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 XII

Alvaro Espina Vocal Asesor 6 de Septiembre de 2010

BACKGROUND PAPERS:

1. Curbin your enthusiasm, The New York Times by Paul Krugman…7 2. Liquidationism further refuted, The Conscience of a Liberal…8 3. Deflation risks, http://krugman.blog.nytimes.com…9 4. The work of depressions, http://krugman.blog.nytimes.com…10 5. We’re number one! http://krugman.blog.nytimes.com…11 6. Tax cut truthiness, http://krugman.blog.nytimes.com…13 7. Debt and growth, yet again, http://krugman.blog.nytimes.com…14 8. Bernanke must end era of ulta-low rates, FT.com by Raghuram Rajan…16 9. The growth imperative, The New York Times by David Brooks…18 10. Economist expect slower growth in second half, The New Yokr Times by Motoko Rich…21 11. Investors drop risk ahead of US GDP data, Ft.com by Telis Demos…24 12. Small, dissize US banks need to raise more capital, IMF financial study finds, The Washington Post by Neil Irwin…26 13. SEC charges billionaire Texas brothers who donate to GOP with fraud, The Washington Post by Zachary A Goldfarb and Philip Rucker…27 14. Small, midsize US banks need to raise more capital, IMF financial study finds, The Washington Post by Neil Inwin …30 15. Speculators rediscover agricultural commodities, Spiegel On line by Susanne Amann…31 16. A food Chain crisis int he world’s oceans, Spiegel On Line by Markus Becker…34 17. Poll shows opposition to health care overhaul declining, The Washington Post by David Hilzenrath…37 18. The past decade is the hottest on record: Ezra Klein’s Wonkbook…38 19. Banks to prepare for eurozone exit scenarios, Eurointelligence…40 20. Banks plan for loss of eurozone member, Ft.com by Anousha Sakoui…44 21. Virtuosi e lazzaroni dei tagli di bilancio, LaVoce by Paolo Manasse…45 22. De la recesión a la recuperación: mayor productividad, nuevas asociaciones y competitividad en costes son la clave, Finanzas e Inversión …48 23. Los cambios demográficos obligan al turismo mundial a reinventar su modelo, Liderazgo y Cambio…51 24. Capital riesgo: ¿el fin de la edad de oro?, Finanzas e Invesión…54 25. El futuro del sector inmobiliario depende del riesgo dispuesto a asumir, Liderazgo y Cambio …58 26. Por un nuevo mundo global sin los excesos del viejo, Liderazgo y Cambio…61 27. Asian shares down on new signs US economy slowing, The New York Times by The Associated Press…64 28. China’s soft power is a threat to the west, Spiegel On Line by Erich Follath…66 29. Europe’s stress test: only one step toward banking repair by Nicolas Véron…70 30. A slew of former regulator are set to lobby following finre¡s passage, Ezra Klein’s wonkbook by Eric Lichtblau…72 31. In study, 2 economists say intervention helped avert a 2nd depression, The New York Times by Sewell Chan…73

1 32. 33. El optimismo permite al Tesoro adjudicar deuda a tipos más bajos, El País de L Doncel…75 34. Telefónica pacta comprar Vivo a Portugal Telecom por 7.500 millones, El País de M Jiménez/R Muñoz…76 35. Levy confirms trend towards more deposits, The Banker …83 36. Post-crisis reality bites for Spain’s Cajas, The Banker by Rodrigo Amaral…84 37. Top 1000 World Banks 2010, The Banker by Philip Alexander…89 38. Europe’s banks face second funding squeeze, Bloomberg, by Gavin Finch and John Glover…94 39. Pain in Spain is saver’s gain as banks battle to win deposits, Bloomberg by Charles Penty…98 40. Santander eyes 3bn UK autumn listing, FT.com by Patrick Jenkins and Sharlene Goff…101 41. Wall Street: short measures, Ft.com by Henny Sender…102 42. El coste de emitir deuda española vuelve a bajar, El País …107 43. Premio a la transparencia española, El País de Luis Doncel…109 44. Los inversores extranjeros poseen el 40% de las compañías españolas cotizadas, El País …111 45. Funcas considera que los españoles demandar más flexibilidad laboral, El País de Jesús Eijo Cánovas…112 46. Deutsche Bank confident on continued recovery, Ft.com by in Frankfurt…114 47. How Italy’s permanent crisis saved it from the downturn, Spiegel On Line by Beat Balzli, Fiona Ehlers and Mar Hujer…116 48. IMF sees yuan as undervalued, The Wall Street Journal by Bob Davis and Aaron Back…121 49. Course of economy hinges on fight over stimulus, The Wall Street Journal by Jon Hilsenrath…123 50. Basel III, the Banks, and the Economy, Brookings by Douglas J Elliott…128 51. Systemic risk theory gains in stature as way to prevent the next bubble, The Washington Post by Howard Schneider…135 52. Basel Committee reaches agreement on bank rules, The Washington Post by Howard Schneider…137 53. Central Bankers reach initial accord on global standards, The New York Times by Eric Dash and Nelson D Schwartz…138 54. Shipman: raising retirement age won’t work, The Washington Times by William g Shipman…140 55. The great (Economist) Mortification by Tracy Alloway…142 56. What set of social institutions has led us to accept that we have to keep getting exposed to this utterly predictable but uninformative stuff from economists?, http//ftalphaville.ft.com by Philip Mirowski…143 57. When does quantitative/credit easing work?, Financial Times by Robin Harding…144 58. The Bush tax cuts: a $3000 bn political and economic battleground by James Politi…144 59. ECB inaction by Ralph Atkins…145

2 60. Long-Terms economic pain, The New York Times by Bob Herbert…146 61. Los gobiernos locales chinos pueden suspenden el pago de 873.000 millones de euros, Expansión.com …148 62. Europe’s Stress-free stress test fails to make the grade, Spiegel On Line…149 63. Report finds labor laws restraining Europe, The Wall Street Journal by William Lyons…151 64. Buena parte de la banca alemana ocultó su exposición a la deuda griega, El País de Miguel Jiménez…153 65. El Santander, campeón en rentabilidad, El País de Miguel Jiménez…155 66. Los mercados premian la transparencia española y castigan la falta de datos de Alemania, El País …157 67. Los bancos y cajas disponen aún de un colchón extra de 20.000 millones, El País de M Jiménez y I de Barrón…158 68. Europe’s illusion of financial strength, Eurointelligence…161 69. Germany accused of reneging on bank test, Ft.com by Patrick Jenkins and James Wilson…164 70. A test cynically calibrated to fix the result, Ft.com by Wolfgang Münchau…165 71. Enduring the stress of testing 91 banks, Ft.com by Patrick Jenkins…167 72. Stocks shrug off bank stress results, Ft.com by Telis Demos…170 73. Telis demos risky assets rally as test results digested, Ft.com by Telis De,os…172 74. EU stress test may be missed opportunity to fortify banks, Bloomberg, by Andrew MacAskill…175 75. Crisis economics, National Affairs by N Gregory Mankiw…178 76. Who cooked the planet?, The New York Times by Paul Krugman…185 77. Coulda woulda shoulda, The Conscience of a Liberal by Ezra Kelin…186 78. The political genius of supply-side-economics, Financial Times …189 79. Wall Street still doen’t have a sheriff, The New York Times by Richard C Sauer…197 80. Warren’s candidacy raises a partisan debate, The New York Times by Binyamin Appelbaum…199 81. Industries find surging profits in deeper cuts, The New York Times by Nelson D Schwartz…202 82. Riesgos de recaída, El País de Editorial…205 83. ¿Frenazo o vuelta a la recesión?, El País de Alicia González…205 84. La banca central desflorada, El País de Harold James…211 85. La segunda gran privatización, El País de Antón Costas…213 86. Antes de que el techo se nos caiga, El País de Edward Hadas…215 87. Último aviso para Martinsa, El País de Julián Rodríguez…216 88. Los ex consejeros de CCM se revuelven, El País de Miguel A Noceda…219 89. Llega la moderación salarial, El País de Manuel V Gómez…221 90. La hora de América Latina, El País de Alicia Barcena…224 91. Enfriamiento en EEUU, El País de José Antonio Herce y Alvaro Lissón…226 92. Análisis comparativo de la deuda española, El País de Ángel Laborda…227 93. ¿Una reforma laboral a medias?, El País de Luis Valero…229 94. Las cajas sufren mucho más la crisis del ladrillo que los bancos, El País de Iñigo de Barrón…232

3 95. El Santander, campeón en rentabilidad, El País de Miguel Jiménez…235 96. Dos tercios de las entidades entrarían en números rojos, El País de MJ…237 97. El supervisor destaca la dureza de las prueba, El País de Agencias…237 98. Necesidades de capital , pero sin complicaciones para funcionar, El País de I de B…238 99. Cinco cajas, entra las 10 que más perderían de Europa, El País de MJ…239 100. Cuidado con los aprobados raspados, El País de Luis Garicano…240 101. Vuelta a la normalidad, El País de Editorial…242 102. Ahora queda demostrado que el sistema financiero es sólido, El País de Iñigo de Barrón…243 103. Los suspensos solo afectan a las cajas más pequeñas, El País de Manuel V Gómez…245 104. Los ocho grupos bancarios superan el peor escenario, El País de Miguel Ángel Noceda…247 105. El suspenso no estresa a las cajas catalanas ni castellanas, El País de C Delgado…248 106. La banca europea suspendida necesita 3.500 millones de euros, El País de W Oppenheimer/RM Rituerto…249 107. España aplica en su examen el mayor ajuste inmobiliario, El País de Miguel Jiménez…251 108. One German bank and six others across Europe fail, Spiegel On Line…253 109. Seven banks fail EU stress test, Ft.com by Patrick Jenkins…256 110. The stress test guide, Financial Times by Tracy Alloway…258 111. The incredible restructured stress test by Joseph Cotterill…261 112. Stress-test rumours and reality by Gwen Robinson…262 113. Merkel pide a Europa un esfuerzo para ganar competitividad, El País de Juan Gómez…265 114. Las pruebas de resistencia a la banca, El País de Walter Oppenheimer/R Martínez de Rituerto…267 115. German business sentiment hits three-year high, Ft.com by Quentin Peel…269 116. Addicted to Bush, The New York Times by Paul Krugman…270 117. More on reinhart-rogoff, The Conscience of a Liberal…271 118. The rating agencies are no longer rating, Eurointelligence…275 119. Am I being unfair to the Fed, or is the Fed being unfait to those who need its help?, Economist’s view by Robin Harding…277 120. The austerity debate, Ft.com …279 121. Stimulate no more –it is now time for all to tighten, Ft.com by Jean Claude Trichet…280 122. Message from Delhi: don’t cut too soon, Ft.com by Montek Singh…282 123. To grow, Britain must solve its jobs deficit, Ft.com by David Miliband…284 124. A double dip is a price worth paying, Ft.com by Martin Feldstein…285 125. More stimulus won’t stop Asia’s rise, Ft.com by Andy Xie…286 126. Sow the seeds of long-term growth, Ft.com by Jeffrey Sachs…288 127. Asia’s Keynesians take pride in prudence, Ft.com by David Pilling…290 128. A sunlit Keinesian paradise awaits our grandchildren, Ft.com by Tim Harford…292

4 129. These anti-keynesian arguments look flimsy, Ft.com by Lord Skideslky…294 130. Harvard’s Felstein sees risk of double dip recession in US, Bloomberg, by Bob Willis and Betty Liu…295 131. Budget cuts and reform will help growth: Trichet, Reuters…296 132. Fed Wathc: Bernanke post morten, Economit’s View by Tin Duy…297 133. Mortgage securities it holds pose sticky problem for Fed, The New York Times by Binyamin Appelbaum…301 134. Restore the estate tax, Slate Moneybox by Daniel Gross…304 135. The great recession is just the beginning, The Washington Post by Matt Miller…306 136. America needs a growth strategy, Ft.com by Michjael Spence …308 137. US goes from leading to lagging in young college graduates, The Washington Post by Daniel de Vise …310 138. Inestabilidad laboral contraproductiva, El País de José Marái Zufiaur…311 139. Tiempo de reformas en la negociación colectiva, Cinco Días de Federico Navarro Nieto…314 140. No Fed Plans to Give More Support, Bernanke says, The New York Times by Sewel Chan…316 141. Dear …, Emergin Markets in a World of Indebted nations…323 142. IMF says EU stress tests not transparent enough, Eurointelligence…324 143. Excess capacity and housing, Calculated Risk…328 144. Housing market stumbles, The Wall Street Journal by Nick Timiraos and Robbie Whelan…330 145. Senate votes, 60-40, to advance jobless benefits legislation, The Washington Post by Lori Montgomery…335 146. Obama’s economic fish stories, The Wall Street Journal by Michael J Boskin…337 147. Fo Obama’s reform agenda, counterterrorism excess is a timely warning, The Washington Post by Steven Pearlstein…339 148. ECB economists on why austerity is better than stimulus, Real Time Economics by Brian Blackstone…341 149. Bond sale?, Don’t quote Us, request credit firms, The Wall Street Journal by Anusha Shrivastava…342 150. What 7 republicans could do, The New York Times by Thomas L Friedman…344 151. Inmobilirias constructoras, responsables del fuerte estirón del endeudamiento de España, Expansion.com by GM…346 152. Consolidadores frente a estimuladores, Project Syndicate by Robert Skidelsky…348 153. The social security squeeze can be solved, Boomberg Businessweek by ChrisFarrell…351 154. Contemos con el FMI, Project Syndicate, by Luigi Zingales…353 155. Los bancos de Europa, la crisis de Europa, Project Syndicate by Daniel Gros…355 156. Corriendo en el lugar en materia de comercio, http://www.project-syndicate.org by Jagdish Bhagwati…357

5 157. De las finanzas desconfiamos, http://www.project-syndicate.org by Michael Spence…359 158. Irish show greeks suffering is Price of admission to euro unión, Bloomberg by Dara Doyle…362 159. European bank stress tests said to describe three scenarios, Bloomberg by Meera Louis and Jann Bettinga…365 160. Deficits do matter, but not the way you think, Naked Capitalism by L. Randall Wray…366 161. The Volcker rule, The New Yorker by John Cassidy…369 162. The answer is the domestic private sector, News N Economics by Jim Hamilton…377 163. Lemmings marching off a Cliff Grasping reality with both hands, http://www.newsneconomics.com…378 164. Regulators are human, too, The New York Times by Edward L Glaeser…380 165. Welfare & Warfare (Featured Article), The Burning Platform by Jin Qinn…382 166. Macroeconomics Parable, Thoughts on Macro…393 167. Defense spending and deficit reduction, Economist’s view…394 168. Hurrah, the Landesbanken have passed the stress test – financial crisis now officially over, Eurointelligence…395 169. No need for a panicked fiscal surge, FT.com by Kenneth Rogoff…398 170. Europe requires end of Merkel and Sarkozy, Ft.com by Wolfgang Münchau…400 171. Emancipation is mixed blessing for Merkel, FT.com by Quentin Peel…401 172. Spain, Ireland, Greece sell debt as funding pressure’ Eases, Bloomberg by Andrew Davis and Anchalee Worrachate…403 173. Hungary’s foot in mouth disease threatens investor confidence, financing, Bloomberg by Edith Balazs…404 174. Pimco selles black swan protection as Wall Street markets fear, Bloomberg by Shannon D Harrington, Miles Weiss…407 175. America’s AAA rating is cut in land of bubbles: William Pesek, Bloomberg by William Pesek…411 176. Wonkbook: jobless benefits to pass; BP seeks new cap method; Warren for CFPB?, The Washington Post …413 177. Get America back to work, The Daily Beast…416 178. Please, no more government spending!, The Daily Beast by The George L Argyros…418 179. The tax expenditure solution for our national debt, The Wall Street Journal by Martin Feldstein…420 180. Deficit neutral stimulus Economist’s view…422 181. Laurence Kotlikoff replies to lord turner: part 1, Financial Times by FT…423

Período: de 19/07/2010 a 29/07/2010 en orden inverso a la fecha

6 Opinion

July 29, 2010 Curbing Your Enthusiasm By PAUL KRUGMAN Why does the Obama administration keep looking for love in all the wrong places? Why does it go out of its way to alienate its friends, while wooing people who will never waver in their hatred? These questions were inspired by the ongoing suspense over whether President Obama will do the obviously right thing and nominate Elizabeth Warren to lead the new consumer financial protection agency. But the Warren affair is only the latest chapter in an ongoing saga. Mr. Obama rode into office on a vast wave of progressive enthusiasm. This enthusiasm was bound to be followed by disappointment, and not just because the president was always more centrist and conventional than his fervent supporters imagined. Given the facts of politics, and above all the difficulty of getting anything done in the face of lock step Republican opposition, he wasn’t going to be the transformational figure some envisioned. And Mr. Obama has delivered in important ways. Above all, he managed (with a lot of help from Nancy Pelosi) to enact a health reform that, imperfect as it is, will greatly improve Americans’ lives — unless a Republican Congress manages to sabotage its implementation. But progressive disillusionment isn’t just a matter of sky-high expectations meeting prosaic reality. Threatened filibusters didn’t force Mr. Obama to waffle on torture; to escalate in Afghanistan; to choose, with exquisitely bad timing, to loosen the rules on offshore drilling early this year. Then there are the appointments. Yes, the administration needed experienced hands. But did all the senior members of the economics team have to be protégés of Robert Rubin, the apostle of financial deregulation? Was it necessary to install Ken Salazar at the Interior Department over the objections of environmentalists who feared, rightly, that his ties to extractive industries would make him slow to clean up a corrupt agency? And where’s this administration’s Frances Perkins? As F.D.R.’s labor secretary, Perkins, a longtime crusader for workers’ rights, served as a symbol of the New Deal’s commitment to change. I have nothing against Hilda Solis, the current labor secretary — but neither she nor any other senior figure in the administration is a progressive with enough independent stature to play that kind of role. What explains Mr. Obama’s consistent snubbing of those who made him what he is? Does he fear that his enemies would use any support for progressive people or ideas as an excuse to denounce him as a left-wing extremist? Well, as you may have noticed, they don’t need such excuses: He’s been portrayed as a socialist because he enacted Mitt Romney’s health-care plan, as a virulent foe of business because he’s been known to mention that corporations sometimes behave badly. The point is that Mr. Obama’s attempts to avoid confrontation have been counterproductive. His opponents remain filled with a passionate intensity, while his supporters, having received no respect, lack all conviction. And in a midterm election, where turnout is crucial, the

7 “enthusiasm gap” between Republicans and Democrats could spell catastrophe for the Obama agenda. Which brings me back to Ms. Warren. The debate over financial reform, in which the G.O.P. has taken the side of the bad guys, should be a political winner for Democrats. Much of the reform, however, is deeply technical: “Maintain the requirement that derivatives be traded on public exchanges!” doesn’t fit on a placard. But protecting consumers, ensuring that they aren’t the victims of predatory financial practices, is something voters can relate to. And choosing a high-profile consumer advocate to lead the agency providing that protection — someone whose scholarship and advocacy were largely responsible for the agency’s creation — is the natural move, both substantively and politically. Meanwhile, the alternative — disappointing supporters yet again by choosing some little-known technocrat — seems like an obvious error. So why is this issue still up in the air? Yes, Republicans might well try to filibuster a Warren appointment, but that’s a fight the administration should welcome. O.K., I don’t really know what’s going on. But I worry that Mr. Obama is still wrapped up in his dream of transcending partisanship, while his aides dislike the idea of having to deal with strong, independent voices. And the end result of this game-playing is an administration that seems determined to alienate its friends. Just to be clear, progressives would be foolish to sit out this election: Mr. Obama may not be the politician of their dreams, but his enemies are definitely the stuff of their nightmares. But Mr. Obama has a responsibility, too. He can’t expect strong support from people his administration keeps ignoring and insulting.

PAUL KRUGMANCurbing Your Enthusiasm July 29, 2010 http://www.nytimes.com/2010/07/30/opinion/30krugman.html?th&emc=th

July 29, 2010, 9:11 pm Liquidationism Further Refuted Following up on an earlier post: Heather Boushey shows that far from requiring an unusual amount of reallocation of workers across sectors, this recession has been unusually broadly spread across the economy.

July 29, 2010, 4:32 pm Beveridge Worries Why does man kill? He kills for food. And not only food: frequently there must be a beverage. – Woody Allen Apropos this post, Mark Thoma reminds me that he wrote about the shifting Beveridge curve a little while ago, linking to David Altig. Here’s the worry, and the puzzle: in general, we expect high unemployment to be associated with low numbers of job vacancies, loosely speaking because employers, facing a buyers’

8 market, should be able to fill positions quickly. An upward shift in this relationship might therefore indicate a worse-functioning job market — say, because employers find a higher proportion of the unemployed unsuitable workers. And in the past, shifts of the Beveridge curve relating unemployment to vacancies seem to have been associated with movements in the NAIRU. So now we face what looks like an abrupt shift for the worse:

David Altig What’s driving this shift? One scary possibility is that we’re rapidly developing a case of Eurosclerosis, as the long-term unemployed come to be seen as unemployable. Another possibility is that it has something to do with the housing market: workers are trapped in place by homes they can’t sell, or by negative equity, and can’t move to where jobs are. Anyway, there’s something happening here; what it is ain’t exactly clear; but it’s probably not good. http://krugman.blogs.nytimes.com/2010/07/29/beveridge-worries/

July 29, 2010, 4:05 pm Deflation Risks Good news: more people at the Fed are taking the risk of a Japanese-type trap seriously. But not all of them: “I think the fear of deflation in and of itself is probably overblown, from my perspective,” Charles I. Plosser, president of the Philadelphia Fed, said last week in an interview. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said. Atrios asks whether this makes sense. No, it doesn’t. I mean, if we’re talking about the risk of turning Japanese, shouldn’t we, um, look at Japanese experience? Here’s Japan’s monetary base — the sum of bank reserves and currency in circulation — from 1995 to 2005: Bank of Japan

9 All that money sitting there — and deflation continued apace. I remember Taka Ito telling me that the only consumer durable selling well was … safes. When you’re in a liquidity trap, the size of the base doesn’t matter. But at least some Fed types are getting it. http://krugman.blogs.nytimes.com/2010/07/29/deflation-risks/ July 29, 2010, 11:16 am The Work Of Depressions I’ve been surprised by a lot of things since the financial crisis broke, few of them good. One of the truly amazing things, however, is the return of full, 1930s-type liquidationism — the idea that a slump serves a useful purpose, and that stimulating the economy, even through monetary policy, is a mistake. And so we have Raghuram Rajan in today’s FT arguing that with 9.5 percent unemployment, long-term unemployment at record levels, and falling inflation, we need to … raise interest rates: This crisis followed a period, from 2002-2004, when monetary policy had done too much heavy lifting. The US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily. With households now struggling with this remaining debt, should we expect them to spend beyond their means again, or ask them to do so? Moreover, if consumers are now going to want fewer houses and cars, a significant number of jobs will disappear permanently. Workers who know how to build houses, or to sell or finance them, will have to learn new skills. This means resources have to be reallocated into other sectors to ensure a robust recovery, not simply a resumption of the old binge. But this will not necessarily be facilitated by ultra-low interest rates. This is all familiar to students of the history of thought; there’s virtually no difference between what Rajan is saying now and what Schumpeter said in the midst of global economic collapse: http://books.google.com/books?id=MlXr6e4Opo0C&pg=PA115&lpg=PA115&dq=schumpete r+%22depressions+are+not+simply+evils%22&source=bl&ots=cW1MTsQZez&sig=V2zAE0 2CW0CRidEm32kmgICyujE&hl=en&ei=YWpRTM3bLIP68Abj46SiBA&sa=X&oi=book_re sult&ct=result&resnum=6&ved=0CCgQ6AEwBQ#v=onepage&q&f=false I’ve written about this before; but let me add a few numbers. Is it at all reasonable to attribute high unemployment now to the need to shift the economy out of housing and cars? OK, I actually haven’t taken cars into account; someone with more time can do that. But let’s look at the role of job losses in construction versus other sectors, since December 2007. It looks like this: BLS If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble. Yes, as a percentage job losses have been much larger in construction; but nothing in Rajan’s argument explains why we shouldn’t be using policy in an attempt to prevent vast job losses in parts of the economy that aren’t overblown.

10 I’d add that even if you think structural unemployment has gone up, it clearly hasn’t risen enough to stop a slide toward deflation — and if it has risen, the slump is arguably a cause, not an effect, of that rise. Anyway, to go back to the beginning: it’s amazing, and depressing in multiple senses, that we’re having to replay all these old debates. http://krugman.blogs.nytimes.com/2010/07/29/the-work-of-depressions/ July 28, 2010, 8:28 pm We’re Number One! I’ve seen a peculiar meme surfacing here and there lately — the assertion that people like me are exaggerating how bad our current difficulties are, that things were actually worse in the 70s and 80s. I wonder where that’s coming from — and I really do; it has the feel of one of those things being disseminated on talk radio or something, and I think I hear a faint chant of Jimmy Carter! Jimmy Carter! in the background. Whatever. The truth is that this really is the big one. Catherine Rampell recently updated the recession comparison chart, showing declines in employment. Here’s the percentage decline in employment in recessions since 1970:

We’re really number one, by that standard. But wasn’t the unemployment rate higher in the past? Well, in 1982, although not in the 1970s, it was briefly a bit higher than the peak this cycle:

But back then the “full employment” level of unemployment was higher, so the increase wasn’t as large; more important, most of the unemployment was short-term, nothing like the deeply corrosive long-term unemployment we’re facing now: So these really are the worst of times. July 28, 2010, 10:12 am

Japanese Debt And Growth Just a quick note: I thought it might be worth doing an Irons-Bivens plot for Japan (and, to be honest, I wanted to see if I had finally managed to trick a spreadsheet into labeling the data points!). So here it is (data from IMF WEO database): So, Japan has had high debt and low growth since the mid-90s — in other words, since the economy entered deflation. Do you really want to argue that the debt caused the low growth, rather than the other way around? Really, really? http://krugman.blogs.nytimes.com/2010/07/28/japanese-debt-and-growth/ July 28, 2010, 8:05 am

12 How Did We Know The Stimulus Was Too Small? Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance. But the longer answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009: Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things. To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough. Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50. But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.” The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job. In practice, it was even worse, because one of the key elements of the plan — aid to state and local governments — was cut back sharply in the Senate. We ended up with only about $600 billion of real stimulus over that two-year period. So this wasn’t a test of fiscal stimulus, even though it has played out that way in the political arena: the whole thing was obviously underpowered from the start. http://krugman.blogs.nytimes.com/2010/07/28/how-did-we-know-the-stimulus-was-too-small/ July 28, 2010, 7:54 am Tax Cut Truthiness For my sins, I followed a link from Matthew Yglesias to Erick Erickson’s explanation of how great the Bush tax cuts really were. And there I learned some things I didn’t know: More crucially, after the 2001 initial tax cuts, the annual growth rate went from 0.3% in 2001 to 2.5% in 2002. By 2004, GDP growth was the highest in 20 years. Um:

And: Likewise, after the 2003 tax cuts, the unemployment rate fell to the lowest level since World War II. Let me repeat that: the Bush economic program created the lowest unemployment level ever. More um:

The bit about unemployment really surprised me — after all, the incredibly good job market of the late 90s isn’t that far behind us. But I think we have part of the key to how Republicans can believe that returning to the Bush agenda is exactly what we need: they’ve invented themselves an alternate history in which wonderful things happened under Bush, and earlier booms have been sent down the memory hole. http://krugman.blogs.nytimes.com/2010/07/28/tax-cut-truthiness/ July 27, 2010, 7:56 pm Debt And Growth, Yet Again John Irons and Josh Bivens have the best takedown yet of the Reinhart-Rogoff paper (pdf) claiming that debt over 90 percent of GDP leads to drastically slower growth. R-R specifically highlight the case of the United States: Irons and Bivens show, in a nice clean chart, what’s really going on: It’s all, repeat all, the postwar demobilization.

14 I think we can say that this paper has been completely discredited. I’m actually sort of shocked that R-R apparently failed even to notice that all of their high-debt observations for the US — and remember, it was their own choice to highlight US data — come from the years immediately after World War II, and to think about what that means. http://krugman.blogs.nytimes.com/2010/07/27/debt-and-growth-yet-again/ July 27, 2010, 8:40 am The Warren Mystery I have to say, I don’t get the administration waffling on Elizabeth Warren at all. Leave aside the merits of appointing Warren, which are considerable, and think about the politics. At this point, not appointing Warren would be seen by the base as a slap in the face, and would seriously dampen enthusiasm going into the midterms. And Democrats need every bit of enthusiasm they can muster to avoid a Republican takeover of the House. Given that, it’s crazy to vacillate. Maybe Tim Geithner doesn’t like Warren. Maybe Rahm Emanuel finds her hard to deal with. (I’m speculating here, not speaking from any inside knowledge.) How can such things count compared with the catastrophic effect of a GOP victory on the White House? Maybe they don’t understand what will happen if John Boehner becomes speaker. Maybe they don’t realize that they’ll face total obstructionism and quite possibly a government shutdown; maybe they don’t realize that there will be investigations and fake scandals over everything in sight, that Andrew Breitbart will become the de facto GOP whip. But if they don’t realize that, they’re idiots. And I say that with all due respect. http://krugman.blogs.nytimes.com/2010/07/27/the-warren-mystery/ July 27, 2010, 8:14 am Ma! He’s Looking At Me Funny! That’s basically the thrust of Mort Zuckerman’s op-ed accusing Obama of “demonizing” business. The op-ed contains the usual — false claims that Fannie and Freddie caused the financial crisis, false claims that fear of government policy — as opposed to weak demand — is holding back investment and hiring. But I was struck by this passage: The predilection to blame business was manifest in one of President Barack Obama’s recent speeches. He was supposed to be seeking the support of the business community for a doubling of exports over the next five years. Instead he lashed out at “unscrupulous and underhanded businesses, who are unencumbered by any restriction on activities that might harm the environment, take advantage of middle-class families, or, as we’ve seen, threaten to bring down the entire financial system.” This kind of gratuitous and overstated demonisation – widely seen in the business community as a resort to economic populism on the part of Mr Obama to shore up the growing weakness in his political standing – is exactly the wrong approach. That sounded odd, since Obama is not, in fact, given to random business-bashing. So what’s the context? Here’s what Obama actually said:

15 Too much regulation or too much spending can stifle innovation, can hamper confidence and growth, and hurt business and families. A government that does too little can be just as irresponsible as a government that does too much — because, for example, in the absence of sound oversight, responsible businesses are forced to compete against unscrupulous and underhanded businesses, who are unencumbered by any restrictions on activities that might harm the environment, or take advantage of middle-class families, or threaten to bring down the entire financial system. That’s bad for everybody. Kind of different, isn’t it? That’s only business-bashing if you believe that there’s no such thing as businesses who cut costs by ignoring the environmental impact of their activities, or take risks that end up endangering the financial system. If so, I wish I lived on your planet. I think this is telling. This is the only actual example of Obama’s alleged demonization of business that Zuckerman offers — and it’s essentially a mini-Breitbart, a quote taken out of context to make it seem as if Obama was saying something he wasn’t. That’s typical of the whole argument. Oh, and one more thing: are there no copy editors at the FT? When I quote someone in my column, I supply the source material, and my copy editor checks, not just to be sure that the quote is accurate, but that it’s not taken out of context. But I guess such rules don’t apply if you’re a conservative. http://krugman.blogs.nytimes.com/2010/07/27/ma-hes-looking-at-me-funny/

COMMENT Bernanke must end era of ultra-low rates By Raghuram Rajan Published: July 28 2010 23:34 | Last updated: July 28 2010 23:34 Before the Senate banking committee last week, Ben Bernanke, the Federal Reserve chairman, hinted that, with fiscal policy reaching its limits and “unusual uncertainty” in financial markets, interest rates will need to remain ultra-low for the foreseeable future to boost America’s flagging economy. The case against rate rises seems obvious. Although worries about Japan-style deflation in the US are overblown, deflationary pressures are more worrisome than inflation. Moreover, under normal circumstances, monetary policy can boost growth in a range of ways. In depth: US downturn - Jul-22 Editorial: Ben Bernanke’s uncertain world - Jul-22 Fed ready to act amid uncertain outlook - Jul-22 FDIC chief warns over capital standards - Jul-20 Fed eyes looser monetary policy - Jul-19 Short view: Fed unlikely to follow Canada - Jul-19 Low rates give households the incentive to save less, and companies to invest more. Demand will revive and laid-off workers will be rehired. Low rates also boost asset prices, giving companies the collateral with which to borrow and banks the capital with which to lend. With low returns to safe assets, investors are in turn pushed to take more risks. Finally, with the Fed’s promise of low rates for an extended period, companies and banks can take on short-term borrowing to fund illiquid positions, again prompting investment.

16 This is all fine in theory. But the problem is we are not recovering from a normal recession. This crisis followed a period, from 2002-2004, when monetary policy had done too much heavy lifting. The US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily. With households now struggling with this remaining debt, should we expect them to spend beyond their means again, or ask them to do so? Moreover, if consumers are now going to want fewer houses and cars, a significant number of jobs will disappear permanently. Workers who know how to build houses, or to sell or finance them, will have to learn new skills. This means resources have to be reallocated into other sectors to ensure a robust recovery, not simply a resumption of the old binge. But this will not necessarily be facilitated by ultra- low interest rates. What about corporate investment? Large companies have access to funds, but are still not investing. It is hard to see how ultra-low rates can overcome fundamental uncertainties about the future costs of production and the location of demand. There is little point building a factory in New Jersey if US corporate taxes then go up, and demand growth is all in Asia. Some small companies might benefit from more bank lending. But the small banks that typically lend to them are holding back too, with little capital to absorb ongoing loan losses, or to meet the new, tougher regulatory requirements. It is true that low rates did induce more risk-taking before the European sovereign debt crisis. It is also quite possible that the panic of 2008 pushed risk aversion to high levels, and asset prices to low levels. But in trying to reverse this, the Fed could overplay its hand. After all, the low rates introduced by Alan Greenspan from 2002-2004 created momentum in house prices that soon became the rationale for crazy lending. Put differently, by the time risk-taking and asset price inflation again take off, it may be too late for the Fed to turn it back. Furthermore, the pattern of Fed policy over time builds expectations. The market now thinks that whenever the financial sector’s actions result in unemployment, the Fed will respond with ultra-low rates and easy liquidity. So even as the Fed has maintained credibility as an inflation fighter, it has lost credibility in fighting financial adventurism. This cannot augur well for the future. The bottom line is that the current jobless recovery suggests the US has to undertake deep structural reforms to improve its supply side. The quality of its financial sector, its physical infrastructure, as well as its human capital, all need serious, and politically difficult, upgrades. If this is our goal, it is unwise to try to revive the patterns of demand before the recession, following the same monetary policies that led to disaster. None of this is to say that the Fed should jack up rates without warning, or to extremely high levels. Policy at times of unusual uncertainty should never be extreme. But this is precisely why, when the jitters about Europe recede, it would be prudent for the Federal Reserve to set the stage for raising rates from ultra-low to the merely low. The writer is professor of finance at the Booth School and author of Fault Lines: How Hidden Cracks Still Threaten The World Economy http://www.ft.com/cms/s/0/2a19a706-9a7a-11df-87fd-00144feab49a.html

17 Opinion

July 29, 2010 The Growth Imperative By DAVID BROOKS We could be in for a long, slow decade. There’s a confluence of forces that are probably going to retard economic vitality. Consumers are still overindebted, and it will take years of curtailed spending before households are back on a sustainable path. Federal and state governments also will have to pull back. Labor markets were ill before the recession and are worse now. Our trading partners in Europe and Japan are stagnant or in peril. Banks in this country are not lending to small businesses and banks elsewhere have huge write-downs to endure. The psychological war between business and the Obama administration also is taking a toll. Business types think the administration is stuffed with clueless professors. Some administration officials think corporate honchos are free-market hypocrites prowling for corporate welfare. What we have is not just a cycle but a condition. We could look back on the period between 1980 and 2006 as the long boom and the period between 2007 and 2014 or so as the nasty crawl. Politically, this period could be akin to the late-1970s. Economic anxiety could produce good and bad ideological effusions. As the economy stutters, people will ask fundamental questions about the nature of our political-economic structures and come up with grand proposals to revive growth. The electorate could shift in ways hard to imagine. In my previous column, I tried to imagine what a moderate Democratic growth agenda would look like. You could call it the Moon Shot Approach. In this approach, government tries to spur economic development first by creating the context for growth with a big infrastructure program and then by focusing subsidies and tax credits on key sectors, like energy research. The Republicans have their own growth agenda. You could call it the Unleash America Approach. The underlying worldview was deftly sketched out in Arthur C. Brooks’s book, “The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future.” Brooks (no relation) argues that Americans are a uniquely entrepreneurial people. A nation of immigrants, “America’s vast success might be explained in part by our genetic predisposition to embrace risks with potentially explosive rewards.” Citing an array of polling data, Brooks argues that 70 percent of Americans embraces this free-market and entrepreneurial vision of their country. But 30 percent prefers a more government-centric, European-style vision. The battle, Brooks concludes, is between the 70 percent, trying to reclaim the country, and the 30 percent, which is now expanding the federal role on an array of fronts. Paul Ryan, the most intellectually ambitious Republican in Congress, lavishly cites Brooks’s book. Over the past few years, Ryan has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

18 On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale. The idea would be to end the complex and sclerotic arrangements and solve the fiscal crisis. The effect would be to radically reduce the power of federal policy makers and shift discretion (and risks) onto individuals. Both the Democratic and Republican approaches have problems. The Moon Shot Approach relies on omniscient experts to pick out the engines of future growth and on public-spirited legislators to pass bills that maximize productivity instead of special-interest favors. The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk — embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order. The economic debate is not as Manichaean as the culture war since most people are split down the middle and because it’s easier to compromise on money than on life. Still, these two visions are better than the nativist and antiglobalist visions that will be arising. And despite the tough battle talk, they are combinable. At his best, Ryan wants to cleanse and rejuvenate the nation — to sweep away the special-interest sclerosis that strangles flexibility and growth. At his best, Obama wants to create a context for innovation — to employ blue- collar workers and to spur growth clusters like Silicon Valley, which, let us remember, was a magical cocktail of federal research subsidies, hippie culture, entrepreneurial daring and university settings. The two projects are in tension, but in a sane political culture they are not mutually exclusive. It should be possible to simplify the tax code, target welfare spending and also build strong infrastructure at the same time. http://www.nytimes.com/2010/07/30/opinion/30brooks.html?_r=1&th&emc=th

19 20

Business Day Economy

July 29, 2010 Economists Expect Slower Growth in Second Half By MOTOKO RICH Two steps forward, one step back. That describes the current thinking about a year into the putative economic recovery. On Friday, the government will release its report on the nation’s output for the second quarter, showing how much, if at all, the economy downshifted as the summer began. Many economists — concerned about the sluggish pace of job creation, dwindling housing activity and decelerating retail sales — say that slowdown is continuing this summer and have recently downgraded their expectations for the second half of the year. “Practically every Street economist took a knife to Q2 and Q3 G.D.P. growth,” David A. Rosenberg, chief economist for Gluskin Sheff, wrote last week in a note to clients, referring to Wall Street forecasts for gross domestic product. For the second-quarter results to be released Friday, economists project a modest annualized gain of 2.6 percent, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year. Though some people started the year hoping for stronger results, economists say that the slow pace of growth should have been expected. “So far, the recovery is remarkably normal for a postfinancial-crisis recovery,” said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of “This Time Is Different,” an economic history of financial crises. “It doesn’t mean that we should cheer that it’s been so grim,” added Mr. Rogoff, who is a former chief economist of the International Monetary Fund. “But on the other hand, it’s not necessarily a reason to panic.” Even shares in companies that are more ebullient, like Delta Air Lines and Amazon.com, have been driven down by nervous investors when executives announced plans to increase capacity or hire aggressively. Perhaps Ben S. Bernanke, chairman of the Federal Reserve, put it best this month when he described the outlook for the United States economy as “unusually uncertain.” The news in recent weeks has been rather bleak. A crucial index of consumer confidence, which was rising strongly earlier this year, dropped for the second month in a row in July, while sales of existing homes have fallen for two consecutive months. Employers are adding fewer jobs than they were just a few months ago, and banks are lending less to companies than they were a year earlier, even after relatively good second quarter-corporate profits.

21 Earlier this year, expectations were much higher. The National Association of Home Builders, for example, forecast that buyers would sign contracts for 467,000 new homes this year; now it is projecting that they will buy just 375,000 homes — down almost 20 percent. “We just thought that overall, the economy would have been doing better than it’s been doing,” said Bernard Markstein, senior economist with the home builders. At the start of the year, manufacturing seemed to be staging a comeback as companies replenished inventories that fell very low during the recession. Many economists assumed that once products were back on shelves, consumers would start buying enough to deplete warehouse inventories. Now, consumer demand appears not quite strong enough. Many companies that have reported impressive results this earnings season, including bellwethers like United Parcel Service and 3M, indicated that their sales swelled mostly outside the United States. As a result, companies are still not hiring nearly as many people in the United States as policy makers — and the unemployed — want. The unemployment rate, at 9.5 percent, is not far off the peak of 10.1 percent, and 6.75 million people have been out of work for more than six months. Part of the slowdown stems from the expiration of stimulus measures like the home buyer tax credit and the cash for clunkers program to bolster auto sales. But it is also perhaps the inevitable aftermath of a protracted era of credit-driven excess, buoyed by inflated housing prices. Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors. Many Wall Street economists and investors have “been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,” said Ian Shepherdson, chief United States economist at High Frequency Economics, “whereas this was almost entirely driven by what was going on in the financial markets and houses.” Consumers who used their skyrocketing home values to borrow ever larger sums of money to feed further spending are now paying off that debt, which hampers their spending. That process is “very slow and painful,” said Joshua Shapiro, chief United States economist at MFR Inc. “There is not that much that can be done about it, as much as politicians would love to find some silver bullet.” In fact, politicians are debating quite ferociously whether more needs to be done to usher the economy along. The fiercest arguments are over whether to inject further stimulus spending into the economy and whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year. There are those who argue that the current slowdown is just a hiccup, caused in part by tremors in Europe and concerns about a hard landing in China. “We were hit by these shocks,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But as we get additional evidence that the European economies are able to withstand the debt crisis and as banks are showing they have stronger capital and Chinese policy makers are successfully able to avoid any sharp downturn, that will be reflected in higher confidence among U.S. businesses and consumers.”

22 On the ground, slow growth has spawned a cautious mood that is feeding — you have it — slow growth. “A lot of people are looking at things with the glass half empty,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the home builder. “And they’re temporarily on the sidelines.” Companies, meanwhile, are not yet ready to capitalize on good news. Although 3M, which makes things as diverse as Post-it Notes and screen coatings for iPads, announced strong earnings growth in the second quarter, its chief executive, George W. Buckley, told analysts that he expected a slowdown in the second half and that “hiring will likely be low.” At U.P.S., the company’s familiar brown trucks delivered an average of 153,000 more packages a day in the United States during the second quarter than in the comparable period a year earlier. But the company, which has about 18,000 fewer people in package sorting centers and on driving routes in the United States than at its peak two years ago, said it was not yet hiring in great numbers. “The bottom line is that the growth in the U.S. just isn’t quite there in terms of generating jobs right now,” said Norman Black, a U.P.S. spokesman. Industrial companies may wait to hire until early next year, after they have maximized productivity gains among current workers. “Traditionally, when you come out of a down cycle, there’s normally a fairly high reluctance to hire,” said Scott R. Davis of Morgan Stanley. “Investors and boards of directors don’t want to see them hire people until business is 100 percent back.” Some businesses are desperate to hire but just do not see the demand to justify it. Dan Cutillo, the owner of a string of pizza delivery shops near Toledo, said penny-pinching customers are not ordering as much. At one of his stores, he said, the staff is now half the size it was a year ago. “I should be doing larger sales,” Mr. Cutillo added. “I should be hiring more people.”

The New York Times

MOTOKO RICHEconomists Expect Slower Growth in Second Half July 29, 2010 http://www.nytimes.com/2010/07/30/business/economy/30econ.html?_r=1&th&emc=th

23 FT's rolling global market overview Investors drop risk ahead of US GDP data By Telis Demos in London Published: July 30 2010 08:45 | Last updated: July 30 2010 08:45 Friday 8.30 BST. With the second-quarter US GDP report looming later in the day, markets are selling risk on fears that the world’s largest economy will prove to be growing below economists’ projections. The FTSE All-World index is down 0.1 per cent as Asian markets tumble, following soft closes in all regions on Thursday. Futures markets are pricing in lower opening prices for New York’s S&P 500 index. Faltering technology stocks take Asian indices lower - Jul-30 Short View: Equities rally not yet a secular bull - Jul-29 Swap rates fall below Treasury yields - Jul-29 Europe set for overhaul of rules on share dealing - Jul-29 European markets sold off at their open, following some poor economic data, a turnround from recent trends. The Eurofirst 300 index was down 0.3 per cent. The yen is again in demand as a haven, gaining against higher-yielding currencies in Australia and Europe. Benchmark German, Japanese and US government bonds are in demand, while shakier European debts are down. Economists are expecting 2.5 per cent US GDP growth for the second quarter, though after a week of downbeat comments from the US Federal Reserve and continued slipping of economic indicators – including durable goods sales this week – markets fear it may come in disappointing. On Thursday, James Bullard, a regional Fed president, warned that the US risked a “Japanese- style outcome” if it did not consider using measures beyond the Fed funds rate to inject liquidity into the economy, including quantitative easing measures. Earlier in the week, the Fed’s Beige Book survey said that some regions were seeing slower activity. Though earnings season has seen strong headline expectation-beating profit reports, and banks globally have seen an uptick in confidence following the European stress tests, investors have been hesitant to buy shares and other risky assets without some sense that the world’s largest importer is on solid footing. Japan’s Nikkei, heavily reliant on exporting companies, has nose- dived the last two sessions as businesses warn of a third-quarter slowdown. Even in Europe, where economic news has been surprisingly good lately, traders are keenly aware that it is exports – thanks in large part to a cheap euro – that have led German manufacturing activity into an expansion phase and unemployment to its lowest level since 2008. “Germany and Europe’s other big economies are export-driven. We acknowledge that if there were to be a big problem in the US, it would have an impact on the eurozone,” said Astrid Schilo, an economist at HSBC.

24 • Europe. A bit of weakness knocked markets at their open. Spanish unemployment ticked up higher than forecast, and German retail sales were reported to have fallen more than forecast in June. French construction giant Lafarge profits beat analysts’ predictions, but lowered its forecast. The UK’s FTSE 100 index is down 0.2 per cent, and Germany’s Dax opened 0.3 per cent lower. • Asia. Regional bellwether Samsung joined Nissan and Hyundai on Thursday, reporting a strong second-quarter but warning that second-half profits would not be as strong. Japan’s Nikkei 225 was down 1.6 per cent as the yen strengthened, making Japan’s exports more expensive. The FTSE Asia-Pacific is down 0.5 per cent, with across the board losses. The Hang Seng index in Hong Kong and the Shanghai Composite index are both slipping 0.6 per cent. Australia’s S&P/ASX 200 is lower by 0.7 per cent. • Currencies. Traders are selling risky currencies against the safe-haven yen. The New Zealand dollar is down 0.7 per cent against the yen, and the South African rand is down 1 per cent. The yen is up 0.6 per cent against the US dollar. The euro and the pound are holding steady ahead of the US data. Both are flat against the dollar, though the euro is down 0.6 per cent against the yen. • Debt. The US curve continues to steepen, with 30-year bond yields rising 1 basis point and 2-year bond yields dropping 1 basis point, with traders noting that investors are heading to the less-risky part of the curve. Core German 10-year Bund yields are down 2 per cent, as European investors embrace safer assets. Credit-default swap spreads are widening in Greece, Portugal and Ireland. Greek two- year bond yields are up 24 basis points, and Spanish and Portuguese debts are also being sold off. • Commodities. US crude oil is down 0.1 per cent, to $78.25 a barrel, after a week of inventory expansion has driven up supply. The US has reported a growing excess in its markets, a sign of a moderating economy, and Opec on Thursday said that its production had continued to increase. Gold is up 0.1 per cent to $1,169 an ounce. Deflationary fears in the US have counteracted the declining view of lending and currency risk in Europe, and bullion has risen as the week wore on. Following the Global Market Overview on Twitter at @telisdemos. Telis Demos Investors drop risk ahead of US GDP data July 30 2010 08:45 http://www.ft.com/cms/s/0/810e448e-9ba3-11df-9ebd-00144feab49a.html

Small, midsize U.S. banks need to raise more capital, IMF financial study finds By Neil Irwin Washington Post Staff Writer Friday, July 30, 2010; A15 The U.S. financial system remains under stress, with small and midsize banks in particular potentially needing to raise more capital, according to a new report from the International Monetary Fund that shows the continuing strains facing the U.S. economy. The IMF found that U.S. banks need to raise about $45 billion in new capital -- most of it by regional and small banks -- to ride out an "adverse" economic scenario that amounts to a dip back into recession while maintaining the fund's recommended capital ratio. The banking system will be in relatively solid shape if the U.S. economy continues to grow steadily, which the IMF thinks is likely. "There remain important risks to the U.S. financial system and its ability to support the economic recovery," the report said, noting that "bank balance sheets remain fragile and capital buffers may still be inadequate in the face of further increases in nonperforming loans." The report is the first formal IMF assessment of the U.S. financial sector. While they praise much of the government response to the financial crisis and newly passed regulatory legislation, IMF officials argue that in some areas the government has not gone far enough in correcting frailties that contributed to the crisis. In particular, even after enactment of the Dodd-Frank financial overhaul, which President Obama signed into law last week, there are too many U.S. financial regulators with varying and sometimes overlapping roles, the IMF found. For example, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and state regulators all have a hand in overseeing banks. "The complexity of the U.S. supervisory system and the diffusion of powers across agencies undermined its efficiency, effectiveness, transparency, and accountability," the IMF found. "Reform legislation seeks to address these issues but bolder action would have been preferable." Also, the IMF noted that there has yet to be any resolution of the long-term role that Fannie Mae and Freddie Mac, the government-controlled housing finance firms, will play. The IMF endorsed "a public-private model" in which the firms' portfolios of mortgage securities are privatized and their social objectives of supporting homeownership are undertaken by an explicitly public entity. The Obama administration is just beginning to craft proposals for overhauling Fannie and Freddie, and many Republicans criticized the Dodd-Frank bill for not dealing with the firms. http://www.washingtonpost.com/wp- dyn/content/article/2010/07/30/AR2010073000051_pf.html

SEC charges billionaire Texas brothers who donate to GOP with fraud By Zachary A. Goldfarb and Philip Rucker Washington Post Staff Writer Friday, July 30, 2010; A01 Sam and Charles Wyly, billionaire Texas brothers who gained prominence spending millions of dollars on conservative political causes, committed fraud by using secret overseas accounts to generate more than $550 million in profit through illegal stock trades, the Securities and Exchange Commission charged Thursday. The Wylys, who have been generous contributors to the Republican Party and GOP candidates, have spent the past several years facing questions, including from a Senate investigative committee, about whether they hid millions of dollars in tax shelters abroad. Through their lawyer, the Wylys denied all charges. According to the SEC, the brothers, who live in Dallas, created an elaborate and clandestine network of accounts and companies on the Isle of Man and in the Cayman Islands. The brothers then used these accounts and companies to trade more than $750 million of stock in four public companies on whose boards they served, not filing the disclosures required for corporate insiders, the SEC said. In one case, the SEC alleges that the Wylys traded based on insider information they learned as board members, netting a profit of $32 million. "The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws," Lorin L. Reisner, deputy director of SEC enforcement, said Thursday in a statement announcing the civil charges. The agency is seeking unspecified financial penalties and a variety of other sanctions, including barring the Wylys from serving as directors or top executives of public companies. William Brewer III, a lawyer representing the Wylys, said they intend to clear their name. "After six years of investigations, the SEC has chosen to make claims against the Wyly brothers -- claims that, in our view, are without merit," Brewer said in a statement. "It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves -- and expect to be fully vindicated." Charles Wyly, 76, and Sam Wyly, 75, have led a largely reclusive life, with their public persona defined by their political activities. Charles Wyly and his wife, Dee, have given more than $1.5 million to more than 200 Republican candidates, party committees and conservative political action committees over the past 20 years, according to an analysis by the Center for Responsive Politics. Sam Wyly and his wife, Cheryl, gave more than $970,000 over the same period, the analysis shows. The Wylys have given to dozens of Republican candidates, none more so than the Bush family. The brothers were supporters of the campaigns of former President George H. W. Bush and his son, former President George W. Bush.

27 In 2000, the Wylys financed a third-party group, Republicans for Clean Air, that launched a television advertising broadside against George W. Bush's chief opponent, Sen. John McCain (R-Ariz.), on the eve of crucial GOP presidential primaries. Later that year, the brothers each gave $100,000 to fund Bush's inaugural festivities. In 2004, the Wylys helped fund Swift Boat Veterans for Truth, another third-party organization that ran controversial television ads attacking the military record of Sen. John F. Kerry (Mass.), Bush's Democratic opponent. "They are among the biggest of the big when it comes to campaign bank-rollers, and their donors list is a who's who of the Republican Party over the past decade," said Dave Levinthal, a spokesman at the nonpartisan Center for Responsive Politics. "It's almost hard to find prominent Republicans who haven't been a beneficiary of their financial largess. They've definitely been very kind, financially speaking, to a number of Republicans." Their biggest beneficiaries include three Texas Republicans, Sen. Kay Bailey Hutchison, National Republican Congressional Committee Chairman Pete Sessions and former House Republican leader Richard K. Armey, according to the Center for Responsive Politics analysis. The Wylys also have given to Senate Minority Leader Mitch McConnell (Ky.), former New York mayor Rudolph W. Giuliani and many other members of the GOP. Both brothers, according to Forbes magazine, are billionaires who amassed their fortune by founding a computer company and investing in a wide range of interests including oil, insurance and restaurants. In 1979, Sam Wyly faced sanctions by the SEC for improper regulatory disclosures. They have been the subject of probes into potential financial wrongdoing since then. In 2006, the Senate permanent subcommittee on investigations completed a report on tax havens that focused on the Wylys. Over 13 years, the Wylys used an "armada" of lawyers, brokers and other professionals to manage hundreds of millions of dollars in transactions that amounted to "the most elaborate offshore operations reviewed by the Subcommittee," according to the panel's report. In announcing its case, the SEC alleged that the Wylys' improper trades benefited them in many ways. They used the proceeds to buy art, collectibles, and jewelry worth tens of millions of dollars, according to the complaint. They spent $100 million to buy real estate, including two ranches in Aspen, Colo., two condominiums in Aspen, and a 100-acre horse farm outside Dallas. They also used the proceeds to cover charitable contributions made by the Wylys, including $8 million to Sam Wyly's business school alma mater and a $2.5 million contribution to a church Charles Wyly attended. The agency alleges that the Wylys committed fraud and various other violations of securities laws while sitting on the boards of four companies over the course of a decade: Michaels Stores, Sterling Software, Sterling Commerce and Scottish Annuity & Life Holdings. The SEC says that by using offshore accounts to trade shares of these public companies, the Wylys were able to escape filing the regulatory disclosures required of board members when they buy or sell shares. By keeping their trading activity secret, the Wylys deprived outside investors of information they could use "to gauge the sentiment of public companies' insiders and large shareholders about the financial condition and prospects of those companies," the SEC said. In one instance, the Wylys used insider information to make an offshore purchase of shares in Sterling Software, where they served as chairman and vice chairman, according to the

28 complaint. They did not disclose the purchase even though they knew the company was soon going to be sold, according to the SEC. Less than four months later, Sterling Software was sold, and the Wylys netted nearly $32 million. "The Wylys have always received the advice and counsel of leading accounting and legal professionals," said Brewer, the brothers' attorney in the SEC matter. "They have never been given any reason to believe the financial transactions in question were anything other than legal and fully appropriate." The SEC also charged the Wylys' longtime personal attorney, Michael French, and their stockbroker, Louis Schaufele III, for their roles in the alleged scheme. French also served on the board of three of the companies. A lawyer for French did not return calls or e-mails seeking comment. A lawyer for Schaufele declined to comment. Zachary A. Goldfarb and Philip Rucker SEC charges billionaire Texas brothers who donate to GOP with fraud http://www.washingtonpost.com/wp- dyn/content/article/2010/07/29/AR2010072906345.html?wpisrc=nl_headline

Small, midsize U.S. banks need to raise more capital, IMF financial study finds By Neil Irwin Washington Post Staff Writer Friday, July 30, 2010; A15 The U.S. financial system remains under stress, with small and midsize banks in particular potentially needing to raise more capital, according to a new report from the International Monetary Fund that shows the continuing strains facing the U.S. economy. The IMF found that U.S. banks need to raise about $45 billion in new capital -- most of it by regional and small banks -- to ride out an "adverse" economic scenario that amounts to a dip back into recession while maintaining the fund's recommended capital ratio. The banking system will be in relatively solid shape if the U.S. economy continues to grow steadily, which the IMF thinks is likely. "There remain important risks to the U.S. financial system and its ability to support the economic recovery," the report said, noting that "bank balance sheets remain fragile and capital buffers may still be inadequate in the face of further increases in nonperforming loans." The report is the first formal IMF assessment of the U.S. financial sector. While they praise much of the government response to the financial crisis and newly passed regulatory legislation, IMF officials argue that in some areas the government has not gone far enough in correcting frailties that contributed to the crisis. In particular, even after enactment of the Dodd-Frank financial overhaul, which President Obama signed into law last week, there are too many U.S. financial regulators with varying and sometimes overlapping roles, the IMF found. For example, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and state regulators all have a hand in overseeing banks. "The complexity of the U.S. supervisory system and the diffusion of powers across agencies undermined its efficiency, effectiveness, transparency, and accountability," the IMF found. "Reform legislation seeks to address these issues but bolder action would have been preferable." Also, the IMF noted that there has yet to be any resolution of the long-term role that Fannie Mae and Freddie Mac, the government-controlled housing finance firms, will play. The IMF endorsed "a public-private model" in which the firms' portfolios of mortgage securities are privatized and their social objectives of supporting homeownership are undertaken by an explicitly public entity. The Obama administration is just beginning to craft proposals for overhauling Fannie and Freddie, and many Republicans criticized the Dodd-Frank bill for not dealing with the firms. Neil Irwin Small, midsize U.S. banks need to raise more capital, IMF financial study finds July 30, 2010; A15 http://www.washingtonpost.com/wp- dyn/content/article/2010/07/30/AR2010073000051.html?wpisrc=nl_headline

30 07/29/2010 12:34 PM Choc Finger's Big Bet Speculators Rediscover Agricultural Commodities By Susanne Amann and Alexander Jung With the financial crisis fading into the past, speculation on agricultural commodities markets has returned in force. Food prices are climbing once again as hedge funds rediscover the immense profits that can be made -- led by a British chocolate baron. Even by the standards of London's exclusive Mayfair neighborhood, businessman Anthony Ward leads a luxurious lifestyle. He and his family live in a 500-square-meter (5,380-square- foot) townhouse with five bedrooms, each with its own bath. There are separate quarters for the staff. When Ward opens a bottle of wine on his veranda in the evening, it's likely that it comes from his own vineyard at the foot of Paardeberg Mountain near Cape Town. Ward's fabulous wealth comes as a result of his involvement in the cocoa business. The 50- year-old Briton with the nickname "Choc Finger" heads Armajaro, a commodities business and hedge fund he co-founded in 1998. In recent weeks, the hedge fund has caused a furor in the commodities markets. Traders report that Ward has purchased a vast number of futures contracts for the delivery of 241,000 tons of cocoa worth $1 billion (€770 million). The cocoa represents about 7 percent of annual world production, enough to supply Germany with chocolate for an entire year. It was also enough to substantially drive up prices on the cocoa market. Last week, the price of cocoa climbed to a 33-year high. What is so unusual about the British investor's coup is that he did not resell the contracts on the London International Financial Futures and Options Exchange (LIFFE) before they expired, but instead took delivery of the beans. As a result, Armajaro now controls almost all the cocoa beans currently stored in registered warehouses in Europe, from Liverpool to Rotterdam to Hamburg. Turbulence in the Cocoa Market Processors and traders are now accusing Ward of trying to corner the cocoa bean market. "The market is increasingly being manipulated by a few people who control the market positions," says Hamburg cocoa dealer Andreas Christiansen, adding that speculators are taking advantage of the lack of transparency on the LIFFE. This, he says, harms smaller traders, whose hedge transactions are now no longer adding up. "A lot of people have been harmed here." Ward himself has declined to comment on these accusations. The turbulence in the cocoa market is the most recent sign that speculation is back, and that the international financial markets have rediscovered agricultural commodities. They are now betting big again on commodities like wheat, coffee, rice and soybeans. As a result, prices are no longer determined by supply and demand, but by investment banks and hedge funds. Cocoa isn't the only commodity that has become significantly more expensive in recent months. The price of wheat has gone up by 17 percent since April, and soybeans by 12 percent. At the beginning of the year, sugar prices climbed to their highest level in three decades in the space of only a few months and then plunged by almost half. But now sugar prices are back up, climbing by almost 6 percent since April.

31 The food price index of the United Nations Food and Agriculture Organization (FAO), which aggregates price movements for key agriculture products, climbed to 163 points in June. This is only 15 percent lower than the all-time high of 191 points in 2008, the year of the financial crisis. Price Explosion At the time, rice prices rose by 277 percent within only six months, and corn became so unaffordable that millions of Mexicans could no longer afford tortillas, a staple in the country. Hunger riots erupted in Haiti, Egypt and more than 30 other countries. Driving the price explosion was the growing use of agricultural commodities to produce biofuel. But 2008 was also the year in which, for the first time, the public realized that grain merchants were no longer the only ones trading on the exchanges (in their case, by buying grain futures to hedge against poor harvests), but that the major players in the financial markets had discovered the lucrative trade in agricultural commodities. Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan. They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits. The market's behavior reminds one of the Internet bubble at the beginning of last decade and the fluctuations just prior to the financial crisis, then-Merrill Lynch President Gregory Fleming said in May 2008. Indeed, only about 2 percent of commodities futures now end with a real exchange of goods, the FAO concluded in a June study. "As a result, these deals attract investors who are not interested in the commodity itself, but merely in speculative profit," the FAO concludes morosely. The finding is all the more remarkable given the widespread political and social outrage aimed at food speculators just two years ago. But little has changed since then. "Paradoxically, the financial crisis resulted in a brief pause for breath on the agricultural markets, but as the global economy picks up steam, the problems of scarcity are getting worse again," warns Joachim von Braun, an agricultural economist at the Bonn-based Center for Development Research and director of the renowned International Food Policy Research Institute in Washington. Threatening Harvests Even as trading in agricultural commodities is on the rise again, the underlying factors that have driven up food prices for years have not been eliminated. The production of ethanol and biodiesel still competes directly with food production. Energy is still so expensive that the costs of fertilizer and transportation make agricultural production unprofitable. And with 2010 shaping up to be possibly the hottest year on record, droughts in Eastern Europe and West Africa are threatening harvests. Officials at the United Nations World Food Programme (WFP) already fear the worst. "The situation in many countries is already dramatic now," says Ralf Südhoff, director of the WFP office in Berlin. The sad record of more than a billion starving people worldwide could be surpassed this year.

32 The dire situation has prompted experts like Braun, as well as aid organizations and companies, to call for tighter regulation of financial markets. In March, Andreas Land, the managing partner of baked goods maker Griesson-De Beukelaer, complained that certificates were being traded for 60 million tons of cocoa, which he said was 20 times the annual volume of cocoa that was physically available. "This is neither good nor tolerable," said Land. "Speculating with food products shouldn't be allowed, unless you actually take delivery of the products." Strictly speaking, it is re-regulation that many would like to see. In the United States, for example, the Commodity Exchange Act of 1936 limited speculation in agriculture commodities for decades. But thanks to the targeted lobbying activities of the financial industry, the law was watered down in the 1990s, leading to a sharp increase in the trading of food commodities. This shift has prompted agricultural economist Braun to call for more transparency, particularly when it comes to the question of who buys which contracts. "And second," says Braun, "we need to require higher capital investments on the part of traders, which would make speculating in basic food products less attractive." Not Behaving as Planned US President Barack Obama has already taken a step in this direction by making derivatives trading more transparent. The Europeans, on the other hand, are balking at taking even this first step to contain speculation. EU Commissioner for Internal Market and Services Michel Barnier, who has described speculation with food products as "scandalous," plans to introduce legislation this year to impose stricter regulations. But the British have already announced their intention to create their own, less stringent rules for the London exchange. This comes as no surprise; London is the world's largest market for agricultural commodities outside the United States. Cocoa king Ward, in other words, need not fear that his business will be restricted any time soon. Nevertheless, it is far from certain that his current massive bet will turn out in his favor. Worldwide demand for cocoa is growing, especially in Asia. But bad weather in the Ivory Coast, which produces 40 percent of the world's cocoa, does not bode well for a good harvest this fall. Ward is betting that chocolate makers like Lindt & Sprüngli or Kraft will soon have no choice but to order from him at higher prices, especially now that the Christmas business is around the corner. The markets, for their part, have not behaved as planned. Immediately after Ward's coup, the price of cocoa beans dropped by more than 7 percent in three days. But even should it turn out that Choc Finger made a bad bet, traders and processors are no longer willing to put up with such escapades. A group of 20 companies and associations has written a letter to the LIFFE demanding that it make trading more transparent, using the New York markets as a model. The New York exchanges regularly publish information on who is trading in the market, whether they are speculators or agricultural commodities traders, how many contracts they hold and what their positions are. This week, critics of speculation were to hold talks with the managers of the LIFFE. "Everyone should be given the same opportunities," says cocoa dealer Christiansen. Still, it is hardly likely that new rules will be in place by the next maturity date for cocoa contracts in mid-September. In other words, cocoa speculator Ward still has some time left to win his bet. Translated from the German by Christopher Sultan

33 URL: • http://www.spiegel.de/international/business/0,1518,708765,00.html RELATED SPIEGEL ONLINE LINKS: • Obama's Landmark Banking Law: US Leapfrogs Sluggish EU on Financial Reform (07/19/2010) http://www.spiegel.de/international/business/0,1518,707257,00.html • From the Archive: The Fury of the Poor (04/14/2008) http://www.spiegel.de/international/world/0,1518,547198,00.html • From the Archive: The Choice between Food and Fuel (01/24/2008) http://www.spiegel.de/international/world/0,1518,530791,00.html 07/29/2010 05:55 PM Phytoplankton's Dramatic Decline A Food Chain Crisis in the World's Oceans By Markus Becker It is the starting point for our oceans' food chain. But stocks of phytoplankton have decreased by 40 percent since 1950, potentially as a result of global warming. It is an astonishing collapse, say researchers, and may have dramatic consequences for both the oceans and for humans. The forms that marine flora and fauna come in are varied and spectacular. From bizarre deep sea creatures to elegant predators and giant marine mammals, the diversity in our planet's oceans is astounding. But it is the microscopic organisms like diatoms, green algae, dinoflagellates and cayanobacteria that make it all possible. Phytoplankton is the first link in the oceanic food chain. It is eaten by zooplankton which is in turn eaten by other animals, which are then consumed by yet further sea creatures. Sometimes that chain can be quite short -- the only thing that separates whales from phytoplankton in the food chain, for example, are the krill that come in between. But it appears that humans may be in the process of destroying this fundamental link in the oceanic food chain. Temperatures on the surface of our oceans are rising because of climate change, resulting in a reduction of the stock of phytoplankton. Just how severe that reduction is, however, has long been a mystery. Now, a frightening new study reveals the shocking degree of the die-off. Since 1899, the average global mass of phytoplankton has shrunk by 1 percent each year, an international research team reported in the latest issue of the journal Nature. Since 1950, phytoplankton has declined globally by about 40 percent. "We had suspected this for a long time," Boris Worm, the author of the study for Dalhousie University in Halifax, Canada, told SPIEGEL ONLINE. "But these figures still surprised us." At this point, he said, one can only speculate as to what the repercussions might be. "In principal, though, we should assume that such a massive decline is already having tangible consequences," said Worm. He said that the lack of research on the food chain between phytoplankton and larger fish in the open ocean is a hindrance to knowing the extent of the damage.

34 'The Entire Food Chain Will Contract' In other words, it could be that humans have not yet been affected. But Worm fears that will not remain the case for long. If the trend continues and the phytoplankton mass continues to shrink at a rate of 1 percent per year, the "entire food chain will contract," he predicts. Worm's research has found that the problem is not merely limited to certain areas of the world's oceans. "This is global phenomenon that cannot be combatted regionally," Worm said. The data show that the decline is happening in eight of the 10 regions studied. In one of the other two, the phytoplankton is disappearing even more quickly, while one region showed an increase. Both of the two exceptions are in the Indian Ocean. "We suspect other factors are influencing (developments) there," Worm says. The situation in some coastal waters is different. In the North and Baltic Seas in Europe, for example, mass quantities of nutrients flow from land into the ocean. An enormous algae bloom in the Baltic has been the result this summer, but other microscopic organisms benefit as well. Still, coastal waters make up only a fraction of the total ocean. Worm and his colleagues Daniel Boyce and Marion Lewis believe climate change is responsible for the disappearance of phytoplankton. In contrast to coastal areas, waters in the open sea are deeply stratified. Phytoplankton is found near the surface and gets its nourishment when cold and nutrient-rich water rises from the depths. "But when water on the upper surface gets warmer as a result of climate change, then it makes this mixing difficult," Worm explained. As a result, the phytoplankton can no longer get sufficient nutrients. 'So Serious It Is almost Unbelievable' Other experts have also said they were struck by the sheer scale of the development. "A retreat of 40 percent in 60 years, that is so serious that it is almost unbelievable," says Heinz-Dieter Franke of the Biological Institute Helgoland, part of the Alfred Wegener Institute for Polar and Marine Research. He warned, however, against attributing the decline in phytoplankton solely to temperature increases. Higher temperatures, after all, could also result in more nutrients being delivered by air, he said. Other influences, like changes in cloud composition -- and thus changes in sunlight on the oceans' surface -- complicate the situation. The negative effect warmer surface temperatures have had on phytoplankton has long been well-documented, says Worm, just not over extended time periods. Continuous satellite measurements have only been available for the last 12 years or so. The researchers had to collect multiple data sets, including those taken by Pietro Angelo Secchi in the 19th century. The Italian researcher and Jesuit priest was ordered by the Papal fleet to measure the translucency of the Mediterranean Sea. The so-called Secchi disk is still used today to measure water transparency, and the old data he collected remains enormously valuable for marine biologists. "There is a direct corollary between the transparency of water and the density of phytoplankton," said Worm. The scientists also included measurements of micro-organisms as well as data about the ocean's chlorophyll content. All phytoplankton organisms create chlorophyll and it is possible to draw conclusions about the biomass using that data. In total, the team of researchers evaluated close to 450,000 data from measurements taken between 1899 and 2008. Phytoplankton's Contribution to Global Warming That humans have done serious damage to the world's oceans is hardly a new finding. Over- fishing is an acute problem for several species with beloved types like blue fin tuna being

35 threatened with extinction. Already, experts are warning that the world's fisheries could collapse by 2050. But the decline in phytoplankton could make the situation even worse. Franke of the Alfred Wegener Institute said he fears the decline in phytoplankton will make itself particularly apparent in fisheries. "If the oceans' total productivity declines by 40 percent, then the yields of the fisheries must also retreat by the same amount," Franke told SPIEGEL ONLINE. The loss of the oceans as a source of nutrients isn't the only threat to humans. Half of the oxygen produced by plants comes from phytoplankton. For a long time, scientists have been measuring an extremely small, but also constant decline in the oxygen content of the atmosphere. "So far, the use of fossil fuels has been discussed as a reason," said Worm. But it's possible that the loss of phytoplankton could also be a factor. In addition, phytoplankton absorbs a huge amount of the greenhouse gas carbon dioxide each year. The disappearance of the microscopic organisms could further accelerate warming.

URL: • http://www.spiegel.de/international/world/0,1518,709135,00.html RELATED SPIEGEL ONLINE LINKS: • CO2 and Carbon Sinks: How Nature Helps Cancel Out Humanity's Sins (11/13/2009) http://www.spiegel.de/international/spiegel/0,1518,660902,00.html • Warmed to Death: Climate Change Threatens German Flora (08/14/2008) http://www.spiegel.de/international/germany/0,1518,572151,00.html • SPIEGEL ONLINE Interview with Former UNEP Head Klaus Töpfer: 'Protecting Biodiversity Is Critical to Mankind's Survival' (05/23/2008) http://www.spiegel.de/international/world/0,1518,555091,00.html • The Price of Survival: What Would It Cost to Save Nature? (05/23/2008) http://www.spiegel.de/international/world/0,1518,554982,00.html RELATED INTERNET LINKS • Phytoplankton-Rückgang: Fachartikel von Boyce et al. http://www.nature.com/nature/journal/v466/n7306/full/nature09268.html • Temperatur-Wirkung auf die marine Artenvielfalt: Fachartikel von Tittensor et al. http://www.nature.com/nature/journal/vaop/ncurrent/full/nature09329.htmlSPIEGEL ONLINE is not liable for the content of external web pages.

