function, Roberto Roth, a businessman, lists the old Argentine convictions of superiority: disdain for North Americans as yokels too busy making money to know how to live, indulgence for Europeans as failed emigrants left behind to look after the castles and cathedrals, and a view of other Latins as poor, backward relatives. The core of the problem, he says, is that the society has never been fairly represented by the political system and that a ”financial nation” always manipulated power behind scenes. ”We have Socialism without planning, and capitalism without money,” quips one landowner. ”We socialized the losses and exported the profits,” says another. A brief look at the story of Argentina’s decline Let’s hope the next chapters of our story don’t resemble those of Argentina after WWI. The following looks at the economic challenges Argentina’s citizens failed to meet, somewhat like those we face today. Excerpt from ”Three Phases of Argentine Economic Growth“, Alan M. Taylor, National Bureau of Economic Research, October 1994 (subscription only). The headings inserted to the text are mine. The story of Argentine economic growth in the twentieth century is one of decline unparalleled in the annals of economic history. Once one of the richest and fastest growing countries in the world, Argentina is now firmly entrenched in the ranks of less-developed countries; and the Belle $pope, the turn-of-the- century golden age, a time of rapid growth, high culture and dreams of continued prosperity, is but a dim and distant memory for most Argentines. For the economic historian, the development economist, and even the international economist, the case of Argentine economic failure constitutes one of most puzzling case-studies of national development, and though all agree that Argentina underwent relative economic decline, few can agree on its nature and causes. Low savings rate

420 … Relatively low Argentine savings rates made the country’s continued accumulation and economic growth a matter of external dependence on foreign capital, a precarious situation that may explain the onset of Argentine retardation at the time of the First World War. … Thus low saving capacity could be to blame for low rates of Argentine accumulation, capital deepening and economic growth. A natural question arises: what was the origin of this low savings capacity? A full explanation is beyond the scope of this paper, but I have shown elsewhere (Taylor 1992) that Argentine savings were low in the early part of this century, at least when compared with savings rates in Australia and Canada. Whereas both Australia and Canada saved around 15% of GDP between 1900 and 1929, Argentina only saved around 5%. I WWI: disruption, loss of its primary creditor and the search for new sources of credit The great boom of the Belle Epoque was brought to an end by the severe dislocations in international economic relations generated by the First World War and its aftermath. The immediate effect of the war in international markets was a sudden decline in foreign trade volumes and an equally pronounced downturn in the terms-of-trade, due in large part to the virtual shutdown of shipping in the Atlantic. … The disruption was also evident in international factor markets. Perhaps the most dramatic change was in the operation of international capital markets. With the outbreak of hostilities, Britain suspended the operation of the Gold Standard, and it was 10 years before she was able to reinstate it. Thus ended the age of high imperialism, when British capital, acting from its power base in London capital markets, was able to spread its influence all around the globe (Edelstein 1981; Edelstein 1982). Britain’s hegemonic power in capital markets was effectively broken by enormous war debts, and the new “bankers to the world” were the Americans, emerging into net creditor status; yet the Americans were less than enthusiastic about assuming this new responsibility as an international center for finance, and the rise of New York as a truly international capital market was somewhat slow and reluctant (Kindleberger 1986). This was certainly the case from the Argentine perspective, and accounts of contemporary observers confirm the difficulties faced by Argentina in trying to raise capital abroad after the onset of war, and adjusting to the shift from an established link with experienced lenders in London to forging new borrowing relationships with the bankers in New York.6 Peters (1934) and Phelps (1938) both record the restricted access to foreign capital experienced by Argentina after 1913. Before the mid- twenties practically no new capital emerged from war-torn Europe, and such loans as were forthcoming in New York took long negotiation, were limited in quantity, of short-term duration, and at much higher interest rates than formerly prevailed. The Great Depression: economic collapse and the birth of an attractive but destructive political regime In 1929, the perils of external dependence again rebounded on the Argentine economy, but this time with far more lasting effect. The liberal order had

421 survived the pressures of wartime and maintained the commercial and financial status quo in Argentina through WWI and into the 1920s, continuing to emphasize external trade and links to the international economy. However, as the Depression bit, Argentina endured the retreat of American capital and exclusion from Imperial trade preferences, and political events took their own turn. A blend of nationalism and economic protectionism that was to spawn an entire economic philosophy, and provide the setting for the emergence ofhgentina’s best known political couple {Juan and Eva Perón}.

Originally published at Fabius Maximus and reproduced here with the author's permission. http://www.roubini.com/us- monitor/258486/worry_not_about_america_becoming_like_zimbabwe__worry_about_becom ing_like_argentina_

U.S. Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession Are Rising By Nouriel Roubini 3/4/2010 | Last Updated EXECUTIVE SUMMARY A slew of poor economic data over the past two weeks suggests that the U.S. economy in 2010 is headed for – at best – a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic 2.7% growth which RGE forecast for H1. With the positive effects of the historic levels of fiscal stimulus due to fade this year, the U.S. faces at best a 1.5% growth rate in H2, which looks too close for comfort to a tipping point of a double-dip [...] http://www.roubini.com/analysis/106259.php Will Aggressive Cost-Cutting by Firms Continue to Boost U.S. Productivity Growth?

As per revised estimates from the U.S. Bureau of Labor Statistics (BLS), nonfarm business productivity grew at an annual rate of 6.9% q/q (5.8% y/y) in Q4 2009. Hours worked posted their first quarterly gain since Q2 2007, rising 0.6% (revised downward from the advance estimate of 1%); however, output grew faster, rising by 7.6% q/q, causing productivity to jump. Real hourly compensation fell by 2.8% q/q in Q4 2009, revised downward from the advance estimate of a 1.9% decline, following a 3.8% decline in Q3 2009. Productivity outpaced hourly compensation, causing unit labor costs to fall 5.9% q/q and 4.7% y/y, the largest y/y decline in the series' history, going back to 1948. In 2009, productivity rose 3.8% from 2008, while unit labor costs fell 1.7%, a record pace of contraction. http://www.roubini.com/briefings/47208.php#46864v

422 The "Three Speed" Global Manufacturing Recovery Continues in February Edward Hugh Mar 2, 2010 4:17PM Global manufacturing activity continued to expand in February, albeit at a slightly weaker pace than in January. At 55.2, down slightly from 56.1 in January, the JPMorgan Global Manufacturing PMI posted its second highest reading in almost four years. The average reading so far in Q1 2010 (55.7) is above that for Q4 of last year (54.2). The headline Manufacturing PMI has now remained above the no-change mark of 50.0 for eight successive months.