Poll shows opposition to health care overhaul declining By David S. Hilzenrath Washington Post Staff Writer Thursday, July 29, 2010; 12:02 AM Opposition to the landmark health care overhaul declined over the past month, to 35 percent from 41 percent, according to the latest results of a tracking poll, reported Thursday. Fifty percent of the public held a favorable view of the law, up slightly from 48 percent a month ago, while 14 percent expressed no opinion about the measure, according to the poll by the Kaiser Family Foundation. (More polls from the Washington Post) The approval level was the highest for the legislation since it was enacted in March, after a divisive year-long debate. In April, the poll found 46 percent in favor and 40 percent opposed. Though the legislative battle is over, the political tug-of-war continues. Democrats and Republicans have been fighting to shape public opinion on the issue in hopes of influencing the fall elections. (The lastest news on health care reform) Among Republicans, opposition to the law remained steady at 69 percent, but the intensity of that opposition ticked upward. Fifty-three percent of Republicans said they had a "very unfavorable" opinion of the law this month, up from 50 percent in June. Independents, who can tip the balance in elections, split 48 percent to 37 percent in favor, compared with 49 percent to 41 percent a month earlier. The intensity of opinion among this group showed little change; just less than a fifth expressed a very favorable view, and just more than a quarter expressed a very unfavorable view. The legislation was passed by Democratic majorities in the House and Senate and was signed into law by a Democratic president, and over the past month Democratic support for the legislation grew. Seventy-three percent of Democrats expressed a favorable opinion, up from 69 percent in June. Fifteen percent of Democrats expressed an unfavorable opinion, down from 19 percent in June. A third of Democrats held a very favorable opinion of the health care overhaul. The public remains split into rough thirds as to whether the law will leave their own family better off, worse off or unchanged, the Kaiser Family Foundation reported. The poll found that misconceptions about the legislation persist, including the "death panel" falsehood propagated by opponents of the legislation. "A year after the town meeting wars of last summer, a striking 36% of seniors said that the law 'allowed a government panel to make decisions about end of life care for people on Medicare', and another 17% said they didn't know," Kaiser Family Foundation chief executive Drew Altman wrote.

37 The survey of 1,504 adults was conducted from July 8 through July 13 and, for the broadest categories of respondents, has a margin of sampling error of plus or minus 3 percentage points, the Kaiser Family Foundation said. The foundation, which conducts research on health care policy, is not associated with the Kaiser Permanente health plan. http://www.washingtonpost.com/wp- dyn/content/article/2010/07/29/AR2010072900004.html?wpisrc=nl_pmheadline

Thursday, July 29, 2010

The past decade is the hottest on record: http://bit.ly/9G7XpD The White House is preparing to reform Fannie and Freddie next year, reports Zachary Goldfarb: "'We want the private sector back in,' said another administration official, who also spoke on the condition of anonymity. 'There are signs, but it's very minor, I have to say.' Jeffrey Goldstein, under secretary for domestic finance at the Treasury, wrote in an essay on the White House Web site Tuesday that it will be very difficult to totally unwind the government's role in covering losses related to the housing crisis." It's hard to say whether we're in a rough patch of the recovery or something more problematic, reports Neil Irwin: "Just Wednesday, the government announced a surprising 1 percent drop in June orders for durable goods and a compilation of anecdotal reports from around the country by the Federal Reserve showed a recovery that is increasingly uneven. This fit into the pattern of recent economic indicators showing that the transition to a self-sustaining recovery has been rocky. Fits and starts are common during early stages of economic expansion. Before long, it should be clear whether the summer of 2010 has indeed been a mere soft patch as recovery took hold."

Economy/ FinReg States are using stimulus funds to pay private salaries, reports Catherine Rampell: "About 247,000 workers will have been placed in these subsidized jobs by the end of September, according to the Center on Budget and Policy Priorities, a research organization. The jobs cover everything from assembly-line work to white-collar positions like business development, and typically pay $8 to $15 an hour, according to LaDonna Pavetti, a director at the center. There are exceptions: San Francisco, for example, pays up to $74,000 in annual salary, which employers can also supplement with additional pay." The IMF is tempering its criticism of China's currency policy: http://bit.ly/co3OnC Elizabeth Warren's GOP colleagues on the TARP oversight panel offered praise for her tenure, reports Brady Dennis: "the two men said they were troubled by recent reports that Warren's work on the oversight panel, namely the criticisms of Treasury contained in its reports, might hinder her chances as a candidate to direct the new consumer bureau. 'In our view,' McWatters wrote, 'such a proposition would besmirch the integrity and creditability of the panel as well as the critical and fundamental role of independent oversight. What point is

38 there in having a watchdog that is a blind supporter of, or an apologist for, the subject of its oversight?'" Obama is beginning a renewed push for a small business loan package: http://bit.ly/9hYJAF The SEC will not allow a refight of the principle behind FinReg, reports Fred Barbash: "Schapiro said, 'The regulatory process is not designed to redebate issues that Congress has resolved. Rather, investors, leaders of small and large businesses, academics and others who identify issues, and who offer ideas and alternatives, can help us create a regulatory structure that supports our shared goals over the long term.'" Casey Mulligan argues the house buyer's tax credit's effect has been minimal: http://nyti.ms/c0SnhI David Wessel considers the Obama administration's options before the Bush tax cuts expire at year's end: "And then there's the deficit. Raising taxes on the over-$250,000 crowd isn't going to cure it. The price tag on the Obama-backed extension of Mr. Bush's middle-class tax cuts and stopping the alternative minimum tax from reaching down into the middle class is $2.5 trillion over 10 years, the Joint Tax Committee says. Unofficial estimates circulating on Capitol Hill say that's about 85% of the price tag for extendingall the Bush tax cuts." Peter Orszag's legacy will be prying budget authority from the legislature and to the executive, writes Matt Bai: "Mr. Orszag has promoted and carried out an effort by the White House to pry away from Congress some of the responsibility for making hard decisions, especially when it comes to the budget. In the process, he has signaled that an administration populated from the top down by Capitol Hill alumni is intent on altering the balance of power between the branches of government." Matt Miller thinks the deficit commission's proposed 21% of GDP spending limit is too small: "As a matter of math, if you run the government at a smaller level than did Ronald Reagan while accommodating this massive increase in the number of seniors on our health and pension programs, you have to decimate the rest of the budget. That's especially the case when you consider that health costs in the Reagan era were around 10 percent of GDP, while they're now 17 percent, headed toward 20."

Daily Morning Newsbriefing Banks to prepare for eurozone exit scenarios

29.07.2010 ISDA has established a working group to “explore the different scenarios in which a country may leave the eurozone”; preparing for the unthinkable usually means that such an event might become a self-fulfilling prophecy; The Basle Committee postpones, and waters down, Basle III; the Germans are saying that reports of their disagreement with the Basle Committee are exaggerated; Wolfgang Münchau says the German banks are overreliant on hybrid capital, as boosting capital in banks is likely to emerge as the most important economic policy challenge of the decade; EU starts official membership negotiations with Iceland; Spain’s Elena Salgado says it is her government official policy to seek a lower bond spread than Italy’s; there are a signs of a sharp and sudden fall in US housing prices during June; Paul Krugman et al debunk the Reinhart-Rogoff 90% debt rule; Paolo Manasse, meanwhile, has a very good analysis of the real fiscal adjustment 2010-1015, and finds that Italy’s plan is not very ambitious at all.

29.07.2010 Banks to prepare for eurozone exit scenarios

The most surprising story is the FT report that banks have started to prepare for a eurozone member states being forced to leave the euro. The International Swaps and Derivative Association asked some of its members to form a group to consider what they may need to do if a eurozone state is ejected. While those close with the process expect the likelihood of such an event as remote, the recent crisis prompted banks to question about its potential impact. A spokeswoman for the ISDA said the organisation had decided to establish a group to “explore the different scenarios in which a country may leave the eurozone and consider what legal and documentation issues could arise in each for the (over-the-counter) derivatives markets and what steps would be necessary in order to address them”. (Markets are prepare for the

40 unthinkable is precisely the scenario the founding fathers of the Maastricht Treaty always wanted to avoid. Once those expectation get factored in, in the form of “scenario”, the construction becomes significantly more crisis prone ) Basle III – not until 2018, and significantly watered down Coming bright on the heels of a non-eventful stress test, the Basle Committee has decided to postpone the last phase of the Basle III regulatory regime until 2018 and to water down the leverage ratio. There are some important changes, such as an increase in the weighting of small business and retail deposits in the banks’ net stable funding ratio – a change that is going to benefit French banks in particular. The news was extremely large increases in the share prices of banks. FT Alphaville says it looks as though the lever ratio will be based on tier 1 – not the narrower definition of equity tier 1. The FT carried out a story according to which the outgoing German banking regulator played down any suggestions that Germany would block the agreement – or would confront any systemic problems – on the grounds that its savings banks do not have enough equity, and rely too much on retained earnings (and hybrid capital). (We are not entirely sure what to make of the story, as the Basle Committee did say that Germany expressed reservations about the agreement.) Wolfgang Münchau on tier 1 capital in Germany In his column in FT Deutschland, Wolfgang Münchau writes that the German banks, the Landesbanken in particular, would have failed the stress tests, if the benchmark had been equity tier 1 – just equity capital and retained earnings. Münchau argues that the real weakness of the German banking sector is thus not fully captured by the stress tests. Worse still, unlike in Spain, there is no political priority to resolve the issue, as the German government is not going to meddle with the Landesbanken. A weak banking sector is thus likely to persist. EU start membership negotiations with Iceland The EU this week started official membership negotiations with Iceland. Frankfurter Allgemeine quotes enlargement commission Fule that the negotiations are going to be difficult. As Iceland has already joined Schengen, and through its participation in the EEA, large parts of EU law already apply there. Likely stumbling blocks are fisheries, agriculture, food safety, and the independence of the lack of independence of the Iscelandic justice system. Salgado says cutting risk premium is an offical goal in Spanish government policy In an interview with El Pais, Elena Salgado said that the Spanish risk premium was still too high, and needed to come down below the level of Italy – on the grounds that Italy had a lower level of public debt to GDP (that calculation conveniently ignores the contingent debt that is likely to arise as part of the resolution of the Spanish’s banking system’s debt.) The rest of the interview is largely self-congratulatory euro-babble, on how successful the stress tests have been. US Housing Market: Prices falling in June Calculated Risk has report that the house prices in the US are beginning to fall again. The

41 blog quotes a survey according to which home prices drop sharply between May and June – an average of 6.8% for move-in ready foreclosed properties, 6.3% for short sales, and 4.6% for non-distressed properties. A real estate agent in Florida was quoted as saying that prices were dropping. “Same house that had 2 showings a day in April with hopes of a closing by June at $139,000 now gets a showing of just one a week if we are lucky and at $129,000.” This is bad news for financial crisis resolution. Krugman on the Reinhart-Rogoff 90% debt claim Reinhart and Rogoff has been the most influential work of the crisis. It contains a controversial claim that countries with debt above 90% of GDP suffer lower growth in the long-run. Paul Krugman points to a paper by two economists, < http://epi.3cdn.net/d144a03f5b38f7a137_aqm6b9p0y.pdf > who have discredited that claim. Here is Krugman’s conclusion:

http://www.epi.org/page/-/img/bp271-figurea.jpg “I think we can say that this paper has been completely discredited. I’m actually sort of shocked that R-R apparently failed even to notice that all of their high-debt observations for the US — and remember, it was their own choice to highlight US data — come from the years immediately after World War II, and to think about what that means. Measuring the size of the fiscal adjustment A lot of nonsense has been talked about in respect of the “austerity” programmes driven by European governments. Writing in Lavoce, Paolo Manasse has produced a very useful table

42 about the total adjustment for the period. We are reproducing the table below. He also makes the point that Italy’s adjustment is not all that much, in contrast to Giulio Tremonti’s announcement to the contrary.

Basle III – not until 2018, and significantly watered down http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2867&tx_ttnews[backPid]=901&cHash =0679368255#

Banks plan for loss of eurozone member By Anousha Sakoui in London Published: July 28 2010 23:08 | Last updated: July 28 2010 23:08 Banks have started early-stage planning to deal with the potential fallout on the derivatives and bond markets of a European country being forced to leave the euro. After having received queries by some banks about the impact of such an event, the body representing the swaps and derivatives industry last week contacted some of its members to form a group to consider what they may need to do if a eurozone state is ejected. FT Trading Room: News from the exchanges - Jul-27 Lex: Eurozone sovereign debt - Jul-28 Sovereign CDS top ISDA agenda - Mar-15 Interactive: EU stress test results - Jul-23 In depth: European banks - Jul-25 While those close to the process believe the likelihood of such an event is remote, the sovereign debt crisis of recent months has led banks and other firms to start questioning what impact it could have. The moves are at an early stage and it is still unclear who would be part of the group. One person close to the process said that because of the sensitivity of the issue only a small number of members, about 12, predominantly banks but also investors, had been approached. A spokeswoman for the International Swaps and Derivatives Association (ISDA) said the move expressed “no view as to the likelihood of such an event occurring”, but that the organisation had decided to establish a group to “explore the different scenarios in which a country may leave the eurozone and consider what legal and documentation issues could arise in each for the (over-the-counter) derivatives markets and what steps would be necessary in order to address them”. Earlier this year, Angela Merkel, Germany’s chancellor, suggested reform-unwilling countries could be expelled from the eurozone - an idea rejected by Jean-Claude Trichet, president of the European Central Bank. While the event could technically have an impact on any trade or financial contract denominated in euros that is linked to the ejected country, early-stage thinking is that this would not be expected to constitute an event of default – unlike the bankruptcy of Lehman Brothers for example, which was a counterparty to billions of dollars in derivatives trades. Some lawyers believe only contracts governed by laws local to the ejected country would be affected – further limiting the impact. http://www.ft.com/cms/s/0/8f7c5f94-9a6b-11df-87fd-00144feab49a.html

44 NEWSLETTER LAVOCE VIRTUOSI E LAZZARONI DEI TAGLI DI BILANCIO di Paolo Manasse 27.07.2010 È proprio vero, come afferma il ministro Tremonti, che la manovra economica del Governo italiano è in linea con quanto fanno gli altri paesi europei? Passando in rassegna i tagli di bilancio dei paesi dell'Unione e mettendoli a confronto con un benchmark europeo, possiamo assegnare ad ognuno la patente di "virtuoso" o di "lazzarone". E risulta evidente che l'Italia, purtroppo, si comporta peggio degli altri. “La manovra economica è in linea con quanto gli altri paesi europei stanno facendo…e non ci sarà affatto bisogno di misure aggiuntive…”. Così ha dichiarato nei giorni scorsi il ministro dell’Economia, Giulio Tremonti, in diverse interviste alle principali reti televisive. Purtroppo, se guardiamo con attenzione i dati, queste affermazioni non appaiono realistiche. Un’attenta lettura di quest’ultimi suggerisce al contrario che per “essere in linea”con gli altri paesi europei l’Italia dovrebbe predisporre tagli aggiuntivi sostanziali, circa 2,5 punti percentuali di Pil nel periodo 2010-2015. Vediamo perché. CHI HA TAGLIATO DAVVERO IN EUROPA La prima colonna della Tabella 1 mostra i tagli di bilancio programmati per il periodo 2010-15 nei paesi della zona dell’euro ed in Gran Bretagna (fonte: Cesifo). Lo sforzo complessivo di consolidamento fiscale è sostanziale (si veda l’ultima riga), circa 4,2 punti percentuali di Pil europeo in cinque anni, e risulta per lo più concentrato nel 2011-13. Sarebbe però sbagliato attribuire la patente di “lazzarone” o “virtuoso” ad un paese semplicemente confrontandone lo sforzo di aggiustamento con quanto fatto in Europa. In questo modo saremmo portati ad attribuire erroneamente la patente di lazzarone a paesi come la Germania e l’Olanda, che, come vedremo, lazzaroni non sono affatto. Per confrontare i piani di rientro dei diversi paesi dobbiamo valutare la posizione di ciascuno in merito (almeno) al saldo primario di bilancio e al debito pubblico. Prendiamo per esempio l’Italia. Il Pil del nostro paese rappresenta il 14,2 per cento del Pil europeo (zona euro più Gran Bretagna, si veda l’ultima colonna della tabella), mentre il debito pubblico italiano costituisce quasi il 24 percento del debito europeo in circolazione. Sembrerebbe allora ragionevole che l’aggiustamento di bilancio che “spetta” all’Italia debba essere più elevato del magro 1,6 percento di Pil previsto per il 2010-15 (prima colonna della tabella), già ben al di sotto di quanto fatto in Europa (4,2 per cento). D’altro canto, l’Italia è messa molto meglio della maggior parte dei suoi partner europei quanto ad avanzo primario: questo supera di ben 4 punti di Pil il saldo medio europeo (terza colonna nella tabella). Da questo punto di vista, dunque, l’aggiustamento che tocca all’Italia dovrebbe essere più basso. Ma allora come mettere insieme tutti questi elementi, in parte contraddittori? Quello di cui abbiamo bisogno è un benchmark europeo.

45 Tavola 1: Tagli di Bilancio, Debiti e Deficit in Europa Fonte: calcoli dell’autore su dati CESIFO, OECD Economic Outlook, EIU

Il punto è che dobbiamo paragonare la manovra di aggiustamento di bilancio del paese “A” con quella che un “paese europeo medio” avrebbe scelto se avesse avuto gli stessi fondamentali economici di A nel 2009 (e cioè, a parità di bilancio primario, debito pubblico, apprezzamento del tasso di cambio reale, saldo delle partite correnti e tasso di disoccupazione).(1) I risultati di questo esercizio (in due versioni, la prima in cui si esclude la Grecia nel calcolo del benchmark, e la seconda in cui la si include) sono illustrati nella Figura 1. Per ciascun paese, una barretta positiva/negativa misura di quanti punti di Pil la manovra prevista è in eccesso/difetto rispetto all’Europa, rappresentata dall’origine del grafico. Dalla figura emerge chiaramente l’identità dei paesi virtuosi e dei lazzaroni. Tra i primi, il Belgio (i tagli di bilancio previsti eccedono quelli europei, a parità di fondamentali, di 1,5 – 1,8 punti di Pil per il 2010-15), l’Olanda e la Germania (con tagli in eccesso compresi tra +0,4 - 1 punti di Pil), e, sorprendentemente, il Portogallo (+1-1,9 per cento), la Spagna (+0,8-1,3 per cento), e la Grecia (+ 0,7 punti di Pil). La Gran Bretagna appare in linea con la media Eu, quando si include la Grecia nel benchmark, mentre risulta tra i virtuosi (+1,8 punti di Pil) quando la si esclude. L’Irlanda risulta un paese lazzarone solo per il fatto che i tagli di bilancio sono avvenuti prima del 2010 e dunque non sono qui presi in considerazione. Ci sono due piccoli lazzaroni e un grande lazzarone. I piccoli sono l’Austria, la cui minuscola manovra di aggiustamento (inferiore di 0,9 punti di Pil a quella europea) non appare giustificata dai suoi fondamentali, e la Slovacchia (-0,8-1,4 per cento ). Il grande lazzarone è l’Italia: ai livelli attuali di fondamentali per essere in linea con l’Europa il nostro paese dovrebbe metter in cantiere tagli addizionali di bilancio per 2,4-2,7 punti di Pil nel prossimo quinquennio. Fonte: Calcoli dell’autore

CONCLUSIONI Le lezioni da trarre sono le seguenti: Grecia, Portogallo e Spagna, i paesi che i mercati finanziari hanno preso di mira ritenendoli i più vulnerabili, hanno programmato misure draconiane che gli altri europei, se avessero fondamentali paragonabili (ma potendo pagare spread molto inferiori!) neppure si sognerebbero. Germania e l’Olanda sono i paesi virtuosi, ma con moderazione. Tra i paesi ad alto debito, il Belgio eccede in disciplina, probabilmente per tentare con tutte le sue forze di non finire nel club dei Piigs. L’Italia, caro ministro, è il grande lazzarone: per il momento (speriamo che) se la cava...

1) In pratica, nonostante il limitato numero di osservazioni faccio una regressione in cui la variabile dipendente è l’aggiustamento previsto per il 2010-15, le variabili dipendenti sono i seguenti “fondamentali” nel 2009: il rapporto saldo primario/PIL, il rapporto debito pubblico/PIL, l’apprezzamento del cambio reale tra 2005 e 2009, il rapporto tra saldo delle partite correnti e PIL ed il tasso di disoccupazione. Nella prima specificazione includo una variabile dummy per la Grecia, nella seconda no. L’eccesso di aggiustamento che compare nella figura per ogni paese è dato dalla differenza tra aggiustamento attuale e quello previsto, nelle due diverse specificazioni.

Paolo Manasse Virtuosi e Lazzaroni dei Tagli di Bilancio27.07.2010 http://www.lavoce.info/articoli/pagina1001849.html

Boletín de Universia-Knowledge@Wharton http://www.wharton.universia.net 28 Julio - 24 Agosto, 2010 De la recesión a la recuperación: mayor productividad, nuevas asociaciones y competitividad en costes son la clave Durante la sesión de apertura del Global Alumni Forum en Madrid, Sebastián Escarrer, vicepresidente de Sol Meliá SA, el decano de Wharton Thomas S. Robertson y el profesor de Finanzas de Wharton Jeremy Siegel ofrecieron diferentes puntos de vista sobre el estado de los mercados globales, las perspectivas de reforma y el papel que empresas, gobiernos y escuelas de negocio deben desempeñar en el recientemente reconfigurado entorno económico. Escarrer –cuya empresa, con sede en Palma de Mallorca, es líder de mercado en España y uno de los mayores grupos hoteleros internacionales, con más de 300 propiedades en 26 países-, señalaba que la recuperación española “ha demostrado necesitar más tiempo del que se esperaba en un principio; justo lo contrario de lo que ha ocurrido en Latinoamérica, que ha demostrado el éxito de reformas fiscales y políticas estrictas”. Sus observaciones se enmarcan en un contexto que él denominaba “telón de fondo global de crisis política extendida”, que comprende un elevado desempleo, serios problemas sanitarios e incluye “brechas de seguridad internacional que están amenazando la supervivencia de negocios”. Como ejemplos, Escarrer citaba la gripe H1N1, que puede derribar la economía de todo un país, y la amenaza de ataques terroristas, que pueden paralizar todo un sector a nivel internacional. “Los gobiernos por sí mismos no pueden enfrentarse a los retos”, señalaba animando a la creación de alianzas entre el sector público y privado, la adopción de nuevos enfoques de liderazgo que contemplen capacidad de adaptación a las circunstancias cambiantes, y una visión de empresa y finanzas que incluya un compromiso de responsabilidad y sostenibilidad corporativa. Todo esto es lo que su empresa acababa de hacer. España, señalaba, fue la “niña bonita del boom económico. Centrado en el corto plazo, (este país) relajó sus políticas de inmigración y admitió unos siete millones de inmigrantes para alimentar el sector de la construcción. Ahora que el sector inmobiliario ha explotado, muchas de esas personas no tienen medios para sostenerse por sí mismos, lo cual supone una enorme carga para el estado. Al menos un millón de inmigrantes no serán capaces de encontrar un empleo en España en el medio plazo, y no se están creando puesto de trabajo para ellos tampoco en otros países europeos”. De hecho, un artículo de principios de mes del Wall Street Journal señalaba que la tasa de desempleo en España entre los inmigrantes ahora se situaba en el 30%, cifra que en 2007 apenas superaba el 12%, y es mayor que la tasa de desempleo española global (20%). El artículo también señalaba que los inmigrantes ocuparon aproximadamente el 40% de los seis millones de empleos creados entre 1997 y 2007. El porcentaje de población nacida fuera del país ha aumentado más del 500% en los últimos 10 años. Aunque señaló que España “tiene la urgente necesidad de hacer reformas fuertes para

48 recuperar competitividad”, Escarrer también expresaba su confianza en que el país sea capaz de recuperarse de la actual crisis. Parte del reto es la importancia de fomentar nuevos liderazgos, afirmaba en relación con la necesidad de ejecutivos que pudiesen crear valor no sólo para los accionistas, sino también para las diversas partes interesadas, incluyendo a los empleados. “Somos una empresa de servicios. Los empleados son nuestros clientes internos”, decía Escarrer. “Son fundamentales; un 80% de las innovaciones surgen dentro”. No obstante, para poderse adaptar constantemente a los cambios, añadía Escarrer, los líderes también deben saber qué está ocurriendo fuera, en un entorno global que incluye proveedores, socios comerciales, socios de alianza, inversores, ONGs, etc. La clave es “escuchar activamente” a todas las partes implicadas, y no simplemente “sustituir los antiguos rasgos del liderazgo, sino mezclarlos con los nuevos”. Su propio sector –turismo y viajes-, está “muy fragmentado, compuesto de muchas empresas de pequeño y mediano tamaño, lo cual hace difícil tener influencia sobre los gobiernos”. Al no ser capaz de ejercer esa influencia, “los gobiernos no nos están teniendo en cuenta”, sostenía. Un claro ejemplo es la crisis del tráfico aéreo como consecuencia de la erupción de ceniza volcánica en Islandia la pasada primavera, durante la cual 7,5 millones de europeos fueron incapaces de viajar durante 6 días. “Los políticos no le concedieron importancia. Reaccionaron por primera vez el cuarto día, y fue una simple rueda de prensa”, señalaba Escarrer. Este retraso no habría ocurrido si los sectores implicados fuesen el sector automovilístico, el sector de servicios financieros o el sector farmacéutico, añadía. Robertson señalaba la importancia de saber cómo operar en un entorno donde la ambigüedad es la norma, donde los estudiantes estarán trabajando en sectores que no existían hace 10 años, y donde empresas e instituciones, incluyendo escuelas de negocio, deben enfrentarse al “reto de hacerse realmente globales”. Esto significa, por ejemplo, que la academia debería dirigir su atención no sólo hacia los países desarrollados o hacia Brasil, Rusia, India y China, sino también hacia “los 200 países restantes que también forman parte del mundo”. Tener impacto social –ser un factor positivo-, es igualmente importante tanto en un entorno corporativo como en un entorno educativo, añadía Robertson. El objetivo es ser “la mejor escuela de negocio para el mundo, no sólo en el mundo”. “Último optimista que queda en pie” A veces, explicaba Jeremy Siegel, “creo que soy el último optimista que queda en pie” en lo que se refiere a la economía y su dirección futura. No es que no haya problemas, señalaba Siegel durante sus conclusiones en las que cubría, entre otros temas, la recesión estadounidense, la economía europea, el euro, los programas de recorte presupuestario, el envejecimiento poblacional y el crecimiento de la productividad. La mayoría de los economistas profesionales, decía Siegel, creen que Estados Unidos está en “el camino autosostenido” hacia la recuperación, en especial desde que la mayoría de los programas de estímulo –como recortes fiscales, programas de ayudas hipotecarias y reembolsos de la seguridad social-, han finalizado. Siegel predice un crecimiento del 4% del PIB en la segunda mitad de este año, y una caída en el desempleo hasta el 9% a finales de este año; 7% para finales de 2011 (en la actualidad es 9,5%). El Congreso estadounidense “nunca había aprobado prestaciones por desempleo tan generosas”. Algunos estudios sugieren que el 2% del desempleo se debe a esas generosas prestaciones, sostenía Siegel sugiriendo que era el momento de recortarlos. Esto podría causar una mayor caída de la tasa de desempleo que la que algunos economistas prevén. (Un artículo reciente de Wall Street Journal señala que los trabajadores despedidos normalmente tienen derecho a 26 semanas de prestaciones; durante tiempos de recesión, algunos trabajadores en sectores duramente castigados pueden disfrutar

49 las prestaciones 20 semanas adicionales. Según el artículo, en esta recesión se han añadido otras 53 semanas de prestaciones financiadas por el gobierno federal; la prestación semanal promedio es 310 dólares). Dos tercios del actual déficit presupuestario tiene su origen en la recesión, una cifra que muchos economistas creen que es insostenible; sin embargo, Siegel señalaba que un problema importante para muchos países desarrollados (incluyendo Estados Unidos) serán los costes médicos, en especial Medicare. “Medicare era un peso en el presupuesto antes de la actual recesión; ahora es todavía más serio”. Siegel predice que dentro de 10-15 años, Medicare ya no será gratuito. “La seguridad social, te lo creas o no, está prácticamente en equilibrio” y puede ser ajustada si es necesario aumentando, por ejemplo, la edad de jubilación”. Volviendo a Europa, Siegel recordaba a la audiencia discusiones del pasado relacionados con “áreas óptimas para una moneda común”. En los 90, Europa estaba debatiendo quién debería formar parte de la eurozona y cuáles deberían ser los requisitos de admisión. Los candidatos eran, entre otros, Alemania, Francia, Bélgica, Países Bajos, Luxemburgo y Austria. “El gran debate por entonces era si Italia estaría preparado. El siguiente debate fue sobre España y Portugal. Luego Grecia. ¿Grecia se unió a la zona euro? Imposible. Nunca se pensó que podría ocurrir”. A la hora de analizar las cualidades óptimas para crear una moneda única, dos factores importantes son “la movilidad laboral en una zona con una moneda única, y las transferencias fiscales –con un fuerte gobierno central capaz de transferir dinero entre áreas fuertes y débiles. Tal vez Europa no los tenga”, decía Siegel; Estados Unidos cumple “absolutamente esos criterios. Tenemos la fuerza de trabajo más móvil del mundo, y nuestro presupuesto fiscal –lo que pagamos en impuestos federales-, superan los impuestos estatales y locales. Esto convierte a Estados Unidos en una zona óptima. La cuestión es si Europa es una zona óptima”. En opinión de Siegel, los problemas van más allá de los déficits presupuestarios. “Llegan a la cuestión de competitividad en costes: Durante el boom ¿crecieron tanto los costes laborales y otros costes como para que ahora pesen tanto en España, Portugal, Grecia y otros países? Cuando los países tenían sus propias divisas, la solución era la devaluación. Vuelves a ser competitivo de nuevo”. Es más fácil reducir los salarios reales generando inflación que manteniendo la inflación bajo control y decir a los trabajadores que se les va a reducir el sueldo. “Esta asimetría es un gran problema para Europa. No existe la opción de devaluar. El único modo de hacerse competitivo es controlando costes”. Tal y como describía Siegel, los países mediterráneos tienen una población muy envejecida. España, Portugal y Grecia rivalizan con Japón, cuyo perfil de edad es el más viejo. (También se le presentan retos a Estados Unidos en este tema, con 85 millones de personas llegando a la edad de jubilación ahora que los primeros baby boomers están cumpliendo los 65). Los países no van a ser capaz de ofrecer los beneficios que han prometido a sus clientes, en especial en el área de servicios sanitarios, pero también en relación con las pensiones. En cuanto al impacto de la crisis europea sobre Estados Unidos, “implica un retraso mayor de la Reserva Federal a la hora de poner en marcha medidas más estrictas”, señalaba Siegel. “Esperaba que la Fed empezase a incrementar los tipos de interés ahora, pero la inflación ha permanecido a niveles bajos y el riesgo de otra crisis es suficiente para que la Fed paralice sus planes”, una situación que beneficia al dólar estadounidense. Asimismo, dados los problemas con el euro y la zona euro, la mayoría de los bancos centrales y tesoros “en los últimos tres, cuatro años han dejado de acumular euros en términos relativos a favor de los dólares. Estados Unidos realmente nunca perdió su estatus como divisa de reserva mundial, y posiblemente recupere su trono en los próximos años”, predice Siegel.

50 En respuesta a la pregunta sobre el comportamiento de los valores cuando hay un aumento rápido de la inflación, Siegel respondía: “No muy bueno. A largo plazo las acciones son una buena opción contra la inflación porque están basados en activos reales –en la tierra, el capital, las ideas, etc.-, que tienden a aumentar con el nivel de precios”. Asimismo Siegel señalaba que las acciones han obtenido mejores resultados que los bonos en todos los países. Analizando las claves del crecimiento a largo plazo, Siegel señalaba la productividad como el principal factor, “incluyendo tasas de innovación, invenciones, descubrimientos, cómo producir más con menos, cómo aprender a hacer las cosas mejor”. Esto está determinado por “cómo mucha gente de todo el mundo afronta el problema. La explosión de la comunicación internacional –que incorpora a la investigación a miles de millones de personas de China o la India-, fomenta una mayor velocidad de descubrimientos, no una ralentización. “Los beneficios, decía Siegel, llegan a todos. “Un país podría conseguir dinero de la patente o de derechos de copyright”, pero en general habrá enormes avances en energía, investigación médica y conservación alternativa. “La gente pregunta de dónde vendrá la demanda. La demanda siempre procede de nuevos productos… El crecimiento de la productividad será clave para la economía global en el futuro. Ese crecimiento beneficia a todos los países”. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1928

Los cambios demográficos obligan al turismo mundial a reinventar su modelo El turismo ha dejado atrás años de crecimiento sin apenas esfuerzo. Sigue siendo una industria de referencia, no en vano aporta un 10% al PIB mundial, pero ha descubierto que no puede confiarse pensando que los clientes van a llamar a su puerta, sino que debe salir a buscarlos. La difícil coyuntura económica ha abierto los ojos a un sector que debe aprender a anticiparse y reinventar su modelo para dar servicio a un cliente más informado y exigente, que busca que cada viaje sea una auténtica experiencia. "Queremos olvidar un 2009 que ha sido terrible y entender que la caída del RevPar (ingreso medio por habitación disponible) es algo que llevaremos con nosotros en los próximos años. Pero también tenemos que ser conscientes de que el turismo tiene un futuro colosal", afirmó Jean-Claude Baumgarten, presidente y consejero delegado de la organización para la promoción de los viajes y el turismo World Travel & Tourism Council, durante la segunda jornada del Wharton Global Alumni Forum, celebrado recientemente en Madrid. El tono positivo tiene su explicación. En los próximos años, habrá 2.000 millones de nuevos consumidores de clase media en el mundo, según datos de Goldman Sachs. De ahí la necesidad de que el negocio "se modernice y esté preparado para enfrentarse a este nuevo reto, para lo que es fundamental la cooperación entre el sector público y la iniciativa privada", añadió Baumgarten, durante un panel que fue moderado por el profesor de Marketing de Wharton Jehoshua Eliashberg. También hizo referencia a la cuestión demográfica Sebastián Escarrer, vicepresidente de la cadena hotelera española Sol Meliá, la mayor compañía vacacional del mundo. En su opinión, "los cambios en la población y el envejecimiento de ésta están trastocando la industria turística". España, por ejemplo, es el segundo país con una población más longeva

51 (sólo superada por Japón). En los últimos 15 años, la sociedad ha evolucionado y se distinguen dos tipos de clientes: aquellos con mucho dinero, pero con poco tiempo para viajar y otros, con menos recursos y más disponibilidad. La estrategia para dar respuesta a estos nichos de mercado es la segmentación de producto. Sol Meliá, por ejemplo, está trabajando con distintos touroperadores para preparar productos específicos para el segmento senior: parejas en el entorno de los cincuenta años, viudos, etc. "Además de la cuestión demográfica, hay un cambio en la educación del huésped, al que ya no sólo le vale con tirarse en la playa, sino que quiere más valor y una experiencia educativa. El componente de individualismo es importante y las expectativas son completamente distintas para un inmigrante que para una familia cuya estructura ya no es la tradicional, por ejemplo", explicó Escarrer. Por su parte, Taleb Rifai, secretario general de la Organización Mundial del Turismo (OMT), hizo hincapié en el enorme crecimiento que ha experimentado la industria turística y su impacto. “Hasta mediados de los sesenta, la gente se movía en un radio de 100 kilómetros de distancia, mientras que ahora, la transformación de las infraestructuras y del transporte, ofrecen al viajero un gran variedad de medios para moverse”. En este sentido, Rifai calificó el turismo como una industria “poderosa” y afirmó que “es asombroso ver cómo se ha recuperado tan pronto de la peor crisis del sector en los últimos 16 años”. Tras las caídas en las llegadas de turistas internacionales cosechadas en 2008 (4%) y 2009 (6%), comienzan a atisbarse signos de recuperación, “con un repute del 7% este año”. El motivo, desde el punto de vista del secretario general de la OMT, estriba en que “el viaje es parte del cesto de la compra y no sólo de los países desarrollados, sino que es parte de la cultura mundial”. Respecto a este punto, Jeanine Pires, presidenta de Embratur, señaló que en su país, Brasil, 24 millones de personas abandonaron la pobreza entre 2003 y 2008. Hoy, forman parte de la clase media y el viaje figura ya entre sus prioridades, por lo que el gigante latinoamericano, hasta ahora principalmente un mercado emisor, se enfrenta a una dicotomía entre los ciudadanos de gran poder adquisitivo acostumbrados a viajar y aquellos que acceden a este servicio por primera vez. Según sus datos, cuatro millones de brasileños viajaron fuera de su país en 2009: un 32% a Europa, un 22% a Estados Unidos y, el resto, a Latinoamérica. Brasil es, precisamente, uno los países emergentes en los que están puestas todas las miradas de la industria mundial del turismo, junto a India, Rusia y China (los BRIC). A su potencial se refirió el vicepresidente de la cadena hotelera Sol Meliá, quien apuntó que "de ellos surgirán varios millones de consumidores, lo que supone una enorme oportunidad, pero hay que saber captar esos mercados y adaptarse a las nuevas necesidades y exigencias de la demanda". También aludió a estos cambios Taleb Rifai, que agregó que "el sector turístico no tiene más remedio que crecer porque es un proceso que no se detendrá y debemos adaptarnos a la nueva realidad". Los deberes de la industriaEl ‘maná’ del turismo, es decir, los viajeros, no escaseará en los próximos años. Pero, aunque el futuro parece asegurado, es necesario que la industria haga sus deberes y se prepare para dar respuesta a los nuevos consumidores. Entre los retos pendientes, figura la concentración. “La industria turística está muy fragmentada, hay pocos jugadores que tengan una cuota de mercado importante y el caso de las compañías aéreas no es una excepción”, detalló Antonio Vázquez, presidente y consejero delegado de la aerolínea de bandera española Iberia, que se encuentra en pleno proceso de fusión con la británica British Airways. La patronal de transporte aéreo IATA aglutina a unas 400 aerolíneas, mientras que la OACI

52 integra a 1.460. Ahora, los cambios demográficos, en el actual contexto de fragmentación, imponen la necesidad de unas reglas de mercado distintas y "cielos abiertos al intercambio de capitales entre las empresas", subrayó. “Es necesario una consolidación del mercado y definir un mismo campo de juego para todos, porque las reglas son distintas en función del país. Europa y Estados Unidos tienen que hacer sus deberes antes de la transformación sea inevitable porque, si no, vamos a sufrir mucho”, destacó Vázquez. En este proceso de cambio, la tecnología juega un papel fundamental, por lo que Jean- Claude Baumgarten reclamó una actitud positiva hacia ella tanto desde la Administración pública, como desde el sector privado. La innovación dibuja la senda de futuro del sector turístico y, por eso, “hay que pensar en cosas concretas y en ganar agilidad, por ejemplo, permitiendo al cliente pueda mostrar su reserva mediante un mensaje de móvil o que los visados se den de forma automática cuando se reserva el billete”. De la misma opinión es Sebastián Escarrer, quien afirmó que “la productividad seguirá aumentando en este mundo gracias a la innovación. En la actualidad, dos de cada tres consumidores reservan sus viajes a través de la Red y la cuestión es ver cómo se está adaptando cada compañía a esta nueva realidad”. Además de retos corporativos y de la propia industria, también debe cambiar la visión que los gobiernos tienen del turismo. “El reto real es político, ya que las administraciones ven con muy poca seriedad al sector turístico. Quizás por su rápido crecimiento, que ha hecho que no sean conscientes de la cantidad de puestos de trabajo que genera, o porque se vincula al ocio y la diversión”, criticó Rifai. “Sí, la industria está fragmentada, pero lo peor es que no se habla de ella ni se la ve como a un todo, fuera de los círculos sectoriales. Tenemos que hacer que esa percepción cambie porque la colaboración pública es indispensable y hay muchos países cuyos ingresos dependen únicamente del turismo”, añadió el secretario general de la OMT. A este respecto, Baumgarten, presidente del World Travel & Tourism Council, señaló que “el turismo es una industria basada en el servicio al cliente a cambio de dinero y es un círculo vicioso que no se puede romper”. La presidenta de Embratur se mostró de acuerdo y aludió a los próximos acontecimientos deportivos (Mundial de Fútbol, en 2014, y Juegos Olímpicos, en 2016) como la oportunidad para que, en Brasil, se vea la importancia del turismo, un sector emergente. Por su parte, Antonio Vázquez profundizó en el tema y apuntó que el desafío político es aún mayor en el caso de las aerolíneas porque está directamente relacionado con la seguridad, los derechos del cliente y el medio ambiente. “Nuestro vínculo con el cliente es emocional, o hay amor u odio, es un tema sociológico. La relación con el consumidor la tiene la aerolínea, no los administradores de los aeropuertos, pero es injusto que sólo se proteja al consumidor y que la aerolínea tenga que indemnizarle por una circunstancia ajena a ella, como que se ponga a nevar”, aseguró. Asimismo, el consejero delegado de Iberia hizo un llamamiento para poner fin a una transversalidad que obstaculiza el negocio. “No hay una centralización de funciones, una persona responsable de toda la industria turística, y eso dificulta mucho la negociación”. Y volvió a incidir en la consolidación: “No es la solución, pero sí parte de ella. En una fusión, hay aspectos que tienes que solucionar por ti mismo y otros a los que das respuesta externamente, pero lo que está claro es que la concentración ayudará a sentar las bases para sacar rentabilidad al negocio en el futuro”. Al rescate de España En el caso concreto de España, ¿qué aspectos necesita pulir la industria turística nacional? En opinión de Sebastián Escarrer, vicepresidente de Sol Meliá, la problemática es, hasta cierto punto, común. "Es necesaria una alianza público-privada y, además, la descentralización de las competencias en materia turística [en la actualidad, están en manos de las comunidades autónomas, es una dificultad añadida. El dinero para

53 ayudarnos no es despreciable, pero lo que hemos pedido desde Exceltur [la asociación presidida por Escarrer que engloba a 26 grandes compañías del sector] no es dinero, sino liderazgo y coordinación interministerial y del Gobierno central con las comunidades autónomas (entidades territoriales en las que está dividida España)". Por su parte, Antonio Vázquez apuntó al exceso de infraestructuras como una cuestión a tener en cuenta. "Hemos obtenidos créditos y dinero con demasiada facilidad y ahora tenemos más kilómetros de líneas ferroviarias y aeropuertos que muchos países del mundo, pero ahora es un problema porque necesitan mucho dinero en mantenimiento. Las autoridades saben que el problema existe, la cuestión es cómo resolverlo", resaltó. Asimismo, lamentó que en España no haya concentración de responsabilidades en materia turística en un ministerio, ya que se reparten en varias carteras como Industria, Fomento y Medio Ambiente”. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1929&language=Spanish

Capital riesgo: ¿El fin de la edad de oro? Antes de presentar a los panelistas que iban a intervenir en una sesión celebrada en el Madrid Global Alumni Forum titulada Relanzando el capital riesgo, el moderador Raffi Amit resumió los retos a los que se enfrenta el capital-riesgo, tanto el capital-inversión (inversión en empresas ya consolidadas) como el venture equity (inversión en proyectos empresariales que se encuentran en etapas tempranas) cuando los inversores se han vuelto más conservadores, los rendimientos son bajos y el volumen y valor de las transacciones ha descendido. Los emprendedores están encontrando cada vez más difícil captar dinero, lo cual tiene un impacto sobre la innovación y los nuevos desarrollos, señalaba Ammit, y las inversiones en etapas iniciales están en un nivel bajísimo debido a la incertidumbre sobre sus estrategia de salida y el tiempo –y dinero-, necesario para conseguir liquidez. “Obviamente esto hace bajar los rendimientos, lo cual complica a su vez conseguir más capital para un nuevo fondo”, decía. En relación con el capital privado y su dependencia del apalancamiento, “la cuestión es si la edad de oro ya ha finalizado”, sostenía Amit, profesor de Empresa y Gestión en Wharton. “¿Volverá el apalancamiento en las buyouts? En caso afirmativo, ¿Cuándo y a qué ritmo? ¿Qué inversiones realizará el capital-riesgo? En cuanto al nivel de transacciones, Amit señalaba una caída importante en la cifra de fusiones y adquisiciones y también de ofertas públicas iniciales (IPOs) en 2010. Según un artículo de The Wall Street Journal, globalmente 295 empresas captaron 42.000 millones de dólares en todo el mundo en el segundo trimestre de 2010. En el primer trimestre fueron 274 las empresas que captaron 51.500 millones de dólares, lo cual supone un descenso del valor en dólares del 18%. Muchas empresas siguen posponiendo las ofertas públicas iniciales con la esperanza de que los precios se recuperen. En general, ahora se necesitará mucho más tiempo que en el pasado para que los rendimientos se recuperen; un participante y capitalista sugería que los inversores estaban reduciendo sus expectativas de rendimientos a los de hace cinco años. Un estudio de Boston li i d l d l fi d i l i l

54 Consulting Group estima que cerca del 40% de las firmas de capital-riesgo cerrará en los próximos años. Amit añadía que en Estados Unidos los casos de bancarrota han aumentado drásticamente, lo cual sube aún más la incertidumbre en el capital-riesgo y afecta a todo tipo de sectores, desde el inmobiliario al automovilístico o el transporte. ¿Qué está haciendo el capital- riesgo? Una respuesta es que está trasladándose a las economías emergentes, explicaba Amit, citando un significativo incremento en el porcentaje de inversiones en esos países. Trabajo en equipo, talento y estrategia Desde 1994 a 2002, el panelista Angel Corcóstegui fue consejero delegado global y vicepresidente de Banco Santander Central Hispano (hoy Banco Santander), puesto que incluía la participación directa en la gestión de diversas fusiones bancarias complejas. En 2006, Corcóstegui fundaba en Madrid Magnum Industrial Partners, la mayor firma de capital-riesgo de España y Portugal. Durante la ronda de preguntas con la audiencia, Corcóstegui compartió algunas de las lecciones aprendidas en los últimos cuatro años. “Cuando trabajas en una institución financiera, tal y como fue mi caso durante muchos años, y quieres saber algo simplemente presionas un botón y obtienes respuesta. En una pequeña firma de capital-riesgo, tú mismo debes encontrar la respuesta”. En segundo lugar, “debes seleccionar a tus socios muy bien. No eres el jefe. Eres parte de un equipo”. En el caso de Corcóstegui, empezó reclutando a dos socios fundadores. Uno era el director de McKinsey en España y Portugal, el otro un emprendedor portugués. “Los socios son importantes”, señalaba. “Consigue todo el talento que puedas desde el principio”. En tercer lugar, define tu estrategia. En el caso de Magnum, la firma identificó su mercado como España y Portugal y se centró en las compras de empresas por parte de sus gerentes o sus trabajadores (buyouts). “Queríamos conseguir el control mayoritario, no minoritario, de las empresas adquiridas”, decía Corcóstegui. En cuando al tamaño de la entidad, “elegimos captar entre 1.200 y 1.300 millones de dólares en 2007 porque queríamos estar en el mercado intermedio superior. Se necesita tener un gran fondo para estar en dicho espacio. Las firmas de capital-riesgo de pequeño tamaño en España son parte de un universo bastante masificado. En nuestro segmento objetivo sabíamos que tendríamos más campo de maniobra”. En cuanto a los inversores, Corcóstegui aboga por una base de inversores diversificada interesados en el largo plazo. “En caso contrario tendrás problemas”, sostenía Corcóstegui. Magnum tiene 41 inversores de diversas partes del mundo, incluyendo Japón, Estados Unidos, Arabia Saudí, Canadá, España y Portugal. Los socios fundadores comprometieron unos 25-30 millones de dólares en la firma para cubrir los costes iniciales y de captación de fondos. Asimismo, los socios fundadores comprometieron una cantidad importante como simples inversores porque “si no comprometes tu propio dinero, ¿cómo vas a convencer a otros para que lo hagan?”. La diligencia debida tanto comercial y contable como legal son muy importantes a la hora de realizar una adquisición, decía Corcóstegui. Unos niveles razonables de deuda también son importantes -“excepto en un caso, en nuestras empresas no hay más del 50% de apalancamiento”-, así como la transparencia y la comunicación con los inversores. En su última reunión con los accionistas, Magnum tenía más del 90% de asistencia de inversores de todas partes del mundo, señalaba Corcóstegui añadiendo que la empresa proporciona a sus inversores un extenso informe sobre sus actividades cada trimestre, les envía la evaluación completa de la cartera auditada una vez al año y hace una semi-auditoría a mitad ddliiilli

55 de año. “Cuando realizamos una inversión, llamamos antes a nuestros inversores. Les dedicamos mucho tiempo, incluyendo visitas personales”. Por último, en opinión de Corcóstegui el capital-riesgo significa “propiedad activa. Tienes que gestionar activamente tus empresas. Esto no significa gestionarlas tú mismo, sino encontrar a la persona adecuada para hacerlo. Además, tienes que compaginar los intereses de tus inversores con los de los gestores… Cuando adquirimos una empresa, nuestra mejor opción es mantener a los actuales directivos. En 2007 adquirimos una empresa de ingeniería; 10 de los directivos querían quedarse. Compramos el 60% de la empresa; ellos compraron el 40% restante. Buscamos gestores con una mente emprendedora ya que se trata de crear valor”. En respuesta a una pregunta formulada por Amit sobre la dificultad –y coste- de captar capitales hoy en día, Corcóstegui respondía que hay dinero para las empresas excelentes. En 2008 Magnum adquirió una empresa de energía eólica en Portugal por 1.500 millones de dólares diez días antes después del colapso de Lehman Brothers. “Nos han preguntado cómo conseguimos captar el dinero en aquellos momentos. El motivo es que la empresa tenía los resultados adecuados, el precio adecuado, 85% deuda, 15% capital, y se trataba de un activo extraordinario”. El panelista Isaac Devash, director ejecutivo de Devash Investment and Consulting en Tel Aviv, ofrecía su punto de vista sobre el negocio del venture capital, incluyendo su respuesta a los comentarios de colegas que le increparon que “los días del venture capital podrían haberse acabado”. Nada más cierto. En opinión de Devash “el venture capital no sólo seguirá existiendo, sino que es fundamental para el desarrollo de la humanidad”. Devash, que cuenta con 14 años de experiencia en el negocio del capital-riesgo y el capital venture, y que ha trabajado como banquero de inversión con Credit Suisse First Boston, señalaba el progreso conseguido por el mundo desarrollado desde la revolución agrícola hasta la revolución industrial y llegar a la actual “revolución de la era de la información”. Las innovaciones en áreas que van desde la energía a la medicina o la nanotecnología “están aquí para quedarse, y además cada vez habrá más porque podemos compartir la información instantáneamente con millones de personas. Este grado de colaboración” contribuirá al surgimiento de nuevas ideas y avances en sectores de todo el mundo. Aunque el venture capital no esté desapareciendo, debe cambiar –decía Devash-, por ejemplo reduciendo tanto los costes de entrada como las comisiones por gestión. “Debemos ajustar el modelo para que sea sostenible”. Reflejando las dificultades dentro del sector del venture capital, Devash también señalaba que “grandes personas se están pasando de la financiación de venture capital a la financiación de capital-inversión … Hace algún tiempo quise meterme con la gripe aviar. Encontré una tecnología muy buena con la que no era necesario vacunar todos los años, sino cada siete años, como el tétanos. Sabía que ningún inversor de venture capital lo financiaría porque se necesitaría mucho tiempo antes de llegar al mercado Así que acabé acudiendo a ángeles inversores y dividí la inversión entre 25 personas”. Amit también está de acuerdo con la necesidad de cambios, pidiendo a la audiencia que considerase modelos que “fuesen viables desde el punto de vista del socio limitado, el inversor, así como desde la perspectiva del emprendedor, el innovador. Si entra menos dinero y se necesita más tiempo para que las innovaciones lleguen al mercado, todo esto tendrá efectos adversos”. Compitiendo por los mismos activos El panelista Antoine Drèan, fundador y consejero delegado de las empresas de capital- riesgo Triago (Nueva York, París y Dubai) y Mantra (París), centraba algunos de sus il iddi l d dih d

56 comentarios en las oportunidades existentes en los mercados secundarios, que han pasado de ser mercados donde había unos pocos inversores que querían adquirir las participaciones existentes en los fondos de capital-riesgo de otro inversor a convertirse en una clase de activos con todas las de la ley. El mercado secundario “está definitivamente creciendo”, afirmaba, porque los participantes “comprender que compra un activo secundario es lo mismo que comprar una nueva inversión, excepto que puedes mirar que es lo que hay dentro y a veces conseguir un buen precio. Así pues, es un modo viable de entrar en el capital-riesgo más allá de los típicos círculos de captación de fondos”. Asimismo, los activos secundarios son una herramienta muy útil para gestionar carteras. En cuanto al capital-riesgo en el largo plazo, será “una escabechina”, decía. “El capital- riesgo necesita mucho tiempo para morirse y muchas empresas de gestión están cobrando comisiones todos los días a sus socios. No tienen incentivos para dejar el hueco. Nuestras predicciones son que cerca del 50% de la financiación de buyouts podría desaparecer. Es una cifra importante, pero si miras cuántos fondos están compitiendo hoy en día por los mismos activos, podrías darte cuenta de que simplemente hay demasiada gente buscando la misma cosa”. A pesar de ciertos puntos de vista pesimistas, se puede ganar mucho dinero en el capital- riesgo, añadía Drèan. “Muchos inversores aún creen en el capital-riesgo, y muchos grupos aún ofrecen muy buenos rendimientos”. En cuanto al capital venture, Drèan preveía un crecimiento significativo en los próximos años. “en algún momento, si se producen unas cuantas historias con final feliz en el sector del capital ventura –en especial en las ciencias naturales-, podría situar al capital venture de nuevo en los titulares”. Mientras, Drèan sugería “los gestores reales… están a favor de la gente que sabe lo que hace. Algunos inversores dicen que quieren equipos que sean capaces de comprar negocios incluso si no están a la venta”. También están a favor de los mercados emergente por sus relativamente elevadas tasas de crecimiento. “Los inversores comprende que no conseguirán grandes rendimientos debido al efecto apalancamiento. Si quieren conseguir lo mismo a lo que estaban acostumbrados, tendrán que invertir en economías en crecimiento”. Para el panelista Olivier Marchal, socio director en Bain & Company EMEA en París, “el capital-riesgo es un negocio cíclico. Así pues, para mí la pregunta no es si se recuperará –lo hará-, sino cómo. Observando el mercado Europeo, Marchal citaba una “recuperación muy lenta pero real de la firma de acuerdos trimestre tras trimestre. Los acuerdos son diferentes, a menudo de menor tamaño, con mucho menos apalancamiento que en los años de excesos… En el futuro se presentan muchos temas. Uno es la cantidad de dinero que no pudo invertirse en los últimos dos años; más de un billón de dólares”. En su opinión, se necesitarán entre cuatro y seis años para que esos fondos se pongan en funcionamiento. “Así, hay más dinero que nunca buscando menos acuerdos que nunca… Va a ser un mercado muy competitivo”. Asimismo Marchal predecía menores rendimientos “alrededor del 15% para los fondos de inversión en capital-riesgo”. Marchal, -activo en Francia con la firma de capital riesgo de Bain, trabajando con fondos de inversión en generación de ideas, diligencia debida estratégica y mejoras en las carteras de las empresas-, dice que él no ve para el futuro esa “masacre” que predice Drèan, pero está de acuerdo en que el capital-riesgo se volverá un sector muy selectivo. “¿Qué buscarán los socios en el futuro? Empresas que sean intervencionistas y centradas en crear valor tras las adquisiciones, y que tengan la capacidad de superar una estricta auditoría. Esto parece básico en el capital-riesgo, pero no es lo que hizo el sector en los últimos 15 años… Si no consigues el acuerdo adecuado al precio adecuado, no deberías estar en el negocio. La otra i l llh l d dlfi dl d

57 cosa es que necesitas crear valor; y no sólo lo haces el año después de la firma del acurdo, sino desde el primer día. Debes estar preparado para apretar el botón de una nueva estrategia” o un nuevo equipo directivo. El panelista Felipe Oriol, presidente de la firma de capital-riesgo Corpfin Capital en Madrid, rápidamente recordó que “las cosas han cambiado. Hemos vuelto a los principios básicos. El precio es más razonable, el apalancamiento es más razonable, los términos y condiciones vuelven a sus mercados normales. Así, en este sentido no veo deterioro alguno. Volvemos allí donde los equipos de buena gestión tienen la oportunidad de realmente conseguirlo”. Corpfin Capital fue fundada en 2990, pero “nos estamos reinventando”, decía Oriol. “No puedes ser el mismo que eras hace cinco años. Estamos mejorando nuestras actividades: estamos considerando el capital-riesgo inmobiliario, buscando activos interesantes que podamos comprar. Estamos entrando en el mercado en un modo muy sólido”. La empresa también está buscando oportunidades de venture capital, incluyendo en iniciativas de Internet. “Aún queda mucha vida por delante al capital riesgo”. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1926&language=Spanish

El futuro del sector inmobiliario depende del riesgo dispuesto a asumir La crisis financiera está barriendo por todo el mundo y de un sólo golpe billones de dólares en valores inmobiliarios. Hace décadas que el sector inmobiliario no se enfrenta a retos tan profundos. Sin embargo, tal y como señalaban los participantes en uno de los paneles del reciente Madrid Wharton Global Alumni Forum, titulado Sector inmobiliario: Explorando el camino hacia la recuperación, en este contexto tan desfavorable existen algunas oportunidades en los mercados inmobiliarios residencial y comercial. La moderadora del panel, Olivia S. Mitchell, profesora de Gestión de Seguros y Riesgos en Wharton, centró el debate en las perspectivas a largo plazo, incluyendo el impacto de la recesión sobre el desarrollo urbano y las repercusiones de los “crecientes déficits de los gobiernos y los hasta ahora nunca vistos niveles de deuda”. En relación sobre la situación del mercado inmobiliario en España, el panelista Ismael Clemente, director ejecutivo de RREEF, la división de gestión de inversiones inmobiliarias de Deutsche Bank, AG, señalaba que su punto de vista sobre el sector, en un principio negativo, había dado paso a una perspectiva “ligeramente más positiva. Estamos siendo testigos de los primeros pasos de una recuperación, donde ya se han realizado la mayor parte de las correcciones para el sector. Creo que sobreviviremos a esta crisis”, sostenía Clemente añadiendo que aunque aún quedan cosas que corregir en el lado residencial, “lo peor posiblemente ya haya pasado”. Clemente, que es responsable de las inversiones en España, Portugal y el Norte de África, sostenía que ahora lo que se necesitaba es determinar “el ritmo de la recuperación. Es importante delimitar correctamente los plazos temporales. Si inviertes demasiado pronto, saldrás mal parado; igual que si determinas mal el ciclo”. Asimismo, Clemente citaba iliólíilói“Lfiiió

58 varias amenazas a la recuperación, la mayoría a nivel macroeconómico. “La financiación del inmenso déficit que tenemos en las sociedades occidentales podría llevar a los gobiernos a incrementar los impuestos y adoptar otras medidas… teniendo en cuenta que ya estamos en un sector extremadamente regulado, mi mayor temor es una regulación excesiva”. En esta misma línea optimista se encontraba el panelista Christian Schulte Eistrup, director ejecutivo, mercados de capital, de MGPA en Londres. “Ayuda mucho que la recesión haya dado un respiro al sector inmobiliario. Los días de los ingenieros financieros especializados en valores inmobiliarios han desaparecido, y hemos vuelto a un entorno en el que la gente comprende los fundamentos básicos del sector inmobiliario”. Si esta gente sigue informando sobre sus decisiones de inversión, Schulte Eistrup predice que el sector puede empezar a resolver temas como el crecimiento de la población o la urbanización. El panelista Alfonso Vegara, fundador y presidente de Fundación Metrópoli en Madrid y experto en planificación urbana, estaba de acuerdo con la necesidad de centrarse en esas áreas. En los próximos 25 años, explicaba, los países necesitarán construir vivienda para dos mil millones de personas; el crecimiento se producirá sobre todo en Asia y en Latinoamérica, que están creciendo ocho y seis veces más rápido que Europa respectivamente. El panelista Armin Lohr, director de la oficina de McKinsey en Oriente Medio y que trabaja principalmente en infraestructuras, activos inmobiliarios y transportes y logística, habló sobre los retos relacionados con los suministradores. Lohr planteaba la siguiente pregunta a la audiencia: “Suponga que usted es un fabricante de equipamientos originales (en inglés OEM, acrónimo de original equipment manufacturer). ¿Qué ganancias de productividad esperaría de sus suministradores? ¿Al menos 2-3%? ¿Qué ha hecho la construcción en los últimos 15 o 20 años?” La respuesta es que las ganancias de productividad han sido cero en cualquier parte del mundo, sostenía. “No se ha producido literalmente innovación ninguna. Si observas un país como Estados Unidos, la productividad incluso ha disminuido. En Europa ha aumentado ligeramente”. Uno de los grandes retos de los promotores inmobiliarios “es verse a sí mismos como los OEM del sector y hacer todo lo posible para que la productividad de la construcción de hecho aumente”, explicaba. Recientemente Lohr estudiaba 10.000 proyectos inmobiliarios para determinar qué es lo que más afecta a los resultados. “Observamos diferentes factores y no encontramos correlación alguna excepto para uno, que era el gestor del proyecto. Tanto el tamaño como el segmento son irrelevantes. Lo único que parece afectar a los resultados es el gestor del proyecto”. Así, Lohr hizo una comparación con el sector automovilístico. “Existen líneas de producción con buenos trabajadores y malos trabajadores. Las líneas buenas obtienen calidades excelentes y las líneas malas obtienen calidad inferior. Esto no es aceptable. Esta es una gran oportunidad para todo el sector seguir avanzando para mejorar la productividad con los suministradores”. Trabajo de calidad en países en desarrollo A la hora de evaluar el futuro del mercado inmobiliario comercial, el panelista Pelayo Primo de Rivera, director ejecutivo de Norfin en Madrid, una empresa de gestión de inversiones inmobiliarias, analizó tres temas diferentes. El primero es la economía. “La economía nos dirá si lo hacemos bien”. Aunque normalmente el sector inmobiliario se suele recuperar unos años después de que lo haga la economía, “eso no significa que alguien no pueda invertir, por ejemplo, en REITs (fondos de inversión inmobiliarios)”. L l i bili i li b t “ l 50% d l i t t ibl d l

59 Los valores inmobiliarios, explicaba, representan “el 50% de la riqueza neta tangible del mundo”. El segundo tema a considerar es el crecimiento potencial de la población y el empleo –por ejemplo, si los bancos no alquilan, será necesario disminuir el espacio para oficinas-, y el tercer tema es la capacidad (o vacantes) del sector inmobiliario. “La tasa de vacantes es el resultado neto de la nueva construcción”, pero la nueva construcción depende de la financiación, cuya oferta es en estos momentos escasa, señalaba Primo de Rivera. En respuesta a la pregunta de Mitchell sobre regulación, Clemente destacaba el estricto entorno regulatorio en las economías occidentales para los promotores inmobiliarios. La mayor diferencia entre operar en Marruecos y operar en España es que en Marruecos “puedes comprar un terreno, diseñar un gran proyecto, desarrollarlo y venderlo en un marco temporal razonable de tres a cinco años máximo. En España, si tienes suerte, podrías hacer todo eso en 15-20 años; cada vez son más las partes interesadas que intervienen en el diseño y desarrollo del proyecto”. La gente suele pensar que en los países en desarrollo se pueden desarrollar proyectos rápidamente pero que la calidad es baja, señalaba Clemente. “Eso no es cierto. En países como Marruecos se pueden ver ejemplos de buena arquitectura y buenos ingenieros. Se pueden ver puertos, autopistas y vías ferroviarias muy bien ejecutados, principalmente por empresas extranjeras pero también por empresas locales”. Lohr no podía estar más de acuerdo con Clemente, y describía un gran complejo universitario en Arabia Saudi para el cual sólo se necesitaron dos años desde el momento en que surgió la idea hasta que entraron los primeros estudiantes en las aulas. “Aquí tan sólo había un desierto, nada más”, explicaba añadiendo que el proyecto fue desarrollado por una filial de la empresa saudí Aramco por petición del gobierno saudí. “Imaginemos por un momento la velocidad necesaria en el proceso de toma de decisión para conseguir los permisos y las licencias, y al mismo tiempo reclutar profesores y estudiantes de talento”. Los panelistas discutieron otros mercados inmobiliarios globales y sus diferentes escenarios. Por ejemplo, Schulte Eistrup señalaba “la masiva demanda secular de edificios modernos” en Rusia, demanda que hasta el momento no ha sido satisfecha. “La gente quiere vivir en sitios mejores; quieren más locales modernos. Y a medida que aumenta el poder de compra, la gente quiere gastar más dinero en establecimientos atractivos. Sí, existen mercados donde podemos afirmar que los precios inmobiliarios van a seguir creciendo porque existe demanda, lo cual acabará incrementando los alquileres”. En Portugal, “aún puedes ganar dinero si eres inteligente”, añadía Clemente. “Aún se necesitan proyectos específicos. Y si la inflación vuelve, veremos un desapalancamiento natural de toda la economía dado que el valor de los activos subirá mientras la deuda permanecerá más o menos constante”. En respuesta a los comentarios de una persona de la audiencia sobre la existencia de fases de euforia, recesión y negación en la mayoría de los ciclos inmobiliarios –y afirmando que España aún parece estar en fase de negación-, Clemente señalaba las “enormes diferencias entre los inmobiliarios residenciales y comerciales existente en España”. En relación con los inmobiliarios comerciales, “la fase de negación ya ha finalizado porque las rentas han bajado, tal y como era necesario, y el valor del capital está donde necesitaba estar. En el sector comercial los agentes son más profesionales –fondos de inversión, empresas de seguros-, y reflejan más niveles de precios. En el sector residencial es donde tenemos el ttit”

60 mayor retraso en nuestro sistema”. Sin embargo, Primo de Rivera tenía otro punto de vista sobre el sector inmobiliario en España y señalaba la existencia de una cantidad significativa de terreno infradesarrollado que seguía sin desarrollar debido a la falta de financiación y al enorme inventario de edificios vacíos.”El hecho de haber tenido una burbuja tiene muchas consecuencias para el desarrollo futuro del mercado de inversiones. Los precios que la gente ha estado pagando aún siguen presentes en sus cabezas y en los balances generales de bancos e instituciones, y eso está paralizando el desarrollo del sector. No existe mercado. La diferencia entre el precio que se pide y el que se está dispuesto a pagar es enorme. Hay una gran diferencia entre lo que los inversores quieren pagar y lo que los propietarios del activo inmobiliario quiere conseguir”. Otro miembro de la audiencia preguntaba qué se necesitaba para mejorar las inversiones inter-fronterizas. La respuesta es analizar diferentes regiones, como Oriente Medio – explicaba Lohr-, donde las perspectivas de firmas de inversión son buenas tanto en mercados locales como internacionales, “una tendencia liderada por los promotores, no por los bancos ni fondos de inversión soberanos. Se han creado conglomerados de promotores que han conseguido rápidamente presencia internacional, y no sólo en Dubai o Abu Dhabi. La clave detrás de esta tendencia es la política y las relaciones políticas”. Vegara habló del caso de Singapur, que recientemente había dado prioridad a la creación una “solución urbana” que proporcionase vivienda, transporte, agua y otros elementos que contribuyen a la sostenibilidad de la vida urbana. “Existe un acuerdo de colaboración” entre el gobierno de Singapur y el gobierno chino para crear una nueva entidad que pueda conseguir los acuerdos necesarios para crear nuevas ciudades pensadas para albergar unas 500.000 personas. Los conocimientos tecnológicos y la capacidad de gestión de Singapur están siendo empleados para construir una nueva generación de eco-ciudades”, afirmaba Vegara. “Es una oportunidad impresionante. Sin embargo en España nuestro sector inmobiliario está muy fragmentado. En cuanto a China, se desarrollan proyectos muy pequeños con mucho riesgo y sin conexiones institucionales, sin un colchón”. La diferencia clave entre Asia y Europa es la organización, añadía Lohr señalando que en Asia hay muchos promotores haciendo viviendas a precios razonables “con técnicas creativas, con una idea clara de cuál es el segmento al que sirven, y con unos objetivos en costes. En el área se ven márgenes del 20%. Es una oportunidad excelente”. Reconociendo el atractivo de los márgenes del 20%, Schulte Eistrup también señalaba que para los bancos españoles “Asia está lejos, y los rendimientos del 20% se obtienen con cierto grado de riesgo. Así pues, depende del riesgo que estés dispuesto a asumir”. En general, los panelistas parecían estar de acuerdo en las muchas oportunidades que esperaban al sector en el futuro. Asimismo, también estaban de acuerdo en la necesidad de innovación en el sector y de inversión no sólo en terrenos, sino en investigación, en especial a medida que la población aumenta, las ciudades crecen y la demanda de vivienda a precios razonables aumenta. El camino hacia la recuperación, afirmaba Vegara, “se convertirá en un diálogo entre el sector inmobiliario y las ciudades”.