The PMI is a composite (diffusion) index in which current output - which stood at 57.4 in February, down from 60.2 in January - is only one component. Despite this slight slowdown - it was the lowest reading in three months - production increased for the ninth month running. Basically I think it is possible to divide the respective economies into three broad groups. In the first place there are a bunch of emerging economies (largely in Asia, but also Brazil, and now increasingly South Africa) where the recovery continues apace, and the only real doubt is about China, and what happens to manufacturing momentum as inflation takes hold and the central bank tightens liquidity provision. Then come the main group of developed economies, where recovery continues, but at a fairly muted pace. France stands out in this group, since despite the fact manufacturing only expands at a medium pace it is supported by strongish domestic demand. The industrial recoveries in the US and Germany seem more fragile, the former for uncertainties about what will actually happen as the stimulus effect weakens, and the later due to the heavy dependency on exports. Finally we have the stragglers - characterised by Greece and Spain - where the manufacturing sectors struggle to find oxygen. Also manufacturing activity in Ireland, Russia and Italy remains fragile. Central Europe had a positive month in February, though at this point it is not clear to what extent this is dependent on the uptick in Germany, and thus what will happen if German activity weakens.

423 One other element is striking in this months reports: the impact of the changed USD/Euro parity. The relative weakening in the Euro meant that even though domestic demand in many cases remains weak, most Eurozone country reports revealed strong improvements in extra- Eurozone export orders. The only exception to this picture was in Greece. On the other hand, the rise in the US dollar seems to be taking its toll on exports, and the ISM survey showed a weakening in the rate of increase in new export orders. The Japanese Enigma Japan however remains an enigma, since the impression given since December of a steady slowdown continues to be reinforced by the February manufacturing PMI. The reading at 52.5 was identical with January one, but both were down by 1.3 points compared to December.

Export sales were up sharply in February, but the level of new business taken by Japanese manufacturers rose at only a marginal rate - the slowest in the current eight-month period of expansion. Respondents widely attributed slower new business growth to weak domestic consumption. So Japan has a dual economy, and the domestic one still isn't getting traction from the export sector. Japan's exports are mainly supported at this point by demand from Asia, especially China, and it remains to be seen what will happen when China eventually starts to slow. The New Export Orders Index rose rapidly - by 3.7 points to 55.2 - suggesting that export growth gained significant momentum on the month. But with the yen trading at around 90 to the USD (compared with the break even point for export companies of 92.9 yen per dollar reported in the full year 2009 survey) this may well gradually have a negative impact on exports and thus it is quite possible that growth in exports will slow in the near future, with problematic consequences for an export dependent Japanese economy. The Emerging World Continues It's Strong Performance India now seems to be leading the charge, and the seasonally adjusted PMI climbed for the third month running to 58.5 - up from 57.6 in January - suggesting a further significant improvement in the operating conditions faced by Indian manufacturers.Behind the latest rise in the headline index were faster increases in new orders, output and employment. Brazil’s manufacturing sector also expanded at a marked pace in February, although growth cooled slightly from January’s series-record performance. Both output and new orders grew strongly, while job creation accelerated again. On the inflation from survey respondents reported rising price pressures, as higher demand for raw materials, capacity constraints at suppliers and unfavourable exchange rates pushed up input prices. The headline seasonally adjusted Brazil Manufacturing PMI in fact slipped from January’s survey high of 57.8 to 55.8 in February. Despite the slightly weaker expansion pace the latest

424 reading still indicates a marked improvement in operating conditions during the month. Total incoming new business expanded for the seventh month running in February, although the latest increase was the weakest since last October. Both domestic and foreign sales rose on the month, however survey responses showed that the former remained the primary driver of overall new order growth. Anecdotal evidence suggested that a combination of better global economic conditions and successful promotional activities underpinned gains in new work.

The recovery in South Africa's manufacturing sector also continued in February, and the seasonally adjusted PMI increased to 60.4 in February from 53.6 in January, according to Kagiso Securities who run the survey, the highest reading since early 2007. The biggest jump came from new sales orders, which surged by 13.2 points to 68.6 in February, while the PMI employment index increased for the second consecutive month to 52.1.

425 Meanwhile, inflation pressures seem to be mounting, and the PMI price index climbed to 61.9 points in February. This was the highest level since early 2009, although still below the long- term average of over 69 points. On the other hand China’s manufacturing activity grew less than expected in February, as the government reined in spending and purchasing managers reported concerns about the impact of rapidly rising wages. The HSBC China PMI fell to a three-month low of 55.8, down from a record 57.4 in January. An analysis of the components reveals that new orders fell 6.2 percentage points to 53.7 while - despite a strong export performance in January - new export orders fell 2.9 percentage points to 50.3.

Europe's Manufacturing Industry Continued Its Uneven Recovery At 54.2 in February (up from 52.4 in January) the Markit Final Eurozone Manufacturing PMI posted its highest reading since August 2007 and was above the neutral 50.0 mark for the fifth successive month. The 1.8 points rise in the index was the largest improvement since last August. The headline PMI – a composite index based on measures of production, orders, employment, inventories and supplier performance – was also slightly above the earlier flash estimate of 54.1.

Growth of output was recorded for the seventh successive month in February, and the rate of expansion was the fastest since March 2007. Production increased in the capital, consumer and intermediate goods sectors. The strongest rise was recorded for investment products, with growth in this sector the quickest since June 2007.

426 However, national level PMI data revealed a widening disparity between the best and worst performing manufacturing economies. Germany registered the strongest growth of output, overtaking France. The rate of increase in Germany accelerated for the second month running to its highest since January 2007. Growth also picked up in Austria, was broadly unchanged in the Netherlands but eased in France (although the level remained reasonably strong) and Italy (where output growth remains fragile). Meanwhile, the downturns in Spain, Ireland and Greece continued. Rates of contraction in Spain and Ireland were marginal and much slower than in January, whereas Greece fell further behind the other euro area nations, seeing its sharpest fall in production since last April. February data indicated that the recovery in the German manufacturing sector gained momentum during the month, with output and new orders rising at the fastest rates for over three years, while employment numbers fell at a much slower pace. At 57.2, up sharply from 53.7 in January, the final Markit PMI was at its highest since June 2007 and above the neutral 50.0 mark for the fifth month in succession. Output levels increased in all three market groups monitored by the survey and growth remained strongest in the investment goods sector. Overall levels of manufacturing production rose at the fastest rate since January 2007, driven by improving global economic conditions and a corresponding expansion of incoming new orders. February data pointed to the fastest rise in new export orders for three years, which companies mostly attributed to higher demand from emerging markets. Which suggests the decline in the Euro is having a positive impact on German external competitiveness.