Publicado el: 28/07/2010 http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=1927&language=spanish

61 Por un 'nuevo mundo' global sin los excesos del viejo Uno de los paneles de Madrid Global Alumni Forum se titulaba El nuevo mundo financiero. Así que alguien podría preguntarse: “¿Y qué ha pasado con el viejo mundo financiero?”. Ésta fue la pregunta planteada a los participantes del Foro por su moderador, el profesor de Finanzas de Wharton Richard Marston. “En toda mi carrera nunca imaginé que tendríamos dos días tan peligrosos y aterradores como los vividos en septiembre de 2008, cuando Lehman Brothers cayó y Merril Lynch desapareció”. La crisis financiera ha dejado al descubierto un mar de debilidades en la economía global. La confianza en el mercado como principal mecanismo eficiente de asignación de recursos para el crecimiento económico ha disminuido drásticamente, y el debate ahora se centra en qué nuevas regulaciones y restricciones adicionales se necesitan en el futuro. Marston pidió a sus panelistas que trataran temas como las causas de la crisis económica, el modo en que la creciente volatilidad del mercado debería gestionarse, y cómo el mundo puede resolver los problemas de credibilidad relacionados con los desequilibrios globales. Ana Patricia Botín, directora ejecutiva de Banesto, señalaba que “vivimos en un mundo con muchos desequilibrios desde los 80 en cuanto a tendencias de globalización, con miles de millones de personas incorporándose al mercado de trabajo, con tipos de interés muy bajos y con un conjunto de países prometiendo demasiado y un conjunto de países consumiendo demasiado”. Los países latinoamericanos han estado acumulando “grandes superávits comerciales, mientras los consumidores estadounidenses es el motor del crecimiento mundial y está completamente endeudado, con la ayuda de otros países”. Y al final del día, decía Botín –que trabajaba en el Banco Santander al principio de 1988, dirigiendo la expansión internacional del banco en los 90 y con responsabilidades en Latinoamérica, banca corporativa o gestión de activos-, “las causas de la crisis no pueden ser identificadas con las finanzas únicamente. No se puede culpar a los bancos al 100%, y la solución a la crisis tampoco está al 100% en manos de los bancos”. En cuanto a las lecciones a aprender, Botín citaba la importancia de las medidas contra- cíclicas y de la liquidez, los riesgos causados por una supervisión no intrusiva, y las limitaciones de los reguladores locales. “Necesitamos supervisores que controlen la situación y vean las tendencias/eventos a medida que vayan ocurriendo. Los supervisores parecen comprender mejor a los bancos normales, como nosotros, en contraposición a los bancos de inversión”. Asimismo, el sector ha confiado en los reguladores locales y los supervisores locales “con ninguna coordinación a nivel global”. Y por último, “no disponíamos de mecanismos que permitiesen a los bancos grandes fracasar de un modo ordenado. No existe el modo de evitar el riesgo sistemático sin” la capacidad para intervenir cuando sea necesario. “Las normas estaban allí, pero todo el mundo parecía esquivar las preguntas escabrosas… no los reguladores, o los inversores de capital-riesgo o las agencias de calificación o incluso algunos de los comités de riesgo de los propios bancos”. Botín hizo varias sugerencias sobre cómo avanzar, como crear “un nuevo diseño institucional en Europa” que incluiría una mejor cuantificación del riesgo una mejor

62 institucional en Europa” que incluiría una mejor cuantificación del riesgo, una mejor gestión de la liquidez y una mayor atención a las políticas contra-cíclicas así como una mejor coordinación entre supervisores a nivel mundial. Asimismo, Botín también señalaba algunas propuestas que “no son útiles… una de ellas es centrarse en el tamaño de los bancos. Ser demasiado grande no es necesariamente malo. Los bancos que crearon los problemas no fueron aquellos que eran demasiado arriesgados, con demasiado apalancamiento, o gestionando riesgos que no fueron cuantificados”. Otras propuestas “no útiles” son aquellas que defienden impuestos sobre los bancos, y aquellas que se centran en las compensaciones bancarias en lugar de las causas de la crisis financiera, sostenía Botín. El panelista Ángel Cano Fernández, consejero delegado de BBVA en Madrid, señalaba que la etapa más reciente de la crisis financiera empezaba en marzo cuando los elevados niveles de deuda de Grecia se hicieron evidentes; la situación fue agravada por la falta de credibilidad de las estadísticas oficiales. “Esto causó una falta de confianza que se expandió a otros países europeos y que ha aumentado las dudas sobre la capacidad de crecimiento dentro de la eurozona y sobre la idoneidad de una moneda única”. En consecuencia, “la Unión Europea está empezando a ser percibido como un conjunto de partes fragmentadas en lugar de un todo”. Aunque Fernández cree que los bancos son capaces de manejar la situación mejor que cuando Lehman Brothers cayó en bancarrota, “la situación está lejos de estar estabilizada. Se necesitan mejores medidas de coordinación para asegurar la convergencia de las políticas fiscales entre los países europeos… y los programas de ayuda estatal deberían incluir condiciones más estrictas”. El sistema financiero del futuro “debe tener elevados requisitos de capital, pero más liquidez y mayor protección a los clientes. Si no pensamos globalmente, cometeremos los mismos errores que en el pasado”. El panelista Corrado Passera, director ejecutivo y consejero delegado de Intesa Sanpaolo en Milán, ofrecía su punto de vista sobre las principales causas de la crisis financiera, incluyendo un excesivo apalancamiento y la falta de transparencia en el mercado de derivados. En cuanto a cómo arreglar la situación para el futuro, Passera señalaba que sus comentarios podrían haberse titulado “leyes por favor”. La gente cree que los bancos no quieren leyes, “pero no es así; sólo que quieren leyes adecuadas. Cuando suceden las crisis, a veces la gente se lanza en una dirección y olvida que la economía y la sociedad tienen un complejo conjunto de necesidades”. Asimismo, señalaba, “no deberíamos olvidar que el crecimiento económico sostenido es la prioridad número uno, y que crear empleo es el objetivo” por el que todo el mundo está trabajando. Asimismo, Passera advertía sobre la peligrosidad de hacer el sector bancario “tan seguro que ni sea rentable ni atractivo y simplemente desaparezca”. Cualquier ley que se promulgue debería conseguir que el sector bancario “o al menos una buena parte del mismo”, siguiese siendo atractivo para los inversores. Las tres prioridades de Passera para avanzar incluyen en primer lugar fijar límites al apalancamiento global. “Al final, la explosión de deudas impagadas durante los últimos años ha sido la raíz de la crisis, tanto el apalancamiento neto como el apalancamiento bruto. No sólo debemos registrar en los libros las obligaciones on-balance como las off- balance… todos los componentes de la situación real de endeudamiento”. En segundo lugar, las nuevas leyes deben asegurar que la gestión de la liquidez está bajo control. “No te declaras en bancarrota por falta de capital, sino porque tienes dificultades con tu liquidez. Si captas dinero a corto plazo pero dejas tu dinero a largo plazo, tarde o temprano simplemente explotas” En tercer lugar “debemos poner los derivados bajo

63 temprano simplemente explotas”. En tercer lugar, “debemos poner los derivados bajo control introduciendo la estandarización y en la dirección de tener estos instrumentos sólo en intercambios regulados”. Basilea III está resolviendo estos tres puntos, explicaba refiriéndose a las nuevas regulaciones bancarias que están siendo consideradas por el Comité de Supervisión Bancaria de Basilea, el guardián de la banca internacional. Pero según Passera, Basilea III se arriesga proponiendo regulaciones que son tan estrictas que “crean una crisis crediticia que hasta el momento hemos evitado. Tenemos que asegurarnos que los nuevos límites, las nuevas características del marco regulador, no son excesivos y son introducidos gradualmente”. Passera también aconsejaba a los reguladores tener presente que “los bancos reales, los bancos comerciales, no son casas de intercambio. El enfoque café para todos no funciona… no estoy sugiriendo escindamos los grandes bancos, sino que estas dos actividades deberían ser gestionadas, reguladas y supervisadas de manera diferente”. Además, las normas tienen que aplicarse de manera consistente para todo el mundo, y deben ser razonablemente simples, pocas y comprensibles. “Hoy en día, uno de los problemas que estamos padeciendo son los tecnicismos que hacen el leguaje de reguladores, políticos, banqueros y consumidores tan diferente que el debate y la cooperación se hacen muy difícil”. El panelista Carlos Trascara, director de McKinsey en Madrid que codirige los servicios financieros en Europa, apuntaba a la situación de España en particular, describiendo el sistema bancario español como “uno de los más saludables que he visto… El banco central español tiene una buena idea de la situación tras haber superado algún contraataque político al principio del proceso; creo que dentro de unos pocos años disfrutaremos flechas de dos dígitos”. Su punto de vista en general sobre la economía española también era optimista. “Nuestro nivel de deuda como porcentaje del PIB es inferior al de muchos otros país. Es verdad que si haces predicciones sobre el déficit en los próximos diez años, las cifras no son tan buenas… Pero tenemos un límite al crecimiento del déficit público”. Trascasa sugería que esto simplemente implicará un menor crecimiento del PIB durante los próximos dos-tres años, “pero que esperamos que España crezca por encima de la media europea dentro de cinco años”. En respuesta a la pregunta de Marston sobre si los gobiernos deberían obligar a los bancos a dejar dinero, Botín señalaba que la mayoría de los bancos quieren conceder créditos, pero el problema real es la necesidad de reducir el nivel de deuda. “Algunas empresas tienen exceso de capacidad y otras podrían estar demasiado débiles como para pedir prestado. La combinación de esos dos factores implica un menor nivel de demanda de créditos solventes. Esa es la raíz del problema”. Marston planteaba la pregunta de un modo diferente: ahora mismo, el sistema bancario estadounidense tiene una enorme liquidez. La Reserva Federal tiene más del doble del tamaño de su balance y la mayoría está sentada en los balances de la banca comercial en Estados Unidos. “Si fueses la Reserva Federal, ¿cómo podrías animar a los bancos a usar parte de ese efectivo para avivar la economía?” La respuesta de Botín: “Se lo que les diría que no hiciesen. Si los bancos tienen un nivel de capital incierto, es lógico que sean extra prudentes. Al final del día, tenemos que ver cómo la economía se recupera y el des- apalancaminento. Desafortunadamente, algunos clientes están pidiendo ser refinanciados y tal vez no se lo merezcan”. Publicado el: 28/07/2010

64 http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=1925&language=spanish

Business Day

July 28, 2010 Asian Shares Down on New Signs US Economy Slowing By THE ASSOCIATED PRESS Filed at 11:21 p.m. ET TOKYO (AP) -- Most Asian markets retreated Thursday after fresh evidence of slower U.S. growth blunted appetite for riskier assets like stocks. The latest sign of sluggishness in the world's No. 1 economy came from the Federal Reserve's regional survey, a report known as the ''beige book.'' The Fed said economic growth in the U.S. has been steady during the summer in some cities, but was slowing in others like Atlanta and Chicago. The survey followed a U.S. Commerce Department report that showed durable goods orders fell 1 percent in June. Economists expected a 1 percent gain. Japan's Nikkei 225 stock average finished the morning session down 52.85 points, or 0.5 percent, to 9,700.42. Investors moved to lock in profits following a 2.7 percent jump the previous day. Activity in the tech sector was dominated by reports that Panasonic Corp. plans to make Sanyo Electric Co. and Panasonic Electric Works Co. into full subsidiaries. Sanyo surged almost 27 percent. Shares of Panasonic tumbled 5.4 percent. South Korea's Kospi fell 0.2 percent to 1,771.32 and Hong Kong's Hang Seng index lost 0.4 percent to 21,014.53. Australia's S&P/ASX 200 was down 0.4 percent to 4,510.4 on weakness in banks. Markets in Taiwan and Singapore also fell while benchmarks in China, Indonesia and New Zealand were higher. In New York Wednesday, the Dow Jones industrial average finished down 0.4 percent at 10,497.88.The broader Standard & Poor's 500 index fell 0.7 percent to 1,106.13, while the Nasdaq composite index fell 1 percent to 2,264.56. In currencies, the dollar fell to 87.22 yen from 87.44 yen late Wednesday in New York. The euro rose slightly to $1.2999 from $1.2996. Benchmark crude for September delivery was up 4 cents at $77.03 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped 51 cents to settle at $76.99 on Thursday. http://www.nytimes.com/aponline/2010/07/28/business/AP-World- Markets.html?_r=1&th&emc=th

65 07/28/2010 05:06 PM The Dragon's Embrace China's Soft Power Is a Threat to the West By Erich Follath China may have no intentions of using its growing military might, but that is of little comfort for Western countries. From the World Trade Organization to the United Nations, Beijing is happy to use its soft power to get what it wants -- and it is wrong-footing the West at every turn. Former Chinese Foreign Minister Qian Qichen once told me, half with amusement and half with resignation, that military people around the world are all more or less the same. "They can only be happy when they have the most up-to-date toys," he said. If this is true, Beijing's generals must be very happy at the moment. China has increased its military budget by 7.5 percent in 2010, making funds available for new fighter jets and more cruise missiles. Beijing's military buildup is a source of concern for Western experts, even though the US's military budget is about eight times larger. Some feel that China poses a threat to East Asia, while others are even convinced that Beijing is preparing to conquer the world militarily. Nothing could be further from the truth. Unlike, say, the United States, the People's Republic has not attacked any other country in more than three decades, not since it launched an offensive against Vietnam in 1979. And even though Beijing's leaders periodically rattle their sabers against Taiwan, which they refer to as a "renegade province," they have no intention of entering into any armed conflicts. Unlike many in the West, they have long since recognized that bombs are little more than deterrents these days. In today's asymmetric conflicts, it is difficult to hold on to territory captured in bloody battles. War is an instrument of the past, and Mao's argument that "political power grows out of the barrel of a gun" no longer holds true today. Soft Is the New Hard It is, however, true that the Chinese are in the process of conquering the world. They are doing this very successfully by pursuing an aggressive trade policy toward the West, granting low-interest loans to African and Latin American countries, applying diplomatic pressure to their partners, pursuing a campaign bordering on cultural imperialism to oppose the human rights we perceive to be universal, and providing the largest contingent of soldiers for United Nations peacekeeping missions of all Security Council members. In other words, they are doing it with soft power instead of hard power. Beijing is indeed waging a war on all continents, but not in the classical sense. Whether the methods it uses consistently qualify as "peaceful" is another matter. For example, the Chinese apply international agreements as they see fit, and when the rules get in their way, they "creatively" circumvent them or rewrite them with the help of compliant allies. But why are politicians in Washington, Paris and London taking all of this lying down, kowtowing to the Chinese instead of criticizing them? Does capturing -- admittedly lucrative -- markets in East Asia and trying to impress the Chinese really help their cause? The Communist Party leaders manipulate their currency to keep the prices of their exports artificially low. The fact that they recently allowed their currency, the renminbi, to appreciate slightly is evidence more of their knack for public relations than of a real change of heart. They are known for using every trick in the book when buying commodities or signing

66 pipeline deals, with participants talking of aggressive and pushy tactics. Meanwhile, these free-market privateers unscrupulously restrict access to their own natural resources. They denounce protectionism, and yet they are more protectionist than most fellow players in the great game of globalization. '21st-Century Economic Weapon' Beijing recently imposed strict export quotas on rare earths, resources that are indispensable in high technology, where they are essential to the operation of hybrid vehicles, high- performance magnets and computer hard drives. Some 95 percent of metals such as lanthanum, neodymium and promethium are mined in the People's Republic, giving Beijing a virtual monopoly on these resources. It clearly has no intention of exporting these metals without demanding substantially higher export tariffs. In fact, China apparently wants to prohibit exports of some rare earths completely, starting in 2015. Concerned observers in Japan have described the valuable resources are a "21st-century economic weapon." The Chinese have dismissed protests from Washington and Brussels with the audacious claim that World Trade Organization (WTO) rules allow a country to protect its own natural resources. China, a WTO member itself, is now playing a cat-and-mouse game with the organization. Despite several warnings, Beijing still has not signed the Agreement on Government Procurement, and it continues to strongly favor domestic suppliers over their foreign competitors in government purchasing. To secure a government contract in China, an international company has to reveal sensitive data as part of impenetrable licensing procedures and even agree to transfer its technology to the Chinese -- often relinquishing its patent rights in the process. China, for its part, is waging a vehement campaign in the WTO to be granted the privileged status of a "market economy." If it succeeds, it will be largely spared inconvenient anti- dumping procedures in the future. But do China's Communist Party leaders seriously believe that the rest of the world will actually reward them for their dubious trading practices? The answer is yes, and they have good reason to be optimistic. When it comes to diplomacy, Beijing knows how to win. Whether it's at the WTO, the United Nations or other international organizations, China is in the process of outmaneuvering the West everywhere. How China Cultivates Relations with the World In recent years, China's leaders have frequently joined forces with up-and-coming India, such as when the two countries jointly managed to torpedo UN climate negotiations and the Doha trade talks. More importantly, China's leaders have gained the support of African, Latin American and Central Asian countries with their major projects, gifts and goodwill. The Chinese have paid particular attention to nations with large oil and natural gas reserves, such as Venezuela, Kazakhstan and Nigeria, but they also cultivate relations with third-tier countries -- countries that the West tends to ignore but that have voting rights in international bodies like anyone else. Beijing has forgiven billions in loans to African nations and pampered them with infrastructure projects. It has generally tied its assistance merely to two conditions that are relatively painless for the countries in question, namely that they have no official relations with Taiwan and that they support the People's Republic in international organizations. What Beijing is not demanding of these countries is even more telling. Unlike Washington, London or Berlin, the Chinese do not tie their development aid to any conditions relating to good governance. While the West punishes authoritarian behavior by withholding funds (and, in some cases, indirectly threatens "regime change"), Beijing has no scruples about

67 pampering the world's dictators by building them palaces and highways to their weekend villas -- and assuring them territorial integrity, no matter what human rights violations they are found guilty of. Opportunity, not Problem China has friendly relations with some of the world's most problematic countries, including failed states and countries on the brink of failure such as Zimbabwe, Sudan, Myanmar and Yemen. "For the West, failed states are a problem. For China, they're an opportunity," writes American expert Stefan Halper in the magazine Foreign Policy, referring to these countries as "Beijing's coalition of the willing." The diplomatic weapon is having its intended effect. Already, the pro-Chinese voting bloc led by African nations has managed to obstruct progress in the WTO. Meanwhile in the United Nations, the People's Republic's influence is clear: Within the last decade, support for Chinese positions on human rights issues has risen from 50 percent to well over 70 percent. Washington, in turn, is no longer even included in certain key groups. The United States was not invited to take part in the East Asia Summit, and it was denied the observer status it had sought in the Shanghai Cooperation Organization, a sort of anti-NATO under China's de facto leadership that includes Russia and most of the Central Asian countries. Iran, on the other hand, was. A Model Worth Emulating Of course, none of this means that the West has already lost the battle for influence in Africa, Latin America and Asia. While Beijing cozies up to dictators, an approach the West cannot and should not take, America and Europe can compete, and even excel, in another area: by offering the ideal model of a democracy worth emulating. There has been much speculation in recent months that developing countries could be increasingly eyeing China's blend of a market economy and Leninism, economic diversity and strict one-party control as an attractive alternative to democracy. The United States engages too little in self-reflection while the Europeans are too involved with themselves, and both make themselves less attractive as a result, says former Singaporean diplomat and political science professor Kishore Mahbubani. He believes that China's momentum is ultimately unstoppable. Many people in the West who have always viewed trade unions as disruptive and given little heed to human rights violations agree with him. But even though the People's Republic may have become more attractive for some authoritarian rulers, only a few see it as a model. Beijing has already installed more than 500 Confucius Institutes around the world, in hopes of promoting what it views as China's cultural superiority. One of the results of a 10-fold increase in scholarships at Chinese universities is that almost twice as many Indonesians are now studying in China as in the United States. But whether it's Harvard, high-tech cell phones or Hollywood, people in many parts of the world still see the West as the home of everything desirable. Besides, many who flirt with Chinese-style dirigisme see it only as a transitional phase that makes sense from an economic point of view, and that ultimately -- as in South Korea, for example -- leads to a democracy with functioning institutions. More Forceful Approach Required What no one in Asia, Latin America or Africa wants is another messianic US president in the vein of George W. Bush, who believed that he could forcefully impose the American model on other countries. Many people in developing countries can easily distinguish between pompous

68 arrogance and healthy self-confidence. And especially in China, people tend to regard an excessive willingness to compromise as a weakness, and the stubborn adherence to one's own positions as a strength. Chancellor Angela Merkel, the woman at the helm of the world's former top exporting nation, ought to take a much more forceful approach to dealing with the leaders of the current export champion than she did during her recent visit to Beijing. She ought to point out that Germany has to draw the line somewhere: for instance, that it will not support China's bid for preferential status in the WTO as long as Beijing violates its rules. She should also make clear that Germany will not condone the ongoing industrial espionage activities of Chinese agents in German high-tech centers, the continued illegal copying of patents and the fleecing of German small and mid-sized companies in China. When China asks for the lifting of visa restrictions, Germany should ask the Chinese what it can expect in return. And Berlin needs not be concerned that China could react to such criticism by no longer doing business with Germany. The People's Republic acts out of self- interest and needs the West about as much as the West needs China. Besides, the Chinese are used to playing hardball. How Taiwan Gets What It Wants Ironically, Taiwan serves as a prime example of how to deal with Beijing. In a SPIEGEL interview 15 years ago, then Prime Minister Lien Chan complained to me that the People's Republic was cutting the ground from under Taipei's feet. He said that, although only 30 nations recognized Taiwan at the time, that would change. But it didn't. In fact, the total is now only 23 nations. Nevertheless, Taiwan's new leadership is taking a pragmatic approach and, realizing that it cannot win against China, has decided to embrace the mainland Chinese. After tough negotiations, the Taiwanese are now making deals with their big brother. In a trade agreement signed in late June, Taiwan achieved a reduction in Chinese tariffs on $13.8 billion (€10.6 billion) worth of goods it sells to China each year, while Beijing came away from the trade deal with a reduction of tariffs on only $2.9 billion of the goods it exports to Taiwan. "We did not make any compromises when it comes to our independence, and we achieved a favorable agreement," says Wu-lien Wei, Taiwan's representative in Berlin. Perhaps one needs to be Chinese in order to avoid being ripped off by Beijing. Translated from the German by Christopher Sultan URL:http://www.spiegel.de/international/world/0,1518,708645,00.html RELATED SPIEGEL ONLINE LINKS: • Photo Gallery: Beijing Flexes Its Muscles http://www.spiegel.de/fotostrecke/fotostrecke-57560.html • US-China Currency Dispute: 'No-One Is Going to Be Bought Off by a Tiny Revaluation' (06/26/2010) http://www.spiegel.de/international/world/0,1518,703062,00.html • Shanghaied: The Flip Side of China's Economic Miracle (06/02/2010) http://www.spiegel.de/international/business/0,1518,698058,00.html • Masters of the World: The Arrogance of China's Leadership (02/23/2010) http://www.spiegel.de/international/world/0,1518,679568,00.html • Rare Earths: High-Tech Companies Face Shortages as China Hoards Metals (11/05/2009) http://www.spiegel.de/international/business/0,1518,658977,00.html • SPIEGEL 360: Our Full Coverage of China http://www.spiegel.de/international/world/0,1518,k-7214,00.html RELATED INTERNET LINKS Foreign Policy: Beijing's Coalition of the Willing http://www.foreignpolicy.com/articles/2010/06/21/beijings_coalition_of_the_willing 28.07.2010

69 Europe’s Stress Tests: Only One Step Toward Banking Repair By: Nicolas Véron

The European banking “stress test” results announced on July 23 combined encouraging features with disappointing ones, which explains the paradoxical mix of reactions: markets rose, even as many analysts denounced what they saw as a sham. Their publication is unlikely to single-handedly bring the interbank market back to soundness. But it may prove an important step, depending on what policy initiatives come next. On the plus side, there is unprecedented data on sovereign risk exposures, individually and consistently reported by all tested banks except one Greek and six German institutions. The wealth of information adequately addresses investors’ biggest current concern. After having repeatedly called a sovereign default out of question, the authorities could not include one in their stress scenarios, but they have done the next best thing, as analysts can now do it in their place. Further good news is that, on first analysis, a Greek default would appear potentially manageable. Also positive is that, for once, peer pressure has brought results. Spain effectively imposed transparency to reluctant fellow continental countries (the UK, Ireland and the Nordics were already ahead), apparently with substantial behind-the-scenes help from the European Central Bank, International Monetary Fund, and US Treasury. The whole process illustrates that some EU-wide systemic financial problems can only be addressed through EU-wide policy initiatives, a useful lesson for the future. Meanwhile, the Committee of European Banking Supervisors (CEBS) has proven its value added by steering the exercise within the imposed deadlines. Sadly, bad news abounds too. The most obvious is the conclusion that only €3.5bn of additional equity would be sufficient to make Europe’s banking system sound again. Few will find this credible, even allowing for the improved macroeconomic environment since the US stress tests of May 2009 had identified a $75bn capital shortfall. The tests’ focus on Tier 1 capital, a questionable measure of strength, is also regrettable, and the argument that other ratios are insufficiently harmonized fails to convince. Supervisors should have tested core tier 1 under a more severe adverse scenario, to compensate for their assumption of no sovereign default. Furthermore, they should have provided more disaggregated information by asset class to shed light on risks other than sovereign. On these, the EU disclosure format is much less comprehensive than those used by the US last year, or by Spain on its own initiative. The poor communication ahead of the disclosures is another negative. On 17 June, EU leaders rushed to the decision to publish test results without realizing that their end-July deadline was

70 far too short given the complexity and diplomatic haggling involved. It would have been far better to set the deadline in September, and leave more time for coordination and preparation. Even after the deadline of July 23, 4pm GMT, CEBS could not make it clear that exposure to sovereign risk would be disclosed on a country-by-country basis, leading to unnecessarily negative first reports. This stands in stark contrast with the masterful channeling of market expectations by US authorities throughout late April and early May 2009. Of perhaps more lasting concern is the absence of a clear commitment from the EU authorities to the data disclosed last Friday. Both CEBS and the ECB made it clear that the capital assessment belonged to individual national authorities. Respect for member states’ sovereignty is understandable, but it means that nobody actually stands for the full set of disclosed numbers. Last but not least, Germany appears still in denial about its domestic banking crisis. Beyond the legal arguments, German authorities dragged their feet, resisted the call for disclosure, and eventually failed to deliver the full numbers provided by almost all others. Behind the bureaucratic inertia lies a deeper political quandary: German leaders have made too many proclamations of Teutonic virtue against shadowy Anglo-Saxon speculators and profligate Southerners to recognize that there is rot in the middle of their very own banking system, which incidentally happens to be uniquely interdependent with local party elites, left and right. As long as Chancellor Angela Merkel and her team do not amend this stance, Europe is unlikely to get rid of its lingering political fragility. Ultimately, history’s verdict will depend on what happens now. First, Europe’s banks still need to raise more capital, and authorities must find a way to encourage this even after having ostensibly given them a clean bill of health. The trigger for the publication was the eurozone sovereign crisis, and the aim remains to make the banking sector resilient enough to sustain a possible future public debt restructuring. Second, fragile eurozone countries must continue their efforts towards sustainable fiscal consolidation, so that if one eventually defaults, others can resist the contagion pressure. Third, it is crucial for the EU to replace the fledgling CEBS and similar committees on insurance and securities with more authoritative European Supervisory Authorities, as recommended last year by the Larosière Report. It would be disastrous if the ongoing discussions ended in stalemate. But, should adequate progress be made along these three dimensions, then the publication of stress test results may be judged to have been a success after all.

The author is a senior fellow at Bruegel in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington DC. Nicolas Véron Europe’s Stress Tests: Only One Step Toward Banking Repair28.07.2010http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2 866&tx_ttnews[backPid]=901&cHash=0039ebdaf1

71 Economy/ FinReg Wednesday, July 28, 2010 A slew of former regulators are set to lobby following FinReg's passage, reports Eric Lichtblau: "According to the analysis done by the Center for Responsive Politics, nearly 500 officials have gone through the 'revolving doo'" between government financial agencies and the private sector. Of that group, 148 former regulatory officials were registered to lobby the government last year or this year, representing virtually every regulatory agency. Executives at some leading law firms and lobbying shops said in interviews that they began increasing their hiring of former regulators in 2008, soon after the economic crisis hit, in anticipation of the current push for tougher regulations." A study indicates that credit cards spread money from the poor to the rich: http://bit.ly/ciGBZv A new paper from Alan Blinder and Mark Zandi concludes economic policies from 2008 and 2009 prevented a depression, reports Sewell Chan: "The economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration's fiscal stimulus program, the nation's gross domestic product would be about 6.5 percent lower this year..They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P." The SEC is reaching out to business executives as it implements FinReg: http://bit.ly/biukQK The unemployed are being politically radicalized by the fight over unemployment benefits, reports Annie Lowrey: "Among the biggest sites in the unemployment netroots is LayoffList, managed by Michael Thornton, a native of Rochester, N.Y. Thornton stared LayoffList in 2008; five months ago, he began writing articles and posting legislators' information. He now receives hundreds of emails and has logged more than a million hits. Thornton is finding that, rather than losing interest in politics since the end of the fight for extended benefits, the unemployed are "energized and motivated" and have started looking forward to the fall." Christina Romer is rumored to be thinking of leaving the CEA tolead the San Francisco Fed, reports Neil Irwin: "There are even more reasons that the San Francisco Fed might be interested in her: She is a first-rate academic, one of the leading scholars of macroeconomic history. She has deep ties to the bay area, having taught at Berkeley since 1988. And since coming to Washington at the beginning of 2009, she has gained considerable experience in the policy-making world, which she previously lacked. Add to that, Fed Chairman Ben Bernanke has a lot of respect for her, as do her Obama administration colleagues." Cities and counties face further job and service cuts: http://bit.ly/90O5iM Steven Pearlstein argues Obama can't afford to lose the fight over extending the Bush tax cuts: "It is the refusal to put any tax increase on the table that has impeded much-needed reform of the tax code and rendered impotent a bipartisan commission charged with figuring out how to rein in the budget deficit. And it is the tax bugaboo that stands in the way of an investment agenda to match the global challenges we face. If Obama fails to alter the political dynamic and finally slay the anti-tax dragon, it's game over for his economic agenda." Ruth Marcus argues for the expiration of the Bush tax cuts: "Think back to the beginning of the Bush administration tax cuts. It seems almost impossible to believe, but the argument then was that the budget surplus was too large. There was, or so President George W. Bush assured us, ample cash to cut taxes for everyone and protect the Social Security surplus and set aside $1 trillion over the next decade for "additional spending needs" and pay down the national debt." http://view.ed4.net/v/SFBD1U/ZM3JL/30Z94MK/8ZO7FI/MAILACTION=1

72 Business Day Economy

July 27, 2010 In Study, 2 Economists Say Intervention Helped Avert a 2nd Depression By SEWELL CHAN WASHINGTON — Like a mantra, officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression. Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved. In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year. In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years. “While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective,” they write. Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P. By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 — or about 6 percent of G.D.P. at the time. But the new analysis might not be of immediate solace to officials in the Obama administration, who have been trying to promote the “summer of recovery” at events across the nation in the face of polls indicating persistent doubts about the impact of the $787 billion stimulus program. For one thing, Mr. Blinder and Mr. Zandi find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program. If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.

73 The combined effects of both sets of policies cannot be directly compared with the sum of each in isolation, they found, “because the policies tend to reinforce each other.” Told about the findings, another leading economist was unconvinced. “I’m very surprised that they find these big impacts,” said John B. Taylor, a Stanford professor and a senior fellow at the Hoover Institution. “It doesn’t correspond at all to my empirical work.” Mr. Taylor said the Fed had successfully stabilized the commercial paper and money markets, but he argued that its purchases of $1.25 trillion in mortgage-backed securities have not been effective. And he said the Obama administration’s stimulus program has had “very little impact and not much to show for it except a legacy of higher debt.” The disagreement underscored the extent to which econometric estimates are heavily reliant on underlying assumptions and models, but Mr. Blinder and Mr. Zandi said they hoped their analysis would withstand scrutiny by other scholars. “When all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policy makers had not acted at all,” they write. http://www.nytimes.com/2010/07/28/business/economy/28bailout.html?_r=1

74 El examen a la banca europea El optimismo permite al Tesoro adjudicar deuda a tipos más bajos La prima de riesgo y la Bolsa mejoran por segundo día L. DONCEL - Madrid - 28/07/2010 Cuando incluso el Financial Times -el periódico que más duro ha pegado a España en los últimos tiempos- recomienda a Alemania que tome nota de la transparencia de las autoridades españolas, parece como si se estuvieran volviendo las tornas respecto a lo que ocurría en los días más duros de la crisis fiscal europea. El viernes se hicieron públicas las pruebas a la banca europea. Desde entonces, el riesgo país de España cae a plomo, la Bolsa de Madrid es la que más sube y Berlín paga su oscurantismo con un mayor coste de su deuda. Además, el Tesoro logró ayer financiarse a precios más bajos que en la anterior subasta. El Gobierno cumplió su objetivo al colocar 3.429 millones de euro en letras. Pero lo más importante es que lo hizo a un coste menor que en la emisión similar anterior: un tipo marginal del 1,17%, cuando en junio había tenido que pagar el 1,65% en las letras a seis meses; y un 0,7% frente a un 0,95% en las de tres meses. Ya ocurrió algo parecido la semana pasada, en lo que parece ser una tendencia que tiende a consolidarse. La demanda, de casi 11.000 millones, superó con mucho la prevista. Del total colocado, 971 millones de euros correspondieron a los títulos a tres meses; y los 2.458 millones restantes a seis meses. "Había una desconfianza enfermiza sobre las finanzas públicas y eso está cambiando. No tenía sentido lo que se estaba pagando por las letras", explica José Luis Martínez, de Citi. Pero hay más. La prima de riesgo, el dinero extra que España tiene que pagar para financiarse respecto a Alemania, ya cayó el lunes 16 puntos básicos, y ayer lo hizo otros 11, hasta los 137. Se acerca así poco a poco a los niveles que antes se consideraban de normalidad. El Ibex lleva dos días protagonizando las subidas de Europa: tras el 1,1% del lunes, ayer ganó un 1,32%. Y los seguros contra impago de la deuda o CDS, que tan famosos se hicieron hace unos meses, también pierden enteros. "Tenemos que felicitarnos por el buen resultado español. Pero el siguiente paso necesario es que haya más liquidez en el mercado de crédito. Es básico que la banca salga a los mercados mayoristas para encontrar financiación", asegura el analista de Citi. Por otra parte, Deutsche Bank salió ayer al paso de las críticas por ocultar su exposición a la deuda soberana europea y anunció que tiene 1.682 millones de euros en bonos griegos. Los bancos alemanes suman alrededor de 18.000 millones en deuda helénica, cifra muy superior a los 10.977 millones de Francia, el segundo país más expuesto. El optimismo permite al Tesoro adjudicar deuda a tipos más bajos http://www.elpais.com/articulo/economia/optimismo/permite/Tesoro/adjudicar/deuda/tipos/baj os/elpepueco/20100728elpepieco_4/Tes

Telefónica pacta comprar Vivo a Portugal Telecom por 7.500 millones La operadora española confirma la operación, que ha superado el veto del Gobierno luso, a la CNMV.- La portuguesa entrará en la brasileña Oi con el dinero M. JIMÉNEZ / R. MUÑOZ - Madrid - 28/07/2010 La negociación ha dado sus frutos. Telefónica alcanzó anoche un acuerdo para comprar a Portugal Telecom (PT) su 50% de Brasilcel, la sociedad que controla Vivo, según ha confirmado la operadora española a la CNMV. Fuentes conocedoras de la negociación han añadido que el acuerdo, que pone fin así a una batalla empresarial que ha durado más de dos meses, se ha cerrado en 7.500 millones de euros. La operación tiene el visto bueno del Gobierno portugués que preside José Sócrates. Las acciones de Portugal Telecom han sido suspendido en Bolsa hasta nuevo aviso antes del inicio de la sesión, mientras las de Telefónica han abierto al alza y, a las 09.30, subían un 0,83%. La compañía portuguesa aprovechará la mitad de los recursos que obtenga por la venta de Vivo para entrar en la también brasileña Oi a través de una ampliación de capital con la que pasará a controlar entre el 20% y el 25%. Los consejos de administración de ambas empresas analizarán la operación a lo largo del día de hoy, según ha avanzado Telefónica en la nota remitida al regulador bursátil. El precio final de la oferta es 350 millones superior al que fue aceptado por la junta de accionistas del pasado 30 de junio, pero que fue vetado por el Estado portugués mediante la acción de oro, declarada luego ilegal por el tribunal de la UE. Aunque el 16 de julio se dieron oficialmente por rotas las negociaciones, los contactos han persistido y al final han fructificado. El objetivo último de Telefónica es fusionar Vivo con Telesp, su operadora de telefonía fija, pero esa operación no se hará de forma inmediata y de momento ambas compañías seguirán operando de forma independiente. Telefónica ha optado finalmente por la vía del "diálogo y el entendimiento", como le pidió el presidente del Gobierno, José Luis Rodríguez Zapatero. La compañía española amenazó con instar la disolución de Brasilcel, pero sus servicios jurídicos eran conscientes de que el pacto solo preveía la ruptura de mutuo acuerdo, de modo que un arbitraje hubiera supuesto un proceso largo y de resultado incierto. La operación se ha cerrado finalmente dentro de los 12 días extra que PT había pedido a Telefónica para negociar y que la española, oficialmente, había rechazado. Visto bueno para entrar en Oi El acuerdo se alcanzó anoche tras contactos al máximo nivel durante todo el día entre los ejecutivos de las empresas. Previamente, Luiz Inácio Lula da Silva había dado a Sócrates la venia para que PT entrase en el capital de Oi, controlada por el estado brasileño, según publicó el diario Folha de São Paulo. Oi es la cuarta operadora móvil del país suramericano con una cuota de mercado del 20% frente a algo más del 30% que tiene Vivo, líder en ese segmento. La oferta final es un 31,5% superior a la de 5.700 millones que presentó el pasado 6 de mayo. A principios de junio ya había subido la oferta a 6.500 millones y la víspera de la junta, la

76 elevó a 7.150 millones. Finalmente, los gestores de PT han logrado para sus accionistas 1.800 millones más de los que Telefónica ofrecía inicialmente. Telefónica quería tenerlo todo listo para el cierre de la operación. Por ello, ha cerrado el préstamo de 8.000 millones que negociaba con varios bancos, bajo la coordinación de Citigroup, informó Reuters. El crédito se divide en dos tramos. La mayor parte, 5.000 millones, tiene un vencimiento a tres años, y un margen de 65 puntos básicos sobre el Euríbor. El segundo, de 3.000 millones, está suscrito a cinco años, a un interés de 80 puntos básicos sobre el interbancario. El préstamo, que se ha cerrado con sobresuscripción y se podría formalizar en días, servirá para financiar la compra de Vivo. http://www.elpais.com/articulo/economia/Telefonica/pacta/comprar/Vivo/Portugal/Telecom/7 500/millones/elpepueco/20100728elpepueco_1/Tes • Telefónica pacta comprar Vivo a PT por 7.500 millones • Telefónica abandona la oferta por Vivo • El Estado portugués veta la venta de Vivo a Telefónica • El conflicto entre Telefónica y Portugal se enquista • Telefónica plantea otra batalla por Vivo • PT acepta someter a la junta la nueva oferta de Telefónica por Vivo • Portugal veta la venta de Vivo a Telefónica

• Alierta reitera que la oferta de Telefónica por Vivo expira el viernes

77 From: [email protected] Date: Tue, 27 Jul 2010 10:15:51 -0400 Subject: JPMorgan Private Bank - Eye on the Market - July 27, 2010

Attached is our "Eye on the Market" update written by Michael Cembalest, Chief Investment Officer for the J.P. Morgan Private Bank. The summary includes our latest thoughts on the financial markets, the economy, and investment recommendations. Please do not hesitate to call or email us with any questions, comments and ideas. Let us know if you wish to be removed from this email going forward. Eye on the Market, July 27, 2010 Topics: US earnings and the Presidential pump; Asian equity valuations; European stress tests Some clients remarked that last week’s piece on unfunded U.S. and European entitlements was too depressing, particularly for summertime. Maybe it would have been better for November, or February. As for why we look at these things, here’s something Jeremy Grantham wrote recently: “We will generally be better investors if we recognize the worst and refuse to live in a fool's paradise". That more or less sums it up. Over the last decade, there have been substantial returns to doing so. As for what’s going right, U.S. profits continue to exceed expectations, in line with our models pointing to good results for Q2 and Q3 [April 27th, May 20th EoTM]. With more than half of companies reporting, 70% are beating revenue estimates, while 80% are beating earnings estimates (Europe also shows more companies outperforming than underperforming). Technology and industrials lead the pack, with positive guidance from rails, airlines and packaging. Financials remain a question mark: consumer de-leveraging, high levels of cash held by the banks’ best customers (less demand for credit), fierce competition for deposits (deposit growth is negative in 2010) and regulatory reform cast a shadow on pre-provision income.

Taking a broader view of corporate health, it looks OK. The first chart shows free cash flow to market capitalization, and the return on tangible assets. While the transmission to hiring, capital spending and dividends has been slower during this recovery, these trends support a foothold in U.S. equities and in credit. We have beaten the fiscal stimulus withdrawal risks and the slowdown in leading indicators to death, and will not repeat them this week. Our profit expectations are 8%-10% below consensus for 2010 and 2011; we retain our single-digit equity return forecasts for this year.

78 We had been waiting for Asian equity markets to finally incorporate the reality of stimulus withdrawal, which looks much further along. Our exposures to Asia ex-Japan are 2x-3x levels suggested by simple MSCI country weights. At our investment meeting this week, we discussed the chart below (left) sent to us by ISI, showing consistently positive returns in the 3rd year of the U.S. electoral cycle. The implication: Presidents and their supporters in Congress provide fiscal benefits to get re- elected. However, it might not be so easy this time: consider the increase in federal debt since the inception of each Presidency. We believe the administration will allow income and capital gains tax cuts on the top two income brackets to expire. For equities to register strong gains in 2011, it looks like fiscal policy will be a headwind rather than a tailwind. A recent Barclays paper estimated that expiration of these tax cuts could cost 1 multiple point on large cap equity valuations.

Inflation-watch: Grade Inflation from the Committee of European Bank Supervisors Last Friday, as European stress test results were released, I thought capital shortfalls for each country’s banking sector were being reported alphabetically. The first number, 3.5 billion, was presumably from Andorra, with the rest to follow. Not quite: the 3.5 billion bank capital shortfall was for all of Europe (we were expecting 60-90 bn). What to make of all of this?

* European banks raised 220 bn of capital coming into this ritual, so capital ratios had improved since last year (currently 10.2% Tier 1 and 8.8% excluding preferred and hybrid capital). Most European banks are not undercapitalized, and many show capital levels well above 6% Tier 1 even after assumed losses. But the purpose of a stress test is to apply a considerably darker outlook, which this exercise did not do (a). * The U.S. May 2009 stress tests assumed losses similar to the depths of the 1930’s Depression, and were 2-3 times higher than CEBS loss assumptions. We cannot substantiate the reported CEBS assertion that their test was a 1 in 20 year event and that the U.S. version was a 1 in 7 year event. The CEBS’ adverse case GDP growth is only 0.8% below today’s level.

79 * There are substantial losses assumed in the adverse case (560 bn). But losses happen to be offset by an identical amount of projected pre-provision income. Problem solved? Adverse case pre-provision income is only 5.5% below 2009 results. For a region kicking off an austerity program, this might not be conservative enough. * CEBS capital adequacy targets include hybrid securities and preferred stock. Excluding them, capital needs would only be 10 bn higher under the CEBS case. But under a more adverse loss case, capital needs would be 60 bn higher. * Sovereign stress was only applied to trading books and not larger “hold to maturity” books. On private sector exposures, default assumptions were expressed in Table 4 as a “percent of a percent” (i.e., real estate defaults expected to rise by 20%). That could mean from 3.0% to 3.6%, or 10% to 12%. That’s a big difference, and the reporting convention is very odd (b). * European banks relying heavily on wholesale funding may need to shrink, raise deposits and pay more to issue long-term debt. The ECB can help with the transition, but the test probably did little to alter the course of this adjustment. A cynic might argue that the tests were designed to show small incremental capital needs, as a larger shortfall might have triggered the EFSF borrowing mechanism, support for whose actual use in Germany is still unclear. There are modest signs that financial market fear is receding (ECB sovereign bond purchases shrinking; Greece, Spain and Portugal tapped short-term debt markets; Germany issued long-term debt; BBVA issued a secured bond; falling excess bank balances on deposit with the ECB; etc). But what Europe really needs is proof it can survive a large fiscal adjustment without creating a self-reinforcing loop of lower growth. Recent strong data out of Germany and the UK help, but recovering German growth and confidence appears driven heavily by exports and not consumption. That does not imply a demand boost for peripheral Europe, and suggests a continuation of the disparate growth trends that have persisted for the last decade. No changes to portfolios; we intend to retain the barbell of US and Asian exposures as the core of our equity holdings. I asked European Private Bank Strategist Cesar Perez to comment further. He has spent a lot of time with finance ministries, investors and politicians over the last few months, and has some interesting observations. His thoughts appear below. Michael Cembalest Chief Investment Officer J.P. Morgan Private Banking Notes: (a) Remember the Monty Python sketch in which the Spanish Inquisition torments a captive by forcing her to sit in a comfortable chair? (b) US commercial real estate delinquencies rose from 0.8% in Jan 2009 to 7% in June 2010. That’s an increase of 6.2% that the CEBS would have reported as 775%. Under this format, the CEBS would describe Uruguay as having 100% more World Cups than England (2 vs 1).

80 Homage from Catalonia: Cesar Perez on the stress tests Even if the CEBS test had required more than 3.5 bn in new capital, it might not have addressed the liquidity challenges facing European banks. Yesterday’s softening of Basel 3 liquidity and capital requirements by the G-20 (by a committee chaired by ECB President Trichet) may reduce some near-term pressure. But as the first chart below shows, European banks relied much less on deposits as they grew their balance sheets over the prior decade of expansion. If wholesale funding markets and the ECB are not willing to keep financing these loans, it will require more costly customer deposits, decreasing leverage or more issuance of long term debt (at possibly higher spreads). All these measures imply lower ROE for the sector in the coming years. The second chart below shows the redemption profile of European bank debt. While 2010 and 2011 maturities are not that different from the 2000 to 2008 average, we are in a new era regarding appetite for European bank debt.

What would a more adverse stress test result in? Consider the last chart. It shows the concentration of 47 banks with post-stress test Tier 1 ratios from 6%-9%. Using more conservative capital and loss assumptions, these banks would need 60-75 billion in equity. As we wrote last week, the CEBS bank universe has more than 1 trillion of existing core Tier 1 equity. As a result, raising another 75 bn should not have resulted in a systemic failure, particularly given private and public sector resources to recapitalize large and mid-size banks. In that regard, we consider the stress tests a missed opportunity. Disclosure in Europe has been different across the board. The Bank of Spain gave full disclosure of 95% of the banking sector, even though only 50% was required. Spain also disclosed the full breakdown of the loan portfolio, so despite not using aggressive assumptions, analysts now have enough information to run their own. In Germany, six banks did not publish the breakdown of sovereign debt holdings, although as of this morning, more disclosure appears forthcoming. These gaps may result in continued unease regarding undisclosed risks that are still present. Spain's Bankinter issued a “covered bond” for 400mn at 3-year swaps + 2.4%. Covered bonds are secured both by the issuer’s credit and by a specific pool of underlying loans. These securities were issued as tight as swaps + 0.85% last March. But it does show signs of life in demand for risk in the primary market, alongside Spain’s successful refinancing of 30bn in sovereign debt this month. The ultimate verdict on the CEBS stress test is whether this re- opening of debt markets continues, or whether the ECB will have to finance the transition themselves.

Cesar Perez, Head Strategist, Europe-Middle East-Africa

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Levy confirms trend towards more deposits Published: 06 July, 2010 The world average loan-to-deposit ratio has fallen to 87.35% from close to 100% last year as deleveraging of the banking sector continues. One major impact of the financial crisis is the shift back to deposits as the major source of bank funding, and future regulation and taxation policies may push this trend along even further. For example, the UK's announcement of a banking levy in its June budget statement will be based on a bank's liabilities minus Tier 1 capital, insured deposits and repo funding. Furthermore, the rate of taxation will halve on the remaining liabilities if they are financings of longer than a year.

This will push banks to raise more deposits to avoid the tax and to rely less on short-term capital markets fundraising to expand their balance sheets, an activity that got Northern Rock into trouble. French, German and US authorities are expected to follow suit with their own version of the banking levy. Of all the regions, eastern Europe remains the most leveraged, with a loan-to-deposit ratio of 114.58%, and western Europe's is still high at 98.38%. For everywhere else, ratios are below 80%, with Asia's down from 85.04% last year to 77.61% this year. Latin America's fell even further from 105.71% (based on IMF data) to 73.24% and the Middle East similarly from 101.58% to 79.49%. North America's ratio fell from 100.29% to 79.45%, but Africa's rose slightly from 68.37% to 71.45%.

83 The table below, showing changes in the number of banks in each rank of loan to deposits, also illustrates the deleveraging trend. In all the categories over 100% there have been falls, with a large 12 percentage point fall from 29% to 17% in the 100% to 125% category. In the lowest rank showing loan-to-deposit ratios below 50% there was a 9 percentage point increase from 3% to 12%. The largest proportion of banks - roughly 40% - are in the 75% to 100% range, which denotes a bank actively lending but still amply covered with deposits.

This is probably the optimum ratio for banks and various banking reports have identified sectors with loan-to-deposit ratios exceeding 100% and expressed concern - suggesting that 100% should be the cut-off point. Regulators will no doubt be looking at this ratio very carefully in future. Levy confirms trend towards more deposits 06 July, 2010http://www.thebanker.com/news/fullstory.php/aid/7461/Levy_confirms_trend_towards_m ore_deposits.html

Post-crisis reality bites for Spain's Cajas By Rodrigo Amaral | Published: 06 July, 2010

The cranes in Spain: a collapse in Spain's property market has created significant difficulties for the country's financial institutions Once considered one of the better-placed survivors of the financial crisis, the property bubble bursting in Spain has hit the country's savings banks hard, resulting in calls for consolidation in the sector. Writer Rodrigo Amaral Cajasur, a regional lender based in Cordoba, had to be rescued by the Banco de España in May, highlighting the difficulties of the Spanish mutual savings bank sector.

84 After being held up as one of the countries that got banking regulation right, and having sailed through the first round of the financial crisis in good shape, Spain is now coming to terms with domestic challenges in the form of a property collapse. During a long period of fast economic growth, Spaniards had not foreseen that an economy based on a property bubble was set for a hard landing and that challenges lay ahead for financial firms that had embarked too eagerly on a policy of lending to anything connected with the property market. The economic downturn that has hit Spain so hard since 2008 has been particularly nasty for some of the country's 45 mutual savings banks (cajas de ahorro), which account for about 50% of Spain's banking sector. With unemployment breaching 20%, many Spaniards have found it harder to pay their debts. Worse has been the situation for property developers and construction companies, which have seen demand for new homes fall off sharply. The subsequent swelling of non-performing loan (NPL) ratios has forced banks to dig into their profits to increase legally required precautionary provisions. For the largest banks, such as Banco Santander, BBVA and La Caixa, this development has meant that their earnings statements might look less bright than previously. But smaller firms, especially the least capitalised among the cajas, have seen their capital levels deteriorate dramatically. Banco de España (BDE), the country's central bank, has had to intervene to rescue two of the cajas: Caja Castilla La Mancha last year and Cajasur in May. Raising alarm The demise of Cajasur, a regional lender based in Cordoba, a city with a population of 325,000 in the south of the country, raised the level of alarm concerning Spanish banks to new levels on the international markets. After providing €3.7bn in loans to property developers, Cajasur accumulated almost €600m of losses in 2009, a year when NPLs reached 8.29%, noted Deloitte, which audited its books. Cajasur's full name is Caja de Ahorros y Monte de Piedad de Cordoba. The central bank demands that banks maintain capital ratios of at least 8% but Cajasur's reached as low as 3.67%. As bad as the situation was, Cajasur should be viewed within a wider context: the bank represents a mere 0.6% of the assets held by the Spanish banking system. But its situation served as a stark reminder that plenty of other cajas were facing similar problems, although not on the same scale. The Bank of Spain's governor said in June that it had carried out stress tests on the bank, which showed that it had sufficient capital to support even adverse growth scenarios. "It is the private sector, and not the government, that has a huge debt problem in Spain," says Joaquín Maudos, a banking expert at Instituto Valenciano de Investigaciones Económicas, a Valencia-based research institute. "And about 60% of the debt is linked to the property sector." Mr Maudos says loans to property developers, construction companies and homebuyers combined amount to €1500bn, or 105% of the Spanish gross domestic product (GDP). While NPLs amount to about 5% of total loans of all types, for property-related loans they reach as high as 10%, he adds. Both commercial banks and savings banks were active in the property market during the boom, but the latter appear to have been the most extravagant lenders. Since last year, the market has widely assumed that the situation of some cajas was untenable and that they needed to strengthen their capital positions by means of mergers or acquisitions. However, due to political involvement in their administration, many cajas seemed to be wishing that their problems would simply go away, avoiding the need to take drastic measures.

85 The opposite has happened: Spain's banking sector found itself under renewed pressure this year, courtesy of the ongoing debt drama evolving in Greece and across the eurozone. "Concerns related to European sovereign risk have fed concerns about European banks that own sovereign debt on their balance sheets. As a result, the situation is clearly more negative now than at the beginning of the year," says Miguel Martín, the chairman of Asociación Española de Banca, the Spanish association of commercial banks. As a result, hopes that economic recovery would rescue the cajas failed to materialise. The Cajasur crisis marked an escalation of the cajas' problems. Structural problems In the view of some experts, the very structure of the cajas, many of which are controlled by political groups, prevented them from making hard business decisions if these would threaten the special interests represented on their boards. One banker has noted privately that Cajasur seemed to operate in an "other-worldly" way, in a reference to the fact that it was controlled by the church and that its chairman and main officials were Catholic priests. The cajas' unresponsive ways have even created rare common ground between Spain's prime minister, José Luis Rodriguez Zapatero, and the leader of the opposition, Mariano Rajoy, bitter rivals who nonetheless agreed in early May to pass through parliament a bill that would change the law on savings banks. The BDE has tried to push savings banks towards mergers with a €99bn programme, the Fondo de Reestructuración Ordenada Bancaria (FROB), designed to provide capital for banks that find partners to help them strengthen their capital levels. This package is open to all Spanish banks, but it has been widely assumed that the cajas have always been the main target. The FROB was employed to recapitalise Cajasur after its nationalisation, so that it can carry on working while a new partner is sought. It is likely that another caja will be chosen to take on Cajasur, but new ground might be broken if a non- mutual bank ends up absorbing it; Banco Sabadell, a mid-sized outfit, has been reported to be interested. The Cajasur episode caused quite a stir in the market. "The central bank is working within the legal limits of its remit and the Spanish legal framework is complicated, because this is a very decentralised state," explains Emilio Ontiveros, a seasoned market observer who is a partner at Analista Financieros Internationales, a Madrid-based financial consultancy. "Regional governments have much to say about the future of the cajas." Unwanted assets The BDE's latest measure was an order to accelerate the incorporation of distressed property assets into balance sheets. As a result of the inability of developers and homebuyers to pay their debts, banks have ended up owning billions of euros worth of assets such as flats and parcels of land. The central bank stresses that the banking system is capable of absorbing a devaluation of up to 50% in property assets thanks to the provisions that banks have already made. In any case, banks have been trying to get rid of their unwanted property assets as fast as they can. For instance, Bancaja, a Valencia-based savings banks, has created a mortgage with a three-year payment holiday for those willing to take one of the repossessed homes it now owns. As the acceleration of provisions will further erode the profits of the cajas, this may be the final push to accelerate a first round of consolidation among them. Experts have forecast that, in the next few months, the 45 existing cajas will be trimmed down to fewer than 24. A second

86 round of mergers could take place at a later stage, bringing the total down to about 15, according to estimates. Some of the cajas have already decided simply to merge their operations, such as Caixa Galicia and Caixanova, both based in Galicia province, and Caixa Catalunya, Caixa Tarragona and Caixa Manresa, all in Catalonia. Caja Mediterraneo (CAM), a lender that has its headquarters in Andalusia, is leading a multi-regional merger with four other entities. Others have opted for a sistema institucional de protección, a type of merger where each participant keeps its boards, brands and branch networks, while joining up their capital and balance sheets in a separate bank. Even the two biggest fish in the pond, La Caixa and Caja Madrid, have embarked on separate mergers, although the operations look more like acquisitions due to the difference in size between them and the other participants. Operations that get the green light from the central bank can be funded with FROB money, which involves an annual interest charge of 7.75% and repayment within five years. The money also comes with some conditions attached, including the closing of branches. The central bank is thus trying to address another problem faced by the banking system - a surplus of branches. "The provision of banking services was designed for a situation of rapid economic growth," says Mr Ontiveros. Experts believe that, of Spain's 44,000 banking branches, some 12,000 are surplus to demand. But fewer than 2000 closed their doors in 2008 and 2009.

Cajasur, a regional lender based in Cordoba, had to be rescued by the Banco de España in May, highlighting the difficulties of the Spanish mutual savings bank sector Closing branches Shutting bank branches is a sensitive matter because of the redundancies it causes in a country where unemployment is already high, and also because it would probably mean the interruption of services for isolated rural communities. Somehow, however, the trimming will have to come, says Mr Maudos. "Spain has one bank branch for every 1000 inhabitants. In the eurozone, the average ratio is one for every 1700. When there was a high demand for loans, this was not a problem. Now it is." Challenges for the banking system do not stop there. They must also find ways to access new sources of funding as, during the boom years, both banks and cajas became very dependent on the interbank markets to compensate for Spaniards' low levels of savings. The global financial crisis cut this tap for some months and, with concerns about Spain's fiscal position, access to interbank money is again in jeopardy. Reining in spending Fortunately, Spanish consumers, fearing a long economic crisis, have begun to rein in their spending, and savings rates have increased from 11% of GDP before the crisis to almost 25%, according to the Spanish business college Esade. In order to profit from this new trend, banks

87 have engaged in a 'war for deposits' in which savers have been offered rates of up to 4% a year, in a tactic that some executives have described as 'suicidal'. The difficulty in accessing funding is particularly acute for the cajas, which do not have the option of issuing equity to attract capital, says Robert Tornabell, an economist at Esade. CAM has already issued 'participative quotas' - shares without voting rights - and such options have been studied by other cajas. The International Monetary Fund (IMF) has proposed that savings banks be granted the right to "voluntarily" become a listed company. This idea was poorly received as the IMF also urged the government to make it mandatory for cajas that are "systemically important" - which probably means La Caixa and Caja Madrid - to become joint stock companies. It is not all bad news for Spanish banks, however. Mr Maudos says that, for all their problems, the country's banks remain more competitive and potentially more profitable than their European peers. Boosted by their international adventures, Banco Santander and BBVA have posted solid results so far this year, as has La Caixa, the largest of the savings banks. Mr Martin stresses that the IMF has described the Spanish banking system as sound and as having robust capital provision, with particularly positive comments for the commercial banks. But this could change if the economic situation persists. "If economic stagnation lasts too long, the cajas will not be the only entities to suffer. The banking system as a whole could struggle," says Mr Ontiveros. Mr Tornabell goes further. "It is possible that some consolidation could happen among the smaller commercial banks, or that a foreign bank could take over one of them," he says.

Rodrigo Amaral Post-crisis reality bites for Spain's Cajas Published: 06 July, 2010http://www.thebanker.com/news/fullstory.php/aid/7429/Post- crisis_reality_bites_for_Spain_s_Cajas.html

Top 1000 World Banks 2010 By Philip Alexander | Published: 06 July, 2010

Many Western banks are rebounding from the huge losses of 2008 and have strengthened their grasp on the top of the rankings, but elsewhere the pain is just beginning. Philip Alexander reports. The storm has passed, but the clear-up goes on - and the weather looks set to be unsettled for some time. The process of global bank deleveraging has manifested itself all too clearly in The Banker's Top 1000 World Bank figures with the total assets of the Top 1000 falling by almost $1000bn to $95,532bn. But this is perhaps part of a healthy cleansing process. Profitability has rebounded significantly in this year's rankings, almost quadrupling to an aggregate of more than $400bn, based on end-of-2009 results, compared with only $115bn in last year's rankings.Return on capital has not increased at the same rate, however, reaching just 8.2% this year from 2.69% in last year's rankings, and still well below the 20% recorded in 2007. This slower rise reflects the continued process of recapitalisation, taking the aggregate Tier 1 for the rankings to $4915bn, up 15% on last year. While that may dilute return on capital, it is also a reassuring sign of strengthening, in the Western financial sector in particular. The aggregate capital-to-assets ratio (CAR) for the Top 1000 reached 5.1% this year, up from 4.4% last year. The recapitalisation among the top 25 banks in the rankings is even more striking. The average ratio calculated using Bank for International Settlements (BIS) definitions - which includes all forms of capital and adjusts assets by risk-weighting - stood at 12.87% for the top 25 last year. Now it has risen to 15.47%, as leading banks respond to a more volatile world economy and the pressure from regulators to hold a larger (and higher- quality) capital cushion. In addition to banks raising more capital, the BIS ratio increase is also the result of reducing assets - down about $800bn for the top 25. Go west And who are these revived and recapitalised banks? As it turns out, the death of the Western banking sector has been greatly exaggerated. Several of the leading victims of the subprime crisis continue to haemorrhage money, but other banks in the US and western Europe have rebounded with vast increases in profits: Wells Fargo up an extraordinary $65.4bn, with Credit Suisse and Deutsche Bank both returning to profit in dramatic style. Two banks that have broken into the top 10, Barclays and BNP Paribas, are also among the biggest gainers in terms

89 of profits. Even those that are still losing money, such as Citigroup, Royal Bank of Scotland (RBS) and UBS, have pared back losses significantly. In fact, the top 25, which recorded an unprecedented $32.4bn loss in last year's rankings, have returned to make a positive contribution of $19.1bn this year. This is not the product of major changes in the composition of the banks in the top 25: two US banks switch places at the top of the rankings, and many others have hardly moved. There are two new entrants to the top 25, both the products of post-crisis mega-mergers. Lloyds Banking Group absorbs HBOS to enter straight in at 12 (Lloyds itself was at 48 pre- merger, with HBOS at 32). And the French banks Groupe Banques Populaires and Groupe Caisse d'Epargne, at 35 and 63, respectively, in last year's rankings, have merged to form Group BPCE, which comes in at 18. While Lloyds has managed to withstand the problems in the HBOS loan book and record a profit of $1.7bn, Groupe BPCE is taking longer to recover from the crisis. The losses of the two banks combined last year were $4.2bn, mostly from Caisse d'Epargne, and this has narrowed to $530m in the 2010 rankings. Squeezed out The two banks squeezed out of the top 25 are Agricultural Bank of China, which held Tier 1 steady and slipped from 24 to 28, and Japan's Mizuho, which suffered a 12.5% fall in capital and dropped 10 places to 26. The Japanese bank's performance is more representative. Agricultural Bank aside, Chinese banks in general were some of the year's top gainers, and Industrial Commercial Bank of China (ICBC) for the first time dislodged a Japanese bank (Mitsubishi) as the highest-ranked Asian bank. By contrast, Japan's sun continues to dip, and Japanese banks are especially prominent among the largest losses and largest declines in profit. Last year, Japanese banks in the Top 1000 recorded pre-tax profits of $16.5bn. This has collapsed to a loss of $11.1bn in the latest rankings, just as Western banks have recovered. Top 1000 aggregates Top 25 worst losses The market factor But beware: the improvement in profits among Western banks may have much to do with the sharp recovery in global stock markets and other market-based assets during the second half of 2009. For the first time, The Banker has this year expanded the data points that we capture to include about 30 new variables. Not all of these are shown in the Top 1000 here in the magazine, but all are available online at www.thebankerdatabase.com. One of these enhancements was to request banks to submit the risk-weighted assets measurements that they use to calculate their BIS ratios. This allows us to see which banks have a high proportion of market-risk-weighted assets in their portfolio. It is no surprise that Goldman Sachs, the investment bank that obtained a universal banking licence in 2008 to access Federal Deposit Insurance Corporation (FDIC) coverage, is near the top of the list. But other banks with high market-risk ratios include RBS, Standard Chartered, Deutsche Bank, Belgium's KBC Group and both the Swiss banking giants, Credit Suisse and UBS. Of course, we cannot know for sure how sensitive these assets are to market movements, but the fact that the risk-weighted list includes several of the banks that enjoyed the biggest improvement in profitability in 2009 suggests that the stock market

90 declines of 2010 will cause some pain. What is also striking is the number of Russian banks, often closely held by a small group of private owners, that are high up the list. Best year-on-year profit differential ($m) Regions by total Tier 1/total assets/total pre-tax profits 2009 Worst year-on-year profit differential ($m) Russian exposure Russian banks proved especially exposed when the country's stock market plummeted in late 2008 and early 2009, either directly or through clients using shares as loan collateral. Russia's state-owned Gazprombank rebounded from a $2.6bn loss in last year's rankings to a $2.6bn profit, and the bank acknowledged stock market exposure as a significant factor in its annual reports. Closely held National Reserve Bank, which has a higher proportion of market- risk assets than Goldman Sachs, was among the global top 25 banks for return on assets in this year's rankings. But, again, it remains to be seen whether these performances can continue in weaker stock market conditions. Plain vanilla banking With regulatory pressure on US and EU banks to separate or curb proprietary trading operations, enforced by potential capital charges for poor risk management, all but the top trading houses are likely to devote more of their resources to plain vanilla deposit banking. The era of smaller banks trying to enhance return on assets with small-scale trading activities for which they cannot manage the risks may well be over, at least for as long as institutional memory lasts. So what does the world of banking look like without relying on a rallying stock market? Emerging market banks tend to have a more traditional business model based on retail and corporate lending rather than financial market exposure. Profits at these banks have continued to grow, with China up almost 20% at $102bn, Asia (excluding Japan) rising 10% to $160bn, Brazil more than doubling to $28.7bn and Latin America as a whole also doubling to $35bn. But these improvements pale in comparison with the rebounds enjoyed in the US, UK and EU, where losses of $91bn, $51bn and $16bn, respectively, in 2009 turned into profits of $37.5bn, $29.5bn and $103.8bn in the 2010 rankings. As a result, the contribution of profits from emerging markets to this year's total has dropped substantially. China alone accounted for 73% of global banking profits in the 2009 rankings, compared with only 25% this time around. The lesson that profits based on trading operations can be more spectacular but more volatile than traditional bank lending is hardly new, although the past few years have brutally reinforced it. What will be newer is the economic environment that banks face, as the debt- driven boom of the past decade gives way to slower growth this decade. Top 25 banks by assets 2009 Top 25 banks by return on assets 2009 Provision and impairment Another enhancement to our rankings is the incorporation of provision and impairment data, together with a greatly improved fill rate for the non-performing loans (NPL) data field, for which information was provided by 80% of banks in this year's survey. What these data suggest is that many banks may not be fully prepared for rising NPL rates as their clients struggle with slower economic growth. Latin America and the Caribbean stands out as a

91 notable exception. Although only about a quarter of the region's banks reported NPL data, far more gave their provisioning numbers. As against reported NPLs averaging 2.79%, the region has already provisioned 9.3% of its loan book, implying that it is well prepared for economic downturn. A profitability drag Contrast this with Asia (excluding China, where banks did not provide provisioning data). Reported Asian NPLs are already at 2.5%, but provisioning is less than 1%. Or Africa, where provisioning of 2.9% is dwarfed by NPLs of 7.2%. Banks in these regions may have demanded high collateralisation on loans, perhaps valuing the collateral conservatively, or they may be hoping that a bounce in collateral values and economic recovery will enable improvements in the loan book quality before actual loan losses are crystallised. Either way, if economic growth does not impress, further provisioning is likely to drag on the profitability of banks. The reported NPLs of individual banks also shed light on the countries in which they operate. Privately owned Banco Macro in Argentina has reported NPLs of 3.3%. By contrast, Argentinian state-owned banks have either submitted no NPL data or have taken on far lower provisions (less than 1% in the case of Banco de la Nacion). In Spain, the mutual banks known as cajas have provisioned for 0.7% of total loans, with the notable exception of Caja de Ahorros y Monte de Piedad de Cordoba - better known as CajaSur. This bank took provisions of 3.5%, which was enough to trigger losses of $777m in 2009, reducing the bank's Tier 1 capital by almost 70%. CajaSur had to be rescued by the Spanish government in May 2010, but could be the canary in the caja coalmine. In June 2010, ratings agency Standard & Poor's (S&P) revised its loan loss assumptions on Spanish banks up to 5.3%, together with an eye-watering 14.5% for real estate-related lending - a speciality of the cajas. This shows just how far many of these banks may have to go in making provisions, and they have very little cash and low profitability with which to do it. Excluding CajaSur, total loans for the cajas in the Top 1000 are $1656bn, versus total profits of $6.8bn and Tier 1 capital of $116bn. The S&P assumption of 5.3% loan losses would equate to almost $88bn among the cajas in the Top 1000, and more government bail-outs cannot be excluded. Top 25 by pre-tax profit 2009 ($m) The China story On paper at least, Chinese banks are in a far healthier position. Of the 115 new entrants to this year's rankings, 37 are from China. Five of these are the result of better data transparency, as their figures have become available for the first time. But the other 32 have expanded their way into the rankings in the past year, with the highest new entrants being a number of rural credit unions that have merged into fully fledged commercial banks. Of the 84 Chinese banks now in the rankings, the average NPL ratio is just 1.54%, and 65 of the banks are reporting NPLs of less than 2%. However, as The Banker flagged up in its June 2010 edition, many observers are sceptical that such low NPL ratios truly reflect the health of the banking sector. Fitch Ratings analyst Charlene Chu notes the growth of unreported lending such as discounted merchant bills and bank-to-bank loan transactions. She is also concerned that bullet repayment credits and the rolling over of delinquent loans disguise whether or not clients will ever have the means to repay.

92 Provisions and npls by region 2009 Top 10 fastest declines in capital ($m) Reduced share of NPLs But, above all, the speed of asset growth in China has inevitably reduced the share of NPLs in the total portfolio. In the Top 1000, reported Chinese bank assets are up by almost 27% this year in aggregate. The average CAR and BIS ratios for the Chinese banks may provide a better measure of safety than NPL data alone, as they show the cushion available if those bad loan figures prove to be optimistic. The CAR and BIS ratios for Chinese banks were steady in this year's rankings, at 6.5% and 13.1%, respectively. But they are noticeably lower than those of other leading emerging markets where banks face similar risks, such as opaque client balance sheets and the expansion of lending among untested customers. The equivalent CAR and BIS ratios for Brazil are 10.6% and 14.3%, and for Russia 16.1% and 23.3%. Only in India are banks less well capitalised relative to their asset base and, even there, the BIS ratio is fractionally higher than for China, suggesting that Indian banks have a higher proportion of low-risk assets. State lender of last resort In practice, even if some Chinese banks find themselves in need of a capital injection, they need look no further than the $2400bn foreign exchange reserves of the Chinese government. In last year's Top 1000, we noted the role of taxpayers' money in maintaining the capitalisation of troubled Western banks. Straight government equity injections in the US and western Europe largely came to a halt in 2009, and indeed a number of prominent rescued banks such as UBS and Bank of America repaid their home governments. But as the financial crisis of 2008 transformed into an economic slowdown in 2009 - with global gross domestic product growth of just 1.3%, according to the International Monetary Fund - state support for banking sectors migrated from advanced into emerging markets. With the exception of Russia and Kazakhstan, this did not generally take the form of government rescues of ailing banks. Instead, state-owned banks have assumed an increasingly important role as lenders to the real economy, picking up the slack where the privately owned banking sector is in retreat. The Russian government has continued to ramp up the Tier 1 capital of 100% state-owned Russian Agricultural Bank and Gazprombank (the latter partly to replace losses incurred in 2008), while participating in the September 2009 share offering of VTB on a pro rata basis to maintain its 85% shareholding. In Ukraine, where high levels of foreign ownership limit the government's capacity to influence private banking activity, two formerly small specialist state development banks, Oschadbank and Ukreximbank, have been massively capitalised to allow greater lending to the real economy. Oschadbank hurtles straight into our rankings for the first time at 335, the largest Ukrainian bank, while Ukreximbank is up 349 places, to 455, after a 187% capital increase. In Brazil, the Tier 1 capital of state-owned urban development bank Caixa Economica Federal is up 65%, and that of the 90% federally owned Banco do Nordeste more than doubled. The argument of governments supporting state-owned banks in this way is that such banks do not undercut or poach business from the private sector - they are making loans that private banks are not prepared to consider. But it will be interesting to see what will happen to the

93 capital and assets of these state-owned banks once the crisis begins to fade and private banks become more active again. Emerging market capital adequacy Focus on capital quality The enhancements in the depth and breadth of data collected for the Top 1000 rankings coincide with the Basel Committee on Banking Supervision's work to redraft the Basel II agreements on bank capital in light of the lessons of the financial crisis - now generally known as Basel III. The consultation document published in December 2009 had drawn responses from more than 270 individuals and institutions worldwide, including many of the world's largest banks, by the time consultation closed in April 2010. The final outcome of the Basel Committee's deliberations is therefore uncertain, but several clear themes emerge. One is the desire to return to purer definitions of capital - excluding items such as deferred tax assets from Tier 1 and placing less reliance on Tier 2 as 'loss- bearing' capital. The second theme is tougher stress-testing of loss assumptions as part of the process of measuring risk-weighted assets: already, in June 2010, the Basel Committee has announced adjustments to the framework for measuring market risk. Affected regions Using two indicators from the Top 1000 rankings, The Banker can create an impressionist guide to which regions and countries might be most affected by the tighter environment for regulating bank capital. First, looking at the banks that are closest to the upper limit of Tier 2 (which must not exceed Tier 1) in their capital structure shows which may be required to raise the proportion of Tier 1. Second, by observing the largest divergences between the Top 1000's total assets and the total risk-weighted assets calculated for BIS purposes, it is possible to gauge where banks will be most sensitive to tougher assessments of asset risk weighting. Latin America and the Middle East look least affected, with risk-weighted assets equivalent to more than 70% of total assets in both regions, and Tier 2 at 19% of Tier 1 capital in the Middle East and just 7.5% in Latin America. In eastern Europe (including central Asia), there has been heavier reliance on Tier 2, which is almost 27% of Tier 1 on average. But this is offset by a stringent approach to risk weighting, with the result that the risk-weighted assets for the region are equivalent to more than 80% of total assets. Overall, western Europe looks the most affected region, and certain countries stand out. Italian and Austrian banks have been relying heavily on Tier 2, at 43% and 40% of Tier 1 capital on average (and much higher in individual cases). Meanwhile, Swiss banks have managed to secure particularly low risk weightings: risk-weighted assets are just 36% of total assets on average. This suggests that Swiss banks might find themselves with an increased value of risk- weighted assets (and hence a lower BIS solvency ratio) if regulators were to demand tougher stress tests of the risks on their books. Top 15 Equity Raisings by Banks, 2009 Liquidity requirements There is a final element to the Basel reforms that has many banks expressing concern: liquidity requirements look set to be tightened significantly. The Top 1000 already collects data on loan-to-deposit ratios and liquid assets held as a proportion of deposits. While fill rates for both these data fields have roughly doubled this

94 year thanks to a more intensive collection process, they are still less than 70% (less than 50% for the data on cash held), which makes meaningful analysis more difficult. However, we hope to continue making improvements in data collection that will allow still deeper insight from the Top 1000 next year and beyond. The Banker and its research team greatly appreciate the effort put in by participants in this survey, and their understanding that providing as much data as possible makes the resulting rankings even more valuable to all our readers. The research for The Banker's Top 1000 rankings was carried out by Adrian Buchanan, Guillaume Hingel, Charles Piggott, Valeriya Yakutovich, Adrian Knight and Ramona Tzanaki. Top 1000 world banks results http://www.thebanker.com/news/printpage.php/aid/7446/Top_1000_World_Banks_2010.html

Europe's Banks Face Second Funding Squeeze By Gavin Finch and John Glover - Jun 13, 2010 European banks at risk of writedowns from the sovereign debt crisis face a funding squeeze that may depress earnings, curb lending and imperil economic recovery in the region. Investors are shunning bank securities on concern Greek, Portuguese and Spanish bonds held by the lenders will plunge in value. Bank bond sales slowed in May to the lowest since Lehman Brothers Holdings Inc.’s failure in 2008 as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, depositing record funds with the European Central Bank. “There is a lot of mistrust,” said Christoph Rieger, co- head of fixed-income strategy at Commerzbank AG in Frankfurt. “Banks are trading with the ECB rather than with each other.” The central bank is preventing a crisis by providing banks with unprecedented funding. In substituting long-term money with shorter-maturity ECB cash, policymakers are making it harder to wean banks off life support as well as the short-term financing that regulators blame for the credit crisis. The cost of insuring bank debt from default rose close to a record last week. The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed to 208 basis points on June 8, approaching the all-time high of 210 basis points set in March 2009, JPMorgan Chase & Co. prices show. Italy’s Intesa Sanpaolo SpA, SEB AB, the second-biggest bank in the Baltic states, DnB NOR ASA and ING Groep NV have isolated themselves from the freeze by already selling all the debt they needed this year, according to estimates by Morgan Stanley analyst Huw van Steenis. Germany’s Commerzbank AG, France’s Natixis SA and Spain’s Banco Espanol de Credito SA have raised less than 35 percent of the senior funding they require, he wrote in a note to clients on June 9. Markets ’Doing Their Job’ “If you’re not a quality borrower, you’re not going to get funding from the market until you reduce your loan-to-deposit ratio and shrink your balance sheet,” said Simon Maughan, an

95 analyst at MF Global Ltd. in London. “The credit and bond markets are doing their job. Unless you reform, you’ll be stuck on government support for the foreseeable future.” An official at Natixis declined to comment. Officials at Banesto in Madrid didn’t return calls for comment. “We are comfortably funded,” Commerzbank spokesman Reiner Rossman said by telephone. Risk aversion is helping to spur sales of covered bonds, securities that are guaranteed by the issuer and backed by mortgages and other loans, reducing risk for investors and interest payments for the issuer. Financial firms have sold 11.5 billion euros ($13.9 billion) of the bonds this month, three times the total for May, according to van Steenis. Frankfurt- based Commerzbank raised 1 billion euros in a June 9 offering. ‘Rare And Expensive’ Banks are still struggling to borrow even from one another and loans with a maturity of more than one month are “rare and expensive,” making them depend more on ECB funding, Brice Vandamme, a London-based analyst at Deutsche Bank AG, wrote in a note to clients on June 9. Shut out of the interbank market, lenders tapped the ECB for 122 billion euros of seven-day cash at the central bank’s last weekly tender on June 8. The 96 bidders paid an interest rate of 1 percent on those loans, almost three times the one- week euro interbank offered rate of 0.37 percent. The ECB didn’t identify the banks involved. Europe’s lenders deposited a record 369 billion euros in the ECB’s overnight deposit facility on June 9, more than in the aftermath of Lehman’s collapse. Deposits have surpassed 360 billion euros for the past week. In the eight years leading up to Lehman’s collapse, euro-region banks deposited an average of about 277 million euros with the ECB. ‘Dangerous Games’ Firms are leaving cash with the central bank instead of lending it to other banks amid concern that counterparties may collapse. Deposits have also climbed to a record as the ECB flooded money markets with cash since 2008. “Central banks are helping with funding and liquidity and, if push came to shove, further accommodation would be provided,” said Nigel Sillis, director of fixed-income and currency research at Baring Asset Management in London, which has 35 billion euros of assets under management. “The ECB’s role isn’t to play dangerous games by withdrawing funding early: it’s to prevent a sovereign issue becoming a banking issue.” Increased reliance on short-term ECB loans and interbank funding runs counter to the rules being proposed by the Basel Committee on Banking Supervision. The committee, which sets minimum standards for banks in 27 countries, plans to require banks to maintain a “net stable funding ratio” of 100 percent, meaning they would need an amount of longer-term loans or deposits equal to their financing needs for 12 months. Basel Delayed? The Basel Committee’s proposals will have to be modified and phased in over a long period of time, according to Morgan Stanley’s van Steenis. Basel will require 1.5 trillion euros of incremental bank deposits and bond funding alone, he estimated. WestLB AG, the German state-owned lender bailed out during the financial crisis, is among banks paying the most to borrow for three months in euros, dollars and pounds, according to data from the British Bankers’ Association.

96 “Funding costs for any bank are a reflection of an institution’s credit ratings,” WestLB spokesman Richard Bassett said, referring to the bank’s BBB+ credit rating from Standard & Poor’s. “WestLB has benefited from recent restructuring and is now a profitable bank with a stable earnings base.” European banks are on average paying 4 basis points more than U.S. lenders to access three- month dollar cash, close to the widest since November, the BBA data show. Bonds ‘Crowded Out’ The ECB said on May 31 that Europe’s banks will have to write down 195 billion euros of bad debt by 2011, on top of the 444 billion euros of writedowns they have already logged, bringing the total to the equivalent of $762 billion. U.S. banks will have written down $885 billion by the end of 2010, the International Monetary Fund said in April. The ECB said European banks’ ability to sell bonds may be hampered as governments seek to finance fiscal deficits amassed in part to finance a bailout of the banking industry. With governments facing “heavy financing requirements over the coming years” there’s a “risk of bank bond issuance being crowded out,” the Frankfurt-based ECB said in its biannual Financial Stability Report. The ECB is going to have to continue supporting banks in the region for at least the time being, said Danny Gabay, director of Fathom Financial Consulting in London and a former Bank of England economist. “The banks are entering increasingly turbulent waters now,” Gabay said. “For too long policy makers in Europe were looking the other way, hoping we could sail through the financial crisis. Now their chickens have come home to roost.” To contact the reporters on this story: Gavin Finch in London at [email protected]; John Glover in London at [email protected] Gavin Finch and John Glover Europe's Banks Face Second Funding Squeeze Jun 13, 2010 http://www.bloomberg.com/news/print/2010-06-13/europe-s-banks-may-face-second- funding-squeeze-amid-sovereign-debt-crisis.html

Pain in Spain Is Savers' Gain as Banks Battle to Win Deposits Charles Penty, 8 Febr. 2008, 03:04 EST

A branch of Santander bank A bank advertises its savers rates Feb. 8 (Bloomberg) -- Across the street from Madrid's Las Ventas bullfighting arena another battle is brewing. Posters in the window of the local branch of La Caixa, Spain's biggest savings bank, entice savers with accounts that pay 8 percent interest for the first month. A block away, Banco Pastor SA offers 5.22 percent and a Scandinavian comforter. Other banks offer pearls and Nintendos. It's a scene repeated throughout Spain, where banks are vying for deposits to finance lending as the global credit crunch cuts off access to bond markets. Competition for funds has pushed the average interest rate on deposits of three months or more to 5.03 percent compared with an average of 3.64 percent throughout the eurozone, Spanish and European central bank data shows. ``They badly want customers' money, you can just tell,'' grain broker Luis Duran, 61, said as he left a Barclays Plc branch in downtown Madrid. Spanish banks increased lending three times faster than they boosted deposits during the past decade to fund a building boom that helped economic growth outpace that of the euro region. That forced them to rely on bond funding and left lenders vulnerable when the subprime crisis caused investors to shun mortgage-backed securities, said Inigo Lecubarri, who helps manage about $250 million at PCE Investors in London. `Deposit War' ``These are just the right conditions for a deposit war,'' Lecubarri said. ``They either find more deposits to finance themselves or they stop lending.'' Bank loans have risen to 173 percent of deposits from 122 percent a decade ago, according to a report from JPMorgan Chase & Co. European banks' average loan-to- deposit ratio is 123 percent. Securities now account for about 44 percent of funding, up from 15 percent in 2002. No Spanish financial institution has raised money by selling mortgage-backed debt since November, Bloomberg data shows.

98 `Ìt makes sense for Spanish banks to fund themselves in a more reliable way,'' said Peter Braendle, who manages about 64 billion francs ($58 billion) at Swisscanto Asset Management. ``But they're going to have to pay for it.'' Spanish bank shares have fallen as investors assess the impact of costlier funding. Banco Santander SA, Spain's biggest bank, is down 22 percent this year, compared with a 16 percent drop in the Bloomberg Europe Banks and Financial Services Index. Aggressive Competition Banco Popular Espanol SA, Spain's third-biggest bank, offers a deposit that climbs from 2.9 percent to 8 percent over six months, producing for an annual rate of 5 percent. At the end of the third quarter, Madrid-based Popular was the ``most precarious'' of Spanish banks because of its reliance on bonds, mortgage debt and commercial paper, which made up 41 percent of assets compared with 36 percent for customer deposits, Standard & Poor's equity analysts said in a Jan. 15 report. Popular's deposits increased by 16 percent in the fourth quarter, up from 5.9 percent a year earlier, the bank said Jan. 23, when it reported earnings. Client funds increased by more than loans for the first time in at least 12 years. ``The deposit war in Spain has just reopened,'' said Chairman Angel Ron. `Ìt has reopened because of this situation of closure of the international financial markets.'' Jorge Gost, chief executive officer of La Coruna-based Banco Pastor, said the bank's highest- paying deposits are only profitable if Pastor can persuade savers to take on additional products, such as credit cards and loans. Pastor pays 5.22 percent for a one-year deposit and also offers gifts such as bed comforters. Other banks offer George Foreman grills and car navigation systems. `Mean or Miserable?' `Ìf you've got the money for a bank deposit and you don't have a grill or a coffee machine, you're either mean or miserable,'' said Duran, the grain broker. `Ì'm not taken in by these tricks.'' Still, the renewed courtship of savers is yielding results: Deposits increased 14 percent in the 12 months through November, up from 12 percent in 2006, according to central bank statistics. The drive for deposits contributed to a 19.4 billion-euro outflow from Spanish mutual funds in 2007, the trade group Inverco said. The banks' challenge is to maintain deposit growth as homeowners' ability to save erodes, said Josep Prats, a fund manager at Ahorro Corporacion in Madrid. Average household debt in Spain has risen to 130 percent of income from 70 percent in 2000. Not all banks have joined in the fray. Banco Espanol de Credito SA, known as Banesto, won't raise interest rates to attract deposits, CEO Jose Antonio Garcia said Jan. 11, when the bank reported 2007 earnings. Savers will bring their deposits to Banesto because it is owned by Santander and can offer greater security, he said. The glut provides an opportunity for savers to profit by moving their cash from one bank to another to take advantage of the various short-term offers, said Ruben Sanchez, a spokesman for Facua, a Seville-based consumer rights association. ``What's good for us may not be good for the bank,'' Duran said.

99 Charles Penty, Pain in Spain Is Savers' Gain as Banks Battle to Win Deposits 8 Febr. 2008, 03:04 EST http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLGoTwc1h69s&refer=europe

100 COMPANIES Santander eyes £3bn UK autumn listing By Patrick Jenkins and Sharlene Goff Published: July 21 2010 23:04 | Last updated: July 21 2010 23:04 Santander is gearing up to list its UK operations on the London Stock Exchange as soon as this autumn in a deal that could raise an estimated £3bn (€3.5bn) to fund growth by the acquisitive Spanish bank. The group, which is on the verge of buying a portfolio of 318 UK branches from Royal Bank of Scotland, needs the money to fund that deal, following a spate of other acquisitions – most recently the €555m (£467m) purchase of 173 branches in Germany from Sweden’s SEB. Santander faces doubts as it seeks greater growth - Jul-21 In depth: UK banks and the State - Jun-17 In depth: European banks - Jul-25 Santander homes in on Latin America - Jul-11 Spanish data show 48% rise in loans from ECB - Jul-14 Lombard: Vodafone chairman under fire - Jul-22 “They will need to raise capital if they continue the expansionary shopping spree,” said Patrick Lee, analyst at Société Générale. “I can’t see them doing the UK deal without raising capital.” People close to Santander said that if market conditions were to allow it, the group would like to float 20 per cent of Santander UK, the subsidiary formed by the roll-up of its UK acquisitions – Abbey, Alliance & Leicester and parts of Bradford & Bingley. The transaction could raise an estimated £3bn. However, if the economy and stock market were not to show signs of sustained recovery, the bank would be unlikely to proceed, bankers warned. The main alternative way to fund the RBS branch acquisition – which is still in the course of negotiation but which could end up costing £1.5bn-£1.8bn – would be by means of group-level retained profits, they said. By the end of 2011, when the RBS deal is scheduled to be completed, Santander could have accumulated more than €10bn of retained profits, analysts said. If investor appetite were sufficient, bankers said that to raise fresh capital by means of a part- listing of the UK business – a decision that would replicate last year’s $7bn IPO of part of Santander’s Brazilian subsidiary – would be the preferred route. Analysts believe there are a number of reasons why investors would support a listing of Santander UK. First, following a spate of consolidation – during which Lloyds bought HBOS, Santander acquired Alliance and Leicester and Bradford and Bingley, and Northern Rock was nationalised – there is a considerably smaller pool of banking stocks for investors to choose from. The UK is also one of the Spanish bank’s strongest divisions. The business has increased its share of mortgages and savings accounts in the past year and reported profit growth of 15 per cent in the first quarter. It is also one of the most efficient UK banking operations, with a cost-

101 to-income ratio – a measure of how much it has to spend in order to generate revenue – that is considerably less than those of its rivals. However, as shown by Ocado, the online retailer, which was forced to cut its price tag hours before Wednesday’s stock market debut, to launch an IPO in such volatile market conditions is by no means straightforward. One analyst pointed out that investors could also be deterred by the uncertain regulatory environment. Banks face new capital and liquidity rules and they are also subject to numerous competition inquiries. http://www.ft.com/cms/s/0/3c51e9ea-94ff-11df-af3b-00144feab49a.html?ftcamp=rss

COMMENT

Wall Street: Short measures By Henny Sender Published: July 18 2010 20:24 | Last updated: July 18 2010 20:24

Wall Street woes: many customers say there are conflicts of interest in the way banks ‘cut the marks’ or value their assets when calling in loans

In February 2008, Ron Beller appeared to be on a roll. After a career at Goldman Sachs, the London-based American financier was running Peloton Partners, a large hedge fund that had just posted 87 per cent returns and scooped a coveted award. Securities sector seeks to fend off SEC drive - Jul-12 SEC to pay damages to sacked lawyer - Jun-30 Trading body hires former SEC official - Jun-17 SEC vote backs audit trails for equities - May-26 Lex: Flash crash smashed - May-19 SEC eyes trading circuit breakers - May-10 But in the space of a few days his success story soured. Mr Beller’s banks, worried about their exposure to his firm, called in their loans, causing a fatal squeeze at Peloton, which had borrowed a massive $10 of debt for every $1 of equity it owned. Two years on Mr Beller is trying to forge a new career in San Francisco. But the story of Peloton’s dramatic collapse reveals a bigger problem that haunts Wall Street: the uncertainty over how to value complex assets in a market tightly controlled by banks. Since the financial crisis began, many of Wall Street’s customers have been saying there are conflicts of interest in the way banks value the complicated securities at the heart of the global meltdown, giving a small cabal of institutions extraordinary power relative to their clients. Yet until recently these conflicts did not receive widespread attention, even though disputes about how to value complicated mortgage-backed securities were central to the implosions of

102 the biggest victims, including Bear Stearns, the American insurer AIG and numerous hedge funds. Recent investigations and congressional panels examining the causes of the crisis have suggested that Wall Street banks often engaged in predatory practices against both their most sophisticated and least sophisticated clients. Opening congressional hearings on Goldman Sachs in late April, Carl Levin, a Democrat senator, described a firm that “profited by taking advantage of its clients’ reasonable expectation that there was no conflict of economic interest between the firm and its customers”. He added that the bank’s actions “demonstrate that Goldman often saw its clients as objects for its own profit”. THE ABX APPROACH Until 2006, investors or regulators who wanted to track how prices were moving in the mortgage bond market often struggled to acquire good data. But in 2006, Markit, a data company, launched the ABX index, a series that tracks the price of derivatives on mortgage-backed securities. This has provided a fascinating snapshot of how prices collapsed in 2007 and 2008 – hurting many banks and investors. However, this transparency is far from complete. For, while the index provides a general price picture, the deals that were at the centre of disputes about “marks” – when banks tell clients that the value of their securities has dropped and that they must therefore post more collateral – involved securities far more complex than those tracked by the ABX. Moreover, because trading volumes were not published, some investors suspect that the banks sometimes managed to influence how the index moved. As President Barack Obama prepares this week to sign the financial reform bill into law, the issue reveals the sheer scale of challenge his administration faces in its efforts to overhaul Wall Street. For, while the reforms attempt to make finance more transparent and democratic and thus reduce the banks’ power, breaking deeply ingrained habits will be tough. Critics fear the measures will fail to solve the problem of predatory pricing. While they restrict proprietary trading and force the banks to reduce the use of their own money in most investment funds, they do little to address a world in which the banks can make money from their clients rather than with them, as Mr Levin charges. This raises the question of whether the government, as after previous financial scandals, will simply find itself outsmarted yet again. Recent history is sobering. Take the central issue of who controls information about prices. When funds invest in securities widely traded on public exchanges, there is general agreement on the value of a security at a given time. But when the security is not widely traded on an exchange, it is often hard for the buy and sell sides to agree on a fair price, particularly in a thin market with lots of volatility. This has practical implications, say, for funds dealing with banks that have provided them with loans to purchase securities. Typically, these loans are made against collateral – which is valued according to the market price at a given moment. However, if the bank later decides the market price has dropped too much, it might ask for its money back. Then, if the client cannot meet that call, the bank can seize securities at prices that their clients often complain is artificially low. What makes that pattern particularly pernicious, critics claim, it is that the bank itself usually determines the price of that collateral. Thus they can potentially act as judge, jury and executioner.

103 The Peloton saga is a case in point. When the firm started to ail in early 2008, as the value of its investment fell, its counterparties at the big Wall Street firms marked the portfolio down to dramatically lower levels (simply “unrealistic”, the fund claims). While it was furious, Peloton had little recourse since it had signed a contract with the banks that gave them the right to value those securities unilaterally. “The cards are all stacked in favour of the dealers,” says an individual familiar with the case. “The banks have both information and the incentive to push people out of positions and to kill their customers when they begin to smell blood.” Peloton was not alone. In 2007, when Bear Stearns was ailing, the second-tier Wall Street securities company was forced to sell mortgage securities to raise capital to support two of its affiliated hedge funds. However, as it made the sales, the prices of those securities collapsed. This was partly because of a fall in demand, but also because some rivals had trading bets that would pay out if the mortgage securities lost value, giving them an incentive to mark Bear Stearns’ books down – or, in trader jargon, to cut the “marks”. “Every dealer gave us approximately the same valuation except for one firm with a big short position in those same mortgage securities,” says a former Bear Stearns executive, referring to Goldman. “They gave us marks that were 20 points below everyone else’s. The disparities in values are massive.” Goldman, for its part, denies that it was deliberately pushing its marks down in order to make profits. “The marks we supplied [to Bear Stearns] represented fair market value for the underlying securities,” says a Goldman spokesman. Some investors, however, are so angry that they are prepared to push their claims in court. In June, Basis Yield Alpha, an Australian hedge fund, sued Goldman over collateralised debt obligations that the bank underwrote. The fund alleges that Goldman used its knowledge of the market for these complicated securities to sell them to clients at high prices – only to later drop its assessment of their value and ask for more collateral, all without offering “adequate explanation”. Basis Yield Alpha bought into Timberwolf, a CDO containing subprime securities. On paper, it appeared that Goldman was backing this deal. Moreover, the bank even provided the fund with a loan to enable it to invest. As these securities were already losing their value, Goldman sold them to the hedge fund at a discount, charging only 78 cents on the dollar. But a month before the sale, the bank had already started “considering making significant downward adjustments to the marks on the mortgage portfolio”, according to an internal Goldman e-mail. Then, a mere two weeks after Basis Yield Alpha made the investment, it received a series of margin calls as the bank revalued the securities. Goldman denies any wrongdoing. “Far from being misled, Basis made its investment in Timberwolf at a price it deemed attractive, which was at significant discount to the face value,” says a spokesman. In yet another case, during the course of 2007 the proprietary trading desks at Morgan Stanley and Deutsche Bank entered into a dispute about the value of a $16bn subprime CDO deal. Morgan Stanley valued the position at 95 per cent of its face value; Deutsche at 70. In the

104 event, since Deutsche had lent money to the Morgan Stanley team as part of the deal, it was able to force through the lower price – creating a $9bn loss for the American investment bank. (Deutsche’s proprietary trading desk went on to make more money from that transaction. One of the consequences of the settlement was a fall in the value of such CDOs in general – a shift that played into the hands of the German bank’s traders, who had taken considerable short positions betting on precisely such a price drop.) Both Deutsche and Morgan Stanley declined to comment. FINANCIAL REGULATION Attempt to introduce transparency leaves ambiguities The administration of Barack Obama has repeatedly tried to present the financial reform bill as a move to get tough on Wall Street. In doing so, it focused its rhetorical efforts on two central points. First, the legislation seeks to make the pricing of securities as safe and transparent as possible by moving business on to central clearing houses and exchanges. Second, it tries to stop banks acting like hedge funds – and trading against their own clients or exploiting conflicts of interest. In theory, if the reforms were to achieve these goals, the problems over “marks”, arising when banks tell clients their securities have dropped in value and they need to post more collateral, would disappear. In practice, it is far from clear that they will do so. On price transparency, it remains unclear what proportion of the derivatives world will move into clearing houses or exchanges. The bill refers to “standardised” products but the products at the heart of the dispute about marks were not standardised and thus may not be covered. The regulators are now gearing up for months of lobbying and fights with Wall Street as they try to translate the bill into workable rules that will define the meaning of “standardised”. On the issue of banks acting like hedge funds, there is also considerable ambiguity – and considerable distance between Congress and the regulators who will implement the stipulations of the bill, lawyers say. For example, the bill bans material conflicts of interest but there is no real definition of what that is or how much disclosure will be needed to remedy it. Similarly, it is hard to distinguish between helping customers buy and sell securities at attractive prices and trading for the firm’s own account. Wall Street firms have argued they can best serve clients by accumulating positions in anticipation of customer needs rather than simply responding to orders. That may be fair but it also blurs the line between what is done for customers and what is done for the bank. A central reason why banks have enjoyed so much power, and profit, in recent years is that they have been able to control information flows in obscure corners of the market that politicians do not usually have the energy – or appetite – to probe. As things stand, that is unlikely to change. By Gillian Tett and Henry Sender The most damaging case of all, however, concerns AIG. The insurance group’s troubles began in the summer of 2007 when Goldman, which had bought credit insurance from AIG on subprime CDOs, began calling for collateral as the value of those derivatives started to plummet. The bank asked for $4bn. AIG disputed the values, referring to documents that allowed each side to go to the market for alternative prices. However, the insurer’s executives say Goldman refused to accept prices from other dealers and eventually AIG had to “capitulate”. “AIG would not agree on a process to obtain third-party values,” the Goldman spokesman says. “The suggestion that we had an incentive to mark below market is wrong. We were prepared to trade at our marks and others, including the firms that AIG got indicative prices from, weren’t.”

105 The consequences were far-reaching. Previously AIG’s auditors had allowed it to value the insurance it sold on $69bn of subprime CDOs at historic costs, accepting that there were no observable market price. But when Goldman demanded collateral of several billion dollars, the auditors considered the bank’s numbers market prices and forced AIG to revalue its portfolio at greatly reduced levels. “The marks Goldman Sachs gave us were meant to maximise the collateral Goldman could extract from us,” concludes one former executive of AIG. Bankers dispute their clients’ claims that they are “predatory”, saying their actions reflect prudent risk management aimed at protecting their balance sheets. The tactics may strike clients as rapacious but, to many bankers, they are simply the way the financial game works. They also point out that borrowers – or customers – unhappy with the prices have recourse to third-party valuations or the law. In practice, this has offered little protection. When Peloton made financing agreements with counterparties such as UBS, for example, they specified that in the event of a dispute the provider of financing would have the exclusive right to determine prices. (UBS declined to comment.) Likewise when Bear Stearns faced margin calls, it was terrified of challenging the marks because it feared any resulting publicity would raise fears about its ability to meet its obligations. Consequently, some hedge funds conclude that the only way to cope with the unequal power relationship is to avoid hard-to-price securities altogether. A prominent example is John Paulson, the legendary hedge fund investor, who kept clear for fear of becoming victim of arbitrary prices and marks. (In a notable exception, his fund took negative positions in a CDO underwritten by Goldman that subsequently became the subject of litigation from regulators, settled last week when the bank paid $550m.) Other hedge funds, such as Oak Hill Partners, avoided such securities and traded only on more transparent mortgage indices – precisely because they wanted to steer clear of potential disputes with banks. The conditions giving rise to such caution are likely to remain. The financial reform bill is vaguely worded when it comes to what constitutes a conflict of interest and what banks must disclose. Some observers believe this is because lawmakers who were pushing for tighter definitions failed to win the argument with the majority that believed the focus should be on preventing broader systemic meltdown. “The bill says you cannot have material conflicts of interest but does not define them specifically,” says a leading financial lawyer. “Regulators do not think that proprietary trading was the cause of the crisis.” For Peloton such debates are academic. It was a notable casualty of the crisis. Then again, so to a lesser degree was its bank, UBS, which, ironically lost money as a consequence of marking down the securities held by Mr Beller. “By marking Peloton so low, they were actually slitting their own throats, since they had similar holdings,” says one person familiar with the case. http://www.ft.com/cms/s/0/76436fe6-9295-11df-9142-00144feab49a.html

106 El examen a la banca europea El coste de emitir deuda española vuelve a bajar El Tesoro obtiene un nuevo éxito y capta 3.428 millones con una emisión de letras a 3 y 6 meses a precios más bajos que hace un mes EL PAÍS 27/07/2010 El Tesoro ha aprovechado hoy la recuperación de la confianza en España tras las pruebas de resistencia a la banca para reducir el precio de emitir deuda sin renunciar a sus objetivos. En total, ha captado 3.428 millones de euros frente al rango de entre 2.500 a 3.500 millones previsto en letras a 3 y 6 meses. La demanda, de nuevo, ha sido superior a la oferta, sobre todo en los títulos con vencimiento en octubre ya que han cosechado una ratio de cobertura -número de bonos solicitados sobre los emitidos- de 5,6 veces. En las letras a seis meses, las peticiones han duplicado a la oferta. En cuanto al precio, el Estado se ha ahorrado en la operación de hoy más de 12 millones de euros en intereses. En concreto, el Tesoro ha comprometido un tipo del 0,672% en las letras a tres meses, frente al 0,913 % de la anterior operación a los mismos plazos realizada en junio. En los títulos a 6 meses, el interés medio adjudicado ha sido del 1,14%, casi medio punto porcentual menos que hace un mes, cuando se pagaron al 1,57%. Su tipo marginal, el último antes de cortar la subasta, se ha situado en el 1,17%, también inferior al 1,65% anterior. Con la de hoy, ya van dos subastas consecutivas en las que se reduce el precio de la emisión por primera vez desde abril. El optimismo reinante en el mercado de renta fija se ha dejado notar hoy también en la renta variable con una nueva jornada de subidas en la Bolsa española gracias al impulso que han cogido los bancos con los resultados de las pruebas de esfuerzo. El selectivo Ibex 35 ha logrado cerrar por cuarto día consecutivo en verde con un alza del 1,3%, con lo que mañana abrirá en 10.645 puntos, su nivel más alto desde finales de abril. Han destacado las subidas del Popular tras presentar resultados (7,68%), el BBVA (4,76%) Sabadell (4,18%) o Banesto (3,83%). El Santander, por su parte, ha avanzado un 1,96%. En el resto de Europa también han predominado las ganancias gracias a los positivos resultados de la banca y las buenas noticias sobre el sector inmobiliario en EE UU. También el euro ha seguido remontando posiciones, aunque al final no ha logrado mantener la cota de los 1,30 dólares sobre la que ha transitado durante buena parte de la sesión por primera vez desde el 3 de mayo. La prima de riesgo sigue a la baja La operación del Tesoro de hoy confirma la recuperación de la confianza en España y su economía desde inicios de julio. De entonces hasta ahora y en paralelo al anuncio y posterior publicación de las pruebas de resistencia a la banca europea, de las que España salió bien parada pese a que cinco cajas suspendieron, la prima de riesgo del país se ha reducido en más de medio punto porcentual. La mejora de este indicador, que se establece a partir del diferencial entre sus bonos a 10 años y los alemanes, de referencia por su estabilidad, alivia las condiciones de financiación del Estado, tal y como ha quedado patente hoy. Por extensión, también las de su sistema financiero. Hoy, la prima de riesgo ha vuelto a bajar y a media mañana se situaba en 137 puntos básicos, su nivel más bajo desde el 19 de mayo y muy lejos del máximo de 221 de hace un mes gracias

107 al descenso en 12 puntos básicos de la rentabilidad de sus bonos decenales hasta el 4,121%, frente al 4,88% que alcanzó a mediados de julio. Vencimiento de 24.663 millones en julio El anterior examen al que se sometió la deuda española fue el pasado 20 de julio, cuando el Tesoro colocó un total de 5.968 millones de euros en letras a 12 y 18 meses, casi el máximo previsto y también a tipos marginales ligeramente más bajos que en las últimas subastas. Con la de hoy, España ha cumplido sin mayores problemas su calendario de emisiones para julio, un mes que se anunciaba determinante por el vencimiento de 24.663 millones de euros de deuda. Con la de hoy, según los datos oficiales del Tesoro, ya ha captado 21.900 millones a lo largo de julio y contando con la operación sindicada con los bancos por 6.000 millones a 10 años. Según fuentes del Ministerio de Economía, la subasta ha tenido un resultado "muy positivo". Sobre si la publicación de las pruebas de estrés ha influido en la colocación, las mismas fuentes han recordado a Europa Press que ayer se produjo una relajación "muy grande" de los diferenciales en toda la curva de tipos. La 'hucha de las pensiones' cambia deuda de Francia, Alemania y Holanda por la española El Fondo de Reserva de la Seguridad Social vendió deuda pública de Francia, Holanda y Alemania para financiar la compra de deuda española en 2009, según un informe elaborado por la Secretaría de Estado de la Seguridad Social para el Parlamento. Fuentes del Ministerio de Trabajo han explicado que ello se debe a un "cambio de estrategia", después de que el Tesoro, ante la necesidad de financiar el déficit, comenzara a incrementar sus emisiones y ampliara el margen para la compra de deuda pública, limitada a alrededor de un 10% del total en circulación para la hucha de las pensiones, en un contexto en el que el Gobierno cerró el grifo de las aportaciones al Fondo. El documento recoge tres operaciones de venta de deuda procedente de países europeos para su reinversión en deuda nacional que, unidas a otros movimientos de la caja del Fondo con el mismo destino, hicieron que de los 58.017,3 millones de euros depositados en deuda pública en 2009 -el Fondo alcanzó los 60.022 millones de euros en 2009-, un 76,7% correspondiera a España, hasta 20,3 puntos porcentuales más que un año antes.

El coste de emitir deuda española vuelve a bajar27/07/2010http://www.elpais.com/articulo/economia/coste/emitir/deuda/espanola/vuelve/ba jar/elpepueco/20100727elpepueco_2/Tes

108 El examen a la banca europea Premio a la transparencia española La prima de riesgo y la Bolsa mejoran tras la publicación de las pruebas - Los mercados aplauden que España analizara más entidades y de forma más dura Campa visita varios medios en Londres para destacar las notas del sector UBS descarta que los tests despejen las dudas sobre bancos y cajas LUIS DONCEL - Madrid - 27/07/2010 Hay ocasiones en las que las buenas intenciones tienen su recompensa. Algo parecido ocurrió ayer, cuando la prima de riesgo española -sacudida en los últimos meses por los oscuros augurios sobre su economía- cayó con fuerza, hasta los 148 puntos básicos. Es este un nivel desconocido desde finales de mayo, antes de que los mercados viviesen sus días más turbulentos. Hay ocasiones en las que las buenas intenciones tienen su recompensa. Algo parecido ocurrió ayer, cuando la prima de riesgo española -sacudida en los últimos meses por los oscuros augurios sobre su economía- cayó con fuerza, hasta los 148 puntos básicos. Es este un nivel desconocido desde finales de mayo, antes de que los mercados viviesen sus días más turbulentos. Es cierto que España acaparó cinco de los siete suspensos que habían cosechado las entidades europeas. Pero, como se encargó de resaltar el viernes la vicepresidenta Elena Salgado, este aparente mal resultado se debía a que el Banco de España había analizado la práctica totalidad del sistema financiero, y a que los supuestos en los que se había apoyado eran los más pesimistas de toda Europa. Pese a las dudas que habían sembrado algunos analistas, los mercados compraron ayer este mensaje. No es solo que la prima de riesgo del bono a 10 años cayera en un día 16 puntos -efecto que se explica tanto por la caída de 11 puntos de la rentabilidad española, como por la subida de cinco de la alemana-, es que los desplomes fueron aún más intensos en los títulos a corto plazo, síntoma de que mejora la confianza sobre la evolución inmediata de la economía. El diferencial que España tiene que pagar respecto a Alemania por el bono, tanto a cinco años como a dos, descendió 21 puntos básicos. Ningún otro país europeo vivió ayer una mejora tan sustancial en sus condiciones de financiación. Los seguros por impago de deuda o CDS españoles también dieron un respiro, ya que fueron los que más bajaron. Portugal -otro país en la diana de los especuladores, que logró un aprobado para las cuatro entidades que examinó- pasó la reválida de los mercados, con una caída de la prima de riesgo de 10 puntos. En el otro extremo, la deuda alemana recibió el castigo más duro de toda Europa. Berlín paga así caro las serias resistencias de la canciller Angela Merkel a los stress tests, y las dudas sobre la exposición que su banca tiene a la deuda de países como Grecia, con graves problemas para hacer frente a sus compromisos de pago. No es este el problema de las entidades españolas, que sí arrastran el pesado fardo que supone el desplome inmobiliario, una morosidad que no deja de crecer y unas perspectivas económicas que siguen siendo sombrías. El secretario de Estado de Economía, José Manuel Campa, viajó ayer a Londres para convencer de los buenos resultados españoles a medios como Financial Times o The Economist. Campa ya había recurrido en febrero a su excelente inglés y a sus dotes académicas para persuadir a inversores y medios especializados de que la situación española

109 no era tan mala como se deducía de los ataques que esos días recibía en los mercados todo lo que recordara a periferia europea. Los inversores en renta variable bailaron al mismo son que los de renta fija: el Ibex español experimentó la mayor subida, del 1,14%, entre las Bolsas europeas más importantes. La euforia se contagió a casi todos los bancos. El franco-belga Dexia fue el ganador absoluto, con un alza bursátil superior al 9%. Más discretos fueron los españoles: BBVA subió un 2,5%, y el Santander, un 1%. La mayoría de analistas ven con buenos ojos la reacción de los mercados a las pruebas hechas públicas en la tarde del viernes. "Estos ejercicios van a tener resultados positivos, sobre todo para España, que se beneficiará de la mayor transparencia. Se podrá recortar la prima de riesgo que paga por su sector financiero, pero no la parte que se explica por sus mayores dificultades económicas. Se acercará a los 100 puntos básicos, pero sin llegar a tocarlos", señala el catedrático y consultor de la Reserva Federal Santiago Carbó. "Es verdad que el efecto es positivo. Aunque continúa el debate sobre si las pruebas son lo suficientemente duras, o si los supuestos sobre la evolución del mercado inmobiliario son razonables. El mercado ha celebrado sobre todo el aumento de la transparencia. España ha sido hasta ahora de las más castigadas por los inversores. Y, por tanto, para convencer tenía que ir más allá en transparencia y dureza de las pruebas. La respuesta de los mercados corrobora que fue una decisión correcta", añade Ángel Cabrera, director de la escuela de negocios estadounidense Thunderbird. "Los resultados son tranquilizadores y deberían permitir el inicio de la normalización de la operativa en los mercados mayoristas, como reflejan las primeras reacciones de los mercados, tanto en la cotización del euro, como en las valoraciones de activos de renta fija y renta variable", señalan los analistas de AFI. Pero no todas las lecturas son tan alegres. UBS -cuyos analistas se han equivocado sistemáticamente en sus recomendaciones sobre los grandes bancos españoles en los últimos años- insiste en que los problemas esenciales de España, como la elevada exposición de sus bancos al inmobiliario, no han cambiado. "Aparte de la reacción del mercado a corto plazo, no vemos que estos ejercicios despejen las dudas sobre los bancos españoles", señala la entidad suiza en una nota. El economista estadounidense Nouriel Roubini echa más leña al fuego del pesimismo. "Los supuestos asumidos sobre crecimiento económico y riesgo soberano no son suficientemente realistas", declaró a la cadena CNBC. LUIS DONCEL Premio a la transparencia española27/07/2010 http://www.elpais.com/articulo/economia/Premio/transparencia/espanola/elpepieco/20100727e lpepieco_1/Tes?print=1

110 Renta variable Los inversores extranjeros poseen el 40% de las compañías españolas cotizadas La participación de las familias repunta, mientras el sector financiero la reduce a mínimos históricos EL PAÍS 27/07/2010 Al parecer España no es tan peligrosa para los inversores como parecía. Por lo menos esto se desprende del último informe publicado por el Servicio de Estudios de Bolsas y Mercados Españoles (BME), según el cual los inversores extranjeros han incrementado su participación en valores de compañías nacionales cotizadas. A cierre de 2009, un 40% de las mismas ya está en manos de japoneses, arabes y otros países. Aunque no hay que dejarse confundir, durante la recesión este porcentaje ha continuado en crecimiento. De hecho, ha sido 2006 ( un año antes de que se hablase de crisis) el único año en que este dato ha caído respecto al ejercicio anterior. Las razones de esta fuerte presencia extranjera son variadas, pero todo apunta a que las necesidades acuciantes de liquidez y capital de algunas compañías han sido aprovechadas por estos inversores para reforzar su presencia en un accionariado, que en muchos casos ya llevaba tiempo oyendo otros idiomas diferentes al castellano. La presencia de bancos, cajas y demás entidades presentes en el sector financiero ( entre las que se incluyen compañías de seguros y fondos de inversión colectiva), han reducido su participación hasta el 12,6%. Un valor que no se conocía en toda la historia del estudio que se realiza desde el año 1992 y que tuvo su nivel más bajo en 2000 con un 14,4%. En el lado contrario de la balanza estan las familias, que han ganado un punto porcentual y ya se sitúan en un 21,1%, valores cada vez más cercanos a los tiempos anteriores a la crisis. http://www.elpais.com/articulo/economia/inversores/extranjeros/poseen/companias/espanolas/ cotizadas/elpepueco/20100727elpepueco_8/Tes

111

Funcas considera que los españoles demandan más flexibilidad laboral Esta semana se debaten las reformas, tanto en el Parlamento como en el marco del diálogo social JESÚS EIJO CÁNOVAS - Madrid - 27/07/2010 Semana importante para el futuro de las relaciones laborales. Hoy se reúne la ponencia de la Comisión parlamentaria de Trabajo y el jueves se votan las enmiendas presentadas por los grupos políticos al proyecto de ley propuesto por el Gobierno. Mañana, sindicatos y patronal retoman los contactos para iniciar la reforma de la negociación colectiva. Entretanto, la Fundación de Cajas de Ahorros (Funcas) publica un informe en el que se afirma que los españoles demandan una mayor flexibilidad en el mercado laboral. No parece que sea, al menos, lo que opina una parte importante de la sociedad. Dicho informe utiliza datos del Eurobarómetro de mayo y junio de 2009 para asegurar que "un 61,2% de la población española en edad de trabajar estaría de acuerdo con la afirmación: 'Los contratos laborales deberían ser más flexibles para estimular la creación de empleo". Sin embargo, matiza que existen grandes brechas entre la población en torno a este tema. Considera que jóvenes, desempleados y autónomos están muy a favor de la flexibilización, mientras que adultos y asalariados prefieren mantener la regulación actual. Y achaca estas diferencias a que "España ostenta la mayor dualidad entre trabajadores fijos e indefinidos de los países más desarrollados de la UE, generando un conflicto de intereses considerable entre colectivos protegidos y no protegidos". También pone de manifiesto que el país europeo que se percibe a sí mismo con mayor nivel de seguridad laboral es Dinamarca, "país referente en relación con el enfoque de la flexiguridad". Este concepto hace referencia a una legislación de escasa protección al empleo y elevadas prestaciones por desempleo, además de amplias políticas activas para el fomento de la contratación. España avanzaría en cierta medida por esa senda si salen adelante las principales propuestas del proyecto de ley de la reforma laboral. Sobre todo, la que permite una ampliación de los supuestos en los que las empresas pueden efectuar despidos objetivos, pasando de una indemnización de 45 días por año trabajado a una de 20, unida a la creación de un fondo para sufragar esas indemnizaciones que se nutra con aportaciones de las empresas. La concreción de esas condiciones para el despido objetivo, muy vagamente definidas, es una de las enmiendas que tienen más visos de prosperar en el debate parlamentario. Es también, probablemente, una de las pocas del PP -de 71 presentadas- que lleguen a buen puerto. El Gobierno tratará de llegar a acuerdos con el PNV, ERC y, sobre todo, con CIU, la agrupación que se ha mostrado más proclive al pacto en materia laboral. Otras enmiendas con altas posibilidades de salir adelante son el aumento de bonificaciones para jóvenes y discapacitados, la reducción de exigencias para aplicar el contrato de fomento del empleo (con indemnización de 33 días) o las orientadas a luchar contra el absentismo laboral. Negociación colectiva Por un lado está la batalla que se libra en el Parlamento; por otro, la de los agentes sociales. El ministerio de Economía ha presentado su último informe sobre "Evolución reciente de los Indicadores Económicos", en el que se pone de manifiesto que el incremento de los salarios

112 pactado en junio ascendió un 1,3%. En febrero, sindicatos y patronal acordaron límites a las subidas de hasta un 1% para este año, de entre el 1% y el 2% para el que viene, y de entre el 1,5% y el 2,5% para 2012. Por ello, desde Economía se asegura que la moderación salarial no se está adaptando a la situación laboral al ritmo adecuado. Rita Moreno, secretaria confederal de Acción Sindical de CC OO, opina que la moderación salarial "es un hecho", y que los retrasos en la revisión de los convenios se deben a las resistencias que está ejerciendo la patronal. En el acuerdo se incluyó además una cláusula para la salvaguarda del poder adquisitivo de los asalariados durante estos tres años. Moreno considera que el IPC real de 2010 se aproximará más al 2% que al 1% previsto -sobre el que se negocian la mayoría de los convenios- , y que, por ello, la CEOE tendrá que revisarlos "o volver a incumplirlos". Los agentes sociales también se comprometieron en febrero, mediante un preacuerdo, a reformar el modelo vigente de negociación colectiva en un plazo de seis meses. Eso supondría alcanzar un pacto en agosto pero, en línea con lo que viene siendo habitual, este se demorará más allá de lo estipulado. Mañana a las diez de la mañana habrá una toma de contacto, pero todavía ni siquiera se ha establecido un guión con los temas a negociar. Moreno asegura que la patronal no ha dado respuesta al borrador que presentaron los sindicatos en mayo, y augura una apertura de la mesa negociadora en septiembre. En el preacuerdo se hablaba de salarios, de organización interna del trabajo o de la simplificación de la negociación colectiva, entre otras cuestiones. Pero, de momento, la CEOE no ha expresado cuál será su postura. Su portavoz oficial, Francisco Ochoa, ha declinado hacer declaraciones hasta después de la reunión, tras la que probablemente se emita un comunicado. La negociación colectiva es hoy por hoy la única materia que patronal y sindicatos pueden abordar en el marco del diálogo social, tras la ruptura que ambos agentes protagonizaron en junio con respecto a la reforma laboral, y que motivó la aprobación de la misma por parte del Gobierno a través de un decreto ley que ya se está aplicando provisionalmente. Medidas impopulares para unos, necesarias para otros; pero España no tardará en regirse por una legislación muy distinta. http://www.elpais.com/articulo/economia/Funcas/considera/espanoles/demandan/flexibilidad/l aboral/elpepueco/20100727elpepueco_11/Tes

113 COMPANIES. BANKS Deutsche Bank confident on continued recovery

By in Frankfurt Published: July 27 2010 08:02 | Last updated: July 27 2010 11:28 Deutsche Bank on Tuesday reported net income of €1.2bn for the second quarter, slightly beating expectations after a tough period for the trading that it and other investment banks depend upon.

Deutsche Bank Q2 results Earnings per Net Revenues Net profit Dividend share €7.2bn €1.2bn €1.75 – ↓8% ↑18% ↑7% – “In a quarter which was characterised by increased investor uncertainty and higher market volatility, Deutsche Bank’s investment banking business followed the industry-wide trend of weaker profitability,” said Josef Ackermann, chief executive. Deutsche Bank yields over sovereign holdings - Jul-26 Jain sets up structure for Deutsche Bank units - Jul-26 Stress test results ‘underwhelming’ - Jul-26 In depth: European banks - Jul-25 But Mr Ackermann sounded more confident than he had previously of a continuous economic recovery, saying in a statement: “Global economic activity is likely to strengthen.” The bank cut loss provisions to €243m from €1bn a year ago. Deutsche Bank was criticised for being one of the few banks not to reveal its European sovereign debt exposure as part of the stress test results on Friday. On Tuesday, however, the bank unveiled a combined €14.8bn of gross exposure to the “peripheral” EU states of Greece, Spain, Portugal, Ireland and Italy, of which €10.4bn was to Italy. The figures are to the end of March. Most of the bank’s sovereign debt is held for trading and therefore will have been subject to the “haircuts” – reductions in the amount of debt to be repaid to creditors – of up to 23 per cent, in the case of Greece, used in the European stress test. The tests were criticised for not applying any haircuts to banks’ banking books – where debts will be held to maturity – that would have reflected a possibility of a sovereign default. Deutsche’s investment banking unit, known as corporate banking and securities, continued to produce most of the bank’s profits but net revenues fell from €4.6bn a year ago to €3.6bn.

114 Deutsche said credit and emerging market revenues had been hit by Europe’s sovereign debt crisis and investors’ limited risk-taking. Debt sales and trading revenues fell 8 per cent while revenues from equity sales and trading were down 31 per cent compared with a year ago. Pre-tax profits for the quarter for the unit fell from €823m a year ago to €779m. The acquisition of some of Dutch bank ABN Amro’s commercial banking activities in the Netherlands helped push net revenues in global transaction banking from €654m a year ago to €1.1bn, while pre-tax profits rose from €187m to €478m. Asset and wealth management revenues rose 57 per cent to €969m compared with a year ago, including €148m gained from Deutsche’s recent acquisition of Sal Oppenheim, the German private bank. The unit made a pre-tax profit of €45m, compared with a loss of €85m a year ago. Mr Ackermann said Deutsche’s retail banking – what it calls its private and business client business – had enjoyed its best quarterly result since the peak of the financial crisis. The unit, which has 14.5m customers, reduced loss provisioning. Pre-tax profits rose from €55m a year ago to €233m. Deutsche also booked a €64m pre-tax loss from its corporate investments compared with profits of €377m a year ago after an impairment of €124m on a resort development in Las Vegas. In total Deutsche took charges and net markdowns of €451m, including €270m related to a commercial paper vehicle called Ocala Funding. These were partly offset by an expected gain of €208m representing negative goodwill from the ABN Amro deal. Deutsche, which passed EU bank stress tests last week, said its tier one ratio – a key regulatory measure of the bank’s capital strength – had risen slightly to 11.3 per cent, in spite of a slight increase in risk-weighted assets and an expected impact from the Sal Oppenheim acquisition. Shares in Deutsche were 4% higher midday trading in Frankurt at €52.42. 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. James WilsonDeutsche Bank confident on continued recovery July 27 2010 08:02 http://www.ft.com/cms/s/0/281d7da4-994b-11df-9834-00144feab49a.html?ftcamp=rss

115 07/27/2010 02:40 PM Too Cash-Strapped for a Boom How Italy's Permanent Crisis Saved It from the Downturn By Beat Balzli, Fiona Ehlers and Marc Hujer In theory, Italy, with its huge public debt, should be one of the euro zone's problem children. In reality, the country has come through the current crisis relatively unscathed. Can the rest of Europe learn something from its southern neighbor? Maria Cannata can't think of a job that would be more exhausting than hers. She has been la signora del debito, Italy's "debt lady," for almost 10 years. During that time, she has done an outstanding job.

Cannata leans back, relaxed, in a black leather chair. On the walls of her office in the Finance Ministry in Rome hang family photos and promissory notes from the year 1850. Cannata manages the liabilities of the second largest debtor among the world's industrialized countries and ensures that Italy remains solvent. An unpretentious woman, Cannata, 56, sports a practical hairstyle and no makeup. She says that she sleeps well at night -- she's known worse times. Italy's public debt is over €1.76 trillion ($2.27 trillion), or 115.8 percent of its gross domestic product, making it Europe's leading debtor. By comparison, the average public debt of the euro-zone countries comes to 78.7 percent of GDP.

116 Along with Portugal, Ireland, Greece and Spain, Italy is one of the unfortunately named PIIGS countries -- the axis of mismanagement, if you will. It's an appalling performance for a state that belongs to the exclusive G-8 club of the world's seven leading industrialized nations and Russia. Rating agencies put Italy on par with such shaky countries as Ireland, Malta and Portugal. Does Italy pose a threat for all of Europe? Trusting in Italy Cannata is familiar with the rumors. The bottom line is numbers, though, not words -- and how much interest Italy will ultimately have to pay on its debts. Every percentage point reflects a degree of trust, and every 10th of a percent less is a personal triumph for her. When Cannata had to restructure billions in debts again last April -- €9.5 billion to be exact -- for a long time it looked as if there weren't enough buyers for the new government bonds. Some experts advised her to float fewer bonds on the market, to avoid driving down prices. But Cannata stuck to her course and, in the end, got what she wanted. She often negotiates better conditions than Spain, which doesn't have nearly as much government debt. Is this an extraordinary ability? Gambling against the trend? Or just a cheap trick? Why, in the midst of the financial crisis, should anyone believe in this country, whose government debt can be partly attributed to Roman nepotism and corruption? Ongoing Crisis Prime Minister Silvio Berlusconi, 73, is politically weaker than at any other time since his re- election two years ago. For weeks now, his government coalition has appeared paralyzed, bitterly wrangling over a wiretapping law that Berlusconi wants to push through before the summer break, and mired in one bribery and justice scandal after the other. Two ministers have had to retire since May, and now, of all people, Economy Ministry undersecretary Nicola Cosentino has also had to step down amid allegations of mafia contacts and founding a secret society. When Berlusconi received the "Grande Milano" award last week in Milan for his life's work, he was praised as a "statesman with rare abilities who leads his country with a clear conscience into the future." In reality, however, Berlusconi's political days are numbered. The struggle over his succession is already underway. Cannata doesn't talk about politics -- she's not allowed to. She says that Italy has been plagued by an ongoing crisis for the past 20 years -- that's how long the country has been teetering on the edge of bankruptcy. In 1994, its debt peaked at 121.8 percent of GDP. There was already a lot of talk of action back then -- even though there was no global financial crisis at the time -- but that didn't have much of an impact on the amount of debt amassed by the country. Italy continued along the same path. Ironically, the country's state of permanent crisis has perhaps had the effect of staving off the worst during the current crisis. It doesn't have to weather a burst real estate bubble or a construction crisis. Italy didn't have to bail out any banks, either. The government already had its hands full with its own debts. Avoiding Others' Mistakes While in Spain and Ireland a debt-financed construction boom and dubious deals by investment bankers were generating high growth rates, Italy was busy tinkering with its high government debt. "A more highly regulated banking system offered fewer opportunities to copy the mistakes made by other EU countries," says Alexander Kockerbeck, an analyst at the US rating agency Moody's. Italy hasn't engaged in the excesses of the past few years.

117 Italy is suddenly seen as the country that has shown its mettle in the crisis by taking the toughest stance, as an expert in debt management. No country in Europe has been forced to tighten its belt as brutally as Italy. Cannata's boss, Finance Minister Giulio Tremonti, has just enacted draconian cost-cutting measures for his country. He did so against the will of Berlusconi, who has been scoffing at the crisis for months -- even promising tax cuts and maintaining that Italy is the richest country in the EU. The austerity measures aim to save nearly €25 billion by the year 2012, with the main burden being shouldered by municipalities and regions. Its budget deficit amounts to 5.3 percent of GDP, roughly twice as much as in the past, yet remains significantly lower than the European average. The Italians plan for it to drop low enough to meet the Maastricht criteria, which stipulate that a euro-zone member's budget deficit can not exceed 3 percent of GDP, by the year 2012. Experience with a Debt Mountain Italy may not be the only EU country that is placing demands on its citizens, but it is the only one that isn't helping them in other areas. The country didn't even have enough money for an economic stimulus package during the financial crisis. And there is nothing to indicate that things will improve in the future. According to the latest study by the Italian research institute Demos & Pi entitled "We, the Others and the Crisis," 56 percent of Italians no longer believe in Berlusconi's state-decreed optimism. Nearly half of those surveyed fear a Greek tragedy and assess their own economic situation in the year 2010 as "bad" to "very bad." "Necessity is the mother of invention," says Cannata, the debt manager. She now travels a great deal around the world representing Italy, on a mission to build trust. She has to make it clear that government debt alone says nothing about a country -- and that it doesn't present a threat, but rather an opportunity. According to Cannata, it's the years of experience with a mountain of debt that win over her investors. Solid Footing Cannata believes that it's no coincidence that Italy was the first country to create a sophisticated electronic trading system for government bonds -- the bond trading platform MTS. Italy has secured long-term financing, giving it a relatively solid footing. The average maturity period for government bonds is an impressive seven years. Furthermore, most of these securities have fixed -- not variable -- interest rates. "This will allow the Italians to benefit from today's historically low interest rates for a long time to come," says Kockerbeck. Even today, the balance sheets of Italian banks primarily contain business loans for Italy's many small and medium-sized companies, which form the backbone of the country's economy. There are no huge bundles of toxic real estate loans, which can also be explained by the fact that Italian law makes it difficult for banks to seize property when homeowners default on their mortgages. This means that banks often require downpayments that only few people can afford. "The real estate bubble occurred more in the underground economy and was financed with personal capital," says Kockerbeck of Moody's. Taking Matters into Their Own Hands So should we admire Italy instead of ridiculing it? "Europe is converging towards Italy," says Kockerbeck. The country, he explains, has decades of experience in dealing with high debts

118 and low growth rates. These are lessons that the remaining EU countries still have to learn if they are to avoid repeating the mistakes of the past 10 years. There is no generous welfare state in Italy, and no extra funding during the crisis. Where the state has failed, people have taken matters into their own hands -- and saved their euro cents. Household debt in Italy is only 56.6 percent of annual disposable income, whereas in Germany it is 89.4 percent, in Spain 127.8 percent and in the UK a whopping 152.6 percent. Perhaps the lesson to be learned from the Italian miracle is that everyone should look after themselves. "Italians have never expected much from their government -- they don't trust it," says Beppe Severgnini, a columnist for the daily newspaper Corriere della Sera. "They rely on themselves." Severgnini writes best-selling books about the Italians' unique mentality. "Italians are tightrope walkers," he says, explaining that they have mastered the art of walking a fine line, without becoming dizzy or looking down at the abyss. There's no doubt that the facts are dramatic. The challenges facing Italy include the latest political scandals, a government that is falling apart at the seams, extremely high youth unemployment, the joint lowest birth rate in Europe (together with Spain) and catastrophic cutbacks in the educational and health systems. All of those things are well known -- but they are only one side of the story. Bailing the Family Out The other side, says Severgnini, is support within the family. Italians are animali sociali, he says -- family people. Everyone looks after themselves and their clan. The family is Italy's real bailout package. It replaces the missing welfare system, weathers any crisis and comes free of charge for the state. In fact, it even makes life easier for it. Over 80 percent of Italians own their own house or apartment, and the mortgages on most of those properties are already paid off -- another reason why there was no real estate crash in Italy during the financial crisis. During a crisis, families close ranks, place their older members less often in retirement homes, live with three generations under one roof, share the grandparents' retirement funds, line up jobs in their family-owned businesses, lend each other vacation homes and dig into their savings. "The family rescues the state," says Severgnini, "which is another reason why Italy is doing relatively well during the financial crisis." The Italians have coined a name for this phenomenon: bamboccioni -- literally, "big babies." The term is used to describe long-since grown-up children who still live with their parents -- and it applies to 70 percent of all 20- to 30-year-olds. 'I'm Too Old for a Fresh Start' They are mainly well-educated men like Giorgio und Franco Mazzeo, who are 44 and 36. Every night, the brothers fold out the sofa bed in their parents' living room, a two-room apartment on the seventh floor of a high-rise building in Trastevere, one of Rome's better neighborhoods. They both have college degrees, and both have jobs, but no permanent positions. Giorgio is an engineer and his brother works in a call center. Together they earn less than their father receives for his pension: nearly €2,000 ($2,600). Their mother Mazzeo cooks, cleans and irons. Her sons help out, but they don't pay a cent. They can't pay their own way, not in Rome, the city with the highest rents in Italy. Each of them would have to pay over €1,000 a month to rent a room, with too little left over for other expenses. They like to complain at length about the crisis and about having to live at home, something that they say robs them of their independence and leaves them feeling discouraged. But when

119 they have an opportunity to move out -- like Giorgio, who has purchased an apartment with his savings and now only has to furnish the kitchen -- they tend to hesitate. "I'm too old for a fresh start," he says. At night, as he lies on his mother's couch, he often wonders about the future -- about who will feed his children, should he decide to bring any into this crisis-ridden world, and about what a normal life might be like. He has grown accustomed to the crisis. Should it be overcome some day, he will probably miss it. Translated from the German by Paul Cohen

URL: • http://www.spiegel.de/international/europe/0,1518,708701,00.html RELATED SPIEGEL ONLINE LINKS: • The Party's Over: Zapatero Tries to Cure Spain's Economic Hangover (06/24/2010) http://www.spiegel.de/international/europe/0,1518,702567,00.html • 24 Billion Euro Austerity Package: Italy Joins Europe's Wave of Belt-Tightening (05/26/2010) http://www.spiegel.de/international/europe/0,1518,696848,00.html • SPIEGEL 360: The Euro Crisis http://www.spiegel.de/international/europe/0,1518,k-7612,00.html

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ECONOMY JULY 27, 2010 IMF Sees Yuan as Undervalued By BOB DAVIS in Washington and AARON BACK in Beijing Despite China's decision to adopt a "flexible" exchange rate, the International Monetary Fund's long- delayed review of the Chinese economy found that the yuan is "substantially undervalued," according to IMF officials. The IMF determination is bound to put pressure on Beijing to let the currency appreciate more than the 0.7% it has risen since China loosened the yuan's peg to the dollar on June 19. The IMF determination was backed by the U.S., Germany, France, the United Kingdom, among others, say two individuals familiar with the deliberations, as the IMF's executive board debated the China report on Monday, though none of the countries pushed China to boost its currency quickly. In China, the central bank had been explaining to the public how a flexible exchange rate can help the economy by alleviating inflation pressures and improving the effectiveness of monetary policy. On Monday, before the IMF's board met, Hu Xiaolian, a respected deputy governor of the People's Bank of China, made her third statement in less than two weeks addressing the reasons for the government's decision last month to loosen the yuan's de facto peg against the U.S. dollar, a change that was vocally opposed by Chinese exporters and some other interest groups. Her comments echoed arguments made by IMF and other global institutions, but were unusual coming from a Chinese official. "This kind of openness is very rare," said Ken Peng, an economist at Citigroup. "The tone of Hu's statements has actually grown stronger as they have come out." The People's Bank of China has made its third announcement explaining its decision to loosen the yuan's de facto peg against the U.S. dollar. It's unclear whether the IMF's determination will strengthen the hand of those in Beijing urging a revaluation, or create a backlash. One indication of the direction will be whether China will block the IMF from publishing a detailed summary of the board's Monday deliberation over the next few weeks. The full IMF analysis would likely be published in September unless China withholds its permission. IMF members are entitled to block publication of IMF reviews, though most now allow publication. The U.S. has been pressing Beijing to permit publication. China hadn't allowed the IMF to conduct an annual review of its economy since 2007 as the two sides fought over China's policy of pegging the yuan tightly to the dollar, a policy that China put in place in 2008. The U.S. and Europe—the IMF's largest shareholders—complained that policy gave Chinese exporters an unfair advantage. The IMF began the current review in the spring of 2010. Eswar Prasad, a Cornell University economist and a former head of the IMF's China desk, said a draft of the IMF staff report he had seen noted positively Beijing's decision to let its currency float. The report also highlighted that China's current account surplus had fallen in recent months—which could be an indication that the currency is properly valued. But the IMF forecast that the change in the surplus was only temporary, a determination it had made in April as well. "Significant action" was needed to reduce the undervaluation, Mr. Prasad said. Brazil largely backed the Chinese position that the reduction in China's current account balance could be long lasting, said the country's IMF representative, Paulo Nogueira Batista. Chinese officials argued that "they have done what they needed to do and the rest of the world should give them room" to act, he said. Another individual familiar with the deliberations said the report's finding hadn't changed significantly from the draft.

121 In Ms. Hu's latest statement on the yuan, which was posted on the central bank's website, she focused on the dangers of inflation. That is familiar territory for any central banker, but Ms. Hu turned up the rhetorical heat by quoting legendary free-market economist Milton Friedman's statement that inflation is "a dangerous and sometimes fatal disease." "Looking at China's situation, those who suffer greatest from inflation are the low-income masses, especially China's over 40 million poor urban residents and nearly 100 million poor migrant workers, a situation which if improperly handled will affect social equality and stability," she said. Such comments probably indicate that the central bank would like to allow the yuan to appreciate further if it perceives inflationary risks, economists said. But major decisions on currency and monetary policy require approval from China's top political leadership. At the moment, most economists generally see China's current inflation rate as manageable and don't see a need for a major policy shift to stop price increases. China's consumer price index rose 2.9% from a year earlier in June, down from May's 3.1% rise. Ms. Hu said that although the consumer price index has "basically stabilized at a low level" in recent years, other measures of price levels, such as the producer price index, real estate prices and other asset prices, have all risen by larger margins. She said that China faces inflationary pressures from the capital flowing into the country from its massive trade surpluses with the outside world. To keep the currency from rising sharply, the central bank has been forced to buy up the incoming foreign currency with yuan, thus increasing domestic money supply, she said. Write to Bob Davis at [email protected] and Aaron Back at [email protected]

122 JULY 26, 2010 Course of Economy Hinges on Fight Over Stimulus By JON HILSENRATH WASHINGTON—Eighteen months after President Barack Obama administered a massive dose of spending increases and tax cuts to a weak economy, a brawl has broken out among economists and politicians about whether fiscal-stimulus medicine is curing the illness or making it worse. The debate is more than academic. It is shaping congressional decisions on whether to respond to the distressing prognosis for the U.S. economy with more government spending or a dose of deficit reduction.

Getty Images British economist John Maynard Keynes (1883 - 1946). One side says Mr. Obama's $862 billion fiscal stimulus prevented an even graver recession. Cutting the deficit right now, this side insists, would send the economy into a tailspin. The other side questions the benefits of the stimulus and argues addressing long-term deficits now is crucial to avoid higher interest rates and even bigger economic problems down the road. And then there is a camp in the middle—defending last year's stimulus, but urging a deficit-cutting plan now. The quarrel over deficits and the economy is at the center of many congressional disputes. Republicans battled against Mr. Obama's proposal to renew the extension of unemployment compensation benefits for up to 99 weeks, insisting on spending cuts elsewhere to avoid widening the deficit, but lost last week. The president argues the benefits are vital to millions of unemployed and would bolster consumer spending. Meanwhile, the White House says it will allow taxes to rise on families with incomes above $250,000. Republicans and a few Democrats argue that allowing President George W. Bush's

123 income-tax cuts on those upper-income households to expire at year-end, as the law currently provides, will choke the economy. "Too many are searching for answers in the discredited economic playbook of borrow-and-spend Keynesian policies," Rep. Paul Ryan, a Wisconsin Republican who is pushing a long-run deficit cutting plan, said this month. "I reject the false premise that only forceful and sustained government intervention in the economy can secure this country's renewed prosperity." Richard Trumka, president of the AFL-CIO union alliance, says if the government starts cutting deficits now, "We'll slip back into recession and possibly depression." Public opinion seems to be with the deficit fighters. A June Wall Street Journal/NBC News poll asked respondents which statement came closest to their views: (1) The president and Congress should worry more about boosting the economy even if it means bigger deficits; or (2) The president and Congress should worry more about keeping the deficit down even if it means the economy will take longer to recover. Some 63% chose deficit-fighting. Most mainstream economists agree on some points: The U.S. economy needed some kind of fiscal help in 2009 as the financial system teetered and the Federal Reserve pushed interest rates near zero. The deficit has to be reined in eventually, in part by restraining the growth of spending on health and other benefits. And developing a long-term plan to do so now would reduce risks of a future financial market calamity and help hold interest rates down. But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence. Fed Chairman Ben Bernanke backed fiscal stimulus in early 2009. Now he says the economy still needs fiscal stimulus, but says it must be accompanied with a credible plan to reduce future deficits. Like the Obama administration, he doesn't think that plan should be implemented until the economy is on more solid footing. Unlike the U.S., Europe has embraced, at least rhetorically, the primacy of deficit-reduction now. In some instances this is because of pressure from markets and the International Monetary Fund, such as in the cases of Greece and Spain, and in other instances because of local politics, as in the cases as the U.K. and Germany. "It is an error to think that fiscal austerity is a threat to growth and job creation," European Central Bank President Jean-Claude Trichet said recently. "Economies embarking on austerity policies that lend credibility to their fiscal policy strengthen confidence, growth and job creation."

124 The case that government deficit spending can be vital at times of recessions dates to John Maynard Keynes, the British economist whose teachings dominated economics for decades after the Great Depression. "Pyramid-building, earthquakes, even wars may serve to increase wealth," Mr. Keynes said in his 1936 classic, "The General Theory of Employment, Interest and Money." A counter-revolution led by Milton Friedman, of the University of Chicago, de-emphasized the role of government and gave rise to Ronald Reagan and Britain's Margaret Thatcher. Keynes lost favor during the stagflation of the late 1970s and early 1980s. The Fed and its manipulation of interest rates came to be seen as the best way for governments to manage the short-term ups and downs of the economy. One big issue: Lessons about fiscal policy in normal times aren't necessarily applicable to today, when the Fed has cut interest rates to zero and unemployment remains high. Skeptics of fiscal stimulus traditionally argue that government borrowing crowds out private investment and pushes up long-term interest rates. True, says Obama adviser Lawrence Summers, but not at times like these. When private-sector lending was drying up and the credit markets froze, "government investment and creation of demand for consumers was a form of alternative financing, not a threat to private investment," he says. Both camps emphasize past victories. Keynesians cite deficit spending as the eventual cure for the Great Depression and see parallels to today and to Japan's premature deficit-cutting in 1997 as the cause for its return to recession. The other side points to Margaret Thatcher, who in 1981—ignoring protests from hundreds of economists—raised taxes and tightened government purse strings to cut a budget deficit in mid- recession. The U.K. emerged with lower inflation, lower interest rates and a recovery. Keynesians say that episode isn't relevant today because the U.S. can't cut interest rates, as the British did. Another difference: The British pound lost half of its value in the 1980s, spurring exports. The dollar, by contrast, strengthened after the financial crisis hit because global investors saw it as a safe haven. The Obama administration is stocked with heirs of Mr. Keynes, including academics Christina Romer and Mr. Summers. Ms. Romer famously projected in January 2009 that without government support, the unemployment rate would reach 9%, but with support the government could keep it under 8%. It's 9.5% today. Some Obama administration officials privately acknowledge they set job-creation expectations too high. The economy, they argue, was in fact sicker in 2009 than they and most others realized at the time. But they insist unemployment would have been worse without the stimulus. In the first quarter of 2009, when stimulus was enacted, the economy shrank at a 6.4% annual rate. Since then it has grown at a 2.5% annual rate. And the U.S. recently has begun adding jobs, albeit slowly. It's hard to isolate the impact of fiscal stimulus from other actions. Congressional approval of the stimulus in February 2009 coincided with an improvement in the economy. But before Mr. Obama's stimulus was enacted, the Fed pushed short-term interest rates to zero and began buying mortgage-linked securities to drive down long-term interest rates. Soon after the stimulus was okayed, the Fed expanded its securities purchases. A turnaround in the stock market coincided with the Fed's expanded effort and with a separate Fed-Treasury "stress test" to shore up confidence in the nation's banks. The Obama stimulus, a third of which was temporary tax cuts and the rest spending on everything from infrastructure to unemployment insurance, is still affecting the economy.

125 Robert Hall, a Stanford University professor, says there hasn't actually been that much extra government spending overall, because the increased federal spending has been largely offset by a large contraction in state and local government outlays. By the third quarter of 2009, he notes, federal government spending added $66 billion to economic output, less than 0.5% of total output, offset by a $43.1 billion contraction in state and local government spending, he says. A study of 91 fiscal stimulus programs in 21 developed economies between 1970 and 2007 by Harvard's Alberto Alesina found tax cuts were more stimulative than government spending. "I would have done more on the tax side than on the spending side," he says. Underlying the debate is a long-running argument about how much of a lift the government gets from spending more or taxing less. Keynesians argue that when the economy is distressed, a dollar spent by the government multiplies in value. It gives a worker income the private sector has failed to produce, which he spends, creating demand for goods and services. Ms. Romer argued last year that this "multiplier" for government meant every dollar spent created about $1.50 worth of demand. Some economists say that's too high. Valerie Ramey of the University of California at San Diego, initially thinking as a Keynesian, developed doubts after sifting through historical examples. During the military build-ups of World War II, the Korean War and the Reagan era, a dollar spent added roughly a dollar of growth, she says. Although Ms. Ramey supported stimulus in 2009 because the economy was so weak, she doesn't advocate more now. "We just don't have enough evidence to prove that it's good." Robert Barro, a Harvard economist, found even smaller multipliers: A government dollar spent creates about 80 cents worth of growth, or possibly less, he says. Government spending, he says, crowds out private sector spending that would otherwise be taking place. Keynesians say other things were happening at the same time as military build-ups that muddy the results. During World War II, for instance, consumer goods were rationed and Americans were exhorted not to spend. Economists who say Mr. Obama should have relied more on tax cuts cite research of an unlikely source: Ms. Romer, his adviser. In a study she and her husband, David Romer, conducted before she joined the administration, Ms. Romer found large multipliers from tax cuts, which she concluded "have very large and persistent positive output effects." Tax increases, she also found, hurt growth. That study didn't address whether spending is better than tax cuts, though. And she says the gravity of the economic situation called for both tax cuts and spending. Tax cuts haven't been a cure-all. President Bush tried $168 billion of tax rebates in 2008, and a recession ensued anyhow. Economists note that households tend to save temporary tax cuts or use them to pay down debt, so they don't provide much short-term stimulus. Before the debate over the efficacy the 2009 stimulus is resolved, Congress is turning to whether it's time to start cutting deficits. Mr. Alesina says it is: In 107 periods since 1980 when governments cut deficits, doing so tended to quicken economic growth, not slow it. But his study focused on periods when central banks could offset deficit cutting with lower interest rates. The Fed has exhausted that avenue. Carmen Reinhart, a University of Maryland economist who has studied the fiscal aftermath of financial crises, says more stimulus could be counterproductive because it could lead the public to expect even higher taxes in the future. Instead, policy makers now need to convince the public that they are committed to reducing future deficits, without acting on that commitment right away, she says. That could hold interest rates down, without yanking money from an ailing economy too quickly.

126 "We are not in an easy position," she says. "Credibility is going to be difficult to achieve."