The Italian manufacturing sector continued to expand in February, although the speed of recovery slowed fractionally from January and the rate of improvement remains modest. The seasonally adjusted Markit PMI registered 51.6, fractionally down from 51.7 in January. Higher output and growth in new orders also mask underlying headwinds facing what still

427 remains a fragile recovery in Italy's manufacturing industry: job losses continue to mount, and input price inflation soared to an eighteen-month high. Nevertheless export orders have now risen continuously for the past four months, and survey respondents linked the increase to improving demand in key export nations. Business conditions in the Spanish manufacturing sector continued to deteriorate over the month, but the latest decline was the weakest since January 2008. New business fell at a much slower pace, in part due to an increase in new export orders. Consequently, the rates of contraction in output and employment also eased. The seasonally adjusted Markit PMI rose to 49.1 in February, from 45.3 in the previous month, showing the slowest deterioration in operating conditions in more than two years. Nevertheless Spanish manufacturing production still decreased in February, although the rate of contraction eased to its weakest in the current seven-month period of decline. Falling output was concentrated in the consumer and investment goods sectors. Total new business fell slightly as domestic demand continued to decline, with a modest rise in new export orders being insufficient to offset the trend. The Euro decline has helped Spain somewhat, since, according to panellists, exports to countries from outside the Eurozone had been a key factor behind growth in new business from abroad.

Operating conditions in Irish manufacturing firms continued to deteriorate in February, although the level of output remained broadly unchanged over the month suggesting industrial output is steadily stabilising. Total new business decreased despite a sharp rise in new export orders. The seasonally adjusted NCB PMI rose slightly to 48.6 in February, from 48.1 in January, reflecting a modest deterioration of business conditions that was broadly similar to those seen over the previous four months. The underlying weakness in domestic demand is causing ongoing problems for Irish industry.

Greek industry now has the dubious title of being the worst performer globally (taking over this particular poll position from Spain) and the seasonally adjusted Markit Greece

428 Manufacturing PMI continued to slide in February. The index fell from 46.8 in January to hit a ten-month low of 44.2, signalling a marked weakening in the health of Greece’s manufacturing economy. Business conditions in the sector have worsened in each of the past six months, following a brief respite in August last year. Overall, the sector has contracted in sixteen of the past seventeen survey periods. More preoccupyingly total incoming new work fell at the fastest pace since April 2009, as both domestic and external demand receded. Data indicated that the decline in domestic demand was far more pronounced, but new export orders still decreased, albeit moderately. This makes Greece the only Eurozone country not to see the Euro's fall reflected in a pickup in export demand, a reflection of just how deep the competitiveness problem is in the country's manufacturing sector.

Central Europe Gets A Boost From German Demand Polish manufacturing industry showed a renewed recovery in momentum in February. Output, new orders and new export orders all rose at stronger rates. Having slipped the previous month, the headline HSBC Manufacturing PMI posted 52.4 in February, significantly above the long-run trend of 49.6. New orders received by Polish manufacturers rose for the fifth month in succession. The rate of growth picked up to a robust level that was comfortably faster than the eleven-and-a-half year average for the survey. Data signalled similarly marked increases in new work from domestic and export markets.

Czech PMI data continued to point to a recovery in the manufacturing sector mid-way through the first quarter of 2010. New business rose at the fastest rate for almost two years,

429 leading to a further acceleration in production growth. The PMI remained above the no- change mark of 50.0 for the fourth successive month, and rose to 54.3 indicating the strongest overall growth in the sector since March 2008. Growth of new orders was maintained for the seventh successive month in February. The rate of expansion continued to sharpen and was above the average for the survey which began in July 2001. Data signalled robust demand from both domestic and export markets, with the key German and French markets cited as sources of growth.

Hungary's manufacturing PMI ticked up 2.1 percentage points to 55.9 points, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM). The last time the index was at this level was in June 2008 (56.2). This is the only second time since August 2008 that the index has been above 50. (The January reading was revised upward to 53.8 from 53.5 originally). Now we need to see just how sustainable this is in terms of demand for Hungarian exports in Germany and elsewhere since domestic demand is absolutely gone and out for the count at the moment.

While in Russia Manufacturing Stagnates and in Turkey It Weakens Business conditions in Russia’s manufacturing sector continued to improve in February, but the pace of growth remained lacklustre, according to the latest PMI details from VTB Capital. Output rose for the seventh successive month, although new orders increased at a weaker pace and jobs were shed at the fastest rate since last August. Meanwhile, cost inflationary pressures built up. The headline seasonally adjusted Russian Manufacturing PMI remained above the no-change mark of 50.0 for the second month running in February. It was the first time since July 2007 that the Index has posted successive readings above 50.0. However, the latest figure of 50.2, down from 50.8 in January, suggested there had been only a marginal overall

430 improvement in operating conditions. The drop in the PMI reading mainly reflected weaker growth of both output and new orders, and a faster drop in employment. The overall improvement in business conditions was underpinned by a rise in the volume of incoming new work. New orders have increased in six of the past eight months, although the latest increase was only modest and weaker than in January. New export orders remained especially fragile, showing only marginal growth for the second month running.

The headline HSBC Turkey Manufacturing PMI came in at 50.9 in February, indicating a marginal improvement of business conditions in the Turkish manufacturing sector, although the PMI fell back from January’s 53.0. New orders increased marginally during February, supported by improved demand, particularly from overseas. However, the rate at which incoming new business expanded fell since January, and was one of the lowest recorded during the current ten-month period of sustained increases. Similarly, new export orders increased at a slower pace during February, although the latest rise was still solid according to the survey report.

US Manufacturing Continues To Expand Strongly Despite Falling Back US manufacturing expanded in February for a seventh consecutive month, although the Institute for Supply Management’s factory index fell to 56.5, lower than anticipated, from January’s 58.4, which was the highest since August 2004. Measures of new orders and production declined, while employment grew at the fastest pace in five years. Factories boosted production to replenish depleted inventories and invested in new equipment last year as global demand picked up following the worst recession in seven decades.