Write to Jon Hilsenrath at [email protected] JON HILSENRATH Course of Economy Hinges on Fight Over Stimulus JULY 26, 2010 http://online.wsj.com/article/SB10001424052748704720004575376923163437134.html?mod=WSJ_ar ticle_MoreIn_Economy#

127 Tuesday July 27, 2010 Basel III, the Banks, and the Economy Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy July 26, 2010 — By November, banking regulators are likely to complete an international agreement that will determine how strong banks must be. Tough new rules on capital and liquidity are being negotiated through the Basel Committee on Banking Supervision (Basel Committee). The agreement, which is known as “Basel III” because it will be the third version of these rules, will have a large effect on the world’s financial systems and economies. On the positive side, newly toughened capital and liquidity requirements should make national financial systems -- and indeed the global financial system -- safer. Unfortunately, enhanced safety will come at a cost, since it is expensive for banks to hold extra capital and to be more liquid. It is beyond serious dispute that loans and other banking services will become more expensive and harder to obtain. The real argument is about the degree, not the direction. The banking industry argues that Basel III will seriously harm the economy. For example, the Institute of International Finance (IIF) calculated that the economies of the US and Europe would be 3% smaller after five years than if Basel III were not adopted. My own analyses, and those of other disinterested parties, generally suggest a much smaller cost that would seem to be considerably outweighed by the safety benefits. As the recent crisis clearly attests, severe financial crises can cause permanent damage to the world’s economy, imposing economic loss and emotional pain on hundreds of millions, if not billions, of people. It is worthwhile to give up a little economic growth in the average year in order to avoid these major impacts, as my work suggests would be the case. On the other hand, if the industry is right, the additional safety is probably not worth the cost and a more modest regulatory revamp would be preferable. This paper explores the following questions about Basel III. • What is Basel III and who is making the decisions? • What is the timetable for Basel III? • What are capital and liquidity? • What are the current rules? • What are the proposed changes from the current rules? • What stays the same? • What are the major areas of disagreement? • Will the originally proposed changes or timetable be modified? • What are the likely effects of Basel III? What is Basel III and who is making the decisions? Basel III is a set of proposed changes to international capital and liquidity requirements and some other related areas of banking supervision. It is the second major revision to an original set of rules, now known as Basel I, which was promulgated by the Basel Committee in 1988. The committee was established in the mid-1970’s, after the failure of a small German bank (Herstatt) sent shudders through the global financial system as a result of poor coordination between national regulators. The Basel Committee is composed of banking regulators from a number of industrialized countries, with a core membership concentrated in the traditional banking powers within Europe, plus the US and Japan. The Basel accords are not formal treaties and the members of the committee do not always fully implement the rules in national law and regulation. One prominent example of this is in the United States. We had not implemented the Basel II revisions for our commercial banks by the time of the financial crisis, which put any such changes on hold. It is not clear whether we would eventually have implemented them, despite having been closely involved in the negotiations that led to that agreement. In truth, few countries choose to implement every detail of the Basel accords and they sometimes find unexpected ways to interpret the aspects they do implement. Despite this, the accords have led to much greater uniformity of capital requirements around the globe than existed prior to Basel I. In fact, the uniformity extends well beyond the countries represented on the Basel

128 Committee, as most nations with significant banking sectors have modeled their capital regulation on the Basel rules. The Basel Committee is loosely affiliated with the Bank for International Settlements (BIS) which is often referred to as the club for the world’s central bankers. The BIS provides certain financial services to central banks and also serves as a vehicle to promote cooperation between them. In addition, it provides support services to the Basel Committee and several other multi-lateral bodies focused on the world’s financial systems. Prominent among these is the Financial Stability Board (FSB) which was charged last year by the heads of government of the Group of Twenty (G-20) nations with the mission of promoting financial stability around the world. In that capacity, it has been a prominent advisor to the Basel Committee in its work on Basel III. What is the timetable for Basel III? The G-20 heads of government have charged the Basel Committee with finalizing the Basel III rules in time for the G-20 meeting in Seoul, Korea on November 11-12, 2010. The process leading to that started with the issuance of consultation papers in December of 2009 that outlined the changes proposed by the Basel Committee for the capital and liquidity requirements . Comments were solicited by mid-April of 2010 and many parties responded at length. In parallel, the Basel Committee, with assistance from the BIS and the FSB, has been conducting a Quantitative Impact Study (QIS) to estimate the potential effects on the financial markets and the economy of putting in place the proposed changes. It appears that the QIS has been completed in draft form and is being reviewed by the Basel Committee and the member regulators. Release to the public is expected in September, although there is no announced deadline for this. The QIS will presumably influence the Basel Committee’s choices on the levels of certain key ratios and on any revisions that it deems necessary to the elements of the original proposal. The intention is to implement Basel III by the end of 2012, although it seems clear that there will be transition periods, observation periods, or phase-ins for a number of the more important requirements, as well as “grandfathering” of certain features of existing regulation. All of these exceptions would be intended to ease the transitional impact of Basel III, which could potentially be quite large by the time it is entirely phased in. What are capital and liquidity? “Capital” is one of the most important concepts in banking. Unfortunately, it can be difficult for those outside the financial field to grasp, since there is no close analogy to capital in ordinary life. In its simplest form, capital represents the portion of a bank’s assets which have no associated contractual commitment for repayment. It is, therefore, available as a cushion in case the value of the bank’s assets declines or its liabilities rise. For example, if a bank has $100 of loans outstanding, funded by $92 of deposits and $8 of common stock invested by the bank’s owners, then this capital of $8 is available to protect the depositors against losses. If $7 worth of the loans were not repaid, there would still be more than enough money to pay back the depositors. The shareholders would suffer a nearly complete loss, but this is a considered a private matter, whereas there are strong public policy reasons to protect depositors. If bank balance sheets were always accurate and banks always made profits, there would be no need for capital. Unfortunately, we do not live in that utopia, so a cushion of capital is necessary. Banks attempt to hold the minimum level of capital that supplies adequate protection, since capital is expensive, but all parties recognize the need for such a cushion even when they debate the right amount or form. The subject of capital, and regulatory capital requirements, is a complex one and will only be summarized here. A more complete discussion can be found in “Bank Capital: A Primer” . As explained in that paper, common stock is not the only type of security that is considered to be capital because of the protection it provides depositors and other parties that regulators care about. Certain forms of preferred stock, and to a limited extent debt, can also serve as capital. It is worth noting that bank regulation generally uses the reported accounting numbers as the basis for calculating capital levels, without adjusting for market valuations except to the extent they are captured by standard accounting rules, such as occurs with certain “mark to market” requirements. In particular, the market capitalization of bank stocks in the heart of the crisis tended to be substantially lower than the accounting value of the equity of these banks. Essentially, the market believed that accounting values were overstated or that substantial new losses would occur in the future or the market was too low for technical reasons unrelated to expectations of future performance. None of these factors would directly affect regulatory capital levels, although regulators are always wise to note these divergences in case they indicate that the market has determined that the banks are in worse shape than appears on the surface. “Liquidity” refers to the ability to sell an asset, or otherwise convert it to cash, without incurring an excessive loss in doing so. Liquidity almost always increases the longer the timeframe being considered. A house, for example,

129 may be a very illiquid asset if one needs to sell it within a week, but may be quite liquid if one is given five years to manage the sale. More broadly, the liquidity of a bank often refers to the matching of its obligations with its funding sources. A bank with highly liquid assets would generally be considered fairly liquid even if its funding sources were of quite short maturities, since the assets could be liquidated as needed to cover any loss of funding. A bank with less liquid assets might be fine if its funding sources were locked in for long periods, but could be in serious trouble in a panic if it relied on short-term debt or deposits that might flow away. What are the current rules? The core of the Basel rules on capital reflects a belief that the necessary level of capital depends primarily on the riskiness of a bank's assets. Since capital exists to protect against risk, it stands to reason that more is needed when greater risks are being taken. The focus is on the asset side because liabilities are generally known with great precision, since a deposit or a bond must be repaid based on specific contractual terms. (This is a major contrast with the insurance industry, where the future costs of promises to protect against various events, such as fires, are unknown.) Unlike bank liabilities, bank assets can go down, or occasionally up, in value. In particular, bank loans may not be repaid and securities may default or may need to be sold at a time when their market value has declined. The original, Basel I, rules grouped all assets into a small number of categories and applied a risk-weighting to each category. The total value of each asset is multiplied by its risk weighting and this adjusted amount is added across all assets to produce a total risk-weighted asset (RWA) figure. The percentage weighting for each category ranges from 0%, for extremely safe investments such as cash and US government securities, to 100% for riskier classes of assets. (In a few cases, the weightings now exceed 100% for certain very risky assets, such as loans in default or imminent danger of default and the riskiest tranches of securitizations.) For example, residential mortgage loans often have a 50% risk-weighting, so that a $1 million mortgage would generate a risk-weighted asset of $500,000. If a bank were trying to hold capital equal to 10% of its RWA, then it would need $50,000 of capital to cover this mortgage. The Basel II revisions made four major changes to the risk-weighted asset calculations: Refinement of categories. Basel II broke the categories down in much greater detail than in Basel I, with more variation in the risk weighting, since it was realized that the crudeness of the original simple categories was encouraging a great deal of "gaming" and misallocation of resources. In addition to the weaknesses inherent in using a small number of categories, the weightings had been fairly arbitrary and influenced by political considerations. For example, Germany particularly wanted mortgages to carry a lower risk weighting than other bank loans. Ratings. Ratings from the major credit rating agencies became a significant factor in the risk weightings, which had not been true when only broad categories were used. Internal risk modeling. It was agreed that the sophisticated global banks could use their own internal risk rating models to determine the risk weightings for their own particular assets, with some exceptions. The idea was to align regulatory risk calculations with the considerably more sophisticated risk models that were being used by major banks in their own decision-making. This concept counts on the self-interest of the banks to lead them to use the best possible estimates of risk in their own management of assets. Trading assets. Basel II promulgated a different method for calculating the risk of assets that were held in trading accounts, based on the assumption that the risk level of trading assets was principally determined by how far the assets could realistically fall in value before a bank could dispose of the investments. Thus a "value at risk" (VAR) approach was used, utilizing statistical techniques to estimate from historical data how large a loss might be taken in unusually unfavorable circumstances. Capital adequacy under the Basel Rules is determined by calculating a ratio of the level of capital to the total risk- weighted assets. Basel I defined two tiers of capital, a distinction that has been retained. "Tier 1," the strongest, consists mainly of common stock and those forms of preferred stock that are most like common. "Tier 2" adds in certain types of preferred stock that are less like common stock and more like debt, as well as certain subordinated debt securities. In addition, Tier 2 includes some accounting reserves that provide a protective function similar to other forms of capital . The two tiers are intended to ensure that there is enough total capital available to handle even extreme occurrences and that the bulk of this capital is the stronger "Tier 1" variety. Generally, banks have plenty of Tier 2 capital, so the practical focus has been on ensuring there is enough of the stronger, Tier 1, form of capital. The Basel calculations include a number of deductions from the stated balance sheet figures for capital. First, and probably most importantly, the Basel agreements require the deduction of goodwill, (which arises when a company or asset is purchased for more than its book value), effectively treating it as worthless for these

130 purposes. Second, individual national regulators have chosen to fully exclude or to limit the amount of certain other accounting assets. For example, U.S. regulators limit the portion of deferred tax assets that may be counted in equity, since the value of those assets would only be realized if a bank makes future taxable profits, which may not occur if it runs into the kind of trouble that makes capital important. What are the proposed changes? The financial crisis exposed or underlined a number of areas of weakness in the Basel II rules. These problems led to many proposed changes under Basel III, including the following. Higher capital ratios. The consultative document did not specify figures, but made clear that the minimum acceptable Tier 1 and Tier 2 risk-weighted capital ratios would be raised. This will have major effects, but is difficult to discuss further until the proposed levels are known. Speculation centers on an increase of a couple of points in the minimum ratios, but this is not clear. Use of a leverage ratio as a safety net. Most broadly, the crisis pointed out the problems with using risk- weighted asset calculations that are intrinsically based either directly on historical experience, in the case of the internal ratings used by the large banks, or indirectly, in the case of the risk-weightings that are set by the Basel Committee. The value of many assets fell considerably more sharply and quickly than was suggested by historical experience, in some cases because good quality data did not exist for very many years and therefore had only reflected the favorable market conditions of recent times. In response, there is broad agreement that a straight "leverage ratio" should be given more regulatory weight. In this context, a leverage ratio is simply the ratio of capital to total assets with no risk-weighting of the assets. This has the major disadvantage that as much capital would have to be held to back a U.S. government bond as to back a risky loan, but it does avoid the problems caused by inappropriately low risk weightings. The Basel III rules therefore propose to include a leverage ratio as an additional test of capital adequacy to serve as a "safety net" to protect against problems with risk weightings. Tougher risk weightings for trading assets. A second major problem was that the risk weightings for trading assets were clearly set too low, again reflecting an excessive reliance on favorable recent history. This has already been dealt with in a major set of changes that took effect in what might be considered Basel IIa, through a substantial toughening in the methodology for determining risk weightings of trading assets. It appears that capital requirements in these areas have roughly doubled, on average, compared to the old methodology. These rules changes are retained under Basel III. Elimination of softer forms of capital. The financial crisis demonstrated that some securities that were considered capital instruments were unusable as a practical matter in a severe financial crisis. Capital is only useful if it can be made to absorb losses in order to protect other parties, but regulators were effectively blocked from forcing that loss absorption in the case of subordinated debt, which had counted in certain cases as Tier II capital. Since these were legally debt instruments, the holders could force a bankruptcy or insolvency proceeding if they were to suffer a loss. Putting a major financial institution into insolvency was viewed as a very risky move by policymakers, especially after the insolvency of Lehman Brothers caused severe market turmoil. As a result, subordinated debt will no longer count as capital even for Tier II purposes and other soft forms of capital are being eliminated or subjected to tighter conditions. Exclusion of some balance sheet items from capital. Following a similar logic, the Basel Committee decided that certain balance sheet items should be excluded from capital because they might not truly be available to absorb losses in a crisis. For example, a bank or bank holding company's ownership stake in an insurance company would no longer count as capital, on the theory that it represented capital at the level of the insurer and should not be required to do double duty. Put another way, an insurer could easily be hit by the same financial crisis as the bank and its own loss of capital would cause problems both at the insurer and then at the bank which was counting on the value of its investment. "Minority interests," which represent partial ownership of a part of the banking group by outside parties, would also cease to count. Yet another category is "deferred tax assets" which represent the value of previous losses which can be used to offset taxes on future profits. Since the value of these assets is dependent on future profits, Basel III moves to effectively exclude them. (They were already limited in some countries, such as the US, where only tax benefits foreseen to be used over the next year were allowed.) Higher capital requirements for counterparty credit risks. The crisis also showed how much counterparty credit risk existed, causing the committee to tighten the rules for when capital must be set aside and how much must be earmarked for these risks. This includes making a distinction on the amount of capital needed to back exchange-traded derivatives, which carry low counterparty risk, and over the counter derivatives, which will now require more capital. New liquidity requirements. The Basel Committee had largely ignored liquidity in the past, leaving it as one of the many items on which national regulators had discretion to regulate as they pleased. Some countries, such as

131 France, had explicit liquidity requirements, but most viewed it only as a subjective item to keep an eye on. However, the financial crisis highlighted the fundamental fact that financial institutions depend for their survival on managing liquidity in order to prevent a fatal run on the bank if confidence in their financial strength evaporated. As a result, Basel III proposed two tough new liquidity tests that would be standardized globally. First, minimum liquidity levels would be based on a type of stress test using standardized calculations. Effectively, the test mimicked a freezing of the financial markets for a period of [x] months during which it became extremely difficult to raise new funds and existing liabilities, such as short-term debt, would generally roll off at maturity. Core deposits were assumed to be drawn down to some extent, but mostly to remain at the bank. Non-core deposits, such as certificates of deposit, were assumed to roll off completely as soon as they could be withdrawn. Maturing debt was assumed to roll off and not be replaced. Liquid assets could be used to cover cash needs, but haircuts of various sizes were applied to reflect the fire sale in the financial markets caused by the adverse conditions. Second, a "net stable funding ratio" test was created. This measured the level of liquid assets to the level of liabilities that matured in a year or less. The intention was to force banks to move more of their borrowing to multi-year funding sources or to invest more heavily in fairly liquid assets. Contingent capital. Basel III endorsed the general idea of adding contingent forms of capital, but proposed further study rather than immediate implementation, given the numerous technical issues to be resolved. Contingent forms of capital are basically debt securities which would convert to equity under pre-agreed terms in the event that a bank ran into problems. It can be thought of as a pre-arranged debt-to-equity swap and serves the same purpose of reducing debt to equity ratios and allowing a troubled institution to recapitalize outside of an insolvency proceeding. Counter-cyclical capital requirements. Basel III also endorsed the idea that capital requirements should be higher in good times and somewhat lower in bad times. This would achieve the purpose of "leaning against the wind" and slowing banking activity when it overheats and encouraging lending when times are tough. It is unclear at this point how this might be implemented and the degree of discretion that national regulators would have. What stays the same? Regulators, with the concurrence of world leaders, have chosen to keep the essential structure of the Basel II approach intact while trying to improve the mechanisms of the accord. This is not to minimize the extent of the changes described above, which are quite significant, but rather to emphasize that they are consistent with the overall framework of Basel II. The two possible exceptions to this general statement are the leverage ratio, which does not take the risk-based approach that is at the heart of Basel II, and the addition of a liquidity test. In practice, the leverage ratio is likely to be set at levels that leave the risk-based ratios as the key determinants of the capital requirements, muting the effect adding a leverage ratio. For its part, the liquidity test is not truly inconsistent with the capital tests, but should probably be viewed as a supplement that is in the spirit of the original Basel accords. One aspect that remains the same has come under a great deal of criticism from some academics and market observers. Basel II and III both allow the sophisticated global banks to use internal risk models as key determinants of their capital requirements. The argument in favor of this is that banks devote far more resources than regulators can to developing sophisticated approaches to evaluating the risk they are taking on and they have a strong incentive to get it right, in order to maximize their own profitability over time. Unfortunately, we now know that the risk modeling leading into the crisis was seriously flawed by a combination of excessive reliance on a limited historical record and perverse compensation incentives. There is good reason to believe that the modeling is better now, both because of extensive efforts to fix the problems and because the historical record now includes a much worse set of events, automatically increasing their conservatism. However, many remain skeptical that the basic flaws have been fixed. A related issue is that capital requirements for trading assets are still calculated with extensive reference to Value at Risk calculations. Basel III adds layers of conservatism that appear to roughly double the capital requirements on average. However, the VAR concept appears to work better for evaluating daily or weekly risks than for somewhat longer holding periods. For this reason, some observers are skeptical that the VAR approach works effectively when applied to less liquid assets. In both cases, the Basel Committee has chosen to retain the role of standard risk models, despite an awareness of their flaws. The consensus of the committee is that the benefits outweigh the disadvantages and that there is no clearly superior approaches available. What are the major areas of disagreement?

132 There is broad agreement within the Basel Committee, at the G-20, and even in the financial markets, that capital requirements need to be raised in light of the financial crisis. However, there are disagreements, particularly between the banking industry and the committee, on the specific approaches being taken to achieve this purpose. As will be discussed further below, the industry argues that the committee is going overboard in many areas and doing so in ways that will significantly, and unnecessarily, raise the cost of providing loans and other banking services. Some of the key areas of discord are: Net stable funding ratio. There seems to be a reasonable degree of acceptance that Basel rules need to cover liquidity, but the industry has pushed back very hard on the net stable funding ratio test. They believe that it would force very substantial and expensive changes to how they fund themselves and invest their assets and that the gain in safety would be marginal. They have more support from disinterested observers on this than they do on their complaints about the higher capital requirements, although opinion is divided in the academic community. Whatever the merits, it appears that the industry has succeeded in giving the regulators great pause on this topic and the test may be dropped from the initial Basel III rules and studied further. The liquidity stress test has generated less opposition, although it is certainly not without controversy either. As a result, it might be included in Basel III or might be put off along with the other liquidity test. Higher capital ratios. This fight will spring up in full fury once specific capital ratios are specified, but the banking industry has already made clear that they believe only moderate changes are necessary, especially given all of the other ways in which capital levels are being increased in the Basel III proposals. Use of a leverage ratio. There is a heated debate on this topic. Virtually all regulators agree that a simple leverage ratio is a useful way of checking to see if the risk-based approach is leading to excessively large balance sheets. Some countries, notably the US, believe that this is such a useful ratio that it ought to be mandatory and binding, so that a bank's minimum required capital would be the greater of the risk-based figure and the one derived from the leverage ratio. Others, notably France, believe it is simply one useful supplemental measure and that how it is used should be up to national discretion. They further point out various technical problems that could make it very difficult to achieve uniformity, such as the differences between US and international accounting standards. Some analyses have suggested that the two different accounting regimes could show total assets on the balance sheet that differed by as much as 100%, so that a fixed leverage ratio could require twice as much capital in one country as another. At a minimum, there will have to be an approach that adjusts the leverage ratio for such differences. This ratio will probably remain controversial for a long time, if for no other reason than the fact that US banks have been operating under a leverage ratio for some time and are already configured to deal with it, while European banks have not. In a nutshell, many European banks have larger balance sheets than US banks, but focus more on lower-risk assets, since this is what the Basel rules effectively encourage. Adding a leverage ratio would force them to operate more like US banks in their asset allocations. The most likely result is that the Basel Committee will choose to elevate the importance of the leverage ratio, but do so in a manner that allows the development of greater consensus over time. For example, there has been talk of an "observation period" of several years before it becomes binding, which, in practice, would allow for it to remain non-binding if a true consensus cannot be built. Another possibility is for it to be binding, but set at a low enough level that it would rarely be the determinant of the minimum capital requirements, since the risk-based approach would almost always yield a higher requirement. Elimination of softer forms of capital. Everyone agrees that common stock provides the strongest form of capital protection. The problem is that common stock is also by far the most expensive form of capital for a bank to raise. Therefore, banks have availed themselves of substantial amounts of softer, and cheaper, forms of capital. Therefore, the industry has been fighting back against the elimination of some of these forms and has also been pushing for transition periods in which some or all of these forms of capital would continue to count as capital. The European and Japanese banks feel particularly strongly about this, as they have relied somewhat more on these forms than have the American banks. Exclusion of some balance sheet items from capital. Banks in every country gain considerable benefit from at least one of the balance sheet items that will no longer count as capital and therefore put forth arguments as to why they should continue to count. The Europeans are particularly concerned, because many of their corporate structures include investments in insurers and minority interests in their banks to a much greater extent than is true in the US. On the other hand, the US banks are concerned about deferred tax assets and about mortgage servicing rights, which are of lesser concern to the Europeans. There are legitimate arguments in almost all cases, which is why these items had been counted as capital in the past, but the committee strongly wants to ensure that common stock, and not softer forms of capital, really does constitute the core of capital. This difficult balancing act will be resolved by classic horse trading among the different countries on the committee, balanced by a desire to maintain the overall integrity of the Basel III proposals.

133 Virtually every part of the Basel III proposals has been objected to by someone, so the above should not be viewed as a complete list, but merely the most important and controversial items. Will the originally proposed changes or timetable be modified? Despite the various controversies, it appears unlikely that the core Basel III proposals will be dropped, with the exception of the liquidity provisions. Nor does it appear likely that the timetable for initial implementation will be altered significantly. The G-20 heads of government show a strong desire to finish this at their Seoul meeting in November and it appears that there is sufficient consensus to achieve this. It is possible, of course, that some disagreements will effectively be declared to be implementation details that can be delayed modestly, even if an objective observer might consider them to be more fundamental concepts rather than just details. That said, it would be a surprise if there were a major delay in a core part of the Basel III proposals, with the exception of the liquidity requirements. The one thing that might create a postponement would be the onset of a new recession or severe financial crisis, such as the Euro crisis was threatening to become. Leaders are not going to want to risk slowing their economies further under those circumstances. As noted earlier, it is highly likely that there will be a number of arrangements to ease the transition once the initial implementation date is reached, such as phasing out various forms of soft capital over a period of years and perhaps phasing in the new higher Tier 1 capital ratios. What are the likely effects of Basel III? There is very considerable disagreement about the effects of Basel III. Virtually everyone accepts that banks and the financial system would be safer as a result of these changes, but that this would come at the cost of slower economic growth in most years due to higher credit costs and reduced availability. However, the magnitude of these effects is at issue and very much affects one's view of the trade-off. As noted earlier, the IIF, an industry group, calculated that the economies of the major economies would be about 3% smaller as a result of Basel III than they otherwise would be five years on . This is a very large impact and the G-20 leaders would probably reject Basel III if they believed these figures. Nor is the IIF's analysis even the most pessimistic. For example, the French banking association offered calculations that suggested a 6% hit to the French economy. On the other hand, various disinterested observers have concluded that the effects would be much smaller. My own calculations, for example, suggested that a large increase in capital requirements in the US might only increase average loan pricing about 0.2 percentage points, with little effect on availability . (I did not analyze the effects of the liquidity rules, which could be larger, and I assumed a long enough transition effect to avoid abrupt changes.) An increase in loan pricing of this magnitude would likely have quite minimal effects on economic growth. (Consider how small an effect there is on the economy of a 0.25% rate move by the Fed, which is the smallest change they normally make.) My discussions with European and US policymakers and regulators strongly suggest that the key decision-makers are heavily discounting the industry's analyses, instead buying into the Basel Committee's own apparent view that the drag on the economy would be relatively small and more than offset by the benefits of greater systemic safety. This thinking may either be confirmed or altered on the basis of the committee's Quantitative Impact Study which should be publicly available in September. If the Basel Committee is right, the lowered growth rate during non-crisis years may be more than offset by the avoidance of truly severe recessions brought on every few decades by widespread, severe financial crises. A recession as rough as the one we recently went through causes permanent losses to the economy in addition to the awful transitory effects. The long-term unemployed may find they are never able to return to work and some plant and equipment is junked or deteriorates after being out of service for long periods. There are also very long- lasting effects of the sharp increase in national debt that tends to accompany such severe recessions. It is difficult to pin down the permanent shrinkage in the economy, but most observers would agree that it is quite significant. In addition, of course, the temporary shrinkage of the economy adds up to a considerable loss before the economy recovers to more normal levels. Conclusion Basel III will happen, roughly on schedule, and will make a major difference to the operation of the financial system. Banking will be safer, but more expensive, with extensive ramifications throughout the economy. Despite the dry nature of discussions of financial regulation, the Basel III process bears watching closely. http://www.brookings.edu/papers/2010/0726_basel_elliott.aspx?p=1

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'Systemic risk' theory gains in stature as way to prevent the next bubble By Howard Schneider Tuesday, July 27, 2010; A11 Americans might be counting on the day when home and retirement-fund values start to rise again, but anyone expecting to benefit from a future boom in prices should take note: Economic policymakers around the world are looking for ways to make sure that doesn't happen, or at least not with such intensity that it risks the kind of bust that usually follows. In studying how to respond to the recent crisis and create a more stable system, central bankers, international officials and others have been focusing on a concept known as "systemic risk." That's the type of falling-domino problem that allowed mortgage defaults in the United States to lock up the global financial system because of the complex connections among banks, investment companies, insurers and other firms around the world. The phenomenon is not fully understood. "We sort of know vaguely what systemic risk is and what factors might relate to it. But to argue that it is a well-developed science at this point is overstating the fact," said Raghuram Rajan, a former International Monetary Fund chief economist and author of "Fault Lines," which explored the role of U.S. real estate and credit bubbles in the crisis. A recent IMF paper described study of the field as "in its infancy." Still, some central bankers and regulators are devising ways to try to control systemic risk, and one of the things they are focusing on is its connection to fast run-ups in the prices of real estate or other investments, or a quick expansion of credit and lending. When to step in? Before the recent crisis, regulators assumed that markets with large numbers of people with enough information and the ability to move money freely could assess the risks of different investments and look out for themselves. That thinking guided U.S. policy under then-Federal Reserve Chairman Alan Greenspan, creating the conditions that allowed millions of Americans to buy homes and borrow money under loose credit terms. Sometimes consumers profited if they sold property at the right time, but sometimes they became saddled, along with their bankers, with unaffordable mortgages or houses that declined sharply in value. But that approach did not adequately account for systemic risk. Policymakers in the United States and Europe and at organizations such as the IMF are discussing how government agencies could best step in when markets appear to get overheated. It is not easy to tell the difference between a risky "bubble" and a healthy economic expansion, and confusing one for the other could mean slower growth and lost opportunities. Yet the cost of the recent crisis in terms of lost production and high unemployment has convinced a broad array of officials, regulators and analysts that government should do more to "lean against" markets that are thought to be growing too fast, and in the process try to ensure that the United States, Europe and other key areas don't again surge in an unsustainable way -- or crash in the aftermath.

135 "The benefits of successfully moderating both phases of the credit and asset price cycle are clearly worth pursuing," the Switzerland-based Bank for International Settlement said in a recent report. The BIS serves as a grouping of the world's major central banks, including the U.S. Federal Reserve, and is an influential voice in financial regulation. The current discussion involves some of the basic principles of how markets should work in a post-crisis age. It throws open a range of sensitive questions such as whether the Fed and other central banks should use interest rates or other tools for such actions as restraining home prices that are judged to be rising too fast. "I think there has been a massive change in the debate," said Andrew Smithers, founder of the London-based Smithers & Co. economic consultancy. "Simply ignoring asset prices is so demonstrably silly that it will not carry on either side of the Atlantic." Although Fed Chairman Ben S. Bernanke and others speak warily about using interest rates or the other "very blunt" tools of the central bank to address problems in specific parts of the economy, he also has said he remains "open-minded" to the idea. Other ideas under discussion include imposing higher capital requirements on banks under certain conditions to slow lending, as well as steps such as forcing potential home buyers to make larger down payments -- familiar to Asian regulators who have had to cope with rapid increases in real estate values. A new bureaucracy Overheated markets or dangerous levels of credit and borrowing are hardly pressing issues in the current climate, in which concern is centered on keeping a shaky recovery on track in the United States and Europe. But the attention given systemic risk is apparent in the new bureaucracy growing up around it. The legislation signed into law last week by President Obama includes a Financial Stability Oversight Council, with powers to study and move against possible sources of systemic risk in the United States. Europe is establishing a European Systemic Risk Board; the BIS has set up a Financial Stability Board to study and make recommendations about the issue; and the IMF has proposed a central role for itself in monitoring systemic risk on a global scale. In recent papers, both the IMF and the BIS discussed the chance that a wrong policy choice might slow otherwise healthy economic growth. But they also said the depth of the recent downturn showed that central banks and other government agencies need to expand their traditional focus on such issues as inflation and employment, and to be more attuned to controlling systemic risk and ensuring general financial stability. Central banks in the developed world have learned how to keep prices stable, but "there was a gaping hole in the system," which ignored financial stability concerns, IMF financial counselor Jose Vinals wrote in a recent essay. Although he said central banks need to keep inflation as their chief focus on monetary policy, he also called for "more 'leaning' in good times and the need for 'less cleaning' in bad times once bubbles explode." http://www.washingtonpost.com/wp-dyn/content/article/2010/07/26/AR2010072603338.html

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Basel Committee reaches agreement on bank rules By Howard Schneider Washington Post Staff Writer Tuesday, July 27, 2010; A11 A panel of world financial officials has reached "broad agreement" on new rules to govern the global banking system but has postponed some key elements for as long as seven years while the impact is studied, the Switzerland-based group said Monday. The group includes representatives of the world's major central banks, including the Federal Reserve, and the accord marks an important step forward in efforts to build a system less susceptible to the sort of shocks that occurred during the recent financial crisis and more able to weather any downturn. The aim is to create common standards to be applied in all banking centers, and to do so by the time the world's major nations gather in South Korea in November for their next summit. Monday's agreement is "a landmark" toward that end, said European Central Bank President Jean-Claude Trichet, chairman of the group of central bankers and regulators who form the Basel Committee on Banking Supervision. The panel has not reached agreement on some of the most important and sensitive issues - - notably how much capital banks are going to be asked to hold and the degree to which they will be required to hold it in the form of common equity, considered the best buffer against a downturn. Those issues remain under discussion amid both protest from the banking industry that strict new standards will crimp economic growth and division between the United States and Europe over how tough new capital standards should be. European banks have traditionally relied less on common equity, while the United States and some Asian nations want banks globally to have enough highly liquid assets on hand to withstand a shock at least as great as the one experienced in the recent crisis. Still, Monday's announcement represents progress in what has been a complex discussion that attempts to mold regulatory principles that can be applied to banks and banking systems in a broad variety of nations. The committee includes representatives from 27 nations, and all but one -- Germany, according to news reports from Europe -- agreed to the new provisions. The panel agreed, for example, to allow a larger variety of assets to be counted as the highest-quality capital, which will make it easier for some European firms to meet new capital requirements. It also agreed that large, highly connected companies -- those considered "too big to fail" -- be subject to capital surcharges and other provisions so they are better protected in the event of a downturn. Some of the group's more controversial ideas -- such as forcing some banks to rely more on long-term sources of funding or adhere to new limits on lending -- remain in the plan but will be implemented during a transition period of as long as seven years.

137 In a study of the Basel process, Brookings Institution fellow Douglas Elliott said the trade-offs being negotiated by the panel are clear: financial stability vs. more expensive credit, as banks are forced to raise and hold more capital in relation to the loans they make. "Newly toughened capital and liquidity requirements should make national financial systems - - and indeed the global financial system -- safer," Elliott wrote. "Unfortunately, enhanced safety will come at a cost. . . . It is beyond serious dispute that loans and other banking services will become more expensive and harder to obtain." Monday's announcement was "good on both timing and on the maintenance of the basic integrity of a globally negotiated, harmonized increase in capital and liquidity requirement," he said.

Howard Schneider Basel Committee reaches agreement on bank rules July 27, 2010; A11http://www.washingtonpost.com/wp- dyn/content/article/2010/07/26/AR2010072605866.html?wpisrc=nl_headline

Global Business July 26, 2010 Central Bankers Reach Initial Accord on Global Standards By ERIC DASH and NELSON D. SCHWARTZ Even as investors applauded the mostly positive results of recent stress tests of European banks, central bankers and regulators reached a preliminary agreement Monday on new standards to reinforce the stability of the global financial system. Under the new requirements, banks would have to hold higher capital reserves and more cash on their balance sheets to cushion against unexpected shocks, though regulators have not specified a minimum amount. The rules, developed after lengthy negotiations among regulators on the Basel Committee on Banking Supervision, would not take effect for at least seven years. The standards agreed to Monday are less onerous than earlier proposals and give banks more leeway to define what counts as high-quality, or Tier 1, capital. A compromise was struck after private banks and regulators warned that raising capital standards too quickly could choke lending and economic growth. Bankers also fear that having to set aside more capital could reduce profits and ultimately result in lower bonuses for bank employees. The standards were lauded by central bankers who have fresh memories of the collapse of Lehman Brothers and the market chaos that followed in the fall of 2008. “The agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis,” said Jean-Claude Trichet, president of the European Central Bank and chairman of the Basel Committee.

138 In a nod to concerns about the short-term impact of the new rules, Mr. Trichet added, “We will put in place transition arrangements that will ensure the banking sector is able to support the economic recovery.” In the next few months, the regulators will conduct a detailed analysis of how the standards would affect the biggest banks in Europe, Asia and the United States. The committee is expected to meet in November to complete the new rules, which will begin to take effect in the United States next year. Under the plan, banks will have until as early as 2018 to comply with a requirement that they hold at least $3 in capital for every $100 they lend — a so-called leverage ratio of 3 percent. A leverage ratio is considered the broadest measure of a bank’s financial strength. The regulators said the final amount may be adjusted. Whatever the amount, the requirement should have little effect on American institutions, which already easily meet the 3 percent standard. Some European and Asian banks could have to reinforce their financial positions. Regulators granted a broader definition of what qualifies as capital than some bank analysts had expected. For example, European banks persuaded regulators to allow part of their stakes in other banks to count toward their Tier 1 capital. American and Asian institutions successfully lobbied to preserve local rules that let them count a percentage of future tax deductions for losses as Tier 1 capital. Citigroup, for instance, carries a $50 billion tax benefit on its books, largely because of losses during the financial crisis. Bank of America has a $31 billion credit from similar charge-offs. In the United States, bank shares rallied 2.6 percent amid a broader rise in the stock market. And in the first full trading day since the results of the bank stress tests were announced on Friday, European investors seemed to shrug off criticism that the tests were not rigorous enough. Bank shares rose in Europe, while the cost of insuring bank bonds using credit-default swaps fell. The interest rate that banks charge one another for short-term loans also declined, a tentative sign that the stress tests were helping to ease fears about banks’ creditworthiness. ERIC DASH and NELSON D. SCHWARTZ Central Bankers Reach Initial Accord on Global Standards July 26, 2010 http://www.nytimes.com/2010/07/27/business/global/27bank.html?_r=1&ref=business

139 SHIPMAN: Raising retirement age won't work Benefits still meager compared to market-based reform

By William G. Shipman 6:08 p.m., Monday, July 26, 2010

The Social Security retirement system was implemented in the 1930s. Question of the Day The co-chairmen of President Obama's debt and deficit commission, Erskine Bowles and Alan Simpson, recently warned that our country's current fiscal path - primarily the cost of entitlements - unless reversed, "will destroy the country from within." Given such an ominous prophecy, it is almost certain that Social Security, the country's largest entitlement, will go under the government's budget knife. One fiscal fix gaining support is increasing the retirement age. If this is the only change, grave harm will be done in the name of putting Social Security on a secure financial footing. More important, we again will have lost the opportunity to give all workers the fundamental right to earn benefits that are in line with their costs and that are their personal property. At first blush, increasing the retirement age seems logical. When Social Security started in 1935, life expectancy was 61; it's now about 78. Given that people are living longer, the argument is that they should receive full benefits at a later age. There is precedent for this. During the Reagan administration, the normal retirement age was increased from 65 to 67. If it were increased again by the future expected increase in life expectancy, say hypothetically five years, the fix still would provide benefits for the same 18 years of retirement that the system provides now on average, and the unfunded liability would fall, leaving our children and grandchildren with less debt. However, if it were the only fix, workers would suffer needlessly for at least two reasons. First, an increase in the retirement age is simply a cut in benefits, which already are low relative to their cost. Second, it does not address why Social Security's benefits are so low in the first place. They are so low because they are financed by taxing wages. Because benefits are linked to wages, which increase about 1.5 percent per year on average, benefits increase about the same. This is somewhat akin to saving and investing and receiving a real rate of return of 1.5 percent. Until we migrate to saving and investing in capital markets, whose long- run returns are significantly higher than 1.5 percent, benefits always will be unnecessarily low and Social Security will never be fixed. To compare one financing system to the other, consider an average-wage worker who entered the labor force at age 20 in 1964, worked 45 years and retired at the end of 2008. His wage history provided him a first-year Social Security benefit of $18,324. Under present law, his

140 benefit will increase with inflation and will be paid until his death - about 13 years based on estimated life expectancy. Now assume he invested the same amount he paid in taxes, employee and employer combined, in a diversified portfolio of stocks and bonds with a 70-30 balance for 35 years and then a conservative 50-50 balance for the remaining 10 years. He retired at the end of 2008, when he suffered a significant loss because stock markets around the globe collapsed, down 37 percent in the United States alone. Yet even after the loss, his accumulated wealth still would provide more than Social Security's $18,324 benefit, namely $30,000 in the first year, and indexed for inflation for 19 more years. If he chose to withdraw just $18,324 initially, his portfolio would last 39 years. And this assumes that his portfolio during retirement earns just a 1.7 percent real rate of return. If life expectancy increases five years and he works another five years, the portfolio provides $48,000 in the first year, again indexed for inflation for the next 19 years. Or if he withdraws the original Social Security benefit of $18,324, the portfolio would not be exhausted until his 134th birthday. In stark comparison, an average-wage worker who is stuck in Social Security and works and pays taxes an additional five years would receive little more than the original $18,324 in his first year of retirement, and it is indexed thereafter. Because Social Security's benefits are so low relative to their costs, all workers suffer. Social Security is simply a bad deal. That is why it's mandatory. The president's commission has the opportunity to propose fundamental reform along market- based principles, including personal property rights. If instead it promotes raising the retirement age or cutting benefits by some other formula such as progressive price indexing and its proposal is enacted, American workers and America will suffer a high price. Hopefully, the commission's recommendation will not further destroy the country from within. William G. Shipman is chairman of CarriageOaks Partners LLC and co-chairman of the Cato Institute Project on Social Security Choice. http://www.washingtontimes.com/news/2010/jul/26/raising-retirement-age-wont-work/print/

141 The Great (Economist) Mortification Posted by Tracy Alloway on Jul 26 11:12. Will Philip Mirowski be getting an invite to the next economist shindig? Perhaps not. The Carl Koch Professor of Economics and the History and Philosophy of Science at the University of Notre Dame has taken a flame-thrower to the post-crisis explanatory powers of his colleagues, in the latest edition of the Hedgehog Review (H/T Paul Kedrosky). The title of his piece: The Great Mortification: Economists’ Responses to the Crisis of 2007–(and counting) Thus follows Mirowski’s rather gleeful (but well-written) takedown of how and why economists failed to come to grips with the crisis. The whole thing is well worth a read — especially as a counterpoint to this — but we’ve picked out the basics of his argument for you here. Mostly he lays the blame on a lack of of philosophy and history in economics, leading to rigid adherence to overly scientific economic theory (a view perhaps not surprising given his Notre Dame title and previous work). That meant when the crisis struck . . . Of course quite a few had premonitions that something had gone very wrong, but the sad truth was that they were clueless when it came to the analytical construction of an abstract philosophical argument in isolating just where the flaws in professional practice could be traced and assessing the extent to which they were susceptible to methodological remedies. Mired in banality, the best they could prescribe was more of the same. No wonder almost every economist took their philosophical perplexity as an occasion to settle internecine scores within the narrow confines of the orthodox neoclassical profession: MIT v. Chicago, Walras v. Marshall, mindless econometrics v. mindless axiomatics, New Keynesians v. New Classicals, Pareto sub-optima v. rational bubbles, efficient markets v. informationally challenged markets… This was all so boring one can’t help thinking it was being done on purpose, to lull the rabble back to sleep. As Mirowski puts it: . . . it is striking the way that it could be taken for granted in the 1930s that the social position of economists might tend to lead them to exhibit biases in certain predictable directions, and that respected members of the profession could concede that those social structures would mount obstacles to serious analysis of economic breakdown. This was not flaming Marxism; it was just commonsense sociology of knowledge. Yet where are the comparable analyses today?18 Cue an economist exposé: In any case, most conventional outlets for economic ideas have become willfully uninterested in the tangled conflicts of interest of the modern economics profession. Does anyone care that Martin Feldstein was on the board of AIG in the runup to its disastrous failure? Or that Paul Krugman once consulted for Enron (and got radicalized after the New York Times made him foreswear such perks)? Is anyone curious about the tangled history of the funding and organization of the Chicago School of economics? Does anyone care that Larry Summers worked for numerous hedge funds and investment firms before they had to be rescued by an administration that included…Larry Summers? And finally — a question:

142 What set of social institutions has led us to accept that we have to keep getting exposed to this utterly predictable but uninformative stuff from economists? . . . Thoughts/Theories/Answers on a postcard to: 400 Decio Faculty Hall Notre Dame, IN 46556 574.631.7580 http://ftalphaville.ft.com/blog/2010/07/26/297341/the-great-economist-mortification/

Philip Mirowski Career In his book More Heat than Light, Mirowski reveals a history of how physics has drawn inspiration from economics and how economics has sought to emulate physics, especially with regard to the theory of value. He traces the development of the energy concept in Western physics and its subsequent effect on the invention and promulgation of neoclassical economics, the modern orthodox theory. In his book Machine Dreams, Mirowski explores the historical influences of the military and the cyborg sciences on neoclassical economics. The neglected influence of John von Neumann and his theory of automata are key themes throughout the book. Mirowski claims that many of the developments in neoclassical economics in the 20th century, from game theory to computational economics, are the unacknowledged result of von Neumann's plans for economics. The work expands Mirowski's vision for a computational economics, one in which various market types are constructed in a similar fashion to Noam Chomsky's Generative grammar. The role of economics is to explore how various market types perform in measures of complexity and efficiency, with more complicated markets being able to incorporate the effects of the less complex. By complexity Mirowski means something analogous to Computational complexity theory in computer science. http://en.wikipedia.org/wiki/Philip_Mirowski

143 ft.com/money-supply

When does quantitative/credit easing work? July 26, 2010 10:25pm by Robin Harding | Comment | Share An interesting new NBER working paper by Vasco Curdia of the New York Fed and Michael Woodford of Columbia University will likely feature on Ben Bernanke’s reading list as he ponders both the options for further Fed easing (should it be necessary) and the Fed’s eventual exit strategy from easy policy. Mr Woodford is one of the world’s top monetary economists and a former colleague of Mr Bernanke at Princeton. Here is part of the abstract: We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times. To attempt to paraphrase these conclusions: - Quantitative easing - e.g. buying Treasuries to increase bank reserves with no commitment to keep them high in the future - doesn’t work. Continue reading "When does quantitative/credit easing work?" July 26th, 2010 10:25pm in North America, exit strategy, federal reserve, interest rates, quantitative easing, stimulus | Permalink | Comment

The Bush tax cuts: a $3000bn political and economic battleground July 26, 2010 5:51pm by James Politi | Comment | Share With worries about the huge US budget deficit running rampant in Washington - just look at Friday’s midsession budget review by the White House, which forecast deficits in excess of $1,400bn this year and next - fiscal policy options are clearly limited for Congress and the administration. And so the attention of policymakers and politicians is quickly turning to longer-term tax policy issues, like the looming expiration of some $3,000bn of tax cuts enacted by President George W. Bush in 2001 and 2003, as I explain in today’s paper.

144 Last week, the big story was that Kent Conrad, the Democratic chairman of the Senate budget committee, broke with the administration’s official line that the tax cuts should only be extended for Americans earning up to $250,000, and allowed to expire for the wealthy. Continue reading "The Bush tax cuts: a $3000bn political and economic battleground" July 26th, 2010 5:51pm in North America, consolidation, government debt, stimulus, tax | Permalink | Comment

ECB inaction July 26, 2010 3:10pm by Ralph Atkins | Comment | Share The European Central Bank is becoming masterly at making a virtue out of its modesty. Its latest boasting is about how little it has been spending on buying eurozone government bonds. Figures just released showed the ECB bought bonds worth only €176m last week - the lowest weekly amount since the programme started in early May. In the first week, it had bought €16.5bn. ECB policymakers have hinted that the programme would be scaled back significantly. But the message from the ECB’s governing council is that this is a sign of strength, not weakness. Athanasios Orphanides, central bank governor of Cyprus, told a press conference in Nicosia that eurozone government bond spreads would ease as confidence in its economy and banking system returned. “I personally feel happy that the programme didn’t have to be activated to the same degree as earlier,” he said. As a strategy, such chastity could, arguably, prove as effective in rebuilding financial market optimism as doing the opposite: that is, buying on a large scale and trumpeting its activism, which might have been the instinct of other central banks. Certainly, it fits with the emphasis Jean-Claude Trichet, ECB president, has recently placed on the ECB acting as an anchor of stability. Continue reading "ECB inaction"

July 26th, 2010 3:10pm

Ralph AtkinsECB inaction July 26, 2010 3:10pm http://blogs.ft.com/money-supply/

145 Opinion

July 26, 2010 Long-Term Economic Pain By BOB HERBERT The pain coursing through American families is all too real and no one seems to know what to do about it. A rigorous new analysis for the Rockefeller Foundation shows that Americans are more economically insecure now than they have been in a quarter of a century, and the trend lines suggest that things will only get worse. Rampant joblessness and skyrocketing medical costs are among the biggest factors tearing at the very fabric of American economic life so painstakingly put together in the early post- World War II decades. The analysis was done by a team of researchers led by Professor Jacob Hacker of Yale University. They created an economic security index, which measures the percentage of Americans who experience a decrease in their household income of 25 percent or more in one year without having the financial resources to offset that loss. (Major medical expenses were counted as a decrease in available income.) The team’s findings were grim. Simply stated, more and more families are facing utter economic devastation: completely out of money, with their jobs, savings and retirement funds gone, and nowhere to turn for the next dollar. Economic insecurity has been increasing for at least a generation and perhaps longer, with very dangerous levels being reached in this latest recession. Professor Hacker discussed the ominous trend lines in an interview. In 1985, at a time when the unemployment rate was 7.2 percent, the portion of American families that would be counted as economically insecure by the terms of this new index was 12 percent. Professor Hacker explained that the percentage would naturally tend to rise or fall with improvements or a deterioration in the economy. But what has happened over the past few decades is that the percentage of insecure Americans relative to any given level of the economy has tended to steadily rise. So in 2002, coming out of a mild recession, there was a 5.8 percent unemployment rate, but the percentage of economically insecure families had jumped to 17 percent. All of the data for 2009 are not yet in, but the research team projects, conservatively, that more than 20 percent of Americans experienced a 25 percent or greater loss of household income (without a financial cushion) over the prior year — the highest in at least a quarter of a century. A decrease of this magnitude in available income is a heavy blow. As the study points out, “The typical individual who experiences a decline of at least 25 percent in household income requires between six and eight years for income to return to its previous level.” “What we’re seeing, basically, is what we’re calling ‘the new normal,’ ” said Mr. Hacker. “We’re slowly ratcheting up this level of economic insecurity.” Put another way, the bottom is falling out for increasing numbers of Americans, and with the national employment situation stuck in an extended horror zone there is little to stop the free

146 fall. In addition to tracking the percentage of Americans suffering household income losses of 25 percent or more, the index also shows that families are suffering steeper income declines than in previous decades. According to the study, “Between 1985 and 1995, the typical (median) drop among those experiencing a 25 percent or greater available income loss was about 38.2 percent; between 1997 and 2007, it was 41.4 percent.” Only the very well-to-do are out of the range of this buzz saw. “The fact that Americans are facing a very real and growing risk of large-scale economic loss is true across the spectrum,” said Mr. Hacker. “It’s true of blacks more than whites, but it’s true of whites, as well. It’s true of less affluent people more than more affluent people, but it’s true of the more affluent as well. “If anything, we’re understating how bad things are out there right now.” Policy makers seem bewildered by the terrible economic state of ordinary working Americans, including those once considered solidly in the middle class. Despite warnings back in 2008 that we were on the verge of another great depression, the big financial institutions and corporate America seem to be doing just fine now. But average Americans are hurting with no end to the pain in sight. More than 14 million people are out of work and many more are either underemployed or so discouraged they’ve just stopped looking. Big corporations, sitting on fat profits even as the economy continues to struggle, have made it clear that they are not interested in putting a lot more people back to work any time soon. Policy makers have dropped the ball completely in terms of dealing with this devastating long- term trend of ever-increasing economic insecurity for American families. Long-term solutions that have to do with extensive job creation and a strengthening of the safety net are required. But that doesn’t seem to be on anyone’s agenda. http://www.nytimes.com/2010/07/27/opinion/27herbert.html?th&emc=th

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Lunes, 26 de julio de 2010 | Última actualización 14:41 Los gobiernos locales chinos pueden suspender el pago de 873.000 millones de euros 26.07.2010 Expansión.com 0 Los bancos chinos reconocen que alrededor del 23% de los créditos otorgados a los gobiernos locales de su país sufren un riesgo "serio" de impago, según publicó hoy la revista económica "New Century Weekly". La deuda ascendería a 873.000 millones de euros. La publicación citó fuentes de la Comisión Reguladora Bancaria de China (CBRC, por sus siglas en inglés), que en una reunión reciente asumió que cerca de una cuarta parte de los 7,66 billones de yuanes (1,13 billones de dólares, 873.000 millones de euros) corren peligro. La mayoría de los créditos fueron otorgados para proyectos de infraestructuras, dentro del plan de estímulo económico previsto por Pekín para recuperar la economía. Las estimaciones del máximo organismo regulador de la banca en el gigante asiático indican que sólo el 27% de los proyectos están generando suficiente retorno para devolver los créditos e intereses. En este sentido, el presidente de la CBRC, Liu Mingkang, apuntó ya la semana pasada que la utilización masiva de vehículos de financiación y derivados por parte de los gobiernos locales suponía un riesgo para el sector bancario de China. De hecho, varios expertos advirtieron con anterioridad del volumen de endeudamiento y el riesgo de impago, y remitieron a la crisis financiera que vivió Asia a finales de los años noventa. El economista hongkonés Victor C. Shih, profesor de la Northwestern University, alertó en marzo de que los Gobiernos locales de China estaban multiplicando su deuda para desarrollar sus economías, hasta el punto de que sus créditos ascendían a 1,6 billones de dólares, equivalente a casi un tercio del PIB del país. Sin embargo, los créditos locales no están computados en la relación oficial entre deuda y PIB de China, que se sitúa en el 22%. Si se suman estos préstamos a nivel local, la deuda china asciende otro 30%, hasta superar el 50% de su riqueza. En los últimos años, Pekín se embarcó en una reforma y saneamiento del sector bancario, todavía dominado por las entidades estatales (los cuatro mayores bancos chinos son de propiedad pública) y que se estima que obligó al desembolso de más de 650.000 millones de dólares. http://www.expansion.com/2010/07/26/empresas/banca/1280130908.html

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07/26/2010 11:53 AM A Meaningless Report Europe's Stress-Free Stress Test Fails to Make the Grade The Europe-wide banking stress tests published on Friday returned the expected -- and desired -- result. But, as many economic experts see it, the test was useless because it was too simple, too easy to cheat on and tested the wrong things. It wasn't an entirely simple task that Franz-Christoph Zeitler, the vice president of the Bundesbank, Germany's central bank, and Jochen Sanio, the head of Germany's Financial Supervisory Authority (BaFin), had to perform on Friday: It was their job to announce what everyone expected to hear while, at the same time, denying what everyone suspects. As expected, the two said that Germany's banks had passed the Europe-wide stress test with flying colors: "German banks prove to be robust and resilient," was how they put it in their joint official statement. The only exception was Hypo Real Estate (HRE), the Munich-based bank, which failed to maintain an adequate core capital ratio in the most extreme scenario and is only still alive because it has been nationalized by the German federal government. All of Germany's other 13 banks -- and even the chronically ailing state-owned regional investment banks, the Landesbanken, made the grade. But not everyone found the results reassuring. "What are you supposed to be able to do with this kind of report card?" asked Hans-Werner Sinn, the president of the Munich-based Ifo Institute, one of Germany's leading economic think tanks. And the implied answer is fairly obvious: nothing. Sanio and Zeitler -- who was filling in for his vacationing boss, Bundesbank President Axel Weber -- are familiar with this criticism, so they went to great lengths to dispel all doubts. Sanio called the stress test "tough," and Zeitler stressed that the evaluation was "extremely stringent," adding that critics didn't have a correct view of the situation. Insufficient Attention Paid to Government Bonds In Germany, just as in all the other European Union countries whose banks participated in the stress test, the results were not officially publicized until 6 p.m. By then, stock exchanges in Europe had already closed for the night. When asked how he thought the financial markets would react to the results when they reopened on Monday, Sanio dryly replied: "I don't have a crystal ball." Still, it doesn't take supernatural abilities to predict that the European stress test won't have much of an effect at all. At the New York Stock Exchange on Friday evening, for example, the news was simply ignored. The reason: Despite the enormous amount of effort that went into the test, it has only returned a very modest amount of knowledge. Moreover, it has been just too blatantly obvious that the test returned the exact result that those responsible for conducting it were hoping for. From the get-go, the most contentious issue has been whether enough attention is being paid to the risks posed by the government bonds being issued by tottering southern euro-zone

149 members. These bonds currently constitute the greatest threat to European banks -- and particularly to French ones, whose books hold a particularly large number of them. Granted, the simulated scenario did include an imagined drop in the value of these bonds -- but in a way that would have barely bruised the banks. The reason for this, as Frankfurt-based economist and banking-sector expert Mark Wahrenburg puts it, is that most of these bonds "have not been listed in the trading portfolio" -- or, in other words, have been kept out of the only place where the market has to put a price tag on them. Likewise, some traders say that -- just in time for the test's June 30 cut-off date -- some banks transferred substantial quantities of government bonds into their investment portfolios, where they don't have to be depreciated according to market fluctuations. As the Ifo Institute's Sinn puts it: "The risk of write-downs was systematically redefined out of existence." Sinn also suspects that "everything has been organized so as to put France on the safe side." As it turns out, all French banks passed the test, while one Greek bank and five Spanish ones failed. "They shouldn't test a depreciation in the bonds' value but, rather, a complete loss," says Wahrenburg, adding that doing so "would put considerably more institutions under pressure." Still, this worst-case-scenario approach was undesirable because it might have affected too many banks. Likewise, it is conditioned on there being a failure of the euro bailout package -- a possibility that no one is even allowing themselves to consider. Refusing to Take Your Medicine In fact, Wahrenburg doesn't have a very high opinion of the rest of the stress test, either -- at least not the way it was just conducted. As he sees it, it would have been relatively easy for the banks to cheat, so the "only sensible approach would be a standardized stress test that regulatory authorities would conduct themselves based on the figures available to them." Doing so, he adds, would make it possible "to assess the institutions according to a simple traffic-light model." Such a test would only make sense if the light were not always green -- particularly given the fact that there is no way that all of Europe's banks are as fit as a fiddle. In fact, as Sinn sees it, "Most of the banks are undercapitalized" and taking big risks by conducting business with so little capital on hand. Since the beginning of the financial crisis, Sinn has been calling for the banks to be recapitalized -- and with government aid, as the Americans have done. There is enough money available, he points out, and to distribute it, the German government has already created the Federal Agency for Financial Market Stabilization (SoFFin), the bank-rescue fund into which it has pumped €480 billion ($620 billion). Still, hardly any banks have voluntarily accepted a cash injection from the government. And the message of the stress test is that the government has no intention of forcing them to do so. URL: http://www.spiegel.de/international/business/0,1518,708489,00.html RELATED SPIEGEL ONLINE LINKS: • Stress Test: One German Bank and Six Others Across Europe Fail (07/23/2010) http://www.spiegel.de/international/business/0,1518,708221,00.html • Waiting for D-Day: Europe's Financial Giants Nervous Ahead of Stress Test Release (07/22/2010) http://www.spiegel.de/international/business/0,1518,707957,00.html

150 • Too Weak?: Concerns Grow over Rigorousness of EU Stress Tests (07/21/2010) http://www.spiegel.de/international/business/0,1518,707746,00.html

JULY 26, 2010 Report Finds Labor Laws Restraining Europe By WILLIAM LYONS European businesses are struggling to compete with their U.S. rivals who are far more agile at maximizing profit from their investment in people according to new research that warns firms in the EU are being hampered by strict labor laws. The findings, from a report on the efficiency of employees by PricewaterhouseCoopers, shows that Western European companies are failing to compete with their global rivals and lack the key skills to operate in the new global business environment. The report analyzed data drawn from more than 10,000 companies in 40 countries to ascertain the pre-tax profit produced for every pound, euro or dollar paid out in remuneration known as the human capital return on investment, or HC ROI. It shows that during the uninterrupted growth years of 2002 to 2006, HC ROI rose by a relatively modest 4.6% in the U.K. and 8.3% in Western Europe. But during the same period HC ROI leapt by 19.8% in the U.S. Moreover in 2007, when the first signs of slowdown emerged in some economies and with markets suffering in 2008, the index fell in the U.K. by 2.8% and 1.7% for Western Europe, but held steady in the U.S. Richard Phelps, a partner at PricewaterhouseCoopers LLP, said U.S. firms "have proved better at flexing employment costs to market conditions," citing their ability to adjust staff numbers and salaries. "In the U.K. and Western Europe the more regulated environment prevents such agility, he said. The PwC research suggests that the dilemma for many mature economy governments, specifically in Western Europe, is how they will balance entrenched social well-being policies while competing with more highly productive and lower-cost territories. For Western Europe, the recession has highlighted how powerful and agile competing countries have become. Governments will need to ensure that elements such as employment law, taxes and education standards are appropriately structured to attract employers and key talent, the report says. It suggests numerous possible avenues for increasing HC ROI. These include investigating the utilization of overtime; reviewing absenteeism; adjusting the balance of full-time, part-time staff and contract workers; assessing benefits structures, and facilities and overhead costs. Richard Phelps said: "While many companies invariably made job cuts to survive the recession, some employers introduced cost saving initiatives with similar results but with less pain. Either way, the downturn has highlighted the need for companies to have a clear idea of the contribution their people make to the bottom line. A fact-based approach can help ensure decisive and transparent decision making. "However, companies need to ensure employees remain engaged during any subsequent changes as their support is equally vital to return on work-force investment."

151 Write to William Lyons at [email protected] http://online.wsj.com/article/SB10001424052748703294904575385192081185332.html

152 El examen a la banca europea Buena parte de la banca alemana ocultó su exposición a la deuda griega Las pruebas demuestran que el riesgo de las entidades españolas en Grecia es mínimo a diferencia del que han asumido las francesas o las germanas MIGUEL JIMÉNEZ - Madrid - 26/07/2010 La banca española está a salvo del impacto directo de la crisis griega. Los datos revelados por el Banco de España como parte de las pruebas de resistencia muestran cómo la exposición al riesgo soberano griego de las entidades españolas es mínima, a diferencia de las francesas o alemanas. La banca española está a salvo del impacto directo de la crisis griega. Los datos revelados por el Banco de España como parte de las pruebas de resistencia muestran cómo la exposición al riesgo soberano griego de las entidades españolas es mínima, a diferencia del resto de países de la zona euro. Sin contar los propios bancos griegos, Francia es el país con más riesgo declarado: 10.977 millones (de los que 4.937 millones corresponden a BNP Paribas; 4.001, a Société Générale; 1.185, a BPCE, y 854, a Crédit Agricole). Alemania es el segundo país más expuesto, con más de 5.000 millones, pero la cifra es incompleta porque buena parte de las entidades alemanas la han ocultado. Sin embargo, contando no solo los títulos de deuda pública sino también los préstamos a otras entidades y empresas públicas, el riesgo agregado de la banca española en Grecia es de solo 801 millones, de los que únicamente los 300 millones del Santander y nueve millones de la fusión de Caja Madrid y Bancaja están en la cartera de negociación. El Santander, con esos 300 millones, y el BBVA, con 293, son los que tienen mayor exposición. El banco vasco, no obstante, explica que de esa cifra apenas un tercio es deuda pública y la mayoría son préstamos por operaciones comerciales. Con todo, los tests apenas penalizan la tenencia de deuda griega, ya que no se ha contemplado la hipótesis de impago, lo que beneficia sobre todo a las entidades alemanas y francesas. Solo se ha aplicado un recorte de la valoración del 23,1% a los títulos griegos que están en la cartera de trading o negociación, y no al grueso de la deuda, que está en la cartera a vencimiento. En Francia, por ejemplo, solo se ha aplicado el recorte a 2.900 millones. Los 5.000 millones de exposición alemana, a la espera de sumar las cifras de las entidades que se han resistido a publicarlas (como Deutsche Bank, Hypo Real Estate y otras cuatro), se deben sobre todo a Commerzbank (2.900 millones) y LBBW (1.389). El siguiente país es Chipre, con 4.837 millones en solo dos bancos, por sus lazos económicos con Grecia. Bank of Cyprus tiene 1.894 millones y Marfin Popular otros 2.943 millones. Le sigue de cerca Bélgica, con los 3.737 millones de Dexia y los 909 de KBC. En la zona euro, Holanda es el sexto país con más riesgo, 3.161 millones, sobre todo por los 2.425 millones de ING. Va detrás Italia, con 1.778 millones, concentrados sobre todo en Unicredit (801) e Intesa San Paolo (828). En Portugal, Caixa Geral tiene 56 millones; BCP, 718 millones, Espírito Santo, 464, y BPI, 501. Es decir, solo cuatro bancos portugueses tienen 1.739 millones en riesgo griego, más del doble que los 27 bancos y cajas españoles juntos.

153 Austria se sitúa ligeramente por detrás de España en riesgo soberano en Grecia, con 776 millones, casi todos en Erste Bank. Los bancos analizados de Finlandia, Luxemburgo y Malta apenas tienen exposición a Grecia. Fuera del euro, los bancos británicos tienen cerca de 4.400 millones de riesgo soberano griego, de los que 2.400 corresponden a RBS y 1.935, a HSBC. Las entidades suecas, danesas y húngaras tienen una exposición marginal. En el caso de la banca española, el grueso de los bonos y préstamos a entidades públicas de la banca se concentra, lógicamente, en España, con 191.671 millones. El segundo país es Italia (sobre todo por la fuerte presencia del BBVA con operaciones mayoristas) y el tercero, Portugal (básicamente por la filial del Santander en el país). La banca española apenas tiene riesgo con Irlanda y nada con Islandia. http://www.elpais.com/articulo/economia/Buena/parte/banca/alemana/oculto/exposicion/deuda /griega/elpepueco/20100726elpepieco_4/Tes

154 El examen a la banca europea El Santander, campeón en rentabilidad El banco español lograría los mayores beneficios de toda Europa aunque empeore la crisis, según las pruebas - El SIP de Caja Madrid sufriría las mayores pérdidas MIGUEL JIMÉNEZ - Madrid - 25/07/2010 La banca europea ha aprobado las pruebas de resistencia. En su inmensa mayoría, las entidades analizadas seguirían siendo solventes incluso ante un escenario muy adverso. Sin embargo, muchas de ellas entrarían en pérdidas como consecuencia de un hipotético agravamiento de la crisis, según los resultados publicados por el Comité de Supervisores Bancarios Europeos. La banca europea ha aprobado las pruebas de resistencia . En su inmensa mayoría, las entidades analizadas seguirían siendo solventes incluso ante un escenario muy adverso. Sin embargo, muchas de ellas entrarían en pérdidas como consecuencia de un hipotético agravamiento de la crisis, según los resultados publicados por el Comité de Supervisores Bancarios Europeos (CEBS, por sus siglas en inglés). No es el caso del Santander. El banco presidido por Emilio Botín seguiría generando ganancias a fuerte ritmo incluso si se da el escenario más extremo analizado por el Banco de España. Un análisis de los resultados publicados por el CEBS realizado por EL PAÍS muestra que el Santander sería el banco con mayores beneficios de toda Europa en un escenario de tensión, con una gran diferencia sobre las siguientes entidades. El BBVA estaría también entre las más destacadas. Fuentes del sector financiero consideran que una vez despejados los fantasmas sobre la solvencia, el foco de los inversores va a volver a situarse en la rentabilidad, sobre todo en lo que respecta a los bancos que cotizan en Bolsa. En ese terreno, las noticias son buenas para los dos grandes bancos españoles. Las cifras facilitadas por el CEBS para las 91 entidades europeas sometidas a examen muestra que el Santander es la que tiene más capacidad de generación de beneficios. Incluso en una situación de tensión extrema, el banco cántabro generaría un margen de 45.737 millones con el que podría hacer frente a las pérdidas crediticias y demás deterioros de activos y aun así lograr un beneficio bruto de 14.416 millones en dos años. El Banco de España ha elaborado esas cifras con mayor precisión y contempla para el Santander un beneficio antes de impuestos de 14.090 millones que se quedarían en 10.976 millones de euros netos tras pasar por la ventanilla del fisco en el peor de los casos. En el escenario tensionado de referencia, esos resultados se duplicarían con creces hasta los 22.419 millones de beneficio neto, según datos del Banco de España. "Además de mantener los ratios de solvencia intactos en ese hipotético escenario adverso señalado por los reguladores, Banco Santander obtendría beneficios, generaría capital y continuaría con su actual política de pay-out, lo que implica distribuir entre sus accionistas alrededor del 50% del beneficio ordinario", destacaba el Santander al valorar las pruebas que, según Botín, "reafirman el éxito del modelo Santander". "Somos un banco minorista con una fuerte diversificación geográfica, de negocios y clientes. Estamos presentes en una decena de países con cuotas de mercado de más del 10%, lo que nos permite ser muy eficientes", señaló el viernes en un comunicado. Entre los grandes bancos el Santander es el segundo que mejor resiste también desde el punto de vista de la solvencia el escenario más extremo, solo por detrás de Barclays. Pero el español se situaría primero si en lugar de repartir dividendo, retuviera el beneficio, como Barclays.

155 Entre los bancos que lograrían atravesar incluso el escenario más extremo con beneficios se sitúa también el español BBVA, cuarto por detrás de Barclays y BNP Paribas. La entidad que preside Francisco González lograría en el peor de los casos un superávit (asimilable con ciertas reservas a beneficio bruto) de 6.834 millones en dos años, según los datos del CEBS. De nuevo, el Banco de España es más preciso y señala para la entidad vasca un beneficio después de impuestos de 4.224 millones en la hipótesis más extrema y de más del doble (8.789 millones) en el supuesto de tensión de referencia. "Una de las claves de la fortaleza de BBVA es tener un modelo de negocio con capacidad de generar resultados operativos incluso en los escenarios más negativos; un modelo que proporciona recurrencia y sostenibilidad de los beneficios y que refleja una rentabilidad diferencial sobre sus activos", señalan desde el BBVA. "Las pruebas de resistencia confirman la fortaleza financiera del Grupo BBVA, que pese a no haber realizado ninguna ampliación de capital desde el inicio de la crisis, se encuentra entre los bancos más sólidos y solventes de Europa", explicó Francisco González el viernes en una nota. Pero además de situarse en las primeras posiciones en cifras absolutas, el Santander y el BBVA destacan también en términos relativos. Así, entre los grandes bancos, el Santander es el que logra una mayor rentabilidad con relación al tamaño de sus activos en riesgo, seguido por Barclays y BBVA. Junto al mayor beneficio absoluto y la más alta rentabilidad sobre activo, Botín logra la triple corona al conseguir también el mayor beneficio con relación al capital (medido por el Tier 1) de todos los grandes bancos europeos (un 12,1%) en el escenario más duro. En esta categoría, el BBVA es el segundo de Europa, con un 11,4%. Los dos grandes bancos españoles son los más rentables a pesar de que el Banco de España ha usado en las pruebas las previsiones de caída del precio de la vivienda y de las oficinas más duras de toda Europa, según datos del CEBS. El supervisor explicó ayer también a los analistas que ha sido especialmente severo a la hora de la estimación del margen de explotación. Acaso esa severidad es la que provoca que, según las pruebas de resistencia, solo el Santander y el BBVA seguirían logrando beneficios en el escenario negativo más extremo. Todas las demás entidades españolas estarían en pérdidas, déficit o deterioro, según las pruebas. El mayor desfase sería para el Sistema Institucional de Protección (SIP) liderado por Caja Madrid , donde el deterioro de activos superaría en 13.738 millones al margen de explotación, según el CEBS. Con datos del Banco de España, el deterioro neto sería de 11.377 millones tras un efecto fiscal positivo de 3.792 millones. España tendría así, la entidad con mayores beneficios y la de mayores pérdidas de toda Europa. http://www.elpais.com/articulo/economia/Santander/campeon/rentabilidad/elpepueco/2010 0725elpepieco_2/Tes

156 El examen a la banca europea Los mercados premian la transparencia española y castigan la falta de datos de Alemania La deuda y la Bolsa alemanas sufren tras saberse que sus bancos ocultaron la exposición a Grecia.- La prima de riesgo de España y el euro mantienen su mejora EL PAÍS - Madrid - 26/07/2010 El alivio no será inmediato, pero los mercados de renta variable han abierto hoy lunes, primer día de actividad tras la publicación de las pruebas de resistencia a la banca el viernes, dando un veredicto positivo, aunque sin euforia, a sus resultados. Además, los inversores están premiando la transparencia española y castigando la falta de datos de los alemanes, donde la mayoría de sus grandes bancos han ocultado la exposición a la deuda griega. Así, el buen resultado general obtenido por España en las pruebas, que fue el país que más entidades puso bajo la lupa de los supervisores y en peores condiciones, se ha trasladado en más alivio para la prima de riesgo. Este índice, que condiciona tanto las condiciones de financiación del Estado como de sus bancos y que se establece a partir del diferencial entre los bonos españoles a 10 años y los alemanes, que hoy han visto como aumentaba su rentabilidad hasta su nivel más alto en un mes por el correctivo de los inversores, bajaba hasta los 159 puntos básicos a primera hora, muy lejos de los máximos alcanzados a mediados de junio en los 221. La mejora también se ha dejado notar en todos los tramos de la deuda ya sea a cinco, dos o 10 años. No obstante, hay que recordar que los bonos alemanes están en sus niveles más bajos desde que el país entró en el euro, con lo que tienen mucho margen de corrección. Las Bolsas, en recogida de beneficios En cuanto a la renta variable, frente al descenso del principal índice alemán, el Dax de Francfort, el español el Ibex 35 mantenía a media sesión tímidas subidas. Tras llegar a transitar por el rojo en algunos momentos de la sesión, no porque hayan sentado mal los resultados de los tests, sino por la recogida de beneficios tras varias jornadas de recuperación, evolucionaba con sus grandes bancos en verde en línea con la mayoría del resto de Europa. Sin embargo, todos han acabado sucumbiendo al cierre de posiciones por parte de los inversores y, a las 13.00, transitaban en pérdidas. Entre los valores de la Bolsa alemana destacaba la caída del Deutsche Bank, que sufría el mayor recorte de todo el sector en Europa. En contra de la entidad germana, además de conocerse que ha ocultado datos a los supervisores, también está pesando el anuncio de que presentará unos resultados del segundo trimestre peor de lo esperado. En los mercados de divisas, el euro mantiene su remontada frente al dólar y ha llegado a cambiarse a 1,295 unidades del billete verde. Por otra parte, en el interbancario, donde los bancos se prestan dinero entre sí, el Euríbor, que es el índice que mide el interés al que lo hacen y que cerrará julio con su último dato inferior al de hace un año, ha vuelto a subir hoy en su cotización diaria hasta el 1,407%, tal y como venía haciendo desde hace dos meses. Es previsible que este indicador, que a su vez es el más empleado para fijar el precio de las

157 hipotecas en España, subirá en agosto en tasa interanual por primera vez en muchos meses, lo que encarecerá las cuotas mensuales tras una racha a la baja de más de un año. En opinión del miembro del Comité Ejecutivo del Banco Central Europeo (BCE) José Manuel González-Páramo, habrá un "antes y un después" de las pruebas debido al horizonte que éstas han abierto. "Donde había prácticamente sólo rumor y prejuicio ahora tenemos unos datos que los inversores pueden utilizar para llegar a sus propias conclusiones. En su conjunto, nosotros creemos que muestran una solidez y capacidad de resistencia de la banca europea que conocíamos pero que, con estos datos, queda refrendada", ha afirmado hoy González-Páramo en declaraciones a la cadena SER. En cuanto a la reacción de las Bolsas, ha señalado que los mercados deben analizarse a más largo plazo y ha considerado que éstos han estado anticipando unos resultados "relativamente buenos" de las pruebas de estrés, como lo demuestra, a su juicio, la evolución de las acciones bancarias de la semana pasada. "Lo que hoy ocurra con la Bolsa es menos relevante que el horizonte que se abre con estas pruebas. Hay un antes y un después de las pruebas de estrés", ha resumido. http://www.elpais.com/articulo/economia/mercados/premian/transparencia/espanola/castigan/f alta/datos/Alemania/elpepueco/20100726elpepueco_1/Tes

El examen a la banca europea Los bancos y cajas disponen aún de un 'colchón' extra de 20.000 millones Las provisiones genéricas han permitido a numerosas entidades superar las pruebas - Los reguladores quieren extender el sistema a todo el mundo España ha previsto en las pruebas un deterioro de activos por el 20% del PIB El total de provisiones de los bancos analizados es de 70.000 millones M. JIMÉNEZ / Í. DE BARRÓN - Madrid - 26/07/2010 Las provisiones genéricas o anticíclicas, el mecanismo por el que bancos y cajas españoles están obligados a guardar en una hucha reservas para los malos tiempos, han acabado siendo el mejor plan de rescate de la banca. Los 27 bancos y cajas analizados disponen aún de 19.796 millones de euros en ese tipo de provisiones, listas para usarse en escenarios de crisis y pérdidas crediticias. Las provisiones genéricas o anticíclicas, el mecanismo por el que bancos y cajas españoles están obligados a guardar en una hucha reservas para los malos tiempos, han acabado siendo el mejor plan de rescate de la banca. Los 27 bancos y cajas analizados disponen aún de 19.796 millones de euros en ese tipo de provisiones, listas para usarse en escenarios de crisis y pérdidas crediticias. También se crearon para frenar los beneficios de las entidades financieras en momentos de burbuja, como la que vivió España entre 1994 y 2007. En el momento de mayor auge, las entidades españolas acumularon 35.000 millones de colchón. Estas provisiones extra -tantas veces criticadas por las entidades porque les restaban beneficios- son las que han facilitado a numerosas entidades superar las pruebas de resistencia. Incluso, según comentó José María Roldán, director general de Regulación del Banco de España, en el primero de los dos escenarios de tensión, casi todas las entidades pasaban el listón de solvencia al aplicar las provisiones genéricas.

158 Según algunos analistas que acudieron a la presentación de las pruebas de esfuerzo que realizó el supervisor el sábado pasado por la mañana, Roldán comentó que este hecho demuestra el éxito de las provisiones anticíclicas. El informe del Banco de España sobre las pruebas de estrés comenta el efecto positivo de esta hucha, que se une a las provisiones específicas, las reservas que se dotan por créditos que entran en mora: "Una parte sustancial del deterioro hipotético puede ser absorbida por las provisiones acumuladas a diciembre de 2009", 70.000 millones en total, que paran un tercio del golpe de esta supuesta crisis extrema, que se ha cifrado en un deterioro bruto de activos de 207.000 millones, equivalentes a un 20% del PIB, el supuesto más severo de todos los países.

Según los datos publicados, solo cinco de las 17 cajas (si no se tiene en cuenta a Cajasur) sufren deterioro de su solvencia en el primer caso de estrés, aunque en otros cuatro casos el Fondo de Reestructuración Ordenada Bancaria (FROB) les ayuda. Sin las provisiones anticíclicas, eso hubiera sido imposible. El efecto es mayor en los bancos, que no han recibido fondos públicos. En los ocho casos, pasan la primera prueba de estrés sin problemas gracias a las provisiones extra. En la prueba más extrema, hay tres bancos y seis cajas que superan el listón del 6% de solvencia por menos margen que el que tienen en provisiones genéricas. ¿Han aprobado gracias a ellas? Es cierto que hoy por hoy no aprobarían sin ellas, aunque también puede argumentarse que si las entidades no hubieran tenido que dotarlas, tendrían al menos parte de ellas como reservas por el beneficio no distribuido, sobre todo en el caso de las cajas, que no reparten dividendo.

159 Los bancos conservan más provisiones genéricas que las cajas, que ya han tenido que usar más la hucha (ver cuadro). Desde el comienzo de la crisis en 2007 se han alabado estos colchones, objeto de atención internacional. El G-20 los alabó y propuso la extensión de las denominadas "provisiones españolas", como se conocen en algunos países. Ahora, el Banco Internacional de Pagos (BIS) acaba de someter a consulta una propuesta para extender el sistema de reservas anticíclicas. Según el BIS, "serían impuestas cuando, a juicio de las autoridades nacionales, se considere que el excesivo crecimiento del crédito pueda generar un riesgo para el sistema". Esas provisiones "ayudarán a asegurar que el sistema financiero tiene una adecuada reserva de capital para protegerse frente a futuras pérdidas", según los documentos del BIS. La idea del fondo anticíclico es muy antigua y ha sido fuente de agrias polémicas con la banca. Desde la crisis bancaria de los setenta hasta la quiebra de Banesto en 1993, el Banco de España presenció la desaparición de unas 40 entidades. Estos hechos hicieron plantearse la necesidad de una medida especial anticrisis. Mariano Rubio (gobernador desde 1984 hasta 1992) transmitió a Luis Ángel Rojo (1992-2000) las primeras ideas a través de la Ley de Disciplina e Intervención de Entidades de Crédito de 1988, que sigue siendo la base actual de la legislación bancaria. Con la crisis económica de 1993, Banesto se hundió casi sin que el supervisor pudiera hacer nada para evitarlo. El mal trago vivido marcó a los gestores que vivieron la experiencia. Rojo plasmó las ideas definitivas sobre las provisiones en una circular. Jaime Caruana, (2000- 2006), las implantó desde su primer año de mandato. En numerosas ocasiones, bancos y cajas pidieron usarlas para atajar los problemas del momento y exhibir más beneficios. El supervisor no movió su posición. Seis años después se lo habrán agradecido. http://www.elpais.com/articulo/economia/bancos/cajas/disponen/colchon/extra/20000/millones /elpepueco/20100726elpepieco_2/Tes

160

Daily Morning Newsbriefing Europe's illusion of financial strength

26.07.2010 The stress test exercise turned out to what was expected – finely calibrated so that only those banks failed that needed to be restructured in any case; 7 banks failed, including 5 Cajas, one German and one Greek bank; total new capital need is only €3.5bn, an implausibly low sum; Morgan Stanley estimates that a pass rate of 7% would have result in 24 bank failures; the tests did not stress any sovereign defaults; there were some criticisms that the German banks did not disclosure the sovereign exposures; Spain celebrated the results, also because the Spanish tests were tougher than those of the others; Gerald Braunberger says the tests are useful, but the problem of a lack of capital still persists; Das Kapital criticises that the prevalence of hybrid capital invalidates the results; Wolfgang Münchau says the three weaknesses are the treatment of hybrid capital, the lack of sovereign default assumptions, and the exclusion of some of the most toxic banks; A troika of European Commission, ECB and IMF are visit Greece to pave the way for the second tranche of the loan; an FT editorial, meanwhile, makes a strong plea in support of the Basle committees’ new proposals to redefine the capital requirements.

26.07.2010 Europe's illusion of financial strength

We have essentially only one story today – Friday’s stress test and their aftermath. Only 7 out of 91 banks did not pass the stress test, 5 banks in Spain, one in Greece and one in Germany. These banks failed to achieve a tier one capital ratio of 6% once their balance sheets were exposed to a series of macroeconomic scenarios for 2010 and 2011. They are ordered to raise their capital by €3.5bn. No surprises, as the results reflected pretty much what markets

161 expected anyway. The tests got a mixed reception from analysts. It still faces criticism over the set-up, the risk scenarios, the capital definition and the theshhold. Bloomberg quotes Morgan Stanley, saying if the Tier 1 threshold been 7%, 24 of the banks would have failed. Credit Suisse and some analysts are more positive stating that the stress tests were rigorous enough to show that banks can withstand a double dip recession and that it is save to invest in Europe. German banks need extra invitation to disclose their bond holdings Banks were asked by regulators to publish details on their sovereign bond exposures. All banks did, except for six (out of 14) German banks– Deutsche Bank, Postbank, Hypo Real Estate, mutual groups DZ and WGZ, and Landesbank Berlin (Postbank did publish some information on Sunday). The FT quotes German regulatory authorities saying there is no legal ground for forcing the banks to disclose the information, and bankers saying they had not been pushed enough by the German regulator BAFIN. Now the Committee of European Banking Supervisors and the European Commission are trying their luck to get those six banks to publish. Spain celebrates stress test results Spain is celebrating the results that only 5 out of 17 tested failed the test, it could have been worse. They also celebrated the fact that the Spanish test was tougher than that of other member states, covering 95% of the Spanish banks rather than the required 50%; including one extra real estate scenario, a fall of 28% in apartment prices and 68% in property land (from Der Standard). These positive results, argues El Pais, would not have been possible without the reserve system, which requires banks to save for rainy days, and which currently holds some €19.8bn in extra reserves. The Spaniards also are happy to report in another article that their exposure to Greek debt is only €800m, minimal compared to €11bn of the French banks and German exposure of ?? (yet to be determined). There is also a resolution strategy in place. So what to make of the stress tests? Gerald Braunberger comments in Frankfurter Allgemeine that one should not overrate those tests, and there is no reason for Germany to be self-congratulatory. In the case of the Landesbanken, they could only take part in the test because the government had helped recapitalise them. There is still a shortage of capital in the system. His overall conclusion, however, is positive, as he concludes that after the sovereign debt crisis, the EU is finally moving in the right direction. The FT Deutschland column, Das Kapital, is perhaps most negative on the stress tests. It began the comment with a note that only a fraction of Deutsche Bank’s tier one capital is genuine equity capital. Most of it comes in the form of hybrid capital – which is still officially counts as tier one capital, which was an impressive 11.2% of total assets. If you only look at equity capital, the ratio would fall to 1.3%. The situation in the Landesbanken and the Spanish Cajas is even worse. In another article, FT Deutschland questioned whether the tests are comparable because the Landesbanken were still using the old German system to prepare their accounts. Wolfgang Münchau said the tests had three fundamental failings. The first is that they did leave out some important institutions, such as KfW, the German state-owned bank, that has

162 amassed significant amounts of toxic capital. The second is the same point made by Kapital above – that the official tier one ratios do not tell us what we need to know. We are interested in the the risk absorbing parts of the capital structure. And finally, the stress tests did not include the possibility of a sovereign default – which is strange since the CEBS put the likelihood of the adverse scenario at 5% - which is surely less than the likeilood of a Greek default, as implied by recent bond prices. He concludes that this test was fixed. If such a test had been applied to the safety children toys, the testers would end up in jail. In defence of Basel III In editorial the FT makes a strong plea in favour of Basel III, which is facing tough opposition from bankers and some governments. Under the proposals banks would have to hold much larger stocks of capital, and higher quality capital. Basel III would also address the issue raised by Das Kapital and by Münchau, namely the overreliance on hybrid capital. Troika will assess Greek austerity progress The FT reports that a team from the European Commission, the ECB and the IMF will today start a rigorous check of Greece’s fiscal retrenchment efforts. They are embarking on a two- week mission to Athens to assess whether the government has fulfilled the conditions to draw down a second loan tranche in September from the €110bn bail-out package. The Greek finance minister is quoted as saying that that they had fulfilled all the targets, and went beyond by already passed the pension reform.

http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2864&tx_ttnews[ba ckPid]=901&cHash=ddafaac6d9#

163 COMPANIES Germany accused of reneging on bank tests By Patrick Jenkins in London and James Wilson in Frankfurt Published: July 25 2010 22:15 | Last updated: July 25 2010 22:15 European regulators have accused Germany and its banks of reneging on a deal to publish full details of sovereign debt holdings, as part of the four-month-long stress test exercise of the country’s banking sector. In an interview with the Financial Times, Arnoud Vossen, secretary-general of the Committee of European Banking Supervisors, the pan-European banks regulator, said: “We agreed with all supervisory authorities and with the banks in the exercise that there would be a bank-by- bank disclosure of sovereign risks.” Enduring the stress of testing 91 banks - Jul-25 Wolfgang Münchau: A test cynically calibrated to fix the result - Jul-25 In depth: European banks - Jul-25 Markets: Risky assets rally as results digested - Jul-23 Video: EU stress tests seem ‘too soft’ - Jul-23 Interactive: EU stress test results - Jul-23 On Friday, CEBS published the results of its stress test exercise, showing seven of the 91 banks tested across the 27 countries of the European Union failed to achieve a tier one capital ratio of 6 per cent once their balance sheets were exposed to a series of macroeconomic scenarios for 2010 and 2011. The tests – designed to restore nervous markets’ faith in European banks, shaken by the near- default of Greece this year – were supposed to be accompanied by full disclosure of each bank’s sovereign debt holdings. But six of the 14 German banks tested – Deutsche Bank, Postbank, Hypo Real Estate, mutual groups DZ and WGZ, and Landesbank Berlin – did not publish the expected detailed breakdown of sovereign debt holdings, although Postbank disclosed some information on Sunday. Every other European bank, bar Greece’s ATEbank, which failed the test, complied with the disclosure requirement. Analysts said the German banks’ non-compliance would fuel suspicion they had something to hide, and risked further undermining faith in the whole stress test exercise, already criticised for its benign scenarios. Officials from the German regulatory authorities – Bafin and the Bundesbank – said local law meant they could not force banks to publish such details. However, one banker told the FT: “There was a discussion in Germany about whether to publish the sovereign debt holdings, and at one point the banks were told that it was to be compulsory, but in the end Bafin did not require it.” Stress test results FT interactive graphic: Explore the results of EU bank stress tests Mr Vossen would not comment directly on why Germany had backed out of the agreed publication but said he said he would be picking up the phone to the German authorities. “We

164 agreed that these disclosures would be done,” he told the FT. “This is one of the topics we will follow through on. We need to have a chat.” The European Commission echoed that sentiment on Sunday, saying it “encouraged the few banks who had not disclosed the information to do so”. Mr Vossen dismissed criticism from analysts that the terms of the stress tests – particularly the de facto “haircut”, or discount, on the value of Greek sovereign debt compared with its current trading value of only about 5 per cent – were too lenient. Combined with the sovereign debt disclosure requirement, analysts would have all they needed to make their own assessment of a bank’s risk profile, Patrick Amis, Mr Vossen’s deputy said. “We believe that will calm the market.” Privately German banks said they had not been put under pressure by German authorities to publish the information. “If [Bafin chief Jochen] Sanio had said, ‘We have to do it’, it would not have been open to discussion,” said one bank official. Another official at a bank that did publish sovereign debt details said: “We believed this was a European exercise and for most European countries publication of the details was expected, so we decided we should too.” Bafin “did not make much of an effort” to get a firm agreement to publish, the official said. Germany also broke ranks of the timing of the announcements on Friday, holding a press conference in Frankfurt at 4pm London time, two hours ahead of others, including the main CEBS event in London. Additional reporting by Stanley Pignal in Brussels http://www.ft.com/cms/s/0/22241180-9831-11df-b218-00144feab49a.html

COLUMNISTS A test cynically calibrated to fix the result By Wolfgang Münchau Published: July 25 2010 19:48 | Last updated: July 25 2010 19:48 If you tried to test the safety of cars or children’s toys using the same method the European Union applied in its stress tests on banks, you would end up in jail. How so? Simply because the testing mechanism was calibrated to fix the result. The purpose of the exercise was to ensure that the only banks that failed it were those that would have to be restructured anyway. At the same time, the supposedly clever idea was to demonstrate to the outside world that the rest of the banking system remained sound. The purpose of this cynical exercise was to pretend that the EU was solving a problem, when in fact it was not. Germany accused of reneging on bank tests - Jul-25 Enduring the stress of testing 91 banks - Jul-25 In depth: European banks - Jul-25 Markets: Risky assets rally as results digested - Jul-23 Video: EU stress tests seem ‘too soft’ - Jul-23 Interactive: EU stress test results - Jul-23

165 It is too early to judge whether the ploy worked. But from the informed reaction on Friday night, I suspect not. Expectations were not very high. But the EU undershot the lowest of them. There were three fundamental problems with those tests – and each one would have invalidated them. The first, and least serious of the three, is that the tests left out some important institutions, whose financial health is not entirely clear. One of those is KfW, the German state-owned institution that is legally not a bank but carries out bank-like functions – such as accumulating lots of toxic assets. The second problem is the definition of the pass rate – a tier-one ratio of 6 per cent, which refers to various categories of capital, as a percentage of a bank’s total assets. The problem with this definition is that it does not tell us what we need to know. The reason we are interested in capital ratios is not because we are afraid that a bank may fall short of some legal requirement but that it could be insufficiently insured against an exogenous shock. Tier one capital includes equity and retained earnings but also various types of hybrid debt instruments. For example, government support from Germany and Spain comes in the form of hybrid instruments, whereby the state does not become an owner of the bank. Hybrid capital has some characteristics of equity but also some characteristics of a bond, including an entitlement to a guaranteed payment stream. As the question is how the system performs under stress, we are interested in the risk-absorbing elements of core capital – not some bureaucratic or legal definition. The current definition of tier one capital is the reason why all the German Landesbanken have passed the tests. If one had used a narrower definition – equity and retained earnings only – the results would almost surely have been different. The third problem is the most severe, and knocks the credibility of the entire exercise. There was no provision for the possibility of sovereign default. Banks hold most of their bonds on their banking books – where they usually keep them until maturity – and a small minority on their trading books. The stress tests assumed some further loss only on the value of those bonds in the trading books. Yet the pricing of Greek bonds already implies a non-trivial probability of a default – and that would affect both books. Certainly, the stress tests should be based on what one might call a plausible worst-case scenario, not one that represents the absolute worst. Nobody is asking the bank supervisors to stress-test the impact of an alien attack. But sovereign default in the case of Greece is not such a far-fetched scenario – even if you believe it to be unlikely. It is irresponsible for the stress testers to ignore that sort of event. That is like a car crash tester failing to consider the possibility of an oncoming vehicle. In their briefing on Friday evening, officials from the Committee of European Banking Supervisors (CEBS) were reported to have made a strange statement. They calculated that the probability of the adverse stress scenario was 5 per cent. But how can they know? If this estimate is based on some variant of normal distribution, as I suspect, then the 5 per cent threshold must surely include an assumption of a partial Greek default, as that is the probabilistic inference from current market prices. Default probabilities are admittedly a very complicated subject. An easy but very dirty method is to take the square root of the spread to some supposedly safe asset. If the spread for Greece is, say, 900 basis points, that implies a 30 per cent chance of a 30 per cent default. If you really want to include stress scenarios that have only a 5 per cent probability of occurring, surely under current market prices you cannot ignore the possibility of a Greek government default.

166 The stress tests follow a pattern that has been evident since the outbreak of the acute phase of the financial crisis in September 2008. The EU’s approach to the financial sector has been to apply patchwork fixes – a blanket bail-out, some not very serious recapitalisation plans, plus loads of liquidity – rather than solve the problem. A notable exception is Spain, where the situation is the most severe, and where a serious attempt is under way to address it. But while in Madrid the stress tests are part of a political commitment to resolve the banking problems, that is not the case elsewhere. A stress test without a resolution strategy – which is what is absent beyond Spain – is entirely pointless. Mü[email protected] Wolfgang Münchau A test cynically calibrated to fix the result July 25 2010 19:48 http://www.ft.com/cms/s/0/1b00ab58-981c-11df-b218-00144feab49a.html

COMPANIES Enduring the stress of testing 91 banks By Patrick Jenkins Published: July 25 2010 21:37 | Last updated: July 25 2010 21:37

Arnoud Vossen: the scale of the pan-European operation was unprecedented

The City of London is always deserted at the weekend. The odd tourist aside, an eerie calm pervades. But the 18th floor of Tower 42 – the old NatWest tower and the original City skyscraper – feels little different on a Saturday to any other day of the week. With just 25 staff spread across a vast floor, the home of the European Union’s Germany accused of reneging on bank tests - Jul-25 Münchau: Test cynically calibrated to fix result - Jul-25 In depth: European banks - Jul-25 Markets: Risky assets rally as results digested - Jul-23 Video: EU stress tests seem ‘too soft’ - Jul-23 Interactive: EU stress test results - Jul-23 Committee of European Banking Supervisors (CEBS), is never bustling. Yet this skeletal body has just overseen the most ambitious pan-continental exercise to stress test the banking industry that the world has ever seen. “I think it’s unprecedented,” says Arnoud Vossen, the CEBS’s amiable Dutch-born secretary- general. “The number of banks, the number of jurisdictions involved, the scenarios used, the risk factors taken into account and the detailing of the parameters. It’s never been done before.” The safest bank

167 The safest bank in Europe is Spain’s Banca March, according to the CEBS stress test, write Mark Mulligan and Patrick Jenkins. While most scrutiny on Friday focused on the seven banks, of the 91 tested, that fell short of the 6 per cent tier one capital ratio pass mark, the exercise also shines the spotlight on the banks with the strongest capital positions. Banca March, with a stressed tier one capital ratio of 19 per cent, is an anomaly in the Spanish financial system. Neither caja nor stock market-listed lender, March is an 84-year-old family- owned bank and equity investment group based on Mallorca. A small branch network serves mainly wealthy clients, business families and companies looking for one-stop retail and corporate banking, asset management and financial products such as insurance and pensions. Non-performing loans account for 3.5 per cent of total assets, compared with a system average of 5.5 per cent. As other Spanish lenders grapple with offloading multi-billion euro property portfolios acquired via foreclosures, debt-for-equity and debt-for-equity swaps, March is sitting on just €97m ($125m) of real estate. Its only exposure to sovereign debt is €105m of Spanish bonds. Quirks apart, however, the closest attention is likely to be paid to how the big-listed banks shaped up against each other. Two UK institutions – Barclays and the part-nationalised Royal Bank of Scotland – top this league table, followed by Dexia, also a recipient of a Franco- Belgian state bail-out, then HSBC, Société Générale and Santander. It has been a stretch, says Mr Vossen. “People here are selected on their lack of need to sleep,” he jokes. Hard work is one thing. But will the exercise – designed to restore confidence in European banking by probing the capital strength of 91 European banks – actually work? “I’m confident that when you look at all the figures we’ve provided, it will certainly increase market confidence,” says Mr Vossen. There are two measures of that, he says – whether banks’ share prices are boosted, and more crucially, at least for banks in certain countries, notably Spain, whether the interbank lending markets unfreeze. Isidro Fainé, chairman of the Confederation of Spanish cajas (Ceca), on Sunday described the stress tests, and their publication, as a “very demanding exercise . . . that will serve to restore confidence in the Spanish financial system”. Mr Fainé is also chairman of La Caixa, the country’s largest single savings banks and among its most solvent. Early indications from US traders on Friday suggested the exercise was being seen as a non- event, given that only seven of the 91 banks tested – far fewer than expected – failed to beat the pass mark of a 6 per cent tier one capital ratio, when balance sheets were stress-tested for the period to the end of 2011. Mr Vossen dismisses criticism from analysts that some of the parameters of the tests were too lenient, and restricts his “lessons learnt” comments to ones of process. “When you do an exercise for the second, third, fourth time, you can always improve, for instance on the whole communication process, the co-ordination with national supervisory authorities.” He admits the volume of disclosures – running to thousands of pages, distributed by CEBS, by national regulators and by individual banks – so late on Friday, was not ideal.

168 The controversial timing of the disclosures was designed, in part, to allow any banks that failed to organise a capital raising before markets opened again today. In the event, only one bank with a stock market listing – Greece’s ATEbank – failed, and it is part-government- owned, with a nascent plan for it to be bought by a local rival, Piraeus. The other stress test failures were all public sector institutions – five Spanish cajas, or savings banks, and Hypo Real Estate, the now nationalised German bank. Mr Vossen is hopeful that the complexities of co-ordinating the process in 27 member states will become more straight-forward as the power of the central regulator increases. CEBS is set to mutate into the European Banking Authority by January next year, doubling in size by next summer, and quadrupling within the next two or three years. “In future we will have much less of a co-ordinating role,” says Mr Vossen. ““Instead, since we have binding standards, we will be more prescriptive.”

Top 10 banks Stressed tier Tier one one capital capital ratio, Country Bank ratio, Dec 31 2009 Dec 31 2011 (%) (%) Spain Banca March 19.7 19.0 Hungary OTP Bank 13.8 16.2 Powszechna Kasa Poland Oszczednosci Bank 13.3 15.4 Polski Bilbao Bizkaia Spain 14.6 14.1 Kutxa UK Barclays Bank 13.0 13.7 Denmark Sydbank 13.1 13.2 Denmark Jyske Bank 13.5 12.5 Netherlands Rabobank 14.1 12.5 Finland OP - Pohjola Group 12.6 12.3 Banque et Caisse Luxembourg 11.4 11.3 d’Epargne de l’Etat Source: CEBS

Additional reporting by Mark Mulligan in Madrid Patrick Jenkins Enduring the stress of testing 91 banks July 25 2010 21:37 http://www.ft.com/cms/s/0/651b1648-9811-11df-b218-00144feab49a.html

FT's rolling global market overview Stocks shrug off bank stress results By Telis Demos in London Published: July 26 2010 08:58 | Last updated: July 26 2010 10:16

169 Monday 10:00 BST. Risky assets are struggling following the resounding shrug that greeted the European bank stress tests released last Friday. The euro and equities are giving up the modest rally that began late on Friday when Wall Street fought through choppy trading to gain almost 1 per cent once the test results had been digested. Only seven banks out of 91 tested failed, with a capital shortfall of just €3.5bn. Asian shares rise after stress tests - Jul-26 Economic Outlook: US recovery stall expected - Jul-25 BP shares higher as Hayward nears exit - Jul-26 Tony Jackson: Tails you lose - Jul-25 The FTSE All-World index is up 0.2 per cent after Asian markets moved higher but European equities have squandered opening gains. The euro is also wobbly, currently up just 0.1 per cent against the US dollar to just above $1.29, after nearing $1.30 earlier. The S&P 500 is expected to open softer, though only marginally so. Banks are outperforming, with the FTSE Global Banks index adding 0.4 per cent, and banks are leading gains in the FTSE 100 and the Eurofirst 300 indices. Credit spreads on lenders are also slightly tighter, according to Markit. The iTraxx Senior Financials index is narrower by 1 basis point. But the emerging consensus is that the stress tests are not anticipated to have a strong impact on equities. Simon Samuels, banks analyst at Barclays Capital, said that the tests were focused on the risks to interbank funding markets, not to shareholders, who learned little to change their view of bank shares’ riskiness. “The US bank sector surged 70 per cent around the time of its stress test but we do not think Europe will follow suit,” he said, adding that debt markets would probably greet the tests with only a “cautious welcome”. Thus far, Spanish, Greek and Portuguese debt is all in demand. The Market Eye Beware the signal-to-noise ratio in interpreting reaction to the stress tests. On Friday highly traded US-listed shares of continental banks, namely Deutsche Bank and Banco Santander, rose after the test’s results. But remember that strong corporate news – notably the turnround for General Electric, which said it was raising its dividend again having cut it during the financial crisis – supported equities and risky assets across the board. Also keep in mind that many European banks are reporting earnings this week, including Deutsche Bank and UBS, and that transparency counts as much as results in many investors’ minds. In spite of Deutsche’s strong performance in the test, coming through with a 10.3 per cent tier one capital ratio, the fact that the bank did not disclose enough to produce a sovereign debt stress result is not sitting well with traders. It is the leading decliner among large European banks on Monday, dropping 1.2 per cent. With the focus on funding, the euro may be the most closely monitored gauge of reaction to the tests, as the single currency often trades as a proxy for the relative expense of funding in euros versus dollars. However, other factors are buffeting currencies today. Some in Japan on Monday expressed concern about the strength of the yen after export growth was reported to have slowed for the fourth straight month. That led to calls for the Bank of Japan to intervene on the currency’s behalf, which would knock the value of competing riskier currencies.

170 ☼ Factors to watch. The US economy’s relative underperformance will also play a key role in currency markets. June new home sales in the US, released later today, will be closely watched. Last week’s new housing start figures were disappointing but offered a ray of hope with a rise in permits. Whether that rising perception of future demand is borne out, we will learn today. ☼ Europe. Shares in London were slightly lower, with the FTSE 100 falling just 2.7 points. The broader Eurofirst 300 index is down 0.2 per cent. Banking shares are outperforming on both indices, as all of the continent’s big commercial banks passed the stress test’s 6 per cent tier one capital threshold. In Greece, where of six banks tested only the commercial lender Atebank failed, the Athens market is up 0.5 per cent. In Spain, home to five of the seven test failures, the Ibex 35 index is only slightly off. Earlier efforts to recapitalise the caja savings banks were seem as largely successful, as none of the newly consolidated entities failed. Asia. Equities made small gains as investors awaited further news about the stress test results. The Nikkei closed up 0.8 per cent and the Hang Seng composite added 0.5 per cent. Shanghai markets reversed their weaker course of late, adding 0.4 per cent. Mumbai’s Sensex was again the laggard, with bulls believing inflation is under control while the central bank seems poised to tighten policy once again. Forex. The euro is up 0.3 per cent to $1.2948 against the dollar, though up slightly less against the yen, rising 0.2 per cent to Y113.03. Sterling has been higher since the beginning of the session, already up 0.5 per cent to $1.5488, its highest level since mid-April. Much credit goes to the European and UK economies for supporting those currencies’ gains in recent weeks. Last week, the eurozone’s PMI index topped 62, indicating accelerating expansion, and German business confidence showed its biggest monthly leap in decades. Meanwhile, the UK’s second-quarter gross domestic product figures were revised higher, nearly doubling the previously stated rate of growth. Debt. Core bonds are being bid, in contrast to rising risk appetite in other markets, as the yield on 10-year US Treasury bond is 2 basis points lower, to 2.98 per cent. Treasury yields have struggled to move higher even though the risk environment has been supportive in the past week. Traders are concerned that deflation is still the biggest risk in the US, with Ben Bernanke, US Federal Reserve chairman, telling Congress last week about contingency plans for further tightening. German Bunds are down 3 basis points at 2.72 per cent. But peripheral eurozone debt are also in demand. Greek 2-year bond yields are down 42 basis points. Portuguese bonds are down 16 basis points, and Spanish bonds are down 3 basis points. Spain and Greece both had some banks fail the stress tests, but the relatively small number of failures – which were mostly anticipated – may be supportive of risk-takers. Commodities. Oil is volatile around the baseline, having risen slightly during Asian trading but struggling to maintain those gains. It suffered from a technical correction as it neared $80, a level not quite yet supported by global economic growth. Brewing storms in the Gulf of Mexico, however, are being closely watched because they may shut down production. US crude is down 0.4 per cent, at $78.59. In general, however, the complex seems anxious. Copper is up 0.2 per cent, though below the two-month high touched on Friday. Gold is up 0.3 per cent to $1,193 an ounce. http://www.ft.com/cms/s/0/bfed1662-987e-11df-a0b7-00144feab49a.html

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FT's rolling global market overview Telis Demos Risky assets rally as test results digested By Telis Demos in London Published: July 23 2010 09:12 | Last updated: July 23 2010 22:03 Friday 21:45 BST Risky assets are gaining following the initial results of the European bank stress tests, in which all but seven banks passed, but traders are waiting until Monday to take a stronger view of the eurozone and the global economy’s future. Though the headline result was fewer failures than expected, early reaction to the details of the tests was disappointment. The CEBS says the total capital shortfall for the seven failed banks was just €3.5bn. A handful of banks that were earlier seen as in danger of failing, such as Italy’s Banca Monte dei Paschi di Siena and Germany’s Deutsche Postbank, narrowly passed. Equity traders breathe a sigh of stress relief - Jul-23 US stocks stage late rally - Jul-23 Tin surges nearly 9.5% - Jul-23 Shanghai recovers to climb 6% - Jul-23 Short View: EU bank confidence tied to bonds - Jul-22 Volatility gauges suggest trouble is brewing - Jul-22 Following the results, US traders pushed the biggest-volume New York-listed shares of European banks lower. Deutsche Bank and Banco Santander were each down 1.2 per cent at one point, though they have since rallied to gains. “It won't be until Monday that the cynical camp will digest the full details and decide if it was an obviously non-credible test,” said Eric Fine, portfolio manager at Van Eck Global. “But €3.5bn sounds low to me.” However, broader market action was rather muted. The S&P 500 index is 0.8 per cent higher, but traders are crediting General Electric, which said it was raising its dividend, and Sanofi- Aventis, which was reported to be exploring a megadeal for drug-making rival Genzyme. US Treasury yields and the euro have moved higher, alongside shares, but were mostly unchanged immediately after the test release. The FTSE All-World index is up by 0.8 per cent. Although European banking shares spent much of the session lower, Europe was ultimately well supported by a rising economic tide, including surprising jumps in UK GDP growth and German business confidence. Crude oil remains softer despite support from the risk of storms interrupting supply. In general, traders have not been eager to take substantial positions in any market before the tests are fully understood. Thursday’s sharp rally was the real reaction to the early leaks of the stress test results; now begins the wait for serious analysis. While the results may not have impressed, the sheer volume of information released by the CEBS is said to give analysts and investors plenty to work with over the weekend.

172 “The information set is so rich, it should be feasible for people to make up their minds about each bank. Once that fear of not knowing is gone, you’ll see it’s a generally a positive for risk,” said Sebastien Galy, strategist at BNP Paribas in New York. Indeed, that reaction has already begun to some degree. Credit markets actually cheered the results, according to Markit figures, with credit default swap spreads on European banks nearly universally narrowing. The biggest gainers were Greek banks EFG Eurobank, narrowing 109 basis points, and National Bank of Greece, narrowing 92bp. The Market Eye How to judge the stress test results? Well, here is what was expected: The most oft-cited benchmark was a report by Goldman Sachs analysts predicting 10 banks to fail, three too many. Particular banks anticipated to flunk, such as Germany’s troubled Hypo Real Estate, did. Both of Ireland’s banks in the test were said to have passed, and they did. The El País newspaper in Spain reported on Friday that “several” of the Spanish caja savings banks had failed the test, which proved accurate. Also on the mark was a report on Thursday in the Wall Street Journal saying that five of six Greek banks had passed. But Spain’s market rallied, while Greece tumbled. Such is the emerging conventional wisdom on the stress test for the most troubled banks: Failure means it was a good, tough test; success means it was too lenient. ● Europe European equity markets were slightly lower for most of the day. The tone was set after Ericsson, the mobile phone maker, missed its earnings targets, saying global network sales were slower. Shares were down 5.7 per cent, leading telecoms sector lower across Europe. The banking sector was 0.1 per cent higher, rising a bit towards the close after spending much of the session lower. UK banks were softer, leading the FTSE 100 index down slightly lower. Spain’s Ibex index was up 0.8 per cent, with BBVA up 1 per cent and Banco Santander up 1.3 per cent. Spain’s smaller caja savings banks, not its large commercial banks, are in the spotlight. The Athens index, however, was down 1.4 per cent as fears for its largest commercial banks took hold, which were somewhat realised by the failure of Atebank. ● Asia Markets took their overnight cue from Wall Street. They were boosted further by a group of after-the-bell positive earnings reports, including American Express and Microsoft. The Nikkei 225 index was up 2.3 per cent, with the Hang Seng rising 1.1 per cent. The Asia- Pacific index overall added 1.6 per cent. The Shanghai Composite index was a laggard, however, rising just 0.4 per cent, damping hopes that the depressed market had finally turned a corner. Bombay’s Sensex was also behind, adding 0.1 per cent. India’s central bankers are sounding aggressive about monetary tightening, in spite of a report from a government minister of softer-than-expected price growth. ● Forex The pound is up 1.2 per cent, to $1.5426, thanks to the UK’s GDP surprise. The euro has rallied to 0.1 per cent higher against the dollar, at $1.2914. As a result, the dollar is down on a trade weighted basis. But it is 0.4 per cent higher against the yen, at Y87.43, a sure sign of investors embracing risk. Moody’s said that it was putting Hungary, whose austerity programme is seen as insufficient by the International Monetary Fund, on watch for a potential downgrade. The forint is 1.4 per cent lower against the euro.

173 ● Debt US Treasury yields have finally broken their tether to session lows, breaking out a bit toward the end of the session. Two-year bond yields are up 2 basis points from their record- low yield at 0.58 per cent. Ten-year yields are up 6 basis points, at 2.99 per cent, their highest mark in over a week. Core bonds reflected shaky confidence during the European session. German 10-year Bunds, whose yields were higher most of the day, ended flat, at 2.7 per cent. UK Gilts, however, were up 8 basis points to 3.43 per cent following second-quarter GDP growth coming in at nearly double the forecast. Peripheral debt in Portugal and Spain was in demand, while Greek two-year notes were higher by 10 basis points, to yield 10.28 per cent. ● Commodities Benchmark crude oil is down 0.3 per cent, to $78.97, as traders book some of their profits from earlier, when crude nearly hit $80. But it has traded choppily as they weigh an uncertain growth outlook (Europe’s up, but is the US down?) against the support of an approaching storm off the US Gulf coast. The base metals complex is higher across the board, with copper adding 1.1 per cent, to $7,010 a tonne in LME trading, a fresh two-month high. Gold fell 0.4 per cent to $1,190 a troy ounce, as the inflation outlook remains uncertain. 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.

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EU Stress Tests May Be `Missed Opportunity' to Fortify Banks By Andrew MacAskill - Jul 26, 2010 European Union stress tests found banks need to raise 3.5 billion euros ($4.5 billion) of capital, about a tenth of the lowest analyst estimate, leaving doubts about whether regulators were tough enough. “The stress tests are a helpful step forward in a number of areas,” Huw van Steenis, head of European banks research at Morgan Stanley in London, said on a conference call yesterday. “But they are not going to be the game changer that we were really hoping and in some cases are a missed opportunity.” European banking shares rose after the tests found that only Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks lacked adequate reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, according to results published July 23. The banks that failed the stress tests are in “close contact” with national authorities over how they will raise capital, said the Committee of European Banking Supervisors, which ran the assessments of 91 lenders. “The worst fears have not been realized,” said Mike Lenhoff, chief strategist at London-based Brewin Dolphin Securities Ltd., which oversees $33 billion. “Nobody would say we are looking at a complete and utter disaster here in the euro-zone banking system.” Allied Irish Banks Plc, Dexia SA and Societe Generale SA led European bank stocks higher. The 54-company Bloomberg Europe Banks and Financial Services Index rose 0.5 percent. ‘Work to Do’ Had the Tier 1 threshold been 7 percent, 24 of the banks would have failed, said Andrew Sheets, Morgan Stanley’s head of European credit strategy in London, on the conference call. For some, there is “serious work to do,” he said. Italy’s Monte dei Paschi di Siena SpA, Spain’s Banco Pastor SA and Bankinter SA, and Germany’s Deutsche Postbank AG were among 17 banks that showed a drop in their capital ratio to between 6 percent and 7 percent under the toughest scenario, according to figures released by CEBs. Bankinter is sufficiently capitalized, Finance Director David Perez Renovales told Bloomberg Television today. Banco Pastor’s capital levels are adequate for now, a spokesman for the bank said. Monte dei Paschi said on July 23 the test’s adverse scenario shouldn’t be considered as “representative of the current situation or possible present capital needs.” Postbank plans to boost reserves with earnings, spokesman Joachim Strunk in Bonn said today. No Surprises Before the results were published, analysts at Nomura Holdings Inc. estimated the banks would have to raise 30 billion euros. Goldman Sachs Group Inc. predicted they would need 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6 billion.

175 “If we had at least one bank which the markets hadn’t really expected to fail, that would have given the stress tests more credibility,” said Lothar Mentel, chief investment officer at Octopus Investments Ltd. in London, whose team manages more than 600 million pounds ($926 million). “That hasn’t happened.” The European tests ignored the majority of banks’ holdings of sovereign debt. Regulators don’t believe there will be a national default, European Central Bank Vice President Vitor Constancio said July 23. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity, CEBS said. Sovereign Stress “The fact that they did not stress the bank book is going to be seen as a weakness,” said Robert Talbut, chief investment officer at Royal London Asset Management Ltd., which oversees about $52 billion. “I don’t think the results of the tests will resolve anything.” Lenders hold about 90 percent of their Greek government bonds in their banking book and 10 percent in their trading book, according to a survey by Morgan Stanley. They have to write down the value of bonds in their banking book only if there is serious doubt about a state’s ability to repay in full or make interest payments. Twenty-four banks would have fallen below the 6 percent capital threshold had the test included losses on sovereign debt held in banking books, Citigroup Inc. analysts led by Ronit Ghose said in a note to clients. The combined capital deficit of those banks would have reached 15 billion euros, they said. Citigroup said that 85 banks provided breakdowns of their government-debt holdings when they published the stress test results. The six that didn’t are all German banks and include Deutsche Bank AG, the country’s biggest bank, Citigroup said. Capital Already Raised The stress tests assumed a loss of 23.1 percent on Greek debt, 14 percent on Portuguese bonds, 12.3 percent on Spanish debt, and 4.7 percent on German state debt, according to CEBS. U.K. government bonds were subject to a 10 percent haircut and France 5.9 percent, CEBS said. The stress tests are rigorous enough to be taken seriously, Credit Suisse Group AG analysts led by Daniel Davies said in a report. Banks passed because the European industry has raised 220 billion euros in the last 18 months to bolster capital, they said. The Credit Suisse analysts found that the majority of banks still passed the tests when they were reengineered to include bigger haircuts on sovereign debt and better quality capital. Under those more rigorous tests, seven Greek banks and KBC Groep NV would fail. “The criteria used by CEBS created a level playing field for all 91 banks,” Viviane Huybrecht, a spokeswoman for KBC in Brussels, said by phone. “If you now come up with other criteria then of course you end up with other results.” Funding Markets Calls to Alpha Bank AE, National Bank of Greece SA, Hellenic Postbank SA, EFG Eurobank Ergasias, Bank of Cyprus Pcl and Piraeus Bank SA out of office hours were not immediately returned. The tests will be seen as “broadly successful” if the funding markets continue their recovery, said Arturo de Frias, a London-based analyst at Evolution Securities. The exams are “much

176 more aimed at restoring confidence of bond investors and providers of short-term liquidity than for equity investors,” he said. The cost of borrowing in euros for three months rose to the highest level in almost a year today. The euro interbank offered rate, or Euribor, advanced less than one basis point to 0.889 percent today, the most since July 31, 2009, data from the European Banking Federation showed. The rate climbed for the 41st consecutive day, the data showed. ‘Safe to Invest’ European governments aimed to use their first coordinated stress tests to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal. Mounting budget deficits in those countries raised concern that they won’t be able to pay their debts. “The results give you the go-ahead that it’s safe to invest in banks,” said David Serra, co- founder of Algebris Investments, a fund manager which has shares in Societe Generale SA and Banco Santander SA. “We have just had one of the biggest crises and the message from these tests is that the banking system can withstand a double dip.” The U.S. stress tests carried out last year were criticized at the time for being too soft. Yet the evaluations on 19 banks helped persuade investors that the financial system was sound, contributing to a 36 percent rally in the Standard & Poor’s Financials Index in the following seven months. To contact the reporters on this story: Andrew MacAskill in London at [email protected];

Andrew MacAskill EU Stress Tests May Be `Missed Opportunity' to Fortify Banks- Jul 26, 2010http://www.bloomberg.com/news/print/2010-07-26/eu-stress-tests-may-be-missed- opportunity-to-fortify-banks.html

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Crisis Economics N. GREGORY MANKIW To understand the challenge government economists have faced over the past year and a half, it is useful to imagine the case of a physician trying to treat an ill patient. The patient presents herself in terrible shape; the physician has never treated a condition with symptoms quite like hers before; and the causes of the ailments are unclear. The doctor remembers reading about a similar case in medical school — and, trying to recall as much of his training as possible, he endeavors to come up with a theory as to why the patient is sick and to determine what will make her better. In an ideal world, the doctor would run a controlled experiment: He would assemble 100 patients with similar symptoms, give 50 of them the medicine that seems most likely to work and the other 50 a placebo, and then see whether the patients on the medicine in fact improved. But the doctor does not have 100 patients — he has only one. So, based on his assessment of what is causing the patient's troubles, and the most likely remedy, he takes a risk and administers the medicine. The patient, however, returns a few weeks later; this time, her symptoms are worse. What, then, should the doctor conclude? He might decide that he gave the patient the wrong medicine. Or he might determine that the patient was even sicker than he originally thought, and thus that the medicine should be administered at an even higher dosage. Either conclusion is plausible, but there is no way the doctor can be sure. What he does know is that he must act before the situation gets even worse. When the Obama administration came into office, the American economy was one very sick patient. To complicate matters, the financial crisis and the recession that ensued did not neatly follow the pattern of past downturns — instead combining a collapse of the housing market, a credit crisis, failures of large financial firms, and an assortment of other worrisome symptoms. Still, the new administration's economic advisors had no choice but to diagnose the problem and propose solutions. There was, however, little room for trial and error: Their only laboratory was the very economy they were seeking to heal, and time was of the essence, as markets continued to plunge, jobs swiftly evaporated, and bad news mounted. In an economic assessment they released in January 2009, President Obama's advisors concluded that, if they did nothing, the unemployment rate would reach 9% — its highest level since 1983. So they developed their medicine: an ambitious plan to stimulate the economy by spending a great deal of taxpayer money. According to their estimates, that stimulus would help keep the unemployment rate from exceeding 8%. Today, however, the unemployment rate is nearly 10%. Clearly, things have not gone as the president's advisors expected. For economists, this raises some obvious questions. Why were the administration's projections off the mark? What should their experience teach us regarding stimulus policies in future downturns? And what can the government do now, as unemployment remains very high, to help the patient heal faster? Trying to resolve these questions illustrates not only the difficulty confronting policymakers in a crisis, but also the inherent limitations of the economics profession — limitations that both economists and politicians would be wise to keep in mind. TEXTBOOK EXERCISES To the question of why their patient — the U.S. economy — did not respond as expected, the Obama team's answer is that the patient was sicker at the beginning of 2009 than they had originally thought, not that they administered the wrong medicine. The spending-heavy fiscal stimulus, they argue, was the

178 right approach and did some good; if the stimulus bill had not been enacted, unemployment today would be even higher. The reason the stimulus failed to cure the economy's woes is not that it was the wrong course of treatment: It simply wasn't a big enough dose. (Hence the repeated calls for a "second stimulus.") There is no way to decisively prove or disprove the Obama administration's argument. All we can do is consider its premises. On that front, the reasoning emerging from the Obama White House has not been arbitrary, or even purely political. Rather, it represents the application of standard textbook theory — in this case, the theory that evolved from the work of John Maynard Keynes, the great British economist of the early 20th century. According to Keynesian economics, the business cycle reflects not the wonders of Adam Smith's invisible hand of the marketplace but rather market failure on a grand scale. Extreme and sustained unemployment during a recession, Keynesians argue, results from a decline in overall (or aggregate) demand in the economy. When the economy is knocked off balance by serious economic shocks, the government can help restore normalcy by increasing demand through government spending. And because the influx of government spending drives businesses to hire and consumers to spend, its impact is multiplied. Generations of Keynesian economists have sought to model and quantify how that "multiplier" would function in different economic conditions. But most Keynesian economists have agreed that the multiplier effect of government spending is larger than that of the other approach to injecting demand into the economy — cutting taxes — because money from tax cuts might be saved rather than spent. To Obama-administration economists, as well as to many others, the recession that followed the financial crisis of 2008 seemed like a classic case of decline in aggregate demand. Because of the credit crisis, people were not able to obtain loans — for homes, cars, business equipment, or any of the countless other transactions that rely on credit in today's economy. And because people were unable to obtain loans, these sales and purchases couldn't take place, resulting in a significant drop in demand across the economy. So, inspired by the view that fiscal policy can prop up aggregate demand, Obama's advisors (and their congressional allies) began to design a stimulus plan heavy on direct government spending. A few days before President Obama's inauguration, his economic advisors released a document titled "The Job Impact of the American Recovery and Reinvestment Plan," in which they detailed some of their economic assumptions. They determined that the "government-purchases multiplier" — that is, the multiplier for direct spending — would be 1.57, while the tax-cut multiplier would be 0.99. In other words, every dollar spent by the government would yield $1.57 in aggregate demand, while every dollar in reduced taxes would yield only 99 cents in increased demand. And because 1.57 is larger than 0.99, the Obama team concluded it was better to increase spending than to cut taxes. Obama and his advisors arrived at these numbers through a standard macroeconometric model of the sort economists have been using for years. Such models take various past relationships among economic variables (inflation and unemployment, for instance) and extrapolate them into the future. In essence, the economy is modeled as a system of equations, each describing how one variable responds to many others. University of Chicago economist (and Nobel laureate) Robert Lucas famously criticized these models for lacking an appreciation of people's changing expectations; many economists, however, still find such models valuable, and have continued to employ them for forecasting and policy analysis. The question for economists now is whether the administration's assumptions, and the model based on them, were correct. After all, if we could be sure their model was right, we would know what to conclude when their stimulus plan was followed by 10% unemployment: The patient was sicker than they thought, and unemployment would surely have been higher still if not for the stimulus. (Indeed, since Obama's advisors do believe their model was right, this is the conclusion they have reached.) The trouble is, we have no way of knowing for sure if the model was in fact correct. To react to a model's failure to predict events accurately by insisting that the model was nonetheless right — as Obama's economic advisors have done — is hardly the most obvious course. Careful economists

179 should instead respond with humility. When their predictions fail — as they often do — they should not dig in their heels, but should instead be willing to go back to their starting assumptions and question their validity. ECONOMIC HUMILITY Macroeconomists especially have good reason to be humble, for there is a great deal we do not know. Teaching the "Principles of Economics" course at Harvard — a full-year survey — I start each year with what we economists are confident is true, and then move to material that is less and less certain as the course progresses. We look first at supply and demand, the theory of comparative advantage, profit maximization, and marginal revenue equaling marginal cost — the premises that almost every economist shares and accepts. As the course goes on, we move from micro to macroeconomics: examining classical monetary theory, growth theory, and, at the very end of the year, the theory of business cycles. This is the topic we economists understand least of all: We are still deeply divided on the validity and utility of the basic Keynesian paradigm. But it is precisely the topic that government macroeconomists work on most, especially during times of recession. Even as a believer in many aspects of Keynesian theory, I appreciate that one cannot approach this subject matter without showing some humility. Economics is a young science, and much of our knowledge is necessarily tentative. Humility need not result in resignation or fatalism; nor does it mean we can't make economic policy. But it should mean that we constantly test our assumptions and policies against real-world results. We should seek in retrospect the data we cannot have in advance, and use those data to improve both our understanding of the economy and the policies we put in place. At first glance, the Obama administration would seem to be taking such an empirical approach. In an attempt to "know" as much as possible about the consequences of the stimulus bill, the administration has been compiling data to measure its effects. Indeed, the vaunted stimulus web site (recovery.gov) claims to provide state-level job-creation "data," reported to two decimals of accuracy. In reality, however, this ostensible effort at transparency is actually the least credible part of the whole case for the 2009 stimulus bill. For one thing, the reporting errors involved in the data collection are enormous, as hardly anyone accurately fills out the government's questionnaires about the jobs "saved or created" with stimulus money. Some employers, for instance, have counted money used to provide pay raises to existing employees as "creating" jobs. Thus the Wall Street Journal reported last November that the Mid-Willamette Valley Community Action Agency in Oregon had claimed to create 205 jobs with its $397,761 in stimulus money — spending less than $2,000 per "new" job. The results of gathering economic data this way can be downright comical. A shoe-store owner in Kentucky who sold boots to the U.S. Army Corps of Engineers (for work on a project made possible by stimulus funds) claimed to have created nine jobs with $889 — a feat that would certainly make him the most efficient job creator in the country. The store owner apparently reasoned that he was creating one job for every pair of boots he sold the Army; after all, a soldier could not go to work on the project without a pair of boots. The episode received attention only because a reporter discovered the ridiculous claim, and the owner then asserted that he had been confused by the government form. The administration has nevertheless accepted such reports, using them as the basis of their stimulus evaluations. But even if the reporting were perfectly correct, the exercise would still make little sense as a way of assessing the broader macroeconomic effects of the stimulus money. When we talk about the impact of government purchases on aggregate demand, and therefore on job creation, we must take into account an enormous number of "general equilibrium effects" — that is, the indirect effects that occur as one economic variable influences another, which in turn influences yet another, and so on. Such effects can be modeled and analyzed to some extent, but they cannot possibly be captured by crude job-creation surveys, or easily conveyed through administration web sites and talking points. These general equilibrium effects are tremendously important to the economy — sometimes in positive ways, sometimes in negative. The positive effects are those that underlie the conventional Keynesian fiscal-policy multipliers: Higher government spending leads to higher incomes for some people, which causes higher consumption, and therefore higher incomes yet again, such that the effect cascades and

180 multiplies. Economists can certainly track some of these effects, but the "data" on recovery.gov cannot possibly account for them. The negative effects are even more challenging to trace. For example, if people observe the government issuing substantial debt (required to finance a stimulus), they may anticipate higher future taxes and therefore cut back on their current consumption. Increased government borrowing may also drive up long-term interest rates, which could make it difficult for people to borrow money and could therefore reduce spending today. Obviously, recovery.gov has no way to take account of these consequences, either. So even if recipients of stimulus funding filled out their government reports reliably and correctly, the data they provided would not accurately describe the effects of the stimulus on job creation. Nor would data about job creation by itself actually resolve the underlying question about the administration's economic-recovery effort: whether it was right to pursue a spending-heavy stimulus plan, instead of one focused more on tax cuts. TAXING LESS OR SPENDING MORE? Addressing this question requires not only data about the past year or two, but also analysis of some key assumptions at the core of the administration's approach to fiscal policy. In particular, that approach seems to take for granted that the question in choosing between spending and tax cuts is which would have the greater multiplier effect, and that the answer to that question is spending rather than tax cuts. The first assumption overlooks an important difference between spending and tax cuts in the context of economic stimulus. When the government is seeking to revive its sick patient — the economy — time is of the essence. And time must be considered in any analysis of multipliers and other economic effects of stimulus policy. Chief among these considerations is whether government can spend money both quickly and wisely. Many of us can draw on our own experiences in addressing that question. Anyone familiar with government projects even at the municipal level knows that the process is usually prolonged and onerous. Even if the design phase is managed well, the project is built efficiently, and the end product proves to be of good use to the community — all big "ifs" — the time involved in debating project proposals, securing approval from citizens and local boards, planning the design, hiring contractors, and completing the construction often stretches to years. Cram the process into a dramatically shortened time frame, and the likelihood that the project will be an example of "wise" government spending diminishes significantly. Expand the scope of the government spending from town planning to national fiscal policy, and the likelihood shrinks even further. This is not just a matter of government waste, but also a question of whether money spent under such circumstances actually helps the economy grow in a way that best enhances citizens' well-being. Whenever public money is involved, it is important to ask whether the spending will produce something society needs, or wants, to improve the general economic climate. Money spent on a new road that allows farmers to get their products to market faster and in better condition, for instance, creates more value than money spent building a "bridge to nowhere," even if both projects create the same number of construction jobs. To look at it another way: If a person pays his neighbor $100 to dig a hole in his backyard and then fill it up again, and the neighbor hires him to do the same, government statisticians will report that the economy has created two jobs and that the gross domestic product has risen by $200. But it is unlikely that, having wasted all that time digging and filling, either person is better off — economically or otherwise. Each person's net financial gain is zero, and all anyone has to show for the effort is a patch of fresh dirt in the backyard, which is unlikely to improve anyone's standard of living. Private individuals don't usually spend their money on things they don't want or need. So when money is kept in the hands of citizens, and transactions take place in the private sector, there is less cause to worry about inefficient spending. The same cannot always be said of government. This means that government spending designed to stimulate the economy must first be subjected to serious cost-benefit analysis, which is hard to do in a big rush. Not all government spending is created equal — and rushed

181 spending is, in many important ways, likely to be less efficient and less useful than spending that is carefully planned. The administration's second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers. Textbook Keynesian economics tells us that government-purchases multipliers are larger than tax-cut multipliers. And, as we have seen, the Obama administration's economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts. But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama's Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper ("The Macroeconomic Effects of Tax Changes") that sought to measure the influence of tax policy on GDP. Crucial to the Romers' method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such "exogenous" tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions. The Romers' conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 — in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama's advisors assumed it was during their policy simulations. Of course, it could be that all multipliers are larger than previously assumed. Perhaps fiscal policy has such a great influence over our economy that, if the tax multiplier is 3, the government-spending multiplier is 4 or 5. We don't know from the Romers' study; they did not analyze government-spending multipliers, only tax multipliers. But several studies on government-spending multipliers have been conducted using techniques similar to those used by the Romers. And none has found government- spending multipliers to be so large as to justify assumptions about the inherent superiority of government spending over tax cuts. Some excellent work on this topic has come from Valerie Ramey of the University of California, San Diego. Ramey finds a government-spending multiplier of about 1.4 — a figure close to what the Obama administration assumed, but much smaller than the tax multiplier identified by the Romers. Similarly, in recent research, Andrew Mountford (of the University of London) and Harald Uhlig (of the University of Chicago) have used sophisticated statistical techniques that try to capture the complicated relationships among economic variables over time; they conclude that a "deficit-financed tax cut is the best fiscal policy to stimulate the economy." In particular, they report that tax cuts are about four times as potent as increases in government spending. Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments. The data in the Alesina-Ardagna study are mostly European; only a small portion comes from the United States. But the evidence leads to conclusions that are very similar to those from Mountford and Uhlig's work using American data. These conclusions are also consistent with the work of Ramey and the Romers, which looked at the historical record to identify multipliers. There appears to be a growing body of evidence, then, suggesting that taxes may be a better tool for fiscal stimulus than conventional models have indicated. Why would that be? At this point, there is no clear-cut answer, but it is easy to come up with plausible conjectures. The most obvious candidate would be the supply-side effects of tax cuts. Tax rates, for

182 instance, clearly influence work incentives. And economists who focus on supply-side incentives argue that Keynesians overestimate the importance of aggregate demand while underestimating the role that people's willingness to work and invest plays in the performance of modern economies. But even if one believes that aggregate demand drives the economy in the short run, as many Keynesians do, it would still be wise to acknowledge that taxes affect aggregate demand in ways that are not included in the textbook Keynesian model. When we change tax laws, we typically do not just write checks to taxpayers. Usually, we change marginal tax rates — adjusting corporate or personal income taxes, or perhaps instituting tax credits or similar policies to drive incentives in some particular way. These measures have more complicated and nuanced effects on aggregate demand than the textbook Keynesian model assumes. They involve far more than simply changes in cash flow; most notably, they involve changes in marginal incentives, often including direct encouragement to spend. We have seen recent examples of how such changes in incentives can influence behavior. One of the most noteworthy has been the Cash for Clunkers program, which wasn't a tax cut, but wasn't a classic form of Keynesian stimulus spending, either: It was an incentive program to induce personal spending by individuals. Owners of older, less energy-efficient vehicles received a voucher for between $3,500 and $4,500 (depending on differences in fuel economy), which they could apply only to the purchase of new, more energy-efficient vehicles. In the course of the program's two-month run (in July and August of last year), the government spent nearly $3 billion on these rebates. Economists will no doubt long debate whether Cash for Clunkers passed a cost-benefit test. (Some early results, from Burton Abrams and George Parsons of the University of Delaware, suggest not.) But the fact that people responded to the incentive as they did — nearly 680,000 cars were purchased — suggests that a broader, more comprehensive program of incentives, such as an investment tax credit, might have stimulated spending even more. Of course, not all tax cuts or credits are created equal, just as not all direct government spending is. One popular idea in recent years, for instance, has been a tax cut for businesses that make new hires. Indeed, the jobs bill signed by President Obama in March put in place a targeted payroll-tax exemption for some small businesses that hire people who have been unemployed for two months or more; several members of Congress have proposed broader tax cuts for businesses that hire new employees. The premise behind these policies is that, because unemployment is so high even as the economy begins to recover, we should create incentives for businesses to place unemployed workers into jobs. There is a case to be made for a broad-based payroll-tax cut that might have this effect, but a narrower tax cut for new hires suffers from some major flaws. The basic problem is that we do not know how to properly define — or enforce a definition of — a "new hire." Presumably we do not want a business to hire Peter by firing Paul and to then call Peter a new hire; this would cause a great deal of inefficient churning in the labor force (not to mention a great deal of unpleasantness for all the Pauls). Usually when tax credits for new hires are proposed, the idea is to establish some baseline employment — based on a firm's labor force a year or two earlier — and give credit to businesses that meet or exceed their baselines. But relying on such baselines can be problematic. Consider an industry hit particularly hard by a recession — say, construction — in which employment is well below the baseline established for new-hire tax breaks. Because a few new hires would still not make these firms eligible for the tax credits, these firms would have no marginal incentive to hire additional workers. Conversely, industries that have been expanding would be rewarded for hires they might have made even without the tax incentives. This policy, then, would likely create tremendous disparities across industries that could be both inequitable and inefficient. It would also create perverse incentives in favor of new firms: By definition, all employees of a new firm are "new hires." This could even give existing firms an incentive to, say, lay off the janitorial staff and hire instead an independent janitorial contractor that just started up as a new firm, since the cost per worker to the old firm could well be lower. Attractive as such ideas may seem at first, targeted tax cuts and incentives are in fact very difficult to implement properly. If tax cuts indeed make for better fiscal stimulus than direct government spending, they should be broad-based cuts or incentives, rather than narrowly tailored interventions.

183 Here again, the fiscal-policy decisions of the past year and a half have not been implausible or inexplicable — but they have also not been empirically shown to work. The data point to other approaches. ECONOMICS AND POLITICS It may seem unfair to criticize government economists working under great pressure in the midst of a crisis. After all, they are not in fact doctors treating patients. They work for politicians, who must take into account not just economic theory and data but also voter attitudes and political realities. Economic policy is not just applied economics. But economists are social scientists, not politicians. And whether they work for the government or have the luxury of merely observing the scene from an ivory tower, the integrity of the profession and the importance of the work involved demand that they be subjected to critical judgment; they must be compelled always to submit their assumptions, data, models, and conclusions to careful scrutiny. The foremost job of economists is not to make the lives of politicians easier, but to think through problems, to examine all the available information about the problems' causes and potential treatments, and to propose the solutions most likely to work. This is a simple point, but one that is easy to forget. As Milton Friedman once put it: "The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible' and then to recommend it." In a time of economic uncertainty and political turmoil, we economists — both in and out of government — could hardly do better than to follow Friedman's sage advice. N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. You can find this online at: http://www.nationalaffairs.com/publications/detail/crisis-economics

184

Opinion

July 25, 2010 Who Cooked the Planet? By PAUL KRUGMAN Never say that the gods lack a sense of humor. I bet they’re still chuckling on Olympus over the decision to make the first half of 2010 — the year in which all hope of action to limit climate change died — the hottest such stretch on record. Of course, you can’t infer trends in global temperatures from one year’s experience. But ignoring that fact has long been one of the favorite tricks of climate-change deniers: they point to an unusually warm year in the past, and say “See, the planet has been cooling, not warming, since 1998!” Actually, 2005, not 1998, was the warmest year to date — but the point is that the record-breaking temperatures we’re currently experiencing have made a nonsense argument even more nonsensical; at this point it doesn’t work even on its own terms. But will any of the deniers say “O.K., I guess I was wrong,” and support climate action? No. And the planet will continue to cook. So why didn’t climate-change legislation get through the Senate? Let’s talk first about what didn’t cause the failure, because there have been many attempts to blame the wrong people. First of all, we didn’t fail to act because of legitimate doubts about the science. Every piece of valid evidence — long-term temperature averages that smooth out year-to-year fluctuations, Arctic sea ice volume, melting of glaciers, the ratio of record highs to record lows — points to a continuing, and quite possibly accelerating, rise in global temperatures. Nor is this evidence tainted by scientific misbehavior. You’ve probably heard about the accusations leveled against climate researchers — allegations of fabricated data, the supposedly damning e-mail messages of “Climategate,” and so on. What you may not have heard, because it has received much less publicity, is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action, then bought into by many in the news media. You don’t believe such things can happen? Think Shirley Sherrod. Did reasonable concerns about the economic impact of climate legislation block action? No. It has always been funny, in a gallows humor sort of way, to watch conservatives who laud the limitless power and flexibility of markets turn around and insist that the economy would collapse if we were to put a price on carbon. All serious estimates suggest that we could phase in limits on greenhouse gas emissions with at most a small impact on the economy’s growth rate. So it wasn’t the science, the scientists, or the economics that killed action on climate change. What was it? The answer is, the usual suspects: greed and cowardice. If you want to understand opposition to climate action, follow the money. The economy as a whole wouldn’t be significantly hurt if we put a price on carbon, but certain industries —

185 above all, the coal and oil industries — would. And those industries have mounted a huge disinformation campaign to protect their bottom lines. Look at the scientists who question the consensus on climate change; look at the organizations pushing fake scandals; look at the think tanks claiming that any effort to limit emissions would cripple the economy. Again and again, you’ll find that they’re on the receiving end of a pipeline of funding that starts with big energy companies, like Exxon Mobil, which has spent tens of millions of dollars promoting climate-change denial, or Koch Industries, which has been sponsoring anti-environmental organizations for two decades. Or look at the politicians who have been most vociferously opposed to climate action. Where do they get much of their campaign money? You already know the answer. By itself, however, greed wouldn’t have triumphed. It needed the aid of cowardice — above all, the cowardice of politicians who know how big a threat global warming poses, who supported action in the past, but who deserted their posts at the crucial moment. There are a number of such climate cowards, but let me single out one in particular: Senator John McCain. There was a time when Mr. McCain was considered a friend of the environment. Back in 2003 he burnished his maverick image by co-sponsoring legislation that would have created a cap- and-trade system for greenhouse gas emissions. He reaffirmed support for such a system during his presidential campaign, and things might look very different now if he had continued to back climate action once his opponent was in the White House. But he didn’t — and it’s hard to see his switch as anything other than the act of a man willing to sacrifice his principles, and humanity’s future, for the sake of a few years added to his political career. Alas, Mr. McCain wasn’t alone; and there will be no climate bill. Greed, aided by cowardice, has triumphed. And the whole world will pay the price. http://www.nytimes.com/2010/07/26/opinion/26krugman.html?th&emc=th

July 26, 2010, 4:58 pm Coulda Woulda Shoulda Sigh. Ezra Klein today. What went wrong with stimulus The original stimulus package should've been bigger. Rep. David Obey, chairman of the House Appropriations Committee, says the Treasury Department originally asked for $1.4 trillion. Sen. Kent Conrad, chairman of the Senate Budget Committee, wanted $1.2 trillion. What we got was a shade under $800 billion, and something more like $700 billion when you took out the AMT patch that was jammed into the package. So we knew it was too small then, and the recession it was designed to fight turned out to be larger than we'd predicted. In the end, we took a soapbox racer to a go-kart track and then realized we were competing against actual cars. This was a mistake, of course. But the mistake may not just have been the size of the stimulus package. I wonder if it wasn't fed by a belief that there'd be other chances. If all we needed was

186 the $700 billion package, then great. But if unemployment remained high and the recovery had trouble taking hold, surely there would be the votes for further stimulus and relief spending. No one in the political system could possibly look at 10 percent unemployment and walk away from it, right? Wrong. Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed. By Ezra Klein | July 26, 2010; 9:06 AM ET Me, March 2009. Chronicle of a disaster foretold. July 26, 2010, 4:42 pm Permanently High Unemployment Brad DeLong, commenting on Greg Mankiw, writes: Mankiw’s broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse–and hence have the government stand back and wash its hands of the situation. However, even a minor and hasty acquaintance with the Great Depression teaches that the belief that the government should stand back and wash its hands because the self-regulating market quickly returns to full-employment equilibrium is the most arrogant belief possible. And even a minor and hasty acquaintance with the Great Depression teaches that having the government stand back and wash its hands is the most risky strategy conceivable. Quite. I really don’t think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded (25%) Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable. And there are already indications that this is happening. Bill Dickens, one of the people has who worked on downward nominal rigidity, tells me that the Beveridge curve — the relationship between job vacancies and the unemployment rate — already seems to have shifted out dramatically. This has, in the past, been a sign of a major worsening in the NAIRU, the non-accelerating-inflation rate of unemployment. The point is that while policy makers may think they’re being prudent and appropriately cautious in their responses to unemployment, there’s a good chance that they’re prudenting and cautiousing us into a long-term jobs catastrophe. http://krugman.blogs.nytimes.com/2010/07/26/permanently-high-unemployment/

187 July 25, 2010, 2:02 pm The Economics Of Market Corners (Nostalgic Wonkery) Aha. An update on Chocfinger: I was trying to remember exactly how the underlying model behind my old copper-corner column worked. It was actually an application of the logic of my even older reciprocal dumping (pdf) work with Jim Brander. Consider a two-period market in some good, with the possibility of storing some of that good in period 1 and selling it in period 2. Assume, however, that with a competitive market it’s not worth actually doing that — either the expected future price is lower than the current price, or it’s not enough higher to offset interest and storage costs. But now suppose that some trader has managed to surreptitiously take possession of a large fraction of the period 1 supply, before it went to market. Does he have an incentive to hold some of that supply off the market, and in effect dump it into period 2? Yes! Suppose he owns a million candy bars: by taking one of those bars off the market until period 2, he may lose some money on that bar, but he drives up the price on the other 999,999 bars. This may give him an incentive to “dump” some of his candy into the next period, even if it looks on the surface like a money-losing proposition. Or to put it another way, by acquiring a large share of period 1 supply, Chocfinger may have created a situation in which his marginal revenue from a current (as opposed to future) candy bar sale is quite low, making it profitable to hold bars off the market. Fun stuff, if you have an economist’s warped view of what constitutes fun. Oh, and look at how I ended that old Slate piece: The funny thing about the Sumitomo affair is that if you ignore the exotic trimmings–the Japanese names, the Chinese connection–it’s a story right out of the robber-baron era, the days of Jay Gould and Jim Fisk. There has been a worldwide rush to deregulate financial markets, to bring back the good old days of the 19th century when investors were free to make money however they saw fit. Maybe the Sumitomo affair will remind us that not all the profitable things unfettered investors can do with their money are socially productive; maybe it will even remind us why we regulated financial markets in the first place. It didn’t, of course — and the costs of deregulation have exceeded my wildest expectations. http://krugman.blogs.nytimes.com/2010/07/25/the-economics-of-market-corners-nostalgic- wonkery/ July 25, 2010, 1:39 pm Martin Wolf Is Shrill (voceras, deslenguado) He has a long post arguing that the tax-cutting radical right, not liberal advocates of stimulus spending, poses the real threat to US solvency. (And yes, it is possible to have a solvency problem, even here.) Wolf’s argument and main points are similar to those I made in a recent column; that’s not a criticism, because we need more people saying this. Martin ends on a deeply pessimistic note. I wish I could disagree. http://krugman.blogs.nytimes.com/2010/07/25/martin-wolf-is-shrill/

188 ft.com/wolfexchange The political genius of supply-side economics July 25, 2010 4:18pm | Share The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world. My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done. Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history. To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue. The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch? How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state. In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age. True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would

189 unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman). Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas, Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities). Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large. The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney is reported to have told former treasury secretary Paul O’Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale. So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. Indeed, this is precisely what John Kyl (Arizona), a senior Republican senator, has just said: “[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans” What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).