431 The ISM’s production index fell to 58.4 from 66.2 and the new orders index decreased to 59.5 from 65.9. The employment index increased to 56.1, the highest since January 2005, from 53.3, but the gauge of export orders decreased to 56.5 from 58.5, suggesting the dollar's rise is starting to affect exporters.

Originally published at Global Economy Matters: http://globaleconomydoesmatter.blogspot.com/2010/03/three-speed-global- manufacturing.html http://www.roubini.com/globalmacro- monitor/258481/the__three_speed__global_manufacturing_recovery_continues_in_february

Too Soon to Cry "Victory" on Latvia Edward Hugh Mar 1, 2010 4:52PM "Doom-mongers" - the Economist tells us - "are licking their wounds". And why exactly are they licking their wounds? Well for two years now (apparently) they have been telling us that "the struggle to save the lat’s peg to the euro was bound to end in tears". As you could imagine right in the very forefront of these so called doom-mongers is to be found yours very truly (and here), and of course Nobel Economist Paul Krugman (and here). But while I have never thought of myself as especially adverse to admitting defeat when faced with compelling reasons to do so, just why, we might ask ouselves, should we start to think about licking our wounds right now (and why our wounds, since it is poor old Latvia which has been subjected to all the blood-letting implied by this none-too-convincing "thought experiment" turned reality)? Well, in the first place, given the dramatic current account correction, Latvia's outlook has been revised from negative to stable by Standard and Poor's rating agency, which means - when you get down to the nitty gritty - that they don't expect any further downward revisions in Latvia's sovereign credit rating in the next six months. Standard & Poor’s, a rating agency, has raised its outlook on Latvia’s debt from negative to stable (ie, it no longer expects further downgrades). The current account, in deficit to the tune of 27% of GDP in late 2006, is in surplus. Exports are recovering. Interest rates have plunged and debt spreads over German bonds have narrowed (see chart). Fraught negotiations with the

432 IMF and the European Union have kept a €7.5 billion ($10 billion) bail-out on track, in return for spending cuts and tax rises worth a tenth of GDP. And anyway, Latvia is not as bad as Greece. Even so, Latvia looks good when compared with Greece. It did not lie about its public finances or use accounting tricks. Strikes have been scanty. Protests are fought in the courts, not the streets. Both Greece and Latvia have had hard knocks, but Greeks became used to a good life that they are loth to give up. Latvians remain glad just to be on the map. As evidence for just how much better Latvia is doing than Greece the Economist cite the movements in the respective bond spreads, and of course, the extra interest the Greek government has to pay to raise money (with respect to equivalent German bonds) is now marginally more than the extra interest Latvia has to pay, but then Greece has yet to go to the IMF.

But just in case both these arguments seem rather like clutching at straws when compared to the "gravitas" of the situation, there is a "clincher". "despite a fall in GDP last year of 17.5%, Latvia seems to have achieved something many thought impossible: an internal devaluation. This meant regaining competitiveness not by currency depreciation but by deep cuts in wages and public spending. In a recent discussion of Greece, Jörg Asmussen, a German minister, praised Latvia for its self-discipline". Well, I'm sure that having a positive reference from a German minister in a discussion on Greece is a positive sign, but hang on a minute: just what internal devaluation is our author talking about here, and what deep cuts in wages and salaries? According to the latest available data from the Latvian Statistics Office, average wages in Latvia were down 10% in September 2009 over 2008, but since wages in September 2008 were up 6.5% over wages in September 2007, when the Latvian economy was already in deep trouble and wages and prices were already seriously out of line, then they have only actually fallen back some 4.15% over the two year period. I am sure these cuts are painful (a 20% unemployment rate, and young people emigrating is even more painful), but I would hardly call this a "deep cut" yet awhile.

433 The thing to remember here is the difficult characteristics imposed by the presence of a peg. Latvian real wages (when adjusted for inflation) may well have fallen more, but this is to no avail (and simply makes the internal consumption problem worse), since what matters are the Euro equivalent prices of Latvian wages and exports. This is one of the reasons why in these circumstances a peg is such a horrible thing. And if you're still not very convinced, let's try the Eurostat equivalent data for average hourly wage costs, which had in fact only fallen by 3.5% year on year in the third quarter of 2009.

Why the difference between average wages and average hourly labour costs? Well, given the depth of the recession people are obviously earning less, since they are working less, but this doesn't help overall competitiveness, since what matters here is the hourly cost of each unit of labour. I'm sorry if this is all fairly turgid economic data stuff (yawn, yawn, yawn) but if you want to cry victory, you really do need to check your facts a bit first. In fact, as I said in my last post, additional evidence from the consumer price index suggests the "internal devaluation" is only working at a hellishly slow pace. Prices were only down by 3.3% in January 2010 over January 2009 according to the latest HICP data from Eurostat.

And while producer prices have fallen a little further - by 6.6% in January over January 2009 - there is still a long long way to go. Basically there is no doubt that Latvia's great economic fall may be coming to an end, but as I explained in this post here, that is not the same thing at all as resuming growth. To get back to growth Latvia's internal devaluation needs to be driven hard enough and deep enough to generate a sufficient export surplus to drive headline economic growth at a sufficient speed to start creating jobs again. This is not about a fiscal adjustment, it never was, and it is little

434 consolation for Latvia to be compared with Greece and told that they are doing just that little bit better. Cry Victory we are told, and unleash the jobs of war. Easier said than done!

Originally published at Global Economy Matters and http://www.roubini.com/euro-monitor/258469/too_soon_to_cry__victory__on_latvia

435 Ronald Reagan the Keynesian Edward Harrison Mar 2, 2010 3:50PM I came across an article in the FT by Gideon Rachman which examined “How Reagan ruined conservatism.” It is an interesting piece which claims that traditional conservatives abhor populism and respect knowledge, while the Reagan Revolution ushered in a ‘new’ conservatism that appealed to those who love populism and disdain knowledge. All very interesting – but clearly an interpretation, an opinion of the political landscape in America. But what I found most relevant to today was the economic implications buried in the article rather than the political ones which were front and center. The last paragraph sums it up: The real Reagan was, in fact, rather more pragmatic than the “Reagan myth” that sprang up after he left office. Real Reagan was willing to raise taxes in extremis, and became a firm believer in arms-reduction talks. Today’s American conservatives, who claim the mantle of Reagan, would regard these ideas as treachery and weakness. Reagan was ultimately a successful president. But he left behind a poisonous legacy for the conservative movement. Here was Ronald Reagan, the man who wanted to starve the beast (government), raising taxes, ostensibly to cut the massive budget deficit he had created early in his tenure. That is certainly a pragmatic move. But, a friend had another angle on this that I agree with: While conservative in word, Reagan was Keynesian in deed. My friend wrote: He was a great Keynesian President. His financial deregulation was a disaster (although not as bad as what followed), but on tax policy he was vastly superior to what followed. A tax cut equivalent to 6% of GDP. Pretty good impact. Okay, he called it "supply side economics", but that was a fancy word for using fiscal policy activism to restart economic activity. Exactly. If you recall, Ronald Reagan cut taxes massively during the double dip recession of 1980-82 in order to spur on the economy. This had the effect of increasing aggregate demand, so much so in fact that we had extreme financial excess by the mid-to-late 1980s, much of which was channelled into mergers and acquisition and junk bonds. A Keynesian President would see this as a sign of incipient inflation in an economy operating at near full employment. The Keynesian approach, therefore, would be to use fiscal policy as a control mechanism – raising taxes to choke off demand. And that’s exactly what Reagan did. So, was Ronald Reagan a libertarian who also appealed to populist anti-intellectuals and was pragmatic in economic decision-making and taxation? Or was he a closet Keynesian who presided over a large increase in government spending and used fiscal policy to steer the economy?

Originally published at Credit Writedowns and reproduced here with the author's permission. http://www.roubini.com/us-monitor/258479/ronald_reagan_the_keynesian

436 Krugman: No Bill Is Better Than a Weak Bill

James Kwak Mar 1, 2010 4:15PM Paul Krugman begins this morning’s column this way:

“So here’s the situation. We’ve been through the second-worst financial crisis in the history of the world, and we’ve barely begun to recover: 29 million Americans either can’t find jobs or can’t find full-time work. Yet all momentum for serious banking reform has been lost. The question now seems to be whether we’ll get a watered-down bill or no bill at all. And I hate to say this, but the second option is starting to look preferable.”

Krugman says he would be satisfied with the House bill, but that the need to bring moderate Democrats and at least one Republican on board in the Senate could lead to a severely watered-down bill, in particular one without a Consumer Financial Protection Agency. Instead of accepting such a deal, he says:

“In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.”

Krugman recognizes that this is structurally different from what he said about health care reform. In Larissa MacFarquhar’s recent profile of him in The New Yorker, discussing health care, he said, “There’s a trap I’ve seen some people fall into — you let your vision of what should be get completely taken over by what appears possible right now — and that’s something I’m trying to avoid.” Now he’s avoiding it. I generally enjoyed that article. For one thing, I remembered that Krugman and I had a similar perspective on the 2008 Democratic primary (Obama was the most conservative of the major candidates and spouted a lot of “feel-good stuff about hope and dialogue and reconciliation”); both of us supported Edwards, although he switched to Clinton when Edwards dropped out and I switched to Obama. For another, there’s something else we have in common. Explaining why, after the fall of the Berlin Wall, he didn’t set out to consult to post-Communist or developing countries, Krugman says, “I know what Jeff [Sachs] does and I couldn’t do it. Taking transport planes, living on yak meat for days — no. But I do write faster than anybody. You’ve got to figure out what you should be doing.” Anyway, getting back to this morning’s column — I’m with Krugman. There are certainly things that would probably make it into a compromise bill that are better than nothing. Resolution authority would be better than nothing, although far from a perfect solution. Systemic risk regulation would be better than nothing — though perhaps not much better, depending on who is in charge of it. But frankly without the CFPA and without a real solution to banks that are too big to fail, it seems to me we will have avoided solving the biggest problems.

437 If we want change, someone has to be willing to stand up for it. If you want to win a negotiation, you have to be willing to walk away. If you can’t do that, you will get rolled on every issue. The Democrats need to force the Republicans to make a public choice on the CFPA, instead of negotiating against themselves and taking the issue off the table. Voters will be upset if Congress does nothing about the financial system, but the Democrats should have the courage to point out why they couldn’t pass anything. Taking a stand on consumer protection should not be that hard a position to take.

Originally published at The Baseline Scenario and reproduced here with the author's permission. http://www.roubini.com/us- monitor/258468/krugman__no_bill_is_better_than_a_weak_bill

Keep Banks Out of Greek Aid Package Ivo Arnold Mar 1, 2010 5:08PM Notwithstanding the vagueness of the official EU statement (February 11) on Greece, rumours on how a Greek rescue package might be designed continue to pop up in the news. One of the scenarios is to channel aid through the financial system. According to EU sources, a possible purchase of Greek government bonds by a German state-owned development bank has been discussed. Such a solution has obvious attractions to politicians. It doesn’t directly involve taxpayer’s money and it may provide a way around the no-bailout clause of the Maastricht Treaty. Yet fixing a sovereign debt problem with banks is a bad idea. It is also not what EU leaders had in mind when they drafted the Maastricht Treaty. The entanglement between European governments and their financial institutions is already much too strong as it is. Public debt is a favourite investment of many European banks. On average, euro-area banks’ holdings of public debt (mostly from their own government) are larger than their capital. At the end of January 2010, lending to general government (both loans and securities) by euro area MFI’s amounted to € 2510 bln, against € 1917 bln in capital and reserves. This fact provided a major justification for the Stability and Growth Pact (SGP), as sovereign debt crises could undermine the stability of the European financial system. The SGP aimed at lowering the likelihood of a debt crisis by maintaining fiscal discipline. The Greek crisis makes it abundantly clear that this strategy has failed. Reform of the SGP may or may not reduce the likelihood of future debt crises. In the meantime it makes sense to find solutions to limit the damage to the financial system if such crises were again to occur. In this regard, aiding Greece through banks would be a step in the wrong direction. A step in the opposite and more prudent direction would be to put a limit on the amount of sovereign debt that banks can take on their balance sheets. The likelihood that a sovereign debt crisis threatens the solvency of banks can be easily and quickly reduced through proper banking regulation. A starting point is to extend the so-called large exposure directive, which states that banks should not lend more than 25% of their capital to a single private borrower, to government debt. In addition, the directive should also apply to banks’ trading books and the percentage of capital exposed to a single counterparty could be further reduced.