190 Second, the White House will probably veto these cuts, making itself even more politically unpopular. Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it. Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact. Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act. This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic. In sum, a great deal of trouble lies ahead, for the US and the world. Where am I wrong, if at all? July 25, 2010 4:18pm in Financial crisis, The political genius of supply-side economics July 25, 2010 4:18pm http://blogs.ft.com/martin-wolfexchange/2010/07/25/the-political-genius-of-supply-side-economics/ July 25, 2010, 9:04 am Chocolate And Copper Interesting story in today’s Times about Anthony Ward, aka Chocfinger. I actually wrote about a somewhat similar case 14 years ago, in that case in the copper market; back then, I did a bit of analysis in terms of the old Samuelson model of intertemporal speculation and realized that cornering the market in a storable commodity can indeed be profitable, under the right conditions. I guess the question here is whether Ward really has pulled off an old-fashioned corner, or was simply an investor who properly anticipated price trends. http://krugman.blogs.nytimes.com/2010/07/25/chocolate-and-copper/ July 24, 2010, 10:34 am Monetary And Fiscal Policy: A Clarification Some readers are clearly confused about my stance on unconventional monetary policy. In some posts I have expressed skepticism about how effective the Fed can be; in others I have called on the Fed to do more. But these aren’t contradictory positions. I believe that given the grim economic situation, all players in the game should be trying to do whatever they can. There are other things the Fed can do; they would help; uncertainty about how much they would help shouldn’t be a reason not to try.

191 But it would be a big mistake to count on monetary policy alone. The zero lower bound on short rates really does matter, even if longer-term rates are positive. The Fed can control short-term interest rates, it can influence long rates — there’s a world of difference between those two statements. So it’s not safe to assume that the Fed can, for example, hit any target for nominal GDP that it chooses. What that means is that while the Fed should be doing more, so should other actors: unconventional monetary policy should go along with fiscal stimulus. The Fed deserves to be chastised for not doing more; that’s not the same as saying that the Fed should be the only target of criticism. http://krugman.blogs.nytimes.com/2010/07/24/monetary-and-fiscal-policy-a-clarification/ July 24, 2010, 10:21 am Trend Notes There were some good questions in the comments about my post on trends. Some answers: 1. Why does potential growth continue in a recession? Part of the answer is that a lot of capacity growth reflects investments made some time in the past, which come on line only gradually. A larger part of the answer is that the potential output of the economy as a whole reflects more than just business investment; it reflects growth in the working-age population, rising education levels, improving technology, and more, all of which continue even if business investment is depressed. For those who know their aggregate production functions, growth in the stock of physical capital accounts for only a fraction of long-run growth in real GDP, so an investment slowdown doesn’t bring potential growth to a halt. 2. Don’t bubbles affect GDP by changing prices? They affect nominal GDP; but we’re talking about real GDP here, which is a volume measure. 3. Where did my 2 percent trend for the eurozone come from? Actually, I was being quick and dirty there, and another look at the data suggests I should use a slightly lower number. Real GDP in the eurozone rose 14 percent from 2000 to 2007, so 2% reflects actual growth from peak to peak. But I was wrong to call it a conservative estimate; 1.5 would be more like it. That does not, however, make much difference; it reduces the estimated output gap now from 8 to 7. It’s still immense. http://krugman.blogs.nytimes.com/2010/07/24/trend-notes/ July 24, 2010, 9:57 am Keynes In Asia David Pilling: However much Asians trumpet the value of parsimony, their governments have been as bold as any in opening the fiscal sluices. One reason is the bitter memory of the 1997 Asian financial crisis when the International Monetary Fund imposed fiscal austerity on several Asian countries. Those measures are now almost universally seen as a blunder that unnecessarily exacerbated economic misery. … Unlike in the west, there is little debate in Asia about how well the stimulus worked. It has been spectacular. In early 2009, the IMF estimated the size of stimulus programs (pdf) in G20 countries:

192

There are several interesting things about this table; one is the fact that in the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch. I have no idea what was going on in Russia. But the main point here is that Korea and China both engaged in much more aggressive stimulus than any Western nation — and it has worked out well. Part of the reason Asians felt empowered to do this was the fact that during the good years they did what you’re supposed to do. Keynesian economics is often caricatured as a policy of deficit spending always; but as I’ve tried to explain, deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down. Pilling: The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves. Such “prudence” meant, rather bizarrely, that poor countries such as China were foregoing spending and investment in order to facilitate rich foreigner’ binge-buying. But it also meant that, when the crunch came, they had the wherewithal to spend. So that was the fiscal sin of the Bush years: deficits continued even when times were good; there was no effort to prepare for future shocks.

193 And don’t say “what can you expect from politicians”. The ratio of federal debt to GDP (pdf) fell from 49 percent in fiscal 1993 to 33 percent in fiscal 2001; it could have continued on that downward path. But candidate George W. Bush declared that if the government is running a surplus, it means that it’s collecting too much in taxes; Alan Greenspan told Congress that we had to cut taxes to avoid paying off our debt too fast; then came an unfunded war, and the rest is history. Despite all that, we actually did have enough room to take strong fiscal action. But we didn’t. And we’ll spend at least the next decade paying the price for the combination of irresponsibility when times were good and irresolution when they were bad. http://krugman.blogs.nytimes.com/2010/07/24/keynes-in-asia/ July 23, 2010, 8:06 pm Getting Trendy Whenever I draw a chart comparing actual growth with the pre-crisis trend, as I did in my last post, I get two kinds of complaints. Some readers complain that that’s not how you do it — that you have to draw a trend through the middle of the past scatter of points, not start at a business cycle peak. Others complain that a year like 2007, or 2000, is a bad choice because output was inflated by a bubble. But there are actually very good reasons why I’m doing it this way. To understand what’s going on, you need to think about what it means to have a recession. (I’ll offer some caveats at the end.) Think of the economy as a machine, with a certain amount of productive capacity — a maximum rate at which it can be run safely, if you like. This productive capacity grows over time, at a relatively steady pace. But actual production grows much less steadily, and sometimes shrinks, because sometimes the economy falls far short of operating at its capacity. That’s what it means to have a recession; something has gone wrong that causes the machine not to work right. As Keynes said, we have magneto trouble. So what we want to do is compare output with what the economy could be producing. And to estimate that, it’s a good rule of thumb to extrapolate from the last business cycle peak. Why? Because at the peak of the business cycle, the economy is usually operating close to capacity — in part because central banks try to throttle growth back when they think the economy is in danger of running too hot, leading to inflation. It’s standard practice to assess economic trends with peak-to-peak interpolation, because the peaks are a reasonable estimate of the economy’s capacity, while other points on the business cycle don’t convey anything like that information. So I measure my trends from the last business cycle peak. But, say some readers, what if growth at that peak was inflated by a bubble? OK, that’s confusing supply and demand. Bubbles drive demand — they don’t increase the economy’s capacity (if anything they reduce it). They drive capacity utilization, so that a bubble may drive the economy to a peak; but that peak is still a good indicator of how much the economy can produce, no matter if it’s producing stuff people shouldn’t be buying. So I know what I’m doing with these trend lines. OK, the caveat: we don’t really think the economy has a fixed upper limit on output; it’s more of a soft limit, with inflation accelerating as you push unemployment below the NAIRU. That’s why the economy can sometimes operate above standard measures of potential output, which are NAIRU-based. But that just means that when I use, say, 2007 as a base, you need to

194 ask whether there were signs of accelerating inflation back then. There weren’t. And bubbles remain irrelevant. Why does all this matter? On both sides of the Atlantic, advanced economies have surely seen a significant rise in capacity since 2007 — but they’re still producing significantly less than they did then. That’s the output gap. Now, suppose the gap is 6 percent; I’d say 8, but who’s counting? Suppose also that potential output is growing at 2 percent a year. In that case, how much growth would it take to get back to where we ought to be? If we grow at 3 percent, which many would hail as a success, it would take 6 years. If we grow at 4 percent, it would still take 3 years. In short, we’re operating hugely under capacity — and I’m both shocked and depressed at the lack of urgency among policy makers about closing that gap. http://krugman.blogs.nytimes.com/2010/07/23/getting-trendy/ July 23, 2010, 1:23 pm Europe’s Gap Listening to the comments of Jean-Claude Trichet and others, you might have the impression that Europe is well on the way to recovering from its slump. So I took a look at the actual numbers, and even though I sort of knew what they said, it was a bit of a shock. In the figure below, I show an index of eurozone real GDP, from Eurostat, with 2007 fourth quarter — a quarter in which Europe was doing OK, but certainly not experiencing inflationary overheating — set at 100. And I compared it with a trend assuming 2 percent annual growth in potential output, a fairly conservative assumption even for Europe. Here’s what it looks like: (96 vs 104) Eurostat, author’s estimate So a huge gap has opened up between a reasonable estimate of potential output and actual output. Even if you believe that growth in Europe has picked up since the first quarter — and that the pickup will continue — it will take years to close that gap. The only way you could justify not doing more to promote growth is to assume that potential output has been drastically reduced by the crisis — and if you believe that, you should be working day and night to reverse that decline. The idea that policy has done enough is just crazy. http://krugman.blogs.nytimes.com/2010/07/23/europes-gap/ July 23, 2010, 10:54 am High-debt History Continuing the Chatauqua on Reinhart-Rogoff: it’s a pretty devastating observation that the only observations of high debt / low growth for the United States come from the immediate postwar years, when post-war demobilization naturally led to falling real GDP. But what about the broader picture? R-R haven’t released their full data set. But as best I can tell, all or almost all observations of advanced countries with gross debt over 90 percent of GDP come from four main groupings: 1. The US and the UK in the immediate aftermath of WWII 2. Japan after 1995

195 3. Canada in the mid 90s 4. Belgium and Italy since the late 1980s We’ve already seen that (1) is a case of spurious correlation. Surely (2) is largely a case of causation running the other way, from Japan’s slide into slow growth and deflation to its rising debt. As for (3), advocates of austerity have been using Canada in the mid-90s as an example of a success story; surely they can’t have it both ways. This leaves (4); but my first take would be that both Belgium and Italy have problems that have both inhibited growth and led to a runup of debt. I may have missed some small-country examples; but surely they wouldn’t change the picture. There really, truly isn’t anything there. High-debt History July 23, 2010, 10:54 am http://krugman.blogs.nytimes.com/2010/07/23/high-debt-history/ July 23, 2010, 10:35 am Jean-Claude And The Invisibles One of these days someone will write a sequel to Liaquat Ahamed’s Lords Of Finance; where LoF was about the men who helped the Great Depression happen, Lords of Finance: The Next Generation will be about the men who helped turn the financial crisis of 2008 into a lost decade of high unemployment and deflation. And Jean-Claude Trichet will clearly be among the main protagonists. His column in today’s FT is almost a caricature of the austerity genre. Trichet’s explanation of why we must fear the invisible bond vigilantes would be funny if it didn’t have such serious consequences: In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances. Ask yourself, what evidence does he present in that passage? None, because the reality is that bond markets don’t look at all worried. What model does he refer to? None; the vague reference to “non-linear phenomena” is a giveaway that there’s no there there. So what are we to rely on for his definitive judgment that “consolidation is a must”? His “understanding” that “confidence is potentially at stake.” This is a basis for policy that affects hundreds of millions of workers? Meanwhile, I don’t know whether I’m reading too much into this, but Trichet seems to be backing down a bit on the claim that fiscal contraction is actually expansionary — maybe because the alleged evidence for that proposition has been pretty thoroughly debunked, with everyone who’s looked at it seriously realizing that all of the alleged cases involve either an export boom, a sharp fall in interest rates, or both, which makes them irrelevant to our current situation. But the message is now free-standing, relying neither on theory nor on evidence: austerity now now now. http://krugman.blogs.nytimes.com/2010/07/23/jean-claude-and-the-invisibles/

196 Opinion

July 25, 2010 Wall Street Still Doesn’t Have a Sheriff By RICHARD C. SAUER THE current range of opinion on the Securities and Exchange Commission’s $550 million settlement in the Goldman Sachs fraud suit lines up closely with that evoked by previous S.E.C. settlements with corporate defendants. Some Americans are outraged that Goldman “got off easy,” while others feel the deal could be a model for gaining some measure of justice against those responsible for Wall Street’s meltdown. Both sides are wrong: at best, such agreements reflect case-specific facts and circumstances; at worst, they are nearly arbitrary. While the government often claims such high-profile deals are of historic significance, they typically have little effect on future cases and do nothing to resolve long-standing conflicts as to how the law should treat misconduct by public companies. The question of how best to discipline what Chief Justice John Marshall in 1819 called “an artificial being, invisible, intangible and existing only in contemplation of law” is indeed vexing. A corporation can’t be put in jail, its fines are ultimately paid by investors not responsible for the misconduct, and a court order forbidding future violations merely shelves the issue until the next occurrence. In 19th-century America, permissive incorporation laws and rapid economic development led to the rise of the large corporation, which, in turn, led to a century of expanding federal regulation. Most measures regulated certain forms of conduct and prohibited others, specifying fines for failure to comply. There was little consideration given to questions of when, as a matter of practical legal policy, an artificial entity should be treated as if it were a person. The S.E.C. wasn’t forced to grapple with the issue until 1990, when Congress greatly expanded its power to seek financial penalties from corporate violators. (Before then, companies could shrug off civil orders as a passing embarrassment.) Initially, however, the agency made infrequent use of this new authority. Its staff saw fining public companies as harmful to shareholders, the very people the S.E.C. was created to protect. It also feared that managers would tap their corporate treasuries to buy their way out of individual liability. But the public, the press and Congress didn’t accept any abstract arguments that corporations shouldn’t pay fines for securities law violations, as they did for, say, antitrust violations. Eventually heeding these views, the S.E.C. began to seek money penalties from public companies more frequently, in ever-increasing amounts. As with the recent Goldman settlement, record penalties were presented by S.E.C. officials as illustrating the agency’s resolve to enforce securities laws. Objections that such settlements only hurt shareholders were partly overcome with the Sarbanes-Oxley act of 2002, which included a provision authorizing the S.E.C. to give civil penalties it collected to injured investors rather than the Treasury. But doing so can put the

197 agency in the same business as class-action lawyers: taking money from current shareholders for the benefit of previous investors, who are deemed somehow more worthy. In 2006, however, the pro-business tenor of the S.E.C. under President George W. Bush found expression in written guidelines widely seen as intended to provide a principled basis for limiting fines paid by public companies. They emphasized such mitigating factors as a corporate defendant’s cooperation with investigators. The commissioners, who have to approve all deals in the end, also now insisted that staff consult them before soliciting settlement offers, apparently to avoid putting themselves in the potentially embarrassing position of rejecting penalties negotiated by the staff. (This policy has now been discarded — wisely in my view.) The S.E.C. under its current chairwoman, Mary Schapiro, is clearly raising the ceiling on the money penalties it will seek from (at least) high-profile corporate wrongdoers. Thus investors will find there is yet another way that management misconduct can cost them. This is defensible if it achieves compelling law-enforcement objectives. But that is where things get muddy. When, exactly, does fining a public company deter potential future violators, bring attention to the significance of particular forms of misconduct, signal shareholders to throw the (management) bums out, or readjust appropriately the interests of current and former shareholders? And when, on the other hand, does it merely provide a platform for agency self- congratulation? Do not look to the Goldman settlement for guidance. It concludes a case in which the S.E.C. injected itself into a transaction between large financial entities (Goldman and the banks and funds that bought the subprime-mortgage vehicles it peddled) quite capable of defending their own legal interests. This was an unexplained departure from previous practice. The amount of the money penalty bears no relation to the benefits derived by Goldman from its alleged misconduct (reported as $15 million). More important, the settlement brings the commission no closer to developing a clear standard when it comes to seeking redress for the behavior that led to the economic disaster. Its settlements with public companies will probably be much like settlements in private litigation, an ad hoc process that defies standardization and sometimes logic. The quality of the evidence, the perceived culpability of the wrongdoer and the parties’ negotiating prowess and appetite for complex litigation will all go into the mix, with unpredictable results. As for the half-billion paid by Goldman — well, given the unfortunate vagueness of the system, it’s probably about as good a number as any. Richard C. Sauer, a former administrator in the Securities and Exchange Commission’s enforcement division, is the author of “Selling America Short: The S.E.C. and Market Contrarians in the Age of Absurdity.” http://www.nytimes.com/2010/07/26/opinion/26sauer.html?th&emc=th

198

Business Day

July 25, 2010 Warren’s Candidacy Raises a Partisan Debate By BINYAMIN APPELBAUM Elizabeth Warren last week won the endorsements of several dozen Congressional Democrats, two of the nation’s leading labor groups and her hometown newspaper, The Boston Globe. One would be forgiven for thinking that the Harvard professor is running for elected office. Instead, Ms. Warren’s supporters want President Obama to nominate her as the first head of a new consumer financial protection bureau created by the legislation he signed into law last week. They say that Ms. Warren, who conceived the idea and helped shepherd its passage into law, is the only acceptable choice to finish the project. “It is essential to the bill and very, very important that Elizabeth Warren be appointed,” Representative Barney Frank, Democrat of Massachusetts and an architect of the law, said Friday on MSNBC. There is little question that Ms. Warren has become a hero to liberals who see her as a scourge of the banking industry. But the loud, insistent campaign — highly unusual for presidential appointments other than Supreme Court nominees or cabinet positions — also reflects deep anxiety that the work of overhauling financial regulation is shifting from Congress to agencies that are insulated from public pressure and will write and put into effect hundreds of new rules. Ms. Warren’s supporters regard her as the best person to represent consumers during that process. But they also crave the symbolic value of her appointment, which almost certainly would cause a partisan confirmation battle, as an affirmation that the White House is committed to imposing significant new restrictions on the financial industry. “A lot of us are terrified about what happens in rule-making,” said Stephen Lerner of the Service Employees International Union, which is pressing the administration to nominate Ms. Warren. “Symbolically, it does seem incredibly important to pick somebody who not only invented the idea, but someone who doesn’t claim to be a neutral.” Bankers oppose her nomination for exactly that reason. Roger M. Beverage, head of the Oklahoma Bankers Association, said that Ms. Warren was widely respected in Oklahoma, where she was raised and is still remembered as a high school debate champion. But he said that his members did not believe she would understand the needs and concerns of community banks. “Not that she’s not competent. Goodness gracious, I would never say that. She’s exceptionally bright. We just fear what she might come up with,” Mr. Beverage said. “She’s a partisan and she’s bull-headed and she’s opinionated. And she’s terrific. She’s a great advocate. We just respectfully disagree with her view of the world.”

199 Ms. Warren herself has not campaigned publicly for the nomination, though people who know her say that she would welcome it. The debate over her candidacy threatens to sour the celebration of a law that the White House hoped would rally Democrats facing difficult midterm elections. The consumer bureau will be the popular face of the law, which also subjects more financial companies to federal oversight, extends regulation to activities including derivatives trading and creates a new council to detect risks to the financial system and broader economy. So far, the administration has sought to walk a fine line, embracing Ms. Warren and her supporters while refraining from granting their demand. The White House has vetted Ms. Warren and at least two other candidates for the job, officials say. “I have the highest regard for Elizabeth. We have not made decisions about who we’re going to appoint yet,” Mr. Obama said Friday on ABC’s “Good Morning America.” Ms. Warren proposed the creation of a federal agency to protect consumers of financial products, in a 2007 article that said the government put more effort in protecting people who buy toaster ovens than people who borrow money to buy homes. The idea resonated with Mr. Obama and his senior advisers, and it became a centerpiece of the administration’s proposal to overhaul financial regulation. The White House worked with Ms. Warren to flesh out the details, and it worked with her to win the support of Congress. But some administration officials are not sure that Ms. Warren is the best choice to run the new agency. There is no doubt about her status as a symbol. “She represents to a large part of the country — not just people caught up in the damage of the crisis, but people who view this system as being fundamentally broken — she represents one of the most compelling advocates for reform,” Treasury Secretary Timothy F. Geithner said at a breakfast with reporters last week. In an interview Sunday on ABC’s “This Week,” Mr. Geithner cited what he called Ms. Warren’s “enormous credibility” and said that, despite her criticism of the Treasury Department, he had no concerns about her possible appointment. But others have expressed doubts about Ms. Warren’s qualifications, including some Senate Democrats whose votes would be required to confirm her nomination. Detractors say that Ms. Warren lacks management experience, and that she is too partisan to be an effective referee. The other known candidates are both consumer advocates who have more experience in government: Michael S. Barr, an assistant Treasury secretary who played a central role in drafting the financial legislation, and Eugene I. Kimmelman, a former consumer advocate, now deputy assistant attorney general in the antitrust division of the Justice Department. Even some admirers worry that a draining confirmation battle could weaken the new bureau during the critical period when its scope and powers are being defined by its early decisions. Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, warned last week that it would be difficult to gather the 60 votes to confirm Ms. Warren. But her supporters are spoiling for the fight. With midterm elections fast approaching, they are itching for a public debate about consumer protection. There also is frustration among some liberals that the White House has in several instances chosen not to take up the issues that they consider most important.

200 Mr. Frank said that liberals would be justified in holding Mr. Obama accountable for this decision. “We didn’t get a public option and other things we wanted. That wasn’t his fault,” said Mr. Frank, referring to the removal of a major provision from health care legislation. “The economic recovery bill, the stimulus, it wasn’t as big as it should have been. That wasn’t his fault. He couldn’t get the votes. “With regard to appointing Elizabeth Warren, that’s his decision. No one can stop him from making it.” http://www.nytimes.com/2010/07/26/business/26warren.html?th&emc=th

201 Business Day Economy

July 25, 2010 Industries Find Surging Profits in Deeper Cuts By NELSON D. SCHWARTZ By most measures, Harley-Davidson has been having a rough ride. Motorcycle sales are falling in 2010, as they have for each of the last three years. The company does not expect a turnaround anytime soon.

But despite that drought, Harley’s profits are rising — soaring, in fact. Last week, Harley reported a $71 million profit in the second quarter, more than triple what it earned a year ago. This seeming contradiction — falling sales and rising profits — is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing. Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year — more than a fifth of its work force. As companies this month report earnings for the second quarter, news of healthy profits has helped the stock market — the Standard & Poor’s 500-stock index is up 7 percent for July — but the source of those gains raises deep questions about the sustainability of the growth, as

202 well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers. “Because of high unemployment, management is using its leverage to get more hours out of workers,” said Robert C. Pozen, a senior lecturer at Harvard Business School and the former president of Fidelity Investments. “What’s worrisome is that American business has gotten used to being a lot leaner, and it could take a while before they start hiring again.” And some of those businesses, including Harley-Davidson, are preparing for a future where they can prosper even if sales do not recover. Harley’s goal is to permanently be in a position to generate strong profits on a lower revenue base. In some ways, the ability to raise profits in the face of declining sales is a triumph of productivity that makes the United States more globally competitive. The problem is that companies are not investing those earnings, instead letting cash pile up to levels not reached in nearly half a century. “As long as corporations are reinvesting, the economy can grow,” said Ethan Harris, chief economist at Bank of America Merrill Lynch. “But if they’re taking those profits and saving them, rather than buying new equipment, it hurts overall growth. The longer this goes on, the more you worry about income being diverted to a sector that’s not spending.” “There’s no question that there is an income shift going on in the economy,” Mr. Harris added. “Companies are squeezing their labor costs to build profits.” The trend is hardly limited to Harley. Giants like General Electric and JPMorgan Chase, as well as smaller companies like Hasbro, the toymaker, all improved their bottom lines despite slowing sales in the second quarter. Among the S.& P. 500 companies that have reported second-quarter results, more than one in 10 had higher profits on lower sales, nearly twice the number in a typical quarter before the recession, according to Thomson Reuters. “Whole industries are operating at new levels of profitability,” said David J. Kostin, chief United States equity strategist at Goldman Sachs. “In the downturn, companies managed to maintain higher profit margins than ever before.” Profit margins — the percentage of revenue left over after expenses — crumble in most recessions, as overall sales fall but fixed costs like infrastructure, commodities and rent remain the same. In 2002, during the recession that followed the bursting of the technology bubble in addition to the Sept. 11 attacks, margins sank to 4.7 percent. Although the most recent downturn was far more severe, profit margins bottomed out at 5.9 percent in 2009 and quickly rebounded. By next year, analysts expect margins to hit 8.9 percent, a record high. The difference this time is that companies wrung more savings out of their work forces, said Neal Soss, chief economist for Credit Suisse in New York. In fact, while wages and salaries have barely budged from recession lows, profits have staged a vigorous recovery, jumping 40 percent between late 2008 and the first quarter of 2010. Harley-Davidson’s profit gain last quarter was helped by a turnaround in its financing unit, as well as more efficient production, but the company is still cutting. Harley has warned union employees at its Milwaukee factory that it would move production elsewhere in the United States if they did not agree to more flexible work rules and tens of millions in cost-saving measures. Even if sales do improve, a surge in hiring is unlikely. “The last thing we’re worried about is when are we going to have to add more capacity, because what we’re really doing is reconfiguring our entire operational system for greater

203 flexibility,” Keith Wandell, the company’s chief executive, said on a conference call with analysts last week. Harley’s evolution is part of longer-term shift in American manufacturing, said Rod Lache, an analyst with Deutsche Bank. At Ford, revenue in its North American operations is down by $20 billion since 2005, but instead of a loss like it had that year, the unit is expected to earn more than $5 billion in 2010. In large part, that is because Ford has shrunk its North American work force by nearly 50 percent over the last five years. “These companies have cracked the code of a successful industrial turnaround,” Mr. Lache said. “They’re shrinking the business to a size that’s defendable, and growing off that lower base.” To be sure, sales are rising for many companies, albeit at a much slower pace than the increase in profits. Among the 175 companies in the S.& P. 500 that have reported earnings for the second quarter, revenues rose 6.9 percent on average while profits jumped 42.3 percent, according to Thomson Reuters. Still, even at corporations where both the top and bottom lines are expanding, the focus remains on keeping profits high, not rebuilding work forces decimated by the recession. When Alcoa reported a turnaround this month in profits and a 22 percent jump in revenue, its chief financial officer, Charles D. McLane Jr., assured investors that it was not eager to recall the 37,000 workers let go since late 2008. “We have a tight focus on spending as market activity increases, operating more effectively and minimizing rehires where possible,” he said. “We’re not only holding headcount levels, but are also driving restructuring this quarter that will result in further reductions.” Michael E. Belwood, a spokesman for Alcoa, said more than 17,500 of the former workers were employed at units Alcoa has since sold, but added that the company “had to be resized to match the realities of the recession.” “We’re keeping a close eye on costs because there is still uncertainty about the stability of this recovery,” he said. http://www.nytimes.com/2010/07/26/business/economy/26earnings.html?th&emc=th

204 EDITORIAL editorial Riesgos de recaída 25/07/2010 Lleva razón Ben Bernanke al advertir, el miércoles pasado, acerca de los riesgos de interrupción de la recuperación en su país y en la economía global. De "inusualmente inciertas" calificó el presidente de la Reserva Federal las perspectivas de la principal economía del mundo, debilitando la ya precaria confianza de consumidores y empresas. Un peor comportamiento que el esperado en el todavía muy sensible y significativo mercado de la vivienda durante el pasado mes es el último de los indicadores que invita a la prudencia a la hora de valorar las posibilidades de abandono definitivo de todos los peligros que trajo el crash financiero. La del presidente de la Reserva Federal es la más reciente de las cautelosas posiciones de economistas en EE UU acerca de la vulnerabilidad de la fase de recuperación de la economía estadounidense. Otros vienen advirtiendo desde hace tiempo de esa fragilidad y de los riesgos derivados de la prematura retirada de las excepcionales medidas de política económica. El mayor riesgo es no reducir pronto el paro, considerado por el propio Bernanke el principal problema de su economía, situado algo por debajo del 10%. Las probabilidades de recaída en registros negativos de crecimiento del PIB no son descartables tampoco en Europa. En la actualización que ha hecho recientemente el FMI de sus previsiones macroeconómicas, el conjunto de la UE es el bloque con el peor ritmo de crecimiento del mundo. La española es la economía que más tarda en superar la recesión. Europa es, en efecto, el bloque que más ha tentado esa recaída en la recesión (una double-dip recession), a tenor de las políticas asumidas por la totalidad de sus Gobiernos. No solo fueron las economías con más elevados desequilibrios en las finanzas públicas las que decidieron planes de austeridad suficientemente explícitos para que los no siempre mercados financieros se calmaran, sino que también Alemania, Francia y desde luego Reino Unido se han incorporado de forma absolutamente sincrónica al ajuste. Es verdad que se trata de una suerte de masoquismo que no favorecerá la recuperación y, en consecuencia, el pretendido saneamiento de las finanzas públicas. Se trata de señales reivindicatorias de una ortodoxia poco útil. A los mercados de bonos tampoco les gusta que una economía no crezca o lo haga con poca intensidad durante años: sin demanda no es fácil pagar las deudas. Evidencias tales avalan las posiciones que defienden el mantenimiento de los estímulos económicos excepcionales que se adoptaron para evitar que esa crisis constituyera, en efecto, la segunda edición de la sufrida en los años treinta del siglo pasado. El alargamiento de aquella recesión y la conformación de la depresión tuvo mucho que ver con la impaciencia de la Administración americana de entonces para mantener medidas de compensación del desplome de la demanda agregada. Por eso es pertinente sugerir que más vale unas décimas y unos meses más de déficit público que precipitarse en una década perdida sin crecimiento, sin inflación, pero con las más elevadas tasas de desempleo de las ultimas décadas. La recaída en tasas negativas de crecimiento, o simplemente la prolongación del estancamiento, es un escenario que hay que alejar con las herramientas de política económica disponibles, y, siempre, con una estrecha coordinación entre los grandes bloques económicos. http://www.elpais.com/articulo/primer/plano/Riesgos/recaida/elpepueconeg/20100725elp neglse_1/Tes

REPORTAJE: Primer plano

205 ¿Frenazo o vuelta a la recesión? La economía global afronta el riesgo de recaída, agravado por los problemas financieros • Los analistas apuestan por una desaceleración en este semestre • En EE UU solo ha habido tres recaídas en la recesión desde 1854 • El ajuste fiscal no provoca necesariamente una ralentización • Portugal, España e Italia tienen más papeletas para volver a la recesión • La marca Europa cotiza a la baja en el mercado por un problema político • Cada vez más voces cuestionan el efecto multiplicador de los estímulos ALICIA GONZÁLEZ 25/07/2010 En las últimas semanas, buena parte de los economistas, principalmente en Estados Unidos, se han visto obligados a tomar partido. El debate público ha forzado a muchos de ellos a posicionarse bien a favor de una nueva ronda de estímulos económicos o bien por duros programas de austeridad que enderecen las maltrechas cuentas públicas. Casi no ha habido tribuna, seminario e incluso medio de comunicación que no se hiciera eco de estas dos posturas enfrentadas, en ocasiones defendidas incluso con gran ardor. Era la traslación académica del que fuera, en buena medida, el debate que los principales líderes mundiales llevaron a la última reunión del G-20 en Toronto -solo que, como suele ocurrir en estas cumbres, tanto los defensores como los detractores de estas dos posiciones enfrentadas se dieron por vencedores-. Al margen de los posicionamientos ideológicos que también encierra la discusión, lo cierto es que el debate entre más estímulos o austeridad emerge por una realidad anterior: la recuperación económica flaquea. Después de haber logrado evitar una nueva Gran Depresión de la economía mundial y de los ingentes esfuerzos presupuestarios, monetarios y políticos empleados en combatirla, resulta que las bases de esa recuperación se muestran menos sólidas de lo que aparentaban. Y la recuperación flaquea tanto que no solo se advierte un frenazo más que evidente de la actividad sino que surge el temor a una recaída, a una vuelta a la recesión, a los números rojos, a la destrucción económica y al fantasma de la depresión de los años treinta. "Estamos ahora, me temo, en las primeras etapas de una tercera depresión. Probablemente se parecerá más a una depresión larga que a una gran depresión mucho más severa. Pero el coste, para la economía mundial y sobre todo para los millones de vidas deprimidas por la falta de un empleo, es inmenso", aseguraba hace apenas un mes el premio Nobel de Economía de 2008, Paul Krugman. Unos días más tarde, el instituto estadounidense de investigación del ciclo económico (ECRI, por sus siglas en inglés) anunciaba que su indicador adelantado de la actividad se encontraba en el nivel más bajo del último año y su registro actual (-10,5%) en el pasado siempre ha anticipado una recesión. No muchos analistas comparten, al menos por ahora, el pesimismo de Krugman o los temores del ECRI. Pero el riesgo y el miedo a que se materialice existen. A principios de mes, un reconocido economista de una entidad bancaria aseguraba en una presentación a periodistas: "Estamos en un mundo mejor que el que temes: crecimiento global del 4%". Eso alejaría, a su juicio, el riesgo de una nueva recesión y utilizaba como argumento para ello el indicador de búsquedas de Google. "Hace un año si introducíamos el término riesgo de recaída (risk of double dip recession, en inglés) salían aproximadamente 1.150.000 resultados. En el último mes, esa búsqueda se ha reducido a 590.000 resultados y en la última semana a 265.000", dijo entonces. Si ese indicador sirve de algo, esta semana arrojaba un escenario bien distinto: unos 783.000 resultados.

206

Posicionados también ante esta cuestión, la mayoría de los analistas apuesta por ahora porque se producirá una fuerte desaceleración del crecimiento, lo que ha llevado a una rebaja generalizada de las previsiones de crecimiento para esta segunda mitad del año. Pese a la ausencia de números rojos, tampoco se puede decir que esas previsiones se dejen llevar por el optimismo. "En el mejor de los casos, afrontamos un periodo de crecimiento anémico, por

207 debajo del potencial, en las economías desarrolladas mientras se lleva a cabo un proceso de desapalancamiento de hogares, instituciones financieras y Gobiernos, que afectará al consumo y a la inversión", apunta Nouriel Roubini, el gurú que anticipó el estallido de la crisis financiera. También la Reserva Federal de Estados Unidos ha rebajado sus previsiones. De hecho, su presidente, Ben Bernanke, aseguraba esta semana ante el Congreso que "estamos preparados y actuaremos si la economía no sigue mejorando", sobre todo por "el inaceptablemente elevado nivel de desempleo", que en junio se situaba en el 9,5% de la población activa. "El temor no es sobre lo que está pasando [una clara desaceleración] sino sobre lo que va a pasar en el futuro y qué podemos esperar en la segunda mitad del año. La verdad es que nadie lo sabe, el grado de incertidumbre es muy alto y no lo sabremos hasta que pase", concluye Edward Hugh, un macroeconomista independiente y responsable del blog de economía internacional Global Economy Matters [la economía global importa]. La historia no está del lado de los pesimistas en esta materia. De las 33 recesiones que ha vivido Estados Unidos desde 1854 solo en tres ocasiones se ha producido la temida recaída (en 1913, 1929-1931 y en 1981), si entendemos que la recaída en la recesión se produce en los 12 meses siguientes a la salida oficial de los números rojos. Pero incluso si ese rango se amplía a 18 meses, el número de recaídas -o recuperación en forma de W como también se conocen- apenas asciende a cinco. Eso supone que las probabilidades históricas de que la actividad económica vuelva a los números rojos son realmente bajas. Pero los mercados no entienden ni de lógica ni de historia. "Efectivamente, los mercados se están comportando como si hubiéramos vuelto a una fase de recesión, un movimiento consecuente con los temores sobre el crecimiento y el riesgo de recaída. Aunque creemos que esos temores son exagerados, la pérdida de impulso económico hará difícil cambiar esa percepción a corto plazo", apuntaba Keith Wade, el economista jefe de Schroders en una reciente nota a clientes. Entonces, ¿estamos ante un comportamiento irracional de los mercados o son capaces de percibir tendencias que a los demás se nos escapan? Lo cierto es que hay razones que avalan esos movimientos, al menos en parte [ver gráficos adjuntos]. Por ejemplo, el Índice Báltico, que mide el coste del transporte marítimo de mercancías y sirve para comprobar la salud del comercio mundial, se encuentra en su nivel más bajo desde enero de 2009. Muchos argumentan que el coste de los fletes ha caído debido a un aumento de la flota disponible para el transporte, pero si ese indicador se acompaña de una caída del 9% en julio, y por tercer mes consecutivo, de las importaciones de mineral de hierro en China -consecuencia de los esfuerzos de las autoridades por desinflar la burbuja de la construcción- ese comportamiento no puede ser ignorado. Los encargos de la industria, medidos por el índice de gestores de compras, han cambiado su tendencia al alza tanto en las economías desarrolladas como en las emergentes. Y pese a las ingentes cantidades de dinero inyectadas al sistema financiero para asegurar que se mantenía el flujo en el crédito, los préstamos al sector privado siguen sin remontar y la desconfianza entre las entidades ha obligado a los bancos centrales a seguir inyectando liquidez en el sistema. También es verdad que en esta última semana algunos indicadores han registrado una inesperada mejora, especialmente en Europa. El PIB ha mejorado considerablemente en Reino Unido, con un incremento del 1,1% anual en el segundo trimestre. La confianza de la industria en Alemania se sitúa en su nivel más alto en tres años y los pedidos de la industria europea han repuntado en julio. Pero esos datos no implican que la situación económica europea haya mejorado de forma generalizada, sino que muestran las crecientes diferencias entre unas y otras economías de la región. Ahí el entorno juega un papel fundamental: distintos niveles de desempleo (el 7,7% de Alemania frente a casi el 20% en España), de deuda pública (115% del

208 PIB de Italia o el 66,7% de Austria) o de déficit (14,3% de Irlanda o el 0,7% de Luxemburgo) condicionan sin duda las políticas a aplicar por las autoridades. Porque aquí sí que hay que admitir que la marca Europa ahora cotiza a la baja en los mercados. Y el problema es eminentemente de carácter político. "Los inversores dudan de que Europa haga lo que tiene que hacer, además de no entender cómo funcionan sus instituciones. En toda la crisis Europa ha ido siempre por detrás de la curva, por detrás de los acontecimientos, mientras que en Estados Unidos no han dudado de dar un giro radical a sus posiciones ideológicas -como pasó con Bush- si eso era necesario para salir de la crisis", apunta Garicano. Es en ese contexto, y a ambos lados del Atlántico, donde surge el debate entre más estímulos o más austeridad. De la primera postura, sin duda Krugman se ha convertido en su principal defensor. Sin embargo, desde Londres Luis Garicano, profesor de Economía de la London School of Economics, sostiene que "el debate es ficticio. Muchos países no pueden plantearse la elección, como es el caso de España. Otros, como Estados Unidos, siguen recibiendo financiación de los mercados aunque la situación de sus cuentas públicas sea desastrosa. Pero la opinión de los mercados puede cambiar muy deprisa y hay que ser prudente. En todo caso, no hay que exagerar la bondad de los estímulos". Frente a la tesis del premio Nobel de que sin más estímulos la depresión es inevitable, cada vez hay más voces que cuestionan el efecto multiplicador de los estímulos en las economías desarrolladas. "El impacto es muy distinto si se trata de un país emergente, para el que las mejoras en infraestructuras puede suponer un aumento de su crecimiento potencial, que para una economía ya madura, porque no se pueden construir carreteras infinitamente ni se puede consumir sin límite", asegura Hugh. De hecho, un informe de los servicios de inversión de banca privada de Lombard Odier asegura, que pese al enorme estímulo fiscal inyectado por EE UU en su economía desde que estalló la crisis, las ventas finales reales a compradores nacionales (excluidos los inventarios) han crecido un 1% desde su mínimo de principios de 2009, el menor repunte de cuantas recesiones han existido desde la posguerra. Como conclusión sostiene que "la experiencia, sin perjuicio de interpretaciones alternativas de los hechos, sugiere que los estímulos fiscales masivos han tenido escaso éxito a la hora de impulsar el crecimiento en los dos grandes episodios de crisis de los últimos 100 años". La diferencia parece estar en la calidad, más que en la cantidad. Era lo que el profesor Raghuram Rajan, de la Universidad de Chicago, apuntaba en una reciente entrevista. "Una cosa es prolongar las ayudas por desempleo en un país [EE UU] que no está preparado para tener altas tasas de paro durante un tiempo prolongado y otra una nueva ronda de estímulos generalizada, que no serviría para nada". Tampoco la austeridad conlleva necesariamente una contracción económica. Según un trabajo realizado por dos economistas del Fondo Monetario Internacional (FMI) en 1996 (C. J. McDermott y R. Westcott), "los episodios de consolidación fiscal no provocan necesariamente una ralentización económica y las pruebas respaldan la tesis [...] de que la consolidación fiscal que se concentra en el lado del gasto, y en especial en las transferencias públicas y los sueldos de los funcionarios, tiene más probabilidades de conseguir una reducción del ratio de deuda pública que una consolidación basada en subidas de impuestos". Alemania y el Banco Central Europeo (BCE) estarían, pues, de enhorabuena aunque tampoco se puede decir que el ajuste fiscal tenga un efecto neutro para todas las economías. "Portugal, España e Italia son los últimos países en anunciar nuevas medidas de ajuste para reducir sus déficits fiscales. Unas medidas que incluyen recortes en los salarios de los funcionarios, aumentos del IVA y de los impuestos sobre la renta van a provocar daños severos a la recuperación en estos países, hasta

209 situarles ante la posibilidad real de caer en recesión", sostiene el economista jefe de Schrodes, Keith Wade, en una nota a clientes. Si ese proceso de consolidación fiscal se produce de forma paralela a un masivo desapalancamiento del sector privado, tanto de hogares como de empresas, las posibilidades de que el frenazo termine llevando a la economía a los números rojos son muy altas. "La clave es la intersección entre el sector financiero y el sector inmobiliario. Ahí empezó todo y si la confianza no vuelve al sector financiero, y no lo hará si no se sanean de verdad los balances, el riesgo de repetir el modelo de Japón [que alterna periodos de muy bajo crecimiento con algún que otro trimestre en recesión] es elevado", subraya Garicano. Mauro Guillén, profesor del instituto Joseph H. Lauder Institute de gestión y estudios internacionales en Wharton, advierte que en realidad el debate debería ser otro, mucho más profundo, estructural y de largo plazo, "qué debemos hacer para que la economía vuelva a ponerse a funcionar. Y ahí hay reformas que aparecen como imprescindibles, como la reforma laboral en el caso español". Para Edward Hugh, sin embargo, nos encontramos en un momento de transición muy difícil "y que se va a producir a lo largo de los próximos veinte años, para encontrar un modelo de crecimiento que sea sostenible, que resuelva los problemas de fertilidad y riqueza que afrontamos, y que sea capaz a la vez de asumir sus responsabilidades, como el envejecimiento de la población". No les falta razón. Porque los mismos que atribuyen buena parte de la responsabilidad de la crisis a los desequilibrios globales, son los mismos que confían en un consumo desaforado de los estadounidenses y unas exportaciones baratas chinas para salir de la recesión. Así las cosas, un escenario económico en W, con forma de raíz cuadrada (Guillén, dixit) o como el peinado de Bart Simpson no resulta descabellado. Pero haya números rojos o no, si hay un elevado nivel de desempleo, un largo periodo de bajo crecimiento, escasez de crédito y una política fiscal restrictiva, que reduce el gasto público y aumenta los impuestos, "no se llamará recesión, pero se le parece bastante", como apunta Krugman. Y no cabe duda de que un entorno semejante no ejercerá, precisamente, como un factor favorecedor de la confianza. Es el factor psicológico de la economía que ya analizó hace tiempo el profesor de economía de Yale, Robert Shiller, en su libro Animal spirits y que volvía a rescatar hace un par de semanas en un comentario en The New York Times. "Empujados por la psicología de las masas, en el próximo año o dos podría producirse un nuevo temblor en la economía y sería severo (...). Los cambios que se están produciendo lentamente en nuestro ánimo representan un riesgo real de recesión". http://www.elpais.com/articulo/primer/plano/Frenazo/vuelta/recesion/elpepueconeg/2010 0725elpneglse_2/Tes

210 TRIBUNA: Laboratorio de ideas HAROLD JAMES La banca central desflorada HAROLD JAMES 25/07/2010 Después de que el Banco Central Europeo anunciase el 9 de mayo que compraría los bonos gubernamentales de los países mediterráneos que están pasando por graves dificultades fiscales, los escépticos se quejaron de que el banco había "perdido su virginidad". Las medidas parecían una clara infracción del artículo 21 del Estatuto del Banco Central Europeo (BCE), que prohíbe ofrecer facilidades crediticias a los Gobiernos o las instituciones de la Unión Europea. También se hicieron comentarios similares acerca de la Reserva Federal de Estados Unidos en 2008, después de que iniciase compras a gran escala de activos no convencionales, entre ellos deuda pública y valores respaldados por hipotecas, a fin de ayudar al hundido mercado inmobiliario estadounidense. El ex presidente de la Reserva Federal Paul Volcker, por ejemplo, se quejó de que la institución estaba actuando al borde de la legalidad. En ambos casos, el Banco Central daba la impresión de estar haciendo algo que no era política monetaria tradicional. Durante los últimos treinta años se había alcanzado un considerable grado de consenso en cuanto a que la principal -si no la única- responsabilidad de los bancos centrales era garantizar la estabilidad de los precios. Desde principios de los años noventa, se había puesto cada vez más de moda definir la estabilidad de los precios de una forma más precisa mediante el uso de objetivos de inflación. Mantener los precios más o menos constantes era una misión muy distinta de la función histórica de los bancos centrales. Según el concepto original de la banca central, la estabilidad de los precios no era en absoluto un objetivo evidente, puesto que el valor del dinero se establecía en función del peso específico de los metales preciosos. En vez de eso, los bancos centrales se habían creado con dos fines principales. Primero, debían gestionar el crédito del Estado, casi inevitablemente como consecuencia de costosas guerras a gran escala. Así fue como nacieron los bancos centrales más antiguos, el Riksbank sueco (1668) y el Banco de Inglaterra (1694). De forma análoga, a principios del siglo XIX se fundó otro grupo de bancos centrales, y los bancos noruego y finlandés siguieron el ejemplo del Banco de Francia (1800). En cada caso, el nuevo banco estaba estrechamente vinculado a los intereses y la influencia de una selecta élite política. Los bancos daban la impresión de ser instrumentos con los que someter el poder financiero al orden político imperante, aunque fuese controvertido y estuviese amenazado. En consecuencia, había más regímenes democráticos que se mostraban más bien recelosos de las repercusiones políticas de la innovación institucional. Fue la desconfianza hacia la política oculta tras un banco central condicionado por el Estado lo que motivó la no renovación de los estatutos y la desaparición del primer y segundo banco de Estados Unidos. En algunos países (como Suiza), la resistencia al proceso de dominación política llevó a oponerse a la creación de cualquier tipo de banco central. Una segunda motivación histórica para la creación de bancos centrales tenía que ver con la protección de los sistemas financieros. A mediados del siglo XIX, se creó una nueva generación de bancos centrales esencialmente para gestionar los sistemas de pago y estabilizar los sistemas bancarios frágiles.

211 Este fue el motivo que impulsó la fundación del Reichsbank alemán (1875), que era una respuesta al hundimiento financiero y del mercado de valores de 1873, y del Sistema de la Reserva Federal de Estados Unidos (1914), que fue creado a raíz de la gran crisis financiera de 1907. También en estos casos existía la clara sospecha de que el banco central era una herramienta de la élite financiera. El BCE es el primer y más puro ejemplo de un banco central moderno que únicamente se ocupa de emitir dinero y garantizar la estabilidad de los precios. Ha asumido gran parte de la herencia política del Bundesbank de Alemania, cuya creación tras la Segunda Guerra Mundial reflejaba la insistencia aliada en romper con las viejas tradiciones de la banca central alemana, en la que la sumisión política y los estrechos vínculos con la clase dirigente financiera socavaron la estabilidad monetaria y condujeron a la inflación y la destrucción de la moneda. Ya hubo antes un intento de crear una institución que se hiciese cargo de los mecanismos de apoyo a corto plazo a los Estados miembros: el Fondo Europeo de Cooperación Monetaria, fundado en 1973 y dirigido por una junta de gobernadores de bancos centrales. Ideado como una institución de la Comunidad Europea, se le consideraba políticamente peligroso. El BCE también se diferenciaba de los bancos centrales más antiguos en que no se le veía como una fuente de apoyo para un sistema bancario integrado pero posiblemente vulnerable. A finales de los años ochenta y principios de los noventa, hubo algunos debates sobre si el BCE debía responsabilizarse de la supervisión y la regulación bancarias. La respuesta fue que no; una decisión que, tras iniciarse la crisis del crédito de 2007- 2008, parece haber sido un craso error. En otras palabras: ante la crisis, el BCE tiene que comportarse mucho más como los bancos centrales más antiguos. En primer lugar, se está convirtiendo en una institución que se ocupa de la deuda estatal, especialmente de su estructura temporal, y de garantizar que el mercado de esa deuda sigue funcionando impecablemente, sin episodios de crisis y pánico. En segundo lugar, ha quedado claro que, les guste o no, los bancos centrales tienen que asumir la principal responsabilidad en lo que se refiere a la estabilidad del sector financiero. Hay riesgos evidentes: la política monetaria no convencional podría considerarse una especie de política fiscal, en la cual el banco central asigna o redistribuye los recursos entre un grupo concreto: el mercado inmobiliario en el caso de Estados Unidos, o los destinatarios de la generosidad gubernamental en el caso europeo. La transición a la nueva postura conllevará unas funciones más amplias y mucho más políticas para el banco central. Por ello, inevitablemente se exigirá que rinda cuentas e incluso la intervención de las autoridades políticas a la hora de establecer las políticas del banco central. La virginidad permanente conlleva una esterilidad permanente. La banca central europea tiene ahora la posibilidad de elegir: ¿debe flirtear con diversos socios políticos o sentar la cabeza y optar por la estabilidad de la felicidad marital con un mecanismo de responsabilidad y de rendición de cuentas bien definido? - http://www.elpais.com/articulo/primer/plano/banca/central/desflorada/elpepueconeg/201 00725elpneglse_5/Tes

212 TRIBUNA: Laboratorio de ideas ANTÓN COSTAS La segunda gran privatización • ¿Los problemas de algunas cajas vienen de su modelo de propiedad o de una mala gestión y supervisión? ANTÓN COSTAS 25/07/2010 Si no me equivoco, la reforma de las cajas de ahorros aprobada con cierto sigilo y por decreto por el Gobierno el 9 de julio pasado puede ser la antesala de uno de los mayores cambios en la estructura del poder financiero y económico de España. Cambios que a su vez tendrán un impacto significativo en la distribución de poder entre las élites políticas y administrativas territoriales y centrales. Para hacerse una idea, piensen en lo ocurrido con la privatización de las empresas públicas en los años noventa (Telefónica, Argentaria, etcétera). De esa primera gran privatización emergieron nuevas élites económicas que hoy gobiernan una parcela importante del poder empresarial español. A la vez, se produjo una centralización del poder económico que fue cuestionada por los Gobiernos autonómicos. A pesar de indudables beneficios para la economía, la presunción de amiguismo (recuerden lo de los "amigos de Aznar") restó legitimidad social a ese proceso. Ahora estamos hablando de la mitad del sistema financiero español. Además de su importancia para la financiación de empresas y familias, la Obra Social de las cajas reparte un "dividendo social" cuya cuantía es mayor que el monto total de la retribución que los bancos dan a sus accionistas. Constituye una especie de segundo Estado del bienestar que cubre carencias de las políticas públicas, especialmente en zonas rurales y pequeñas ciudades. Una reforma que pueda afectar a este dividendo debe tener como requisito ineludible la transparencia más absoluta. Hasta ahora no ha sido así. La reforma pasó directamente de los despachos de sus proponentes al Boletín Oficial del Estado, quizá utilizando la máxima que dice que "nunca se debe desaprovechar la oportunidad de una buena crisis". ¿En qué consiste la reforma? Para lo que aquí ahora me interesa, su relevancia es que abre por primera vez la posibilidad de que las cajas puedan dar entrada a inversores privados en su capital y en sus órganos de Gobierno. A la vez, saca de esos órganos a políticos electos y altos funcionarios en ejercicio, y reduce la presencia de los grupos de interés actualmente representados (Administraciones, impositores y empleados). Se producirá, por tanto, la sustitución de algunos grupos de interés ahora presentes por nuevos grupos de interés privados. No me arriesgo demasiado suponiendo que surgirán tensiones políticas y sociales de no fácil gestión. La reforma plantea muchas preguntas: ¿los problemas que tienen algunas cajas son consecuencia de su singular modelo de propiedad y gestión o de la mala gestión y de insuficiencias de la supervisión? ¿Están realmente demasiado "politizadas" o es un argumento interesado utilizado para sacar poder a los Gobiernos autónomos? ¿Por qué el Gobierno ha abierto las puertas a la privatización? ¿Han actuado de forma oportunista las grandes cajas para introducir un cambio que les interesa especialmente? ¿Ocurrirá como en Italia y otros países en que la entrada de inversores privados acabó con las cajas? En todo caso, ¿cuáles deberían ser los requisitos de transparencia que debe cumplir la entrada de inversores privados

213 para preservar que las cajas "duren al menos otros 200 años", como ha señalado uno de sus principales impulsores? A falta de debate previo, el real decreto ley de 13 de julio trae una inusualmente larga exposición de motivos. El hilo argumental es que las cajas han sido una historia de éxito; que la singularidad de su modelo de propiedad y de Gobierno no ha impedido que compitan en productos similares con los bancos y que se haya producido una convergencia en el modelo de negocio de ambos; pero que, a la vista de los problemas de capitalización y reestructuración que ahora se enfrentan, es necesario permitir que puedan converger también sus modelos de propiedad y gobierno, bajo el supuesto de que dando entrada y voto a inversores privados que arriesgan una parte de su patrimonio las cajas tendrán una mayor disciplina, una mayor capacidad de reestructuración y una mayor posibilidad de encontrar nuevos recursos para capitalizarse. Es un camino válido, aunque no fácil de transitar y de resultados inciertos. ¿No había otros? Los hay. Vicente Salas, uno de los mejores expertos académicos en gobierno de las empresas, ha señalado que la diferencia más relevante entre bancos y cajas es la menor capacidad de respuesta ágil y eficaz de las cajas en los momentos en que es necesario llevar a cabo ajustes a situaciones de shocks externos. Una posibilidad es, entonces, acomodar el modelo de negocio que pueden desarrollar las cajas, y su capacidad de asumir riesgos ex ante, a su capacidad de ajuste a posteriori. Esto llevaría a replantear la premisa de la convergencia, aceptando que no es deseable que las cajas converjan hacia el mismo modelo de negocio, al menos mientras se mantenga la menor capacidad de ajuste a las situaciones de crisis. Esta diferencia no es inusual en el mundo financiero, como muestra la separación entre banca comercial y banca de negocios. La reforma aprobada ha descartado ese camino. Pero permite a las cajas ejercer el principio de libertad de elección. Esto es algo que merece elogio, porque facilita un proceso de adaptación participativo y transparente. En relación con la transparencia, y al margen de las funciones de supervisión del Banco de España, el Gobierno debería valorar la creación de una comisión privatización, de composición plural, que garantizase la transparencia de los procesos de adaptación a la reforma. Se evitaría así la sospecha de que se ha aprovechado que el Pisuerga pasa por Valladolid para colar una reforma que solo interesa a unos pocos y que puede acabar con esa biodiversidad financiera española que tanto éxito y eficacia ha tenido hasta ahora. http://www.elpais.com/articulo/primer/plano/segunda/gran/privatizacion/elpepueconeg/2 0100725elpneglse_6/Tes

214 REPORTAJE: Laboratorio de ideas - BREAKINGVIEWS. REUTERS Antes de que el techo se nos caiga El gobernador del BCE defiende la política de austeridad presupuestaria EDWARD HADAS 25/07/2010 Hemos ganado la guerra contra la caída en espiral de la economía, por lo que ya no hay necesidad de déficits gubernamentales propios de épocas de guerra. Esto es un resumen rápido de las agresivas opiniones de Jean-Claude Trichet que ha manifestado en un artículo en el Financial Times. Habría que hacerle caso. Si no hubiera riesgos en la radical política fiscal, ni dudas sobre su eficacia, entonces las advertencias del presidente del Banco Central Europeo resultarían excesivas. La recuperación mundial de la recesión sigue sin acabar de arrancar y el sistema financiero no es muy sólido que digamos. Pero los riesgos y las dudas sobre los estímulos abundan. La principal duda es en qué medida contribuye realmente el dinero adicional de los Gobiernos a los gastos de los consumidores y los negocios. Trichet insinúa que la experiencia histórica apoya la conclusión contraria: que una vuelta a la prudencia fiscal es la mejor manera de mantener el crecimiento. El principal riesgo es lo que Trichet denomina una respuesta "no lineal", una repentina pérdida de la confianza en un Gobierno o una divisa. No ha mencionado nombres, pero Estados Unidos y Japón nos vienen a la mente como países sin un programa serio para restaurar el equilibrio financiero. En otras grandes economías, entre ellas Alemania y Francia, la retórica de la prudencia no se corresponde mucho con la realidad. Esto supone coquetear con el desastre, un desastre que los Gobiernos, que ya están al límite de su capacidad, no podrán abordar con facilidad, como ya ha demostrado la crisis de la zona euro. Si bien disminuir el estímulo significa un pequeño sacrificio del crecimiento, es un precio razonable que pagar por renovar la flexibilidad y la credibilidad de los Gobiernos. El tono firme de Trichet al hablar de los Gobiernos choca un tanto con su modo de actuar en su trabajo diario de definir la política monetaria. Es cierto que el BCE no se ha unido a sus homólogos de Estados Unidos y Reino Unido a la hora de plantearse una campaña renovada de relajación cuantitativa del crédito. Pero aún tiene tipos de interés ultrabajos y recibe con los brazos abiertos a los Gobiernos y bancos que tienen problemas de liquidez. La eficacia de no renunciar a este radicalismo monetario también es cuestionable, mientras que los riesgos de facilitarle demasiado la vida a los acreedores y los bancos están claros. Pero los bancos centrales pueden actuar más rápido que los Gobiernos. No se debería hacer caso omiso de Trichet solo porque aún no esté listo para tomar su propia medicina. - http://www.elpais.com/articulo/primer/plano/techo/nos/caiga/elpepueconeg/20100725elpn eglse_7/Tes

215 REPORTAJE: Empresas & sectores Último aviso para Martinsa El nuevo convenio ata de pies y manos la gestión de Fernando Martín y los administradores devuelven la inmobiliaria a una situación patrimonial positiva JULIÁN RODRÍGUEZ 25/07/2010 Pocas veces un matiz llega a cobrar tal significado para la viabilidad de una empresa. " Martinsa-Fadesa es un proyecto vivo, perdurable y solvente si nos dejan", advirtió el presidente de la inmobiliaria, Fernando Martín, en la última junta de accionistas, celebrada en junio. Esa coletilla, "si nos dejan", se ha convertido en un mes en la piedra angular de un futuro que está ahora más que nunca en manos de la banca, en un esfuerzo, quizá el último, por salvar de la liquidación la que es desde hace dos años la mayor suspensión de pagos de la historia española. El nuevo convenio presentado por los cuatro mayores acreedores (Caja Madrid, La Caixa, Caixa Galicia y Banco Popular) marca una hoja de ruta muy diferente de la pergeñada en su día por Martín, da oxígeno a la inmobiliaria, que no a su presidente, y traza un horizonte para que haga frente a sus deudas que, en el peor de los casos, se prolonga hasta 2023. A modo de contrarreloj sobre esos dos años inmersa en el concurso, el titular del Juzgado de lo Mercantil número 1 de A Coruña dictó el miércoles el final de la fase común y abrió así la puerta a la tramitación de los convenios de acreedores que ahora hay sobre la mesa. Por un lado, la propuesta de Martín, de diciembre de 2008 y de la que ahora se descuelgan las cuatro entidades que impulsan el nuevo acuerdo (suman más del 20% de pasivo). Y por otro, el convenio de la banca, que "suaviza los términos de la propuesta anticipada con un objetivo: satisfacer a los acreedores a través del mantenimiento de la actividad" de la inmobiliaria. Pero desde las cuatro entidades financieras lanzan un mensaje explícito: "Es hora de que Fernando Martín demuestre que sabe gestionar; de lo contrario, se abre la posibilidad de que seamos los acreedores los que nos hagamos con el control y todo cambiará". Los cuatro mayores acreedores han conseguido una primera victoria, que los administradores concursales, en el preceptivo informe que actualiza y determina el total del pasivo de la compañía, reconozca más deudas de la que tenían cuando presentó la suspensión de pagos. Son 2.454,1 millones de euros los que la inmobiliaria debe ahora a Caja Madrid, La Caixa, Caixa Galicia y el Popular, los que impulsan el convenio, frente a los 2.217 millones que declararon al iniciarse el concurso. En total, el pasivo de la inmobiliaria ha quedado fijado en 6.905 millones, aunque en el juzgado se agolpan ya más de un centenar de comunicaciones de recursos por parte de otros acreedores contra las sentencias del titular de la plaza, Pablo González-Carreró Fojón, que fijan ese importe. La banca plantea en el nuevo convenio dos alternativas para que la inmobiliaria abone sus deudas, pero muestra claramente su preferencia por una: la conversión de parte de su pasivo ordinario, hasta un 15%, en créditos participativos, cuyo vencimiento se fija para diciembre de 2019. En caso de impago, y con el límite del 40% del importe total que hay que devolver, esa deuda se convertirá en acciones de la compañía si así lo consideran los acreedores a título individual. De lo contrario, si no aceptan la conversión de su deuda en acciones, recibirán su dinero en diciembre de 2023. También establecen un calendario de abono para el 85% de los cerca de 7.000 millones de pasivo, que se alarga en el tiempo sobre la propuesta de convenio

216 planteada por la compañía en 2008. Entre 2011 y 2013, Martinsa solo abonará el 2% del total de la deuda.

La banca no las debe de tener todas consigo, ya que en la propuesta de convenio ata de pies y manos la capacidad ejecutiva de Fernando Martín como presidente. Por ejemplo, le impide tomar decisiones en solitario (deberán ser todas mancomunadas) y también le prohíbe nombrar un consejero delegado. Una comisión de seguimiento, que supervisará las ventas de activos, también podrá estar presente en los consejos de administración. Y a mayores, establece la prohibición de que el propio Martín pueda asumir el cargo de director general. Otro de los

217 compromisos que plantean los acreedores es dar oxígeno para que Martinsa pueda continuar con su actividad, ya que acuerdan abrir una línea de circulante para financiar gastos operativos por un máximo de 147 millones. En las últimas semanas, al tiempo que se diseñaba el nuevo convenio, los administradores concursales daban por cerrado un preceptivo informe para establecer, a ojos del juez, lo que tiene y debe la compañía tras todos los incidentes planteados por los acreedores en estos dos años. Ese análisis actualiza el pasivo presentado por la compañía cuando suspendió pagos y reconoce a una veintena de entidades una deuda ligeramente mayor. Aunque pueda parecer una ilusión contable, también devuelve a la compañía a una situación de patrimonio positivo de 359 millones de euros. Lo cierto es que tras dos años en concurso la inmobiliaria presentó ante la autoridad bursátil unas cuentas correspondientes al primer trimestre de 2010 con un patrimonio negativo neto de nada menos que 1.427 millones de euros, siendo lo que debe prácticamente igual a lo que cifran ahora en su informe los administradores: 6.914 millones. Otro cantar, además, son las filiales de Martinsa en suspensión de pagos, empleadas en su día por el empresario vallisoletano como palanca y aval para adquirir Fadesa. Construcciones Pórtico, Fercler, Inomar, Marplus, Jafemafe y Town Planning arrastran un agujero superior a los 3.800 millones de euros, según la administración concursal. No todo son jarros de agua fría para la compañía por parte de los tres administradores, que quieren ver la botella medio llena en su informe al asegurar que "las ventas de inmuebles han permitido reducir el endeudamiento, por cuanto los créditos y préstamos hipotecarios que la sociedad tenía concedidos y que figuran como privilegio especial, por 548,4 millones de euros, han desaparecido del balance a 30 de junio, asumidos por los compradores". Las ventas corresponden en buena parte "a operaciones que se han realizado con las entidades financieras titulares de los créditos hipotecarios". La inmobiliaria también cumplía dos años en concurso con una sorpresa nada agradable para el ex propietario de Fadesa, que se encuentra entre sus quince mayores acreedores. Entre las últimas decisiones del juez está la de resolver un incidente concursal presentado por el grupo de Manuel Jove calificando el grueso de las deudas de Martinsa con el antiguo propietario de la compañía como crédito subordinado, por importe de 94 millones, con la misma categoría que una reclamación que se hubiera presentado fuera de plazo y en los últimos lugares para el cobro. Jove reclama en total a la inmobiliaria que él fundó alrededor de 124 millones, entre los que se encuentra el importe de la venta de 24 millones de metros cuadrados en el Estado mexicano de Baja California. La realidad de la inmobiliaria es tan distinta de la de hace dos años que el propio informe de auditoría de las últimas cuentas, firmado por Enrst & Young, sitúa en 2.982 millones el deterioro acumulado en el valor de los activos de Martinsa el pasado mes de diciembre, ya revisado por agencias de tasación independientes. ¿Llegará a tiempo el nuevo convenio de acreedores? - http://www.elpais.com/articulo/empresas/sectores/Ultimo/aviso/Martinsa/elpepueconeg/2 0100725elpnegemp_1/Tes

218 REPORTAJE: Información privilegiada Los ex consejeros de CCM se revuelven La resolución de Economía aumenta las tensiones políticas y judicializa el caso MIGUEL Á. NOCEDA 25/07/2010 Esta semana, antes de hacer públicas las pruebas de estrés, el Ministerio de Economía adelantó las sanciones a los miembros del consejo de administración de Caja Castilla-La Mancha (CCM) en el momento que fue intervenida por el Banco de España (BE), el 29 de marzo de 2009. Para disgusto de los implicados, el departamento que dirige Elena Salgado ha ratificado la propuesta del regulador sin tocar una coma. Un total de 19 personas se tienen que enfrentar a multas de diversa cuantía, que en el caso del ex presidente, Juan Pedro Hernández Moltó, y el ex director general, Ildefonso Ortega, lleva emparejada la inhabilitación de cinco años. Ese es el resultado provisional de una historia que comenzó aquel último domingo de marzo de 2009. La decisión provocó un consejo de ministros extraordinario el mismo día para autorizar una inyección de liquidez y garantizar la estabilidad de la caja. El propio gobernador, Miguel Ángel Fernández Ordóñez (MAFO), había advertido que la situación era insostenible y había que buscar una solución con el apoyo político, dada la influencia de los partidos en el control de las cajas. Visto en perspectiva, es posible que la autoridad podría haber esperado a una solución menos traumática; pero todo se precipitó tras fracasar la integración en Unicaja, que reclamaba ayudas de 1.700 millones de euros para tapar los agujeros de la entidad castellanomanchega. La cifra que el presidente de la caja andaluza, Braulio Medel, exigió para reflotar CCM se antojó exagerada. Sin embargo, al final se han destinado 4.125 millones (3.775 provinientes del Fondo de Garantía de Depósitos -1.300 de preferentes, que debe devolver, y 2.475 de garantías adicionales sobre el valor de los activos- y 350 de financiación puente). Una cifra que, puestos a comparar, multiplica por 10 la ayuda que la BBK va a recibir por quedarse Cajasur (392 millones), al margen de los 800 que recibirá del FROB y piensa devolver en septiembre. Esto hace que los ex consejeros de CCM no puedan evitar cuestionar la intervención. En su opinión, se podría haber insistido en una integración como las que se han orquestado después. A estas alturas de la película ya nadie duda de que la intervención de CCM fue el banderazo de salida que buscaba el BE para la reconversión del sector y que, aunque ha tenido algunos atropellos y retrasos por el camino, ahora parece haber entrado en la recta final tras las pruebas de estrés. Tampoco nadie es ajeno a que la intervención se trasladó inmediatamente a la arena política con un PP ávido de tocar poder en Castilla-La Mancha liderado por una candidata ansiosa, María Dolores de Cospedal, y un PSOE a la defensiva tras ser cuestionada la gestión de su militante Moltó. El asunto no acaba ahí. Precisamente la división partidista que el PP ha querido aprovechar para descalificar a su rival ha provocado que los ex consejeros no estén unidos. De momento, todos van a recurrir por vía contencioso-administrativa la decisión de Economía de sancionarles con multas que van de 5.000 a 100.000 euros; pero algunos de ellos, los ligados a la disciplina de Cospedal (Carlos Cotillas, alcalde de Tomelloso; Rosa Romero, alcaldesa de Ciudad Real, y Emilio Sanz) se descolgarán de la querella que la mayor parte presentará contra el ex director general, Ildefonso Ortega, por maquillaje contable.

219 En ese conjunto es muy posible que entren el representante de UGT, Carlos Jiménez, y el ex presidente de CEPYME, Jesús Bárcenas, cuyos abogados están coordinados con los del grupo principal, ligados al PSOE, entre ellos el propio Moltó, o profesionales independientes. La reclamación se basa en que recibieron información falsa, que el propio BE había respaldado, por lo que entienden que se debía haber sancionado al equipo de dirección y no a un consejo desinformado. Mientras tanto, el PP estaría preparando una demanda contra Moltó en el mismo sentido. El grupo conservador parece muy interesado también en que el caso llegue a la Fiscalía. Para ello, el BE tendría que denunciar prácticas delictivas, cosa que no ha hecho. Lo que sí hizo el BE fue sancionarle por extralimitarse en sus funciones, que no eran ejecutivas, sobre todo en la concesión de créditos. Además, se le tacha de que tampoco informó al consejo, lo que le deja bastante en mala posición por mucho que se le quiera eximir. http://www.elpais.com/articulo/empresas/sectores/ex/consejeros/CCM/revuelven/elpepue coneg/20100725elpnegemp_2/Tes

220 REPORTAJE: Economía global Llega la moderación salarial Los sueldos pactados en convenio apenas suben un 1,3% en el primer semestre MANUEL V. GÓMEZ 25/07/2010 El anémico comportamiento de los precios se ha trasladado a los salarios. Ha tardado. Aún en diciembre pasado, con la recesión en vigor, cuando los precios apenas subían un 0,8%, el aumento pactado en los convenios subía un 2,3% y el coste salarial que calcula el Instituto Nacional de Estadística, un 2,2%. Seis meses después, o sea en junio, los acuerdos entre empresarios y trabajadores recogen subidas del 1,3%, cuando los precios crecen un 1,5%.