438 Abolishing the exemption from the large exposure directive which governments currently enjoy would put an end to the positive discrimination in favour of public debt. This public privilege is a legacy of the pre-EMU era, when governments still had command over money creation and thus an unchallenged ability to pay off domestic currency debt whatever happened in the bond market. The raison d’être of such discriminatory regulation disappeared once EMU removed the privilege of money creation from national governments. Though euro area governments have retained the right to impose taxes other than the inflation tax, this is no guarantee for default-free public debt. In the past, a state’s power to tax did not prevent defaults on foreign currency debt in many countries. When money creation does not offer an easy way out, politicians can arrive in a situation where default on public debt is easier than raising taxes or cutting spending. This shouldn’t be too hard to imagine when Greeks take to the streets to protest against reform. Credit rating agencies have since long recognized the change in the risk profile of public debt. At the start of EMU, six founding members lost their standard AAA rating for domestic currency debt. The government exemption from the large exposure directive also goes against the spirit (and maybe even against the letter) of the prohibition on privileged access for the public sector to financial institutions, which is laid down in article 102 (ex 104A) of the Maastricht Treaty. Article 102 reads: “any measure, not based on prudential considerations, establishing privileged access by community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States to financial institutions shall be prohibited.” At the end of January 2010, Greek banks held €46 bln in public sector assets (mostly Greek), which is larger than the size of their capital and reserves (€39 bln). It is hard to argue why the Greek government is exempted from the large exposure directive, when higher-quality private creditors must comply. This is a privilege indeed. And one can hardly argue that this privilege can be based on prudential considerations. For the sake of financial stability, banks should be protected from attempts by governments to use bank funding when bond markets dry up. This is the reason why article 102 has been included in the Maastricht Treaty. Limiting and diversifying public debt holdings of banks would bring banking regulation in line with article 102 and increase banks’ abilities to withstand disruptions in the market for sovereign debt. Increased diversification of the credit exposures of banks to the public sector would thus promote the stability of the euro-area financial system. It would also prevent Europe from being held hostage by a profligate government, whose negotiating power increases with the amount of its public debt that has infected Europe’s banking system. EMU has altered the risk profile of euro-area public debt. Recognition of this fact in banking regulation would provide a welcome strengthening of the credibility of the no-bailout clause. http://www.roubini.com/euro-monitor/258470/keep_banks_out_of_greek_aid_package

439 COLUMNISTS How Reagan ruined conservatism By Gideon Rachman Published: March 1 2010 20:21 | Last updated: March 1 2010 20:21

Battling my way through Sarah Palin’s book, Going Rogue, last weekend, I began to wonder how American conservatism had come to this. Ms Palin’s book is smug, lightweight, nationalistic, entirely free of original ideas. How has this woman become the darling of the American right? How has she become so popular that some bookmakers make her the favourite to win the Republican party nomination in 2012? And then I realised – the rot set in with Ronald Reagan. This might seem an odd conclusion, since President Reagan is a conservative hero who won two presidential elections. But the ideas that are now known as “Reaganism” are, in fact, profoundly subversive of some of the most important conservative values. Traditional conservatives disdain populism and respect knowledge. They believe in balancing the government’s books. And they are pragmatists who are suspicious of ideology. Reagan debased all these ideas – and modern American conservatism is still suffering the consequences. The most damaging idea propagated by the Reagan myth is the cult of the idiot-savant (the wise fool). You can see it in the very first line of Dinesh D’Souza’s admiring biography of Reagan, which proclaims: “Sometimes it really helps to be a dummy.” Mr D’Souza recounts numerous stories in which intellectuals – even conservative intellectuals – disdained Reagan. They scorned his tendency to spend cabinet meetings sorting jelly beans into different colours, and his taste for flaky anecdotes. But, Mr D’Souza concludes, the “dummy” was right and the pointy-heads were wrong. A dangerous chain of reasoning flows from this popular version of history. Reagan was apparently stupid and often startlingly ignorant – but he was vindicated by history. Therefore, goes the theory, ignorance and stupidity are good signs. They show that a politician is in tune

440 with the deeper wisdom of the people. Once you start thinking like that, it is but a short step to Sarah Palin. If it is ignorance you are after, then Ms Palin is definitely your woman. Game Change, a recent book on the 2008 presidential election campaign, recounts how desperate advisers to the McCain-Palin campaign decided that they had to give her a crash-course in modern history, before the vice-presidential debate with Joe Biden. “They sat Palin down at a table in the suite, spread out a map of the world, and proceeded to give her a potted history of foreign policy. They started with the Spanish civil war, then moved on to world war one, world war two, the cold war. When the teachers suggested breaking for lunch or dinner, the student resisted. ‘No, no, no, let’s keep going,’ Ms Palin said. ‘This is awesome’.” The history of the 20th century? I suppose it is pretty awesome. In fact, Ms Palin is much, much less qualified to be president than Reagan ever was. She is Ronald Reagan lite – and Reagan was pretty lite to begin with. But he had, at least, been governor of California, not Alaska, and had read widely. The damage Reaganism did to conservatism extends well beyond the Palin effect. The late president also became associated with a couple of bad ideas that helped make the administration of George W. Bush such a disaster. The first was fiscal incontinence; the second is the view that the key to a successful foreign policy is a rigid distinction between good and evil, and a strong military. The Republican party – with Ms Palin to the fore – is currently decrying the huge deficits being run by the Obama administration. But this is a recent conversion. Ever since the Reagan years, the Republicans have been the party of deficit spending. Conservatives once believed both in lower taxes and in balancing the budget. Under Reagan, they simply became the party of tax cuts, without any commitment to fiscal responsibility. Dick Cheney, George W. Bush’s vice-president, admitted as much when he told a cabinet colleague: “Reagan proved deficits don’t matter.” A mystical belief took hold that if you just cut taxes, the economy would grow fast enough to cover the shortfall – or government would shrink, almost by magic. Somehow it would all come right. This drift in Republican thinking was actually profoundly anti-conservative – because it elevated ideology (cut taxes at any cost) over a pragmatic commitment to good governance. It is the same with foreign policy. Reagan’s insistence that the Soviet Union was an “evil empire” caused many liberals to wince – but was basically accurate. However, when George W. Bush attempted to emulate Reagan’s “moral clarity”, he came up with the “Axis of Evil” – a silly concept that led America into a costly and unnecessary war in Iraq. President Bush also missed the fact that while Reagan had built up the US military, he had avoided any big wars. Invading Grenada under Reagan was one thing; invading Iraq under Mr Bush turned out to be quite another. The real Reagan was, in fact, rather more pragmatic than the “Reagan myth” that sprang up after he left office. Real Reagan was willing to raise taxes in extremis, and became a firm believer in arms-reduction talks. Today’s American conservatives, who claim the mantle of Reagan, would regard these ideas as treachery and weakness. Reagan was ultimately a successful president. But he left behind a poisonous legacy for the conservative movement. [email protected] http://www.ft.com/cms/s/0/d640855c-256a-11df-9cdb-00144feab49a.html

441 The Enthusiasm Gap Robert Reich Mar 1, 2010 3:51PM I had dinner the other night with a Democratic pollster who told me Dems are heading toward next fall’s mid-term elections with a serious enthusiasm gap: The Republican base is fired up. The Dem base is packing up. The Dem base is lethargic because congressional Democrats continue to compromise on everything the Dem base cares about. For a year now it’s been nothing but compromises, watered-down ideas, weakened provisions, wider loopholes, softened regulations. Health care went from what the Dem base wanted — single payer — to a public option, to no public option, to a bunch of ideas that the President tried to explain last week, and it now hangs by a string as Nancy Pelosi and Harry Reid try to round up conservative Dems and a 51-vote reconciliation package in the Senate. The jobs bill went from what the base wanted — a second stimulus — to $165 billion of extended unemployment benefits and aid to states and locales, then to $15 billion of tax breaks for businesses that make new hires. Financial regulation went from tough new capital requirements, sharp constraints on derivate trading, a consumer protection agency, and a resurrection of the Glass-Steagall Act – all popular with the Dem base — to some limits on derivatives and a consumer-protection agency inside the Treasury Department and a rearrangement of oversight boxes, and it’s now looking like even less. The environment went from the base’s desire for a carbon tax to a cap-and-trade carbon auction then to a cap-and-trade with all sorts of exemptions and offsets for the biggest polluters, and now Senate Dems are talking about trying to do it industry-by-industry. These waffles and wiggle rooms have drained the Democratic base of all passion. “Why should I care?” are words I hear over and over again from stalwart Democrats who worked their hearts out in the last election. The Republican base, meanwhile, is on a rampage. It’s more and more energized by its mad- as-hell populists. Tea partiers, libertarians, Birchers, birthers, and Dick Armey astro-turfers are channeling the economic anxieties of millions of Americans against “big government.” Technically, the Dems have the majority in Congress and could still make major reforms. But conservative, “blue-dog” Dems won’t go along. They say the public has grown wary of government. But they must know the public hasn’t grown even more wary of big business and Wall Street, on which effective government is the only constraint. Anyone with an ounce of sanity understands government is the only effective countervailing force against the forces that got us into this mess: Against Goldman Sachs and the rest of the big banks that plunged the economy into crisis, got our bailout money, and are now back at their old games, dispensing huge bonuses to themselves. Against WellPoint and the rest of the giant health insurers who are at this moment robbing us of the care we need by raising their rates by double digits. Against giant corporations that are showing big profits by continuing to lay off millions of Americans and cutting the wages of millions of more, by shifting jobs abroad and substituting software. Against big oil and big utilities that are raising prices and rates, and continue to ravage the atmosphere. If there was ever a time to connect the dots and make the case for government as the singular means of protecting the public from these forces it is now. Yet the White House and the congressional Dem’s ongoing refusal to blame big business and Wall Street has created the biggest irony in modern political history. A growing portion of the public, fed by the right, blames our problems on “big government.”

442 Much of the reason for the Democrats’ astonishing reluctance to place blame where it belongs rests with big business’s and Wall Street’s generous flows of campaign donations to Dems, coupled with their implicit promise of high-paying jobs once Democratic officials retire from government. This is the rot at the center of the system. And unless or until it’s remedied, it will be difficult for the President to achieve any “change you can believe in.” To his credit, Obama himself has not scaled back his health-care ambitions all that much, and he appears, intermittently, to want to push conservative blue-dog Dems to join him on a bigger jobs bill, tougher financial reform, and a more effective approach to global warming. (His overtures to Republicans seem ever more transparently designed to give blue-dog Dems cover to vote with him.) But our President is not comfortable wielding blame. He will not give the public the larger narrative of private-sector greed, its nefarious effect on the American public at this dangerous juncture, and the private sector’s corruption of the democratic process. He has so far eschewed any major plan to get corporate and Wall Street money out of politics. He can be indignant– as when he lashed out at the “fat cats” on Wall Street – but his indignance is fleeting, and it is no match for the faux indignance of the right that blames government for all that ails us.

Originally published at Robert Reich's Blog and reproduced here with the author's permission. http://www.roubini.com/us-monitor/258467/the_enthusiasm_gap A Tale of Two Recoveries: Malaysia vs. Germany Rebecca Wilder Feb 26, 2010 1:16PM Today, North America saw the Q4 2009 GDP figures for Malaysia and Germany. In my view, the two releases accurately depict the developed vs. developing picture of economic recoveries: one is causing the other. Malaysia's real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%.

443 The recovery in Malaysia is healthy. Domestic private consumption improved 1.7% Y/Y, while investment surged 8.2% over the same period (up from -7.9% in Q3). The pace of contraction in German real GDP, population 82,140,043 according to the World Bank, slowed to -1.7% Y/Y from -4.7% Y/Y in Q3. On the surface, the trend is sound: the annual economic deterioration is slowing markedly. But below the hood, the true nature of the beast is present: only external demand and government spending are stabilizing GDP.

The growth rate in domestic demand is essentially moving laterally; it fell to -2.8% Y/Y from -1.6% Y/Y in Q3, and is now essentially unchanged from Q2 (-2.7% Y/Y) . Pockets here and there are improving - the decline in imports and machinery slowed somewhat; spending on machinery jumped 3 points to -18% Y/Y in Q4 (this is not much of an improvement). Is this a country-level illustration of the world growth schism? Are Emerging Markets providing the impetus growth for all? I think so.

Originally published at News N Economics and reproduced here with the author's permission. http://www.roubini.com/globalmacro- monitor/258462/a_tale_of_two_recoveries__malaysia_vs__germany

The High Road Procurement Policy Mark Thoma Feb 26, 2010 1:36PM We hear about Wall Street and Main Street, but not as much about the streets where people live, at least not much beyond all the foreclosed houses. And with unemployment as high as it is, and Congress doing little more than than tossing a few bones at the problem now and again, it's no wonder those streets are feeling overlooked and neglected. Maybe that's part of the problem Tim Geithner describes: The president says somehow we've managed to create a situation where there's a large portion of Americans that think we are running a pro-business, pro- Wall Street policy. But the business community and Wall Street think we are like a bunch of socialists.

444 Well, we have been socializing Wall Street's losses, but I don't think that's what they're complaining about. In any case, Wall street and the business community aren't going to like this: Plan to Seek Use of U.S. Contracts as a Wage Lever, by Steven Greenhouse, NY Times: The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan. By altering how it awards $500 billion in contracts each year, the government would disqualify more companies with labor, environmental or other violations and give an edge to companies that offer better levels of pay, health coverage, pensions and other benefits, the officials said. Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class. It would affect contracts like those awarded to make Army uniforms, clean federal buildings and mow lawns at military bases. Although the details are still being worked out, the outline of the plan is drawing fierce opposition from business groups and Republican lawmakers. They see it as a gift to organized labor... Even as business groups press the administration for more details, they are denouncing the plan, tentatively named the High Road Procurement Policy. ... One federal official said the proposed policy would encourage procurement officers to favor companies with better compensation packages only if choosing them did not add substantially to contract costs. As an example, he said, if two companies each bid $10 million for a contract, and one had considerably better wages and pensions than the other, that company would be favored...

Originally published at Economist's View and reproduced here with the author's permission. http://www.roubini.com/us-monitor/258463/the_high_road_procurement_policy Spain: The Way Forward By Elisa Parisi-Capone and Nouriel Roubini 2/23/2010 9:05:00 AM | Last Updated EXECUTIVE SUMMARY RGE's Q1 2010 Outlook notes the following factors undermining Spain’s medium-term performance: a lack of intra-EMU competitiveness, as measured by relative unit labor costs; a dysfunctional labor market with distinct insider-outsider features; low total-factor productivity growth, even during the boom years, which sets the stage for lower potential growth; rigid product markets and wage indexation that resulted in persistent inflation differentials which translate into a pro-cyclical real interest rate channel; high private-sector debt that translates into high structural public deficits in times of crisis. Compared to Greece, Spain’s macro and financial vulnerabilities are in some aspects less severe and in [...] http://www.roubini.com/analysis/103835.php

445 OPINION: GLOBAL VIEW Europe's Crisis of Ideas By BRET STEPHENS

FEBRUARY 23, 2010 Europe is in a crisis. Superficially, the crisis is about money: the Greek budget, a German-led bailout, the risk of contagion, moral hazard, the fragility of the euro. Fundamentally, it's a crisis of ideas. At last month's meeting of the World Economic Forum in Davos, Greek Prime Minister George Papandreou offered a view on the source of Europe's woes. "This is an attack on the euro zone by certain other interests, political or financial," he said, without specifying who or what those interests might be. In Madrid, the government has reportedly ordered its intelligence service to investigate "collusion" between U.S. investors and the media to bring Spain's economy low. Maybe the paladins of Spanish and Greek politics seriously imagine that hedge-fund managers sit around dimly lit conference rooms like so many Lex Luthors and—cue the sinister cackles—decide on a whim to sink this or that economy. Or maybe they think there are political dividends to reap by playing to peanut galleries already inclined toward these kinds of fantasies. Whichever way, the recrudescence of conspiracy-theory politics, among governments that supposedly belong to the First World, is just one symptom of Europe's intellectual malaise. On the other end of the spectrum is the view that the Greek crisis is the perfect opportunity to expand the regulatory reach and taxing authority of Brussels. Never mind that Greece's economic woes are transparently the result of a government spending beyond its means while failing to promote growth. In this reading of events, the ideal resolution is to extend the prerogatives of a bureaucracy to an even higher level of unaccountability. This is a bit like saying that if your toenail appears to be seriously infected, consider having brain surgery. Why do Europeans so often find themselves trapped in this sterile dialectic of populist obscurantism and technocratic irrelevancy? Largely because those are the options that remain when other modes of analysis and prescription have been ruled out of bounds. "All European economic policies are the cultural derivatives of one dominant, nearly totalitarian statist ideology: the state is good, the market is bad," says French economist Guy Sorman. The free market, he adds, is "perceived as fundamentally American, while statism is the ultimate form of patriotism." In the U.S., faith in the general efficacy of markets isn't simply a cultural inheritance. It is sustained by the work of serious university economics departments; think tanks like the Hoover Institution and grant-makers like the Kauffman Foundation, plus a few editorial pages here and there. It's also the default position of the Republican Party, at least rhetorically. By contrast, in continental Europe the dominant mode of conservative politics is sometimes pro-business but rarely pro-market: During his 12-year presidency of France, Jacques Chirac railed against "Anglo-Saxon ultraliberalism," a phrase that became so ubiquitous as to almost obscure its crassly xenophobic appeal. There are think tanks, but they are almost invariably funded by political parties and hew to the party line. Not a single economics faculty in Europe is remotely competitive with a Chicago or a George Mason: Since 1990, only three of

446 the 36 winners of the Nobel Prize in Economics were then affiliated with a European university. Then there is the media. Last week, German Foreign Minister Guido Westerwelle, who leads the country's market-friendly Free Democrats, took to the pages of Die Welt to lament that Germany's working poor make less than welfare recipients. "For too long," he wrote, "we have perfected in Germany the redistribution [of wealth], forgetting where prosperity comes from." For his banal observations, Mr. Westerwelle was roundly accused of "[defaming] millions of welfare recipients" and urged to apologize to them. It takes a remarkably stultified intellectual climate for an op-ed to spark this kind of brouhaha: It is the empire of the Emperor's New Clothes, adapted to the 21st century welfare state. This is all the more remarkable given that Europe's economic travails aren't exactly difficult to grasp. Greece in a nutshell? It costs $10,218 to obtain all the permitting needed to start a new business there, according to Harvard economist Alberto Alesina. In the U.S., it takes $166. But tyrannies of thought are hard to break, especially when the beneficiaries of state largess—from college students to government workers to captains of subsidized industries— become a political majority. The U.S. may now be approaching just such a point itself. Is there a way out? "I am deeply convinced," says Mr. Sorman, "that I belong to a continuous tradition of liberty against the state, with a fine pedigree: Montesquieu, Tocqueville, Jean Baptiste Say, Jacques Rueff, Raymond Aron, Jean-Francois Revel." Not an Anglo-Saxon name among them. Europe's recovery—and the recovery of Europe—will come only when they are no longer prophets without honor in their own lands. Write to [email protected] Printed in The Wall Street Journal, page A17

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