El acuerdo de negociación colectiva que a comienzos de año firmaron la patronal CEOE y los sindicatos ya lo presagiaba. Para este año el pacto -que tiene una vigencia de tres años- recomendaba subidas no superiores al 1% en 2010. En su frontispicio figura la moderación salarial como objetivo para impulsar a la maltrecha economía española. Y eso poco a poco se está trasladando a las mesas de negociación. Todavía es pronto -hay datos hasta junio- para

221 sacar conclusiones acerca de cómo ha contagiado la rebaja de los sueldos de los funcionarios al sector privado. Al Acuerdo Estatal de Negociación Colectiva (nombre oficial de este pacto guía) recurre la CEOE para explicar la moderación, no sin resaltar que, en su opinión, llega con dos años de retraso. Pero no es el único factor que explica la moderación de los salarios. El secretario de Acción Sindical de UGT, Toni Ferrer, argumenta que el conflicto vivido en 2009 -la patronal puso en duda en muchos convenios que la revisión salarial tuviera que realizarse con la inflación prevista del 2%- ha llevado a muchos convenios a actualizar los sueldos de acuerdo con la inflación pasada, históricamente baja. Desde CC OO, Rita Moreno también habla de la forma en que el Ministerio de Trabajo computa la estadística de los convenios colectivos, y eso puede hacer que todavía no se haya recogido todo el aumento real. Además, apunta que la marcha de la negociación colectiva este año va especialmente rezagada. En todo caso, una prueba irrefutable de que la moderación salarial se extiende es que en los convenios nuevos, el aumento salarial es menor en estos pactos. Sea por el motivo que sea, lo cierto es que la brecha que hubo el año pasado entre los precios y los salarios, y que desde algunas tribunas -sobre todo empresariales y académicas- se había utilizado para explicar parte de por qué en España se ha destruido más empleo que en Europa, se ha cerrado. "En los sectores protegidos, que no salen al exterior, la parte salarial es muy importante en el gasto fijo de las empresas. Al caer el consumo interior y sus ventas, las empresas optaron por reducir la masa salarial y eso se tradujo en destrucción de empleo", explica José Carlos Díez, economista jefe de Intermoney. Sin embargo, en su opinión, a la hora de explicar el deterioro del mercado laboral él también pone énfasis en la burbuja inmobiliaria. La moderación salarial, como explica Díez, se ha convertido en un factor que puede ayudar a mejorar la competitividad de las compañías españolas. Y llega ahora que el consumo interior se encuentra bajo mínimos y las exportaciones tienen que ayudar a la recuperación económica. No obstante, Ferrer matiza: "Solo un 7% de las empresas españolas exportan". Su línea argumental prosigue aclarando que la recuperación económica no llegará hasta que se recupere el mercado interior, y si se da una bajada de sueldos no se animará el consumo. Desde CC OO apuntan que para impulsar la productividad y, en última estancia, la competitividad, también tiene su papel la formación de los trabajadores. Para Díez, de Intermoney, la moderación salarial es tal que teoriza sobre una caída real de los salarios. Su tesis dice que la destrucción de empleo se ha cebado con los puestos de trabajo peor remunerados, y porque quienes pierden su empleo luego se ven obligados a aceptar trabajos mucho peor retribuidos. "Pero esto no se ve en las estadísticas que tenemos en España", justifica. - Cae el peso de los sueldos El comienzo de año trajo el final de la recesión. Siete trimestres después de arrancar la que ha sido la contracción económica más larga de las últimas décadas, entre enero y junio la actividad se reactivó levemente, apenas creció un 0,1%. Pero la letra pequeña de la contabilidad nacional esconde detalles significativos. Por ejemplo, el peso de las rentas

222 salariales en la riqueza nacional cayó casi un punto y quedó en el 47,9%. Hay que remontarse hasta 1998 para encontrar un retroceso mayor. A la paulatina moderación salarial llegada en los primeros seis meses de 2010 hay que sumar el hundimiento del empleo durante la crisis. Los más de dos millones de puestos de trabajo perdidos han tenido en este retroceso un papel clave. De hecho, en el primer trimestre del año volvió a acentuarse la destrucción de empleo. Desaparecieron unos 250.000 puestos de trabajo (algo solo superado en los momentos más duros de la crisis, a finales de 2008 y comienzos de 2009). El hueco dejado por los salarios fue cubierto por las otras dos porciones de la riqueza nacional, la empresarial y los impuestos. Ambas crecieron. El excedente bruto de explotación, nombre que reciben las rentas empresariales en la contabilidad nacional, copó el 44,47% de las rentas. Avanzó casi siete décimas y llegó así a la cota más alta en los últimos años. Se ahonda así en una larga tendencia caracterizada por el retroceso de las rentas del trabajo frente a las empresariales. Por su parte, el peso de los impuestos en 2010 avanzó dos décimas, hasta el 7,6%. El desplome de la recaudación fiscal este año se ha frenado. Este avance podría ir en aumento en la segunda mitad del año gracias al incremento del IVA en julio. "El reparto de rentas en la riqueza nacional tiene un comportamiento cíclico. En los años sesenta, los salarios tocaron techo. Ahora estamos en el otro extremo, así que tienen que ganar peso", explica José Carlos Díez, economista jefe de Intermoney. Con un punto de provocación, Díez incluso apunta cómo se podría corregir esta tendencia: "Es difícil que Europa suba salarios ahora si quiere competir con China. Así que para transferir rentas los Gobiernos tendrán que recurrir a la política fiscal". http://www.elpais.com/articulo/economia/global/Llega/moderacion/salarial/elpepueconeg /20100725elpnegeco_1/Tes

223 TRIBUNA: Economía global ALICIA BÁRCENA La hora de América Latina • A diferencia de otras crisis, la región no ha sido parte del problema, sino de la solución • La recuperación será más lenta para los países de América Central y el Caribe ALICIA BÁRCENA 25/07/2010 Una de las características principales de la crisis económica global, y que ha sido esencial para la forma en que se ha manifestado en América Latina y el Caribe, es que el epicentro de la crisis estuvo en el mundo desarrollado y, asimismo, en el aparato financiero. En América Latina y el Caribe, la banca no colapsó, los créditos hipotecarios siguieron su curso normal, los activos tóxicos no constituyeron un aporte al vocabulario doméstico, las compañías de seguros han respirado con tranquilidad. Los Gobiernos no tuvieron que salir presos del pánico a salvar a los bancos privados y los niveles de déficit fiscal se han mantenido en umbrales de gran responsabilidad. A diferencia de crisis anteriores, esta vez los países de la región no han sido parte del problema, sino parte de la solución, y han dado muestras contundentes de responsabilidad fiscal, de sobriedad financiera, de preocupación por las personas. La crisis se hizo presente en la región particularmente durante 2009. Principalmente, se manifestó en cuatro dimensiones muy relevantes: a) una brusca caída del comercio, que en volumen cayó un 13,5%; b) una acentuada caída en la inversión extranjera directa, que decreció un 42%, tras alcanzar un récord en 2008; c) una significativa caída en el volumen de las remesas, de alrededor del 10%, y d) una fuerte caída de los precios de los productos básicos (25%). La economía se resintió de todo ello y en 2009 cayó el 1,9%. Además aumentó el desempleo y la economía sumergida, y la pobreza, que había bajado 11 puntos entre 2002 y 2008, habrá vuelto en 2009 a subir en un punto porcentual. Pero no todos los países de la región han sufrido la crisis de la misma manera, y, por tanto, las vías y los ritmos de recuperación son también distintos. Los países principalmente de América del Sur basan sus economías en la exportación de productos básicos (petróleo, soja, cobre, minerales) que, tras sufrir una caída en sus precios internacionales, rápidamente se han recuperado. El dinamismo de China y de otros países asiáticos ha significado una recuperación de la demanda y de los precios internacionales de estos productos en general. Por otra parte, en la mayoría de las economías de América Central y México, un pilar muy importante es la exportación de bienes a EE UU y, junto con el Caribe, reciben montos significativos por concepto de remesas de sus migrantes. Para estos países, los efectos negativos han sido mayores y los ritmos de recuperación se prevén también más lentos. En Europa, no obstante, las medidas de contención del riesgo de pérdidas, recuperación de la confianza en los mercados mediante garantías y la limpieza de las carteras a través de la compra de activos comprometidos por parte de entidades estatales o semiestatales trasladaron el riesgo privado hacia un mayor riesgo de la deuda pública. Por ello, en varios países se observó un deterioro de las finanzas públicas. Adicionalmente, en otros países el déficit proyectado exhibía más bien una dinámica propia, por lo que desde antes de la eclosión de la crisis las proyecciones sobre sus resultados fiscales apuntaban a una agudización del problema. Aún más, las dudas sobre la sostenibilidad del cuadro macroeconómico se agudizaban en aquellos casos en que el déficit fiscal fue acompañado de un déficit en las cuentas externas. Así, en el primer trimestre de 2010 surgen

224 interrogantes en los mercados financieros internacionales sobre la capacidad de cumplimiento del servicio de la deuda pública de algunos países europeos y rebrotan sentimientos de incertidumbre respecto a una pronta recuperación de la economía internacional. El Estudio Económico de América Latina y el Caribe presentado por CEPAL el 21 de este mes muestra una vigorosa recuperación de las economías de la región en lo que va de 2010. En términos regionales, y en lo que se refiere a los componentes del gasto, la formación bruta de capital, el consumo privado y las exportaciones de bienes y servicios son los componentes más dinámicos. El elevado dinamismo evidenciado por la demanda interna, tanto de consumo como de inversión, en el cual influye la reanudación de proyectos que fueron suspendidos durante la crisis, así como la recuperación de la producción agrícola en varios países de América del Sur, han impulsado la economía regional hasta un crecimiento del 5,2% en 2010. Este estudio también muestra que el comercio tuvo una recuperación paulatina desde mediados de 2009, cuando empezó a registrar crecimientos mensuales positivos, tendencia que se refuerza en lo que va de 2010. Asimismo, los precios de los productos básicos muestran un aumento, lo que implica que se proyecte para este año un aumento del 7,1%, en promedio para la región, de los términos de intercambio. Para América Central y el Caribe, se estima un aumento del turismo del 7,5% y el 3,8% respectivamente, así como un fuerte repunte de las remesas. A pesar de la turbulencia causada por la crisis europea, la región sigue experimentando condiciones de financiamiento externo favorables y mostrando mejoras en sus indicadores de riesgo. En suma, la región da muestras de una recuperación económica muy vigorosa, con un sistema financiero sano y con las cuentas fiscales en orden. http://www.elpais.com/articulo/economia/global/hora/America/Latina/elpepueconeg/2010 0725elpnegeco_2/Tes

225 TRIBUNA: Economía global Enfriamiento en EE UU JOSÉ ANTONIO HERCE y ÁLVARO LISSÓN 25/07/2010 En las últimas semanas hemos contado con las primeras señales de enfriamiento de una de las economías que han liderado hasta hace poco, junto a las emergentes, la recuperación de la economía mundial: EE UU. El consumo de las familias acumula varios meses de caída, la producción industrial se ha estancado y los índices de confianza empresarial, que fueron los primeros indicadores que adelantaron la recuperación económica a partir del tercer trimestre de 2009, han comenzado a ceder de forma preocupante. El escenario de desaceleración de la economía de Estados Unidos ha quedado también patente con la intervención del presidente de la Reserva Federal, Ben Bernanke, en su comparecencia semestral ante el Congreso, donde no ha dudado en sostener que la Reserva Federal tomará nuevas medidas en caso de que la ralentización económica se mantenga, alineándose así con la Casa Blanca respecto a la renovación de los estímulos. Una posición contraria a la que vivimos en la Unión Europea, donde la consolidación fiscal se ha situado como la máxima prioridad, ante las exigencias de los mercados financieros, en detrimento del crecimiento económico. Si bien otorgamos una baja probabilidad a un escenario de recaída del PIB en Estados Unidos, esperamos un segundo semestre de bajo crecimiento en esta economía con una tasa de paro enquistada en niveles del 9%. En este contexto, vemos estabilidad de los fondos federales en los actuales niveles históricamente reducidos durante, al menos, lo que resta de año. La debilidad de los últimos datos de Estados Unidos, unido a la progresiva normalización en el mercado de deuda de la periferia europea y el incremento de los tipos de interés en el mercado interbancario del euro, están contribuyendo a la recuperación de la moneda común, que ha escalado posiciones para oscilar alrededor de 1,30 dólares por euro. Una apreciación de la divisa europea que, si bien a corto plazo puede tener continuidad, no debería tenerla en el medio y largo plazo, en la medida en que la actividad económica del área euro permanezca debilitada por la consolidación fiscal. Esto ha sido recogido por el Fondo Monetario Internacional en su actualización de previsiones de crecimiento, revisando a la baja el crecimiento previsto en 2011 para el área euro y el Reino Unido, justo aquellas economías que han puesto sobre la mesa medidas más contundentes de consolidación fiscal. A pesar de ello, el crecimiento del PIB mundial previsto para 2011 no ha cambiado respecto a la previsión de abril (4,3%), mientras que la previsión de 2010 ha sido revisada al alza (en 0,4 puntos, hasta el 4,6%), por el dinamismo de la actividad económica en EE UU durante el primer trimestre de 2010, ahora matizada con los datos del segundo trimestre, y por la vitalidad de las economías emergentes, especialmente de Brasil, que, con una revisión al alza de 1,6 puntos y un crecimiento previsto del PIB del 7,1%, avanza a ritmos propios de las economías del sureste asiático. - http://www.elpais.com/articulo/economia/global/Enfriamiento/EE/UU/elpepueconeg/2010 0725elpnegeco_3/Tes

226 ANÁLISIS: Economía global - Coyuntura nacional Análisis comparativo de la deuda española • Sumando la deuda bruta de todos los sectores, la cifra equivalía al 399,5% del PIB a finales de marzo • Los datos constatan que el proceso de desendeudamiento apenas ha empezado ÁNGEL LABORDA 25/07/2010

Entre la información sobre la economía española publicada en esta semana destacan las cuentas financieras que confecciona el Banco de España con datos hasta el primer trimestre de este año. Esas cuentas informan sobre las operaciones con activos y pasivos financieros de los

227 distintos sectores institucionales en un periodo determinado y sobre los balances de dichos sectores al finalizar el mismo. No hace falta decir que en estos momentos dominados por la crisis de la deuda esos datos son fundamentales. Comenzando por el balance de las familias, su riqueza financiera neta (diferencia entre el valor de sus activos y el de sus pasivos) aumentó en el primer trimestre un 16,1% respecto a igual periodo de 2009. Ello fue consecuencia de un aumento de sus activos en un 6,7% y una ligera disminución de sus pasivos de un 0,1%. El 95% de estos últimos se encuadran dentro del concepto de deuda bruta (préstamos y valores distintos de acciones), que disminuyó un 0,3%. No es mucha reducción, y esto es bastante sorprendente, pues indica que el superávit que están generando ahora las familias lo dedican a adquirir activos financieros y, en mucha menor medida, a reducir su deuda. Parece, por tanto, que esta es llevadera y que no hay prisa por reducirla. En el primer trimestre la deuda familiar alcanzó una cifra equivalente al 86% del PIB de los últimos cuatro trimestres, solo dos décimas menos que en el trimestre anterior. En el gráfico superior izquierdo vemos que la deuda de las familias españolas es más de 20 puntos porcentuales del PIB, superior a la media de la eurozona, aunque bastante inferior a la de países como EE UU, Reino Unido, Irlanda y Holanda. En el caso de las empresas no financieras, la diferencia entre sus activos y pasivos da una cifra negativa, es decir, tienen pasivos netos, lo que es normal. Desde 2008, unos y otros han venido disminuyendo, en un contexto de restricción crediticia y de disminución de las necesidades de financiación, pero esta tendencia se ha roto en el primer trimestre. No obstante, la deuda bruta, que supone algo más del 41% del total de los pasivos, sí que disminuye, aunque muy moderadamente, un 1,1% respecto al mismo periodo del año anterior, a pesar de lo cual sigue aumentando como porcentaje del PIB, hasta el 141,2%, dado que este cae más que la deuda. La diferencia entre el endeudamiento de las empresas españolas y las de la eurozona es mayor que en el caso de las familias y alcanza unos 40 puntos porcentuales del PIB, solo superado por Portugal e Irlanda. No obstante, aunque las cuentas financieras no dan datos desagregados por sectores productivos, utilizando otras fuentes de información puede concluirse que este endeudamiento está muy concentrado en las empresas de servicios inmobiliarios y de construcción, de tal forma que el resto de empresas no deben registrar niveles de endeudamiento muy superiores a sus homólogas europeas. La deuda bruta de los otros dos sectores, las sociedades financieras y las administraciones públicas, siguió aumentando en el primer trimestre, especialmente la de estas últimas. No obstante, en ambos casos, su nivel, como porcentaje del PIB, sigue estando notablemente por debajo de la eurozona, de EE UU, del Reino Unido y de Japón. Sumando la deuda bruta de todos los sectores, la cifra resultante equivalía al 399,5% del PIB en el primer trimestre de este año, 2,5 puntos más que al finalizar 2009. La comparación internacional sitúa a España no muy por encima de la eurozona o Estados Unidos. Algo más del 42% de esta deuda (el 170,4% del PIB en el primer trimestre de este año) está contraída con el resto del mundo. Tampoco en este caso España destaca respecto al resto de países europeos. A la vista de los datos puede concluirse, en primer lugar, que el proceso de desendeudamiento apenas ha empezado, y en segundo lugar, que España solo destaca significativamente en deuda bruta en el caso de los hogares y de las empresas inmobiliarias y de la construcción. Esta última es la que hace daño a los balances de las entidades de crédito. Por eso, el saneamiento de dichos balances y la contención de la deuda pública son las dos asignaturas principales de la economía española para los próximos años. http://www.elpais.com/articulo/economia/global/Analisis/comparativo/deuda/espanola/elpepue coneg/20100725elpnegeco_4/Tes

228 TRIBUNA: Economía global LUIS VALERO ¿Una reforma laboral a medias? • Hay que definir exactamente qué se entiende por evolución económica negativa • La tramitación de los ERE es muy lenta, aunque haya acuerdo de trabajadores y empresa sobre su aplicación LUIS VALERO 25/07/2010 La Reforma Laboral aprobada por el Gobierno el 16 de junio es la que necesitamos? Los fabricantes de vehículos pensamos que, aunque supone algunos avances, no son los necesarios para cumplir los objetivos que se ha marcado. Es importante que se aborden en la reforma aspectos fundamentales para incrementar las ventajas competitivas de nuestras empresas frente a las del exterior. En lo relativo a nuestro sector hay que destacar lo siguiente: - Medidas para reducir la dualidad y la temporalidad del mercado de trabajo. En lo que se refiere a la reducción de la temporalidad, hay que señalar que la existente en las factorías españolas de producción de vehículos representa solo un 9% del total del empleo. Estamos muy lejos, por tanto, del 30% de media del resto de los sectores. Cuando demandamos mayor duración del contrato estamos pidiendo mayor estabilidad, no más temporalidad, y se hace porque la duración de 6 meses (12 si hay un convenio sectorial) es insuficiente, ya que casi el 50% de los 6 meses se va en formación al trabajador. Por tanto, la reforma aprobada, en este caso limita aún más la posibilidad de uso de los temporales, restando parte de la escasa flexibilidad de la que se disponía. Por eso es necesario un tipo de contrato que dote de mayor estabilidad a los trabajadores eventuales, mediante una mayor duración máxima de los mismos, de hasta al menos tres años. Por lo que respecta a la extinción de contratos por causas objetivas (extinciones colectivas), en tanto que entendemos que sí existe un avance en la definición de las causas técnicas, organizativas y de producción, no puede afirmarse lo mismo de las causas económicas, que permanecen casi en los mismos términos anteriores a la reforma (evolución económica negativa de la empresa). Pero esta falta de concreción ha hecho que los tribunales tengan que pronunciarse a menudo sobre qué debe entenderse por este concepto, pronunciamiento precisamente no uniforme. Por otro lado, la crisis que sufrimos desde el segundo semestre de 2007 ha puesto de manifiesto que el procedimiento de tramitación de los ERES es muy lento (una tramitación rápida puede constituir la diferencia entre que un ERE suspensivo se convierta al final en extintivo), aunque exista acuerdo entre trabajadores y empresa sobre los términos de aplicación. Hay que definir exactamente qué se entiende por evolución económica negativa (disminución continuada del rendimiento durante seis meses), reducir los plazos de tramitación de los ERE y suprimir la necesidad de autorización administrativa cuando haya acuerdo entre las partes, ya que ahora la ley limita la intervención de la autoridad laboral a sancionar lo acordado por ambas. - Medidas para favorecer la flexibilidad interna de las empresas y para fomentar el uso de la reducción de jornada.

229 Respecto de la modificación sustancial de las condiciones de trabajo de carácter colectivo, se supedita la aplicación de cualquier medida al previo acuerdo de las partes. Debería haberse dotado a las empresas de un mecanismo que permitiera una respuesta inmediata a situaciones puntuales extraordinarias, dentro de las facultades de organización del trabajo del empresario, sin perjuicio del derecho de los trabajadores que se sintieran perjudicados a la tutela judicial efectiva. Bastaría con establecer en el 10% el límite del número de trabajadores que determina si una modificación de condiciones de trabajo es individual o es colectiva para las empresas de 300 o más trabajadores. En la actualidad existe el mismo límite para una empresa de 300 trabajadores que para una empresa de 9.000: 30 trabajadores. En cuanto a la inaplicación del régimen salarial, la necesidad del previo acuerdo de las partes lo hace muy poco operativo en situaciones de dificultades. Además, se obvia que aparte del salario hay otras muchas condiciones de los convenios que en circunstancias complicadas puede ser necesario inaplicar, como la jornada, el horario y la distribución del tiempo de trabajo, los turnos y el resto de condiciones laborales. Igualmente, en nuestro ámbito, las medidas de descuelgue deben ser también respecto a lo establecido en los convenios de empresa, y no solo como es en la actualidad, respecto de lo establecido en convenios de ámbito superior a la empresa. - Medidas para favorecer el empleo de los jóvenes y las personas desempleadas Valoramos positivamente el nuevo régimen de los contratos para la formación, sin embargo, en cuanto a incentivos a la contratación indefinida se producen algunas exclusiones que carecen de sentido (ejemplo, quedan sin bonificación las nuevas contrataciones mediante el indefinido ordinario los trabajadores de entre 31 y 45 años). - Medidas para reducir el impacto en el empresario del coste de las extinciones Las medidas propuestas son más aparentes que reales y, además, pueden suponer un nuevo coste adicional, vía cotizaciones sociales, para las empresas. No obstante, reiteramos que nuestros fabricantes ponen el acento en una mayor flexibilidad en la producción, no en el menor coste de las extinciones. - ¿Qué falta en la reforma laboral para que sea verdaderamente efectiva? La reforma, además de como dinamizadora del mercado de trabajo, debe servir para dotar de una mayor competitividad a las empresas. Para ello deberían abordarse los siguientes aspectos: - Modernización de la negociación colectiva. El convenio de empresa constituye el mejor instrumento de adaptación en cada momento a las necesidades de trabajadores y empresa. Sin embargo, nuestra normativa limita las materias objeto de negociación en este ámbito, pudiendo quedar vacío de contenido de existir un convenio sectorial. Por ello, debe potenciarse el convenio de empresa, dotándole de plena autonomía y eliminando la actual jerarquía de convenios y la reserva de materias a favor de los de ámbito superior a la empresa. - Incremento de la flexibilidad laboral. Son medidas necesarias el incremento del límite que determina la condición de individual o colectiva de las modificaciones sustanciales de trabajo; la modificación del sistema de cómputo de las horas extraordinarias; el cómputo plurianual de las jornadas para favorecer las bolsas de horas; un nuevo contrato temporal de al menos tres años de duración que permita optimizar el rendimiento de la formación que reciben estos trabajadores. - Reducción del absentismo laboral. Es necesaria una mejora del control del absentismo por las administraciones y cambios normativos para permitir una mayor participación de las empresas y las mutuas en su control. También es necesaria la reforma del actual artículo 52 d) del Estatuto de los Trabajadores, que se refiere al cómputo de las ausencias en las extinciones por

230 faltas de asistencia al trabajo.- Mejora de la formación para y en el empleo. Debe reformarse la formación profesional para adaptarla en títulos, contenidos e impartición a las necesidades de las empresas. También debe adaptarse la formación ocupacional a las demandas reales del mercado. Asimismo, deben incrementarse las ayudas a las empresas por formación continua durante el trabajo, dado que solo se recupera un 6%, aproximadamente, de las inversiones por este concepto. - Mantenimiento del contrato de relevo y la jubilación parcial. En un momento de destrucción de empleo, el contrato de relevo sigue representando en torno al 6% del total de las plantillas. Esto supone que, gracias al contrato de relevo, más de 4.000 trabajadores se han mantenido en sus puestos durante 2009. Un instrumento que ha permitido mantener el empleo en un momento como este debe mantenerse a toda costa. No obstante, sí se ha evidenciado que es necesario adaptar esta figura para periodos como el presente, flexibilizando sus condiciones de uso. En definitiva, la crisis está demostrando que la estructura económica de nuestro país es demasiado sensible a las variaciones del mercado, lo que exige una reforma del modelo productivo. Pero también se está evidenciando que muchas de nuestras instituciones laborales están obsoletas. En este sentido, consideramos que debe cerrarse este capítulo y debe abordarse una reforma más en profundidad de nuestro actual sistema de relaciones laborales que permita dinamizar la gestión de las empresas e incrementar la competitividad de las mismas, siempre sobre la base del mantenimiento de la paz social, que tan grandes ventajas ha supuesto para empresarios y trabajadores. http://www.elpais.com/articulo/economia/global/reforma/laboral/medias/elpepueconeg/20 100725elpnegeco_7/Tes

231

El examen a la banca europea Las cajas sufren mucho más la crisis del ladrillo que los bancos El impacto de los promotores y adjudicados coloca en hipotéticas pérdidas a todas estas entidades si la crisis se agrava, según las pruebas de estrés La vocación inmobiliaria de las cajas castigaría sus resultados El crédito al consumo y las empresas, gran baldón de los bancos Las uniones de Madrid, Galicia y Murcia aprueban por la ayuda pública Ibercaja y Unicaja, los dos solitarios con buena situación de capital ÍÑIGO DE BARRÓN - Madrid - 25/07/2010 Una semana antes de que se publicaran los resultados de las pruebas de estrés, varios representantes de las cajas se quejaron de que no iban a ser homogéneos con los exámenes europeos. Y así fue. El Banco de España comentó ayer ante los analistas que había establecido una caída del margen operativo de las entidades del 40% sobre la media de los últimos veinte años. Una semana antes de que se publicaran los resultados de las pruebas de estrés, varios representantes de las cajas se quejaron de que no iban a ser homogéneos con los exámenes europeos. Y así fue. El Banco de España comentó ayer ante los analistas que había establecido una caída del margen operativo de las entidades del 40% sobre la media de los últimos veinte años, con un rigor no visto en otros supervisores europeos. Además, el Comité de Supervisores Bancarios Europeos (CEBS, por sus siglas en inglés) estableció una hipotética crisis con condiciones más severas que en otros países para examinar la resistencia de las entidades españolas. Así, determinó que el precio de la vivienda terminada caería un 28% desde el máximo del ciclo actual, del 50% en la vivienda en curso y del 61% en el suelo. La consecuencia es que han caído los ingresos y han subido las necesidades de provisiones por la morosidad. Las cajas se han caracterizado por su vocación inmobiliaria desde inicios de 2000 y en las pruebas de estrés lo han pagado caro. De todas formas, según algunas fuentes del mercado, el supervisor ha sido generoso en la admisión de plusvalías, sobre todo en algunas fusiones de cajas. Según los datos publicados, el deterioro causado por la cartera de promotores y activos adjudicados sumaría 54.800 millones frente a los 21.200 que padecerían los bancos. El baldón del ladrillo es la principal causa para que todo el sector de cajas esté en hipotéticas pérdidas en el peor escenario contemplado por las pruebas de resistencia. Ascenderían a 38.636 millones. También refleja la excesiva concentración de sus riesgos. Frente a esta situación, los bancos lograrían ganar 10.561 millones, gracias al Santander y al BBVA, que son los únicos con beneficios (ver cuadro). En las empresas y en las pymes los bancos perderían más que sus competidores. Lo mismo sucede con el crédito al consumo, donde la crisis les costaría casi 30.000 millones a los bancos frente a los 4.426 millones de las cajas. - Santander. El gigante español tiene un margen de explotación y provisiones que le permitirían soportar la peor crisis con un 10% de solvencia.

232 - BBVA. La diversificación de los negocios distribuye las pérdidas hipotéticas por toda la cartera. Las provisiones le defienden de la crisis y consigue un 9,3% de solvencia. - La Caixa. Los promotores, las empresas y la cartera de deuda serían las más golpeadas. La entidad (y Caixa Girona) no cerraría el examen con beneficios y obtendría unas hipotéticas perdidas de 4.290 millones, pero un confortable ratio de solvencia del 7,7%. - Caja Madrid-Bancaja. El examen pone de manifiesto que la fusión fría más importante del sistema, con activos de 213.000 millones, tiene su punto débil en el suelo y las promociones, que le provocarían hipotéticas pérdidas de 13.000 millones y le ocasionarían 11.377 millones de números rojos en el peor escenario de final de 2011. - Popular. Los números indican que la cartera promotora es muy pesada, el 18% del activo, con las mayores pérdidas de entre los bancos, que le conducen a un hipotético resultado negativo de 1.988 millones en el cierre de 2011. Sin embargo, también es el tercer mejor banco en margen de explotación (que refleja la marcha del negocio tradicional bancario) y plusvalías, lo que le permite obtener un 7% en solvencia. - CAM-Cajastur. El Sistema Institucional de Protección (SIP) o fusión fría, más incierto y polémico hasta el momento, por los intentos de rotura lanzados desde Alicante, es el segundo con más perdidas hipotéticas, 5.673 millones. La situación explica que el Banco de España siga los movimientos con atención. Los promotores y viviendas adjudicadas provocan demasiadas perdidas para compensarlas con un margen muy escaso. Sin embargo, la solvencia es más que adecuada, un 7,8%. Ha recibido casi 5.300 millones en ayudas. Según fuentes de la CAM, esta entidad es la que aporta más recursos para esa nota de solvencia. Incluso afirma que, según sus cálculos, la CAM en solitario habría aprobado con el 6%. - Banco Sabadell. Es el segundo con más pérdidas hipotéticas como consecuencia de las inversiones en ladrillo y pymes, donde es uno de los bancos más activos, con casi un tercio del negocio dedicado a estas actividades. No obstante, las provisiones y el margen le defienden y logra una solvencia del 7,2% en la peor crisis posible, con unas pérdidas de 3.261 millones. - Fusión Gallega. El ladrillo y las pequeñas y medianas empresas, como era conocido por la vocación de Caixanova, serían los principales problemas de esta fusión si llegara una crisis económica muy severa. Los números rojos llegan a 1.321 millones, pero la solvencia se sitúa en un cómodo 7,2%. Sin el fondo público de 1.162 millones, la solvencia sería de 4,7%, claramente insuficiente. - Fusión Murcia. La unión de Murcia, Granada, Sa Nostra y Penedés ya ha recibido 916 millones del FROB y ha pasado el examen de solvencia con un 7% en el ratio Tier 1. De no ser por el fondo, no hubiera pasado la prueba, al quedarse con un 4,9% en el escenario más adverso. Las pérdidas hipotéticas serían de 3.141 millones en el peor escenario. - Bankinter. El 30% de su activo se concentra en promoción y pymes. El escenario de fuerte crisis de deuda pública le estropea los ratios y cerraría la prueba con pérdidas hipotéticas de 214 millones. - Ibercaja. Es uno de los llaneros solitarios del sector, con buena parte del negocio en empresas medianas y grandes, que absorben el 6% de los activos. Según los test tendría 676 millones de números rojos, pero una solvencia del 6,7%. - Unicaja. En tres ocasiones ha intentado buscar novia (CCM y dos veces con Cajasur) y siempre se ha llevado calabazas. Las pruebas demuestran que está robusta, con una solvencia del 9%, aunque la concentración en ladrillo y pymes castigaría el resultado hasta 618 millones en situación de estrés.

233 - Banco Pastor. Aprobado justo con el 6% por el 20% del activo dedicado al ladrillo. Tercero de los bancos con hipotéticas pérdidas de 814 millones. - Cajasol. Otro aprobado justo, el 6%, es una de las cajas con más pymes, el 10% de su balance. Las pérdidas alcanzarían los 935 millones en el peor escenario. - BBK. Una de las entidades líderes en solvencia que se ha hecho con la quebrada Cajasur. Sin ésta, la solvencia se sitúa en 14,1%. Las pérdidas serían de 105 millones. - Banca March. La pequeña entidad balear, participada por Corporacion Financiera Alba, es un récord en solvencia con el 19%.

http://www.elpais.com/articulo/economia/cajas/sufren/mucho/crisis/ladrillo/bancos/elpepueco/ 20100725elpepieco_5/Tes

234 El examen a la banca europea El Santander, campeón en rentabilidad El banco español lograría los mayores beneficios de toda Europa aunque empeore la crisis, según las pruebas - El SIP de Caja Madrid sufriría las mayores pérdidas Dos tercios de las entidades entrarían en números rojos Cinco cajas, entre las 10 que más perderían de Europa Cuidado con los aprobados raspados Las cajas sufren mucho más la crisis del ladrillo que los bancos MIGUEL JIMÉNEZ - Madrid - 25/07/2010 La banca europea ha aprobado las pruebas de resistencia. En su inmensa mayoría, las entidades analizadas seguirían siendo solventes incluso ante un escenario muy adverso. Sin embargo, muchas de ellas entrarían en pérdidas como consecuencia de un hipotético agravamiento de la crisis, según los resultados publicados por el Comité de Supervisores Bancarios Europeos. La banca europea ha aprobado las pruebas de resistencia . En su inmensa mayoría, las entidades analizadas seguirían siendo solventes incluso ante un escenario muy adverso. Sin embargo, muchas de ellas entrarían en pérdidas como consecuencia de un hipotético agravamiento de la crisis, según los resultados publicados por el Comité de Supervisores Bancarios Europeos (CEBS, por sus siglas en inglés). No es el caso del Santander. El banco presidido por Emilio Botín seguiría generando ganancias a fuerte ritmo incluso si se da el escenario más extremo analizado por el Banco de España. Un análisis de los resultados publicados por el CEBS realizado por EL PAÍS muestra que el Santander sería el banco con mayores beneficios de toda Europa en un escenario de tensión, con una gran diferencia sobre las siguientes entidades. El BBVA estaría también entre las más destacadas. Fuentes del sector financiero consideran que una vez despejados los fantasmas sobre la solvencia, el foco de los inversores va a volver a situarse en la rentabilidad, sobre todo en lo que respecta a los bancos que cotizan en Bolsa. En ese terreno, las noticias son buenas para los dos grandes bancos españoles. Las cifras facilitadas por el CEBS para las 91 entidades europeas sometidas a examen muestra que el Santander es la que tiene más capacidad de generación de beneficios. Incluso en una situación de tensión extrema, el banco cántabro generaría un margen de 45.737 millones con el que podría hacer frente a las pérdidas crediticias y demás deterioros de activos y aun así lograr un beneficio bruto de 14.416 millones en dos años. El Banco de España ha elaborado esas cifras con mayor precisión y contempla para el Santander un beneficio antes de impuestos de 14.090 millones que se quedarían en 10.976 millones de euros netos tras pasar por la ventanilla del fisco en el peor de los casos. En el escenario tensionado de referencia, esos resultados se duplicarían con creces hasta los 22.419 millones de beneficio neto, según datos del Banco de España. "Además de mantener los ratios de solvencia intactos en ese hipotético escenario adverso señalado por los reguladores, Banco Santander obtendría beneficios, generaría capital y continuaría con su actual política de pay-out, lo que implica distribuir entre sus accionistas alrededor del 50% del beneficio ordinario", destacaba el Santander al valorar las pruebas que, según Botín, "reafirman el éxito del modelo Santander". "Somos un banco minorista con una

235 fuerte diversificación geográfica, de negocios y clientes. Estamos presentes en una decena de países con cuotas de mercado de más del 10%, lo que nos permite ser muy eficientes", señaló el viernes en un comunicado. Entre los grandes bancos el Santander es el segundo que mejor resiste también desde el punto de vista de la solvencia el escenario más extremo, solo por detrás de Barclays. Pero el español se situaría primero si en lugar de repartir dividendo, retuviera el beneficio, como Barclays. Entre los bancos que lograrían atravesar incluso el escenario más extremo con beneficios se sitúa también el español BBVA, cuarto por detrás de Barclays y BNP Paribas. La entidad que preside Francisco González lograría en el peor de los casos un superávit (asimilable con ciertas reservas a beneficio bruto) de 6.834 millones en dos años, según los datos del CEBS. De nuevo, el Banco de España es más preciso y señala para la entidad vasca un beneficio después de impuestos de 4.224 millones en la hipótesis más extrema y de más del doble (8.789 millones) en el supuesto de tensión de referencia. "Una de las claves de la fortaleza de BBVA es tener un modelo de negocio con capacidad de generar resultados operativos incluso en los escenarios más negativos; un modelo que proporciona recurrencia y sostenibilidad de los beneficios y que refleja una rentabilidad diferencial sobre sus activos", señalan desde el BBVA. "Las pruebas de resistencia confirman la fortaleza financiera del Grupo BBVA, que pese a no haber realizado ninguna ampliación de capital desde el inicio de la crisis, se encuentra entre los bancos más sólidos y solventes de Europa", explicó Francisco González el viernes en una nota. Pero además de situarse en las primeras posiciones en cifras absolutas, el Santander y el BBVA destacan también en términos relativos. Así, entre los grandes bancos, el Santander es el que logra una mayor rentabilidad con relación al tamaño de sus activos en riesgo, seguido por Barclays y BBVA. Junto al mayor beneficio absoluto y la más alta rentabilidad sobre activo, Botín logra la triple corona al conseguir también el mayor beneficio con relación al capital (medido por el Tier 1) de todos los grandes bancos europeos (un 12,1%) en el escenario más duro. En esta categoría, el BBVA es el segundo de Europa, con un 11,4%. Los dos grandes bancos españoles son los más rentables a pesar de que el Banco de España ha usado en las pruebas las previsiones de caída del precio de la vivienda y de las oficinas más duras de toda Europa, según datos del CEBS. El supervisor explicó ayer también a los analistas que ha sido especialmente severo a la hora de la estimación del margen de explotación. Acaso esa severidad es la que provoca que, según las pruebas de resistencia, solo el Santander y el BBVA seguirían logrando beneficios en el escenario negativo más extremo. Todas las demás entidades españolas estarían en pérdidas, déficit o deterioro, según las pruebas. El mayor desfase sería para el Sistema Institucional de Protección (SIP) liderado por Caja Madrid , donde el deterioro de activos superaría en 13.738 millones al margen de explotación, según el CEBS. Con datos del Banco de España, el deterioro neto sería de 11.377 millones tras un efecto fiscal positivo de 3.792 millones. España tendría así, la entidad con mayores beneficios y la de mayores pérdidas de toda Europa. http://www.elpais.com/articulo/economia/Santander/campeon/rentabilidad/elpepueco/20 100725elpepieco_2/Tes

236 El examen a la banca europea EUROPA Dos tercios de las entidades entrarían en números rojos M. J. - Madrid - 25/07/2010 De las 91 entidades analizadas en las pruebas, 84 aprobaron en solvencia ante el escenario más extremo. Sin embargo, esas hipótesis de tensión llevarían al grueso de la banca europea a pérdidas, según el análisis de los datos del CEBS realizado por EL PAÍS. Solo 29 bancos resistirían el escenario más adverso con beneficios, la mayoría de ellos de gran tamaño. Los cálculos del CEBS apuntan a que el deterioro de activos del conjunto de la banca europea sería de unos 566.000 millones de euros en el peor escenario contemplado. El margen de explotación generado en esas circunstancias no sería suficiente para absorber tales pérdidas. El resultado global es que las 91 entidades analizadas sufrirían pérdidas (o déficit o deterioro) antes de impuestos por un importe agregado de 57.000 millones de euros, según datos del CEBS. Tras la fusión fría de Caja Madrid y Bancaja con otras entidades, la firma con más pérdidas sería la irlandesa Allied Irish Bank, seguida por el Royal Bank of Scotland, que aprobó con nota en solvencia, pero suspende rotundamente en rentabilidad. Unicredit, Commerzbank y los mayores landesbanken alemanes también tendrían pérdidas. http://www.elpais.com/articulo/economia/tercios/entidades/entrarian/numeros/rojos/elpe pueco/20100725elpepieco_1/Tes

El examen a la banca europea El supervisor destaca la dureza de las pruebas AGENCIAS - Madrid - 25/07/2010 Las pruebas de resistencia para bancos y cajas españolas han sido duras y han abarcado a la práctica totalidad del sistema financiero. Y eso, para el Banco de España, pone en valor los resultados, pese a que cinco de las siete entidades que suspenden sean españolas. Esta fue la línea argumental del encuentro que el director Regulación del Supervisor, José María Roldán, mantuvo con un grupo de analistas. Tras la reunión, AFI hizo una lectura “muy positiva” de los resultados conocidos el pasado viernes. Un analista citado por Efe habla de un ejercicio “muy útil”. En la arena política, el nimistro de Fomento, José Blanco, se mostró confiado en que con las ayudas públicas las entidades suspendidas puedan salir adelante. Por su parte, el portavoz parlamentario de CiU, Josep Antoni Duran i Lleida, subrayó que la fusión liderada por Caixa Catalunya tenía “color socialista”. http://www.elpais.com/articulo/economia/supervisor/destaca/dureza/pruebas/elpepueco/2 0100725elpepieco_6/Tes

237 El examen a la banca europea Necesitadas de capital, pero sin complicaciones para funcionar Tres grupos de cajas se endeudarán a un tipo del 8% para cumplir el examen Í. DE B. - Madrid - 25/07/2010 El resultado de las pruebas de esfuerzo ha sido positivo para la mayoría de expertos porque, entre otras razones, ha sido un ejercicio realista. Y la demostración es que cuatro grupos de cajas no llegaron al 6% de solvencia o Tier 1 que se exigía en el peor de los escenarios previstos, algo que solo tiene un 0,5% de probabilidades de producirse. El resultado de las pruebas de esfuerzo ha sido positivo para la mayoría de expertos porque, entre otras razones, ha sido un ejercicio realista. Y la demostración es que cuatro grupos de cajas no llegaron al 6% de solvencia o Tier 1 que se exigía en el peor de los escenarios previstos, algo que solo tiene un 0,5% de probabilidades de producirse. En este escenario, Diada (Caixa Catalunya, Tarragona y Manresa) quedaría en un ratio de solvencia del 3,9%; Unnim (Sabadell, Terrassa y Manlleu), en el 4,5%; Espiga (Caja España y Caja Duero), en el 5,6% y Banca Cívica (Caja Navarra, General de Canarias y Municipal de Burgos), en el 4,7%. También suspendió Cajasur, pero al estar vendida a la BBK, sobrante de capital, no se considera un problema. Estas cuatro entidades son solventes y fiables. Los depósitos no corren ningún tipo de riesgo, como ha garantizado el gobernador del Banco de España, Miguel Ángel Fernández Ordóñez. Sin embargo, en el futuro sí los pueden tener. Los ministros de Economía de la Unión Europea determinaron que si no llegan al 6% de solvencia debían pedir el capital que les faltaba. En total las entidades españolas que no han alcanzado este nivel necesitan 1.835 millones: Diada requerirá 1.032 millones; Banca Cívica, 406; Unnim, 270 y Espiga, 127. Una de estas entidades ya se ha puesto manos a la obra. Banca Cívica, capitaneada por Caja Navarra, anunció por la mañana del viernes un acuerdo con un fondo de capital riesgo de Estados Unidos, JC Flowers. El fondo se ha comprometido a invertir 450 millones en deuda convertible en acciones de la entidad. Si la operación llega a buen puerto, Banca Cívica no tendría que pedir recursos al Estado. Lo curioso de este caso es que Banca Cívica no pidió ayudas al Fondo de Reestructuración Ordenada Bancaria (FROB) ya que partía de una holgada situación de capital, pero el escenario más adverso de crisis de deuda pública, PIB, morosidad y caída de la vivienda, les ha hundido los ratios. Los 1.429 millones restantes serán más difíciles de conseguir. Fernández Ordóñez aclaró que los tres grupos de cajas deben presentar un plan para explicar cómo van a lograr el dinero. Las tres dijeron que disponen de mecanismos para recapitalizarse por la nueva ley de cajas e incluso que cuentan con plusvalías de fusión en algunos casos. En el mercado no se cree posible que logren inversores privados. Tendrán que pedir más dinero al FROB. Las tres están endeudadas con el fondo, que cobra un interés anual del 8,05%, mucho para una entidad en problemas. La fusión de Caixa Catalunya deberá así al FROB 2.282 millones, lo que le exige pagar 183 millones anuales de intereses; Unnim sumará 650 millones, lo que supone 52 millones anuales de intereses, la misma cantidad que la unión de Caja España y Caja Duero.

238 "CCM y Cajasur han salido adelante con préstamos a fondo perdido de 2.475 millones y de 392 millones respectivamente para la morosidad. Lo habitual en estos casos. El 8% es una soga al cuello", resume un experto del mercado. Los tres grupos han sido de inspiración política (cajas obligatoriamente de la misma región) y han supuesto una gran concentración de riesgos. Estas son las consecuencias. http://www.elpais.com/articulo/economia/Necesitadas/capital/complicaciones/funcionar/elpep ueco/20100725elpepieco_8/Tes

El examen a la banca europea ESPAÑA Cinco cajas, entre las 10 que más perderían de Europa M. J. - Madrid - 25/07/2010 Cinco cajas de ahorros españoles se sitúan entre las 10 entidades que tendrían un mayor desfase entre el margen o beneficio de explotación generado por su negocio y las pérdidas crediticias y por deterioro de activos a que tendrían que hacer frente en un caso de extrema tensión, con una fuerte caída de la actividad económica en España y una crisis de la deuda soberana en el conjunto de Europa. En parte, el mal resultado que las pruebas atribuyen a las entidades españolas se debe a que el banco de España ha usado hipótesis muy severas sobre la evolución del negocio y ha incluido en su escenario las mayores caídas de precios de los activos inmobiliarios de toda Europa. El resultado es que ese desfase, asimilable con ciertas reservas a unas pérdidas antes de impuestos, es de 13.378 millones para Caja Madrid, según los datos del CEBS. La segunda caja española con mayor deterioro es La Caixa, con 8.443 millones, cuarta peor entidad de Europa por este criterio (tendría un deterioro después de impuestos de 4.290 millones con datos más afinados del Banco de España). Las fusiones lideradas por Cajastur, Caixa Catalunya y Caixanova también estarían entre las peores de Europa por este criterio. http://www.elpais.com/articulo/economia/cajas/perderian/Europa/elpepueco/20100725elp epieco_3/Tes

239 ANÁLISIS: El examen a la banca europea ANÁLISIS Cuidado con los aprobados raspados Las entidades con menos del 6,5% de solvencia deben recapitalizarse LUIS GARICANO 25/07/2010 No hay nada más importante ni urgente para la enferma economía española que recuperar el acceso a los mercados internacionales de capitales. Ahora, ni las empresas ni el sector financiero tienen acceso a la financiación exterior. Y sin capital exterior, una economía fuertemente endeudada como la española no puede sobrevivir. Las previsiones de crecimiento para los próximos años, ya en sí preocupantes (el Gobierno prevé desempleo por encima del 16% hasta 2013) no tienen en cuenta esta parálisis crediticia; de continuar, tendrían que ser empeoradas sustancialmente. ¿Por qué la parálisis? El problema es que nadie se fía de los riesgos que pueden estar escondidos en los balances de los bancos y cajas. Esto aumenta sustancialmente el precio de endeudarse y crea un problema de selección adversa: como en la broma de Groucho (que no querría ir a ningún club tan poco selectivo como para admitirle a él) nadie querría prestar a ningún banco o empresa dispuesta a endeudarse en condiciones tan duras. Y de ahí también, la solución propuesta: incrementar la transparencia a través de los tests de estrés, para ayudar al mercado a diferenciar a las entidades buenas de los malos. Así podrá empezar a circular la financiación a precios razonables hacia los buenos. La clave, por tanto, es separar los buenos de los malos, para permitir que los buenos se salven, y luego cerrar o recapitalizar los malos. Los tests de estrés que acaba de pasar el sistema financiero español han conseguido gran parte de este objetivo. Contrariamente a los de otros países de la zona euro los tests han sido serios, la cobertura general, los parámetros duros (el supuesto más negativo prevé que el sistema sufre impagos antes de provisiones del 20% del PIB), y han revelado mucha información. De esta manera, se ha establecido con claridad que no todas las cajas son el problema (ver BBK, con una capitalización elevadísima, del 14%, incluso en el caso más adverso), que los bancos grandes son sólidos, y que el sistema es viable. Al establecer que no todos son iguales, se ha dado al mercado la información necesaria para eliminar el problema de "selección adversa" que provocaba la congelación del mercado. Lo que falla, de momento, es la segunda parte: establecer un camino para las entidades que han resultado ser vulnerables. Tras revelar la información -y establecer la solvencia del corazón del sistema (BBVA, Santander, La Caixa)-, los tests confirman que hay una serie de bancos y cajas descapitalizados y expuestos al desplome inmobiliario. No se trata solo de los cinco suspensos (los que han quedado por debajo del 6% de capital requerido), sino sobre todo de los aprobados raspados (menos del 6,5%), que ha habido varios. Quizás el más significativo sea la fusión liderada por Caja Madrid y Bancaja (con 6,3% en el escenario adverso), pero también están en el grupo el Banco Pastor, CajaSol, Caja3 (Caja Inmaculada, Badajoz y Círculo Católico de Burgos), Guipuzcoano y Pollença. El regulador argumenta que el ejercicio de estrés era tan extremo que no hay que preocuparse. En realidad los tests, tras hacer duros supuestos de impagos, hacen supuestos bastante generosos por el lado de la cobertura y la evolución de los beneficios que permiten tapar los agujeros creados. Es necesario reconocer que, se hagan los cálculos como se hagan, estas entidades son vulnerables y deben ser recapitalizadas. De no hacerlo, se crea el riesgo de que estas entidades se conviertan en "zombis" que en vez de ejercer su papel de circular la financiación a la economía real, la extraen para sus propias necesidades, imposibilitando

240 además el ajuste inmobiliario a base de no vender para no reconocer contablemente las pérdidas. Para recapitalizar estas entidades, la solución preferible pasa por forzarlas a conseguir capital privado adicional. Esto puede suceder sin garantía estatal, como en el reciente caso de la entrada de JC Flowers en Banca Cívica o con garantía parcial sobre parte de las pérdidas, como en el caso de la adquisición de CajaSur por BBK. Se trata en cualquier caso de conseguir sanearlas sin hacer responsables a los contribuyentes de nada más que lo estrictamente necesario de las pérdidas incurridas por sus incompetentes gestores. Las noticias son, en todo caso, buenas. En los últimos dos meses, por fin y después de muchas dilaciones incomprensibles, el Banco de España y el Gobierno han conseguido un notable impulso reformista que empieza a dar sus frutos. Queda terminar de sanear el sistema financiero; dar un empujón final con CiU en esta semana a una reforma laboral que se está quedando descafeinada; y no abandonar (y aquí la responsabilidad clave es del Partido Popular) el anunciado incremento de la edad de jubilación y reforma del sistema de cálculo de las pensiones. España se está alejando del precipicio. Pero si el impulso reformista desaparece, nos enfrentamos a años sin crecimiento y sin empleo. http://www.elpais.com/articulo/economia/Cuidado/aprobados/raspados/elpepieco/201007 25elpepieco_4/Tes

241 EDITORIAL Vuelta a la normalidad Las pruebas de solvencia son la base para que se recuperen el crédito y el interbancario en Europa 24/07/2010 Las pruebas de resistencia (stress tests) de la banca europea, esperadas con gran expectación por los inversores y los Gobiernos, han confirmado la percepción general de que las entidades financieras del área euro tienen un grado de solvencia razonable. Solo siete entidades europeas, entre los que se encuentran CajaSur, cuatro grupos de cajas españolas en proceso de fusión, el nacionalizado Hypo Real Estate alemán y el griego Atebank, han suspendido las pruebas, mientras que los españoles Santander y BBVA se sitúan entre los mejores ratios de capital (10% y 9,3%, respectivamente) de la eurozona. El Banco Central Europeo (BCE), los Gobiernos y la Comisión Europea se apuntan un tanto, puesto que han jugado con éxito la carta de la transparencia como el mejor remedio para combatir los rumores poco fundados sobre la debilidad de la banca europea y, al mismo tiempo, se demuestra que los costosos programas de rescate y recapitalización (236.000 millones en toda Europa) han tenido éxito. El caso de las cajas españolas que no han pasado el examen (el grupo Caixa Catalunya, Caixa Tarragona y Caixa Manresa, el formado por Caja Duero y Caja España, la Banca Cívica, Unimm y CajaSur) tampoco se aparta del guión previsto. Como puede apreciarse, están incursas en procesos de fusión y requerirán en conjunto una recapitalización de poco más de 2.000 millones de euros para cumplir con los requisitos de solvencia en el peor de los escenarios establecidos. En función de los resultados conocidos de los exámenes, está claro que el Fondo de Reestructuración Ordenada Bancaria (FROB), cuya prórroga autorizó ayer Bruselas, está suficientemente dotado para hacer frente a la recapitalización de la banca española. Las pruebas demuestran además la malevolencia de las interpretaciones según las cuales el hecho de que el FROB hubiese aportado apenas 11.000 millones de los 99.000 que entre capital y avales tenía como dotación era prueba inequívoca de que el sistema español requería fortísimas inyecciones de capital que el Gobierno y la propia banca se negaban a reconocer. Pues bien, el Banco de España ha facilitado toda la información necesaria sobre el 95% del sistema financiero español, un esfuerzo de transparencia muy por encima del que han realizado otros países europeos (Francia solo examinó a cuatro bancos). Lo propio ahora es que las entidades suspendidas acuerden con el Banco de España si el nuevo capital que requieren puede ser privado. En apariencia, con las pruebas de resistencia publicadas ayer los inversores y las entidades financieras tienen la información necesaria como para tomar decisiones razonablemente seguras. Difícilmente tendrán los mercados y los propios bancos por otras vías una información tan detallada y exacta como la que se dio a conocer ayer en Londres. Los controles son más duros que los que se aplicaron a la banca estadounidense hace algo más de un año. Los mercados abiertos recibieron ayer con subidas los resultados de las pruebas. Por tanto, en condiciones normales deberían despejar las dudas sobre la solidez financiera europea (y española), tal como ayer sugirió el gobernador, dar por superada la primera fase de la crisis bancaria e iniciar la segunda, que será la recuperación del crédito y la normalización de los préstamos interbancarios, que se habían secado. Ahora bien, los mercados pueden empecinarse en mantener la desconfianza con el argumento de que los datos facilitados son falsos, las estadísticas están trucadas o los requerimientos legales de solvencia de un país son demasiado laxos. La banca española sufre de graves

242 problemas de liquidez en el interbancario por la sencilla razón de que en Europa se calcula que su exposición al hundimiento inmobiliario no se refleja en una tasa de morosidad excesivamente baja. Si esa desconfianza se mantiene, estaríamos ante un caso de mala fe. http://www.elpais.com/articulo/opinion/Vuelta/normalidad/elpepuopi/20100724elpepiopi_1/T es

El examen a la banca europea - El balance general "Ahora queda demostrado que el sistema financiero es sólido" El Banco de España cree que la banca superaría una crisis aunque cuatro grupos de cajas no pasan el examen ÍÑIGO DE BARRÓN - Madrid - 24/07/2010 "Hemos sometido a todo el sistema bancario a unas pruebas de máxima tensión en unos escenarios que son más que improbables por su dureza. El resultado es que la banca española goza de solidez y, a la vez, se justifica el proceso de reestructuración de las cajas", resumió ayer el gobernador del Banco de España, Miguel Ángel Fernández Ordóñez. "Hemos sometido a todo el sistema bancario a unas pruebas de máxima tensión en unos escenarios que son más que improbables por su dureza. El resultado es que la banca española goza de solidez y, a la vez, se justifica el proceso de reestructuración de las cajas", resumió ayer el gobernador del Banco de España, Miguel Ángel Fernández Ordóñez, el resultado de las pruebas de resistencia. Un total de 27 entidades, los ocho bancos cotizados y las 19 cajas de ahorros (además de 64 bancos europeos), fueron sometidas a escenarios de fuerte caída del PIB, aumento del paro y de la morosidad, disminución del 28% en el precio de la vivienda terminada, así como una reducción del precio de la deuda pública. El supervisor insistió en que solo hay un 0,5% de probabilidades de que esto ocurra. "No es ninguna previsión. Es como probar un puente y colocar 60 camiones encima llenos de sacos de arena. No porque se piense que van a pasar, sino para probarlo", dijo gráficamente Fernández Ordóñez. El objetivo es que los inversores conozcan cómo están y cómo podrían quedar las entidades si se hunde la economía. Con esta transparencia se espera que regrese la confianza a los mercados, estos financien a la banca y las entidades concedan créditos "para que se pueda recuperar la economía cuando regrese la demanda solvente", indicó Fernández Ordóñez. El sistema financiero español, en la peor de las hipótesis, acabaría esa crisis con una solvencia del 8,3%, frente al 6% pedido ahora y el 4% exigido legalmente. El Santander ha sido el que mejor nota ha obtenido, seguido del BBVA, entre los grandes. Banca March ha logrado el pódium europeo. Pero no todo han sido buenas noticias. Cuando se baja al detalle, aparecen cuatro grupos de cajas, agrupadas en fusiones tradicionales o fusiones frías, que han quedado por debajo del mínimo exigido por Bruselas. Para aprobar el examen había que sacar un ratio de solvencia o Tier 1 (que refleja el capital y las participaciones preferentes que poseen frente a los riesgos asumidos) del 6% en un escenario de crisis macroeconómica y de deuda pública. Las cajas afectadas son: Diada (Caixa Catalunya, Tarragona y Manresa), que obtuvo un 3,9%; Unnim (Sabadell, Terrassa y Manlleu), con un 4,5%; Espiga (Caja España y Caja Duero), con un 5,6% y Banca Cívica (Caja Navarra, General de Canarias y Municipal de Burgos), un 4,7%.

243 En total suman el 15,6% sobre los activos totales del sistema financiero. Estos cuatro grupos necesitarán 1.835 millones de capital para tener el capital mínimo en esos hipotéticos escenarios negativos. Diada requerirá 1.032 millones; Banca Cívica, 406 millones; Unnim, 270 millones y Espiga, 127 millones. "Es una cantidad ridícula con lo que se ha metido en otros países, como los 260.000 millones que inyectaron a la banca europea para superar la crisis subprime", recordó Ordóñez. Elena Salgado, vicepresidenta y ministra de Economía, también apuntó que es una cantidad muy baja en relación con los recursos del FROB. "Es alrededor del 1% del PIB, una cifra irrelevante", añadió. El gobernador del Banco de España quiso dejar claro que las entidades afectadas no necesitan planes de emergencia. "Los cuatro grupos pueden funcionar perfectamente porque, hoy están en una posición en la que superan la solvencia exigida, que es el 4%. Lo que sucede es que los ministros de Economía de la UE establecieron que si en un escenario de tensión, tenían menos del 6% de capital, lo buscaran en el mercado o lo recibieran del Estado", aclaró el gobernador para tranquilizar a los clientes y evitar su estigmatización. El Banco de España ha establecido que los cuatro grupos deben presentar un plan para captar capital antes de que termine el año. Con excepción de Banca Cívica, parece imposible que encuentren capital privado, por lo que acudirán al Fondo de Reestructuración Ordenada Bancaria (FROB), que ya les ha concedido dinero previamente. Si reciben más recursos, deberán someterse a exigencias de recorte de gastos y reducción de plantilla, una difícil tarea. Banca Cívica, capitaneada por Caja Navarra, anunció ayer que JC Flowers, un inversor de capital riesgo norteamericano, ha firmado un compromiso para invertir 450 millones en deuda convertible en acciones. Si la operación llega a buen puerto, no tendría que pedir recursos al Estado. Además, también queda suspendida la quebrada Cajasur, que se ha incluido en el análisis porque se cerró hace 10 días, antes de que la entidad fuera adjudicada a la BBK. El supervisor considera que la entidad quedará perfectamente capitalizada cuando la absorba la BBK. La entidad vasca tenía, antes de la operación, uno de los mejores ratios de solvencia de Europa, con un 14,1% de Tier 1 en el escenario más adverso. ¿Y, después de este striptease financiero volverá la liquidez? "Los mercados son más inteligentes de lo que a veces creemos", confió Salgado. "No esperamos que este ejercicio de mayor transparencia vaya a ser penalizado. No tenemos nada que esconder", ahondó. El gobernador considera que la tranquilidad no llegará el lunes, pero "los mercados tienen que ir funcionando mejor porque ya se sabe todo". Una de las grandes cuestiones que se debatía en el mercado es si las pruebas de España son homogéneas con las europeas, donde el banco alemán de crédito hipotecario Hypo Real Estate (HRE) y el Banco Agrícola Griego (Atebank), suspendieron la prueba. Ordóñez dejó claro que no son comparables porque los demás sistemas solo han examinado al 50% de los bancos, frente al 95% de España. "¿Quién sabe cómo están otros bancos de Europa que no se han analizado? Si nosotros hubiéramos analizado al 75% del sector, no habría aparecido ningún problema", apuntó el gobernador con toda intención. También dijo que no se puede comparar porque las condiciones impuestas a la banca española son más duras que las soportadas por sus colegas europeos. La banca de continente superó mejor de lo esperado el ejercicio de estrés. Pero las buenas noticias levantaron sospechas entre los analistas. El hecho de que tan solo siete de los 91 bancos examinados suspendieran el examen y de que el conjunto de la banca europea solo necesite una inyección adicional de 3.500 millones, no gustó entre los expertos. El Comité de Supervisores Bancarios Europeos (CEBS, en sus siglas en inglés), se defendió en Londres diciendo que se podrían cuestionar los escenarios, pero no los resultados porque estaban

244 hechos con todo rigor. De los británicos, el peor parado fue Lloyd TSB, con un 9,2% en el peor de los casos. Además de España, la mayor tensión está en Alemania, donde sus bancos han comprado mucha deuda griega y han financiado parte de las hipotecas españolas. Al final aprobaron 13 de los 14 bancos. La excepción fue el Hypo Real Estate, que pasó al sector público después de que el Gobierno lo salvara de la quiebra en otoño de 2008. Otras dos entidades, las más endebles del país, aprobaron por los pelos. El banco estatal Nord LB, con un coeficiente Tier 1 del 6,2%, y el Postbank, con un 6,6%, ambos en el escenario de crisis más extremo. Además de Hypo, en Alemania se sometieron a las pruebas el Deutsche Bank, el Commerzbank, el Postbank, el Dekabank, siete bancos regionales o Landesbanken, el DZ Bank y el WGZ Bank. En Austria, los dos bancos examinados, el Erste Group y el Raiffeisen Zentralbank, aprobaron con holgura. Otro foco estaba en la endeble Grecia. Atebank, controlada por el Estado, suspendió su stress test. Otros cinco bancos helenos sí pasaron el examen. Tras conocerse el resultado, Atebank anunció una ampliación de 250 millones. En Francia los cuatro bancos pasaron bien la prueba, sobre todo BNP Paribas, que tuvo un 9,6%. También los cinco italianos aprobaron y destacó Intesa San Paolo. Si todo ha servido para algo o no, dependerá del comportamiento de los mercados el próximo lunes. http://www.elpais.com/articulo/economia/Ahora/queda/demostrado/sistema/financiero/solido/e lpepieco/20100724elpepieco_1/Tes

El examen a la banca europea - La valoración política Los suspensos solo afectan a las cajas más pequeñas Salgado cree que el peor resultado de la banca española respecto a la europea se debe a la mayor transparencia MANUEL V. GÓMEZ - Madrid - 24/07/2010 El Gobierno está "satisfecho" con el resultado del sistema financiero español en las pruebas de solvencia. Al menos así lo afirmó ayer la vicepresidenta segunda y ministra de Economía, Elena Salgado. Sí, en el peor de los escenarios previstos por los stress test, cinco de los siete bancos europeos que suspenden son españoles. El Gobierno está "satisfecho" con el resultado del sistema financiero español en las pruebas de solvencia. Al menos así lo afirmó ayer la vicepresidenta segunda y ministra de Economía, Elena Salgado. Sí, en el peor de los escenarios previstos por los stress test, cinco de los siete bancos europeos que suspenden son españoles, pero eso se debe al mayor ejercicio de transparencia que ha hecho respecto a los socios europeos. España ha desnudado al 95% de su sistema financiero, ningún país de la Unión Europea lo ha hecho. Ahí está la clave, explicó Salgado, que afirmó que para encontrar a la primera entidad española con deberes, es decir, con necesidad de captar capital, hay que analizar a más del 75% del sistema financiero. Así es. Las ocho mayores entidades españolas (Santander, BBVA, el grupo de Caja Madrid, La Caixa, el Popular, el grupo de Caja Astur, la fusión de cajas gallegas y el Banco de Sabadell), que representan el 76% del sector financiero, aprueban las pruebas de resistencia. El requisito mínimo para el examen era el 50% y a lo más que han llegado otros países es al 65%.

245 La recuperación económica española se enfrentaba ayer a una prueba casi tan decisiva como la anhelada y reclamada reforma laboral. Al fin y al cabo, en un sistema capitalista, la banca es el corazón que bombea sangre, o sea dinero. Y no había faltado quien había sugerido que el infarto del sector financiero español era inminente. Así que el Gobierno había apostado fuerte en la partida. Quería demostrar a los mercados que las entidades no tenían nada que esconder. Y para lograrlo, las pruebas a las que se sometió la banca fueron más exigentes que en el resto de Europa. "Las hipótesis son muy duras", definió Salgado, en la rueda de prensa que convocó por la tarde para valorar los resultados de las pruebas. Entre los supuestos que definían la peor de las situaciones se contempla una caída del PIB del 3% hasta 2011 o una desplome del precio de la vivienda nueva sin acabar del 50%. "Los escenarios son peores porque tenemos un sector inomobiliario mayor. También por los spreads -prima de riesgo-, que son más altos y son más exigentes", justificó. Pero el Gobierno cree que ese panorama está muy lejos. Tanto que es casi imposible que llegue. "Es muy poco probable. Solo hay un 1% de probabilidad de que se produzca", explicó Salgado queriendo descartarlo. La ministra enfatizó que "en el escenario central" de las pruebas de resistencia ninguna entidad española, sea banco o caja, suspendería. Pero es en el peor escenario, el más llamativo, donde aparecen las cuatro entidades (cinco al incluir Cajasur, ya comprada por la caja vizcaína BBK) que tendrían necesidad de captar capital. En total, 1.835 millones, que según Salgado, no tendría ningún impacto sobre la deuda española si estas entidades decidieran acudir a las ayudas públicas. El Fondo de Reordenación Ordenada Bancaria (FROB), de momento, tiene más recursos disponibles y por tanto no sería necesario emitir más títulos de deuda. Con estos resultados sobre la mesa, el Gobierno espera que a partir del lunes los mercados actúen con racionalidad y que sean capaces de separar el grano de la paja, algo que no han sido capaces de hacer hasta ahora. "Los mercados son más inteligentes de lo que a veces creemos", confió la ministra. "No esperamos que este ejercicio de mayor transparencia vaya a ser penalizado. No tenemos nada que esconder", ahondó. Sin decirlo abiertamente, Salgado sugirió que las mejores notas del resto de la banca europea deben mucho a los más de 250.000 millones de euros en ayudas públicas que ha recibido ya de sus Gobiernos. No obstante, descartó que la reestructuración del sector financiero en España llegue tarde. "La crisis financiera quema sus etapas", analizó. Según su tesis las entidades españolas han recurrido a la ayuda pública cuando la tormenta financiera ha acabado trasladándose a la economía real y ha disparado la morosidad. El buen resultado de las pruebas de resistencia, en opinión de Salgado, no debe servir para dejar de lado los cambios en el sistema financiero que hay en marca en todo el mundo. "La reforma del sector sigue siendo necesaria. Es conveniente regular los derivados, una supervisión más estricta y una mejor regulación financiera", zanjó la ministra. http://www.elpais.com/articulo/economia/suspensos/solo/afectan/cajas/pequenas/elpepieco/20 100724elpepieco_2/Tes

246 El examen de la banca europea - Las pruebas españolas Los ocho grupos bancarios superan el peor escenario El Santander es el único que no sufre recorte de solvencia, mientras Pastor y Guipuzcoano aprueban por los pelos MIGUEL ÁNGEL NOCEDA - Madrid - 24/07/2010 El Banco de España ha examinado al 95% del sistema financiero español mientras en el resto de Europa se han quedado en el 50%. Un total de 27 entidades, de las que 8 son bancos y 19 cajas de ahorros, han pasado por la criba de la supervisión, quedando solo fuera las cooperativas de crédito y algunas entidades menores. El Banco de España ha examinado al 95% del sistema financiero español mientras en el resto de Europa se han quedado en el 50%. Un total de 27 entidades, de las que 8 son bancos y 19 cajas de ahorros, han pasado por la criba de la supervisión, quedando solo fuera las cooperativas de crédito y algunas entidades menores. Es decir, tal como subrayaron ayer el gobernador y la vicepresidenta económica, se ha querido ir a la totalidad. La fotografía da idea con toda fidelidad de la situación de la banca española, probablemente por el empeño del presidente del Gobierno, José Luis Rodríguez Zapatero, de compararla con las entidades del resto de Europa y mostrar su fortaleza. El análisis metodológico prueba la respuesta de las entidades ante escenarios macroeconómi- cos adversos, incluyendo una eventual crisis de riesgo soberano. Es decir, el peor de los casos. El examen tiene en cuenta la calidad de los activos, la morosidad y la exposición a sectores con mucho riesgo. Al final, los bancos españoles han salido bien parados. Los ocho grupos analizados han pasado la prueba, en algunos casos con muy buena calificación, superando a los europeos que han pasado la criba. Es el caso de los dos grandes bancos, Santander y BBVA, que solo son superados por el Barclays. El Santander, además, es el único que mantiene aún en ese peor escenario barajado las ratios de solvencia igual que los que tenía a final del pasado ejercicio, mientras el Barclays lo mejora en 70 puntos básicos. No obstante, el Barclays no reparte dividendo. El banco que preside Emilio Botín preservaría una ratio de capital Tier 1 (el capital básico) del 10%, muy por encima del 6% exigido por los reguladores como mínimo para no requerir capital adicional. Esa ratio está entre los más altos de la banca europea y mundial. Además de mantener la solvencia intacta, el Santander obtendría beneficios, generaría capital y continuaría con su actual política de dividendos, lo que implica distribuir en torno al 50% del beneficio ordinario, según explicaron ayer fuentes de la entidad. En una nota de prensa difundida por el banco, Emilio Botín subraya que "el resultado de las pruebas reafirma el éxito del modelo del banco". Botín también destaca la fuerte diversificación geográfica en negocios y clientes, con presencia en una decena de países con cuotas por encima del 10%. La segunda entidad española por tamaño, el BBVA, no le va a zaga con un destacado comportamiento y por las mismas razones esgrimidas. El Tier 1 del banco que preside Francisco González se reduciría únicamente del 9,4% al 9,3%. "Las pruebas confirman la fortaleza del BBVA pese a no haber realizado ninguna ampliación de capital desde el inicio de la crisis", afirmó González.

247 También se mantiene en una situación sobresaliente la Banca March, cuya ratio es la más alta de todas las analizadas, aunque sea un banco de pequeño tamaño. Sufre, no obstante, un recorte, pasando del 19,70% al 19%. Popular y Sabadell, tercero y cuarto en la clasificación, dan un resultado similar y no se puede decir que sea para echar las campanas al vuelo. El banco que preside Ángel Ron reduce la ratio del 9,1% al 7%, mientras el que encabeza Josep Oliu pasa del 9% al 7,2%. Parecidos parámetros arroja Bankinter, que pasa del 7,5% al 6,8% en el peor escenario posible, aunque en este caso muestra que es una de las entidades con menor impacto negativo. Según destaca la entidad que preside Pedro Guerrero, se debe a "la calidad de sus activos, la baja morosidad e ínfima exposición a los sectores con mayores perdidas potenciales", particularidad que hace que las cajas y algunos bancos, como el Popular, sufran mayores mazazos. Los peor parados son Pastor y Guipuzcoano, que aprueban por los pelos, con el 6% y un 6,1%. En el caso del Banco Gallego, además, sufre un recorte brutal que le hace pasar del 10,50% al citado al 6%. Tampoco es pequeño el de la entidad vasca, que tenía un 9,1%. Esta circunstancia obliga a estas dos entidades a abordar procesos de musculación importante para no verse en situaciones límite. http://www.elpais.com/articulo/economia/grupos/bancarios/superan/peor/escenario/elpepieco/ 20100724elpepieco_4/Tes?print=1

El examen de la banca europea - Las entidades españolas que necesitan reforzarse El suspenso no estresa a las cajas catalanas ni castellanas Unnim, Catalunya y Duero-España no se ven en peligro C. DELGADO - Barcelona - 24/07/2010 Las dos grandes fusiones de cajas catalanas, Unnim y el conglomerado Caixa Catalunya, han suspendido las pruebas de estrés bancarias. También la unión castellana de Caja Duero y Caja España. Podría parecer un duro golpe para entidades con tan poco tiempo de vida. Pero los tres grupos se apresuraron a decir que están muy tranquilos. Señalaron la botella medio llena y se agarraron a que lo único que indica la prueba es la remota posibilidad de que necesiten más fondos si el panorama se pone tenebroso. Unos fondos que el FROB proveerá. En el caso de Caixa Catalunya, que sacó la peor nota de todas las entidades estudiadas, hasta felicitó al Comité de Supervisores Bancarios Europeos por la existencia de la prueba que suspenden. En un escenario económico muy adverso, su Tier 1 (un coeficiente que mide la solvencia) se quedaría en el 3,9%. Medio punto por encima de lo permitido por ley, pero lejos del 6% necesario para pasar el examen. Si el escenario muy adverso se hiciera realidad, necesitaría 1.032 millones de refuerzo para aguantar el tirón. “Es un escenario de muy baja probabilidad”, insiste la entidad. “Se han penalizado los activos inmobiliarios. Y puesto que nuestra estrategia ha sido la de adjudicarnos activos en lugar de refinanciar como han hecho otros, el test parece resultar peor. Pero es nuestra estrategia, y nos está dando buenos resultados”, defendió un portavoz.

248 Unnim, que requeriría 270 millones de euros en el peor caso imaginado, también insistió en que su Tier 1 “siempre se mantiene por encima del 4%, el mínimo establecido por el regulador”. Una explicación similar a la que dio Caja Duero-Caja España, al que solo le faltan cuatro décimas para aprobar incluso el peor panorama imaginado en el examen (lo que le llevaría a necesitar 127 millones). En un escenario estable, insistieron, su coeficiente de solvencia estaría incluso por encima del 8%. http://www.elpais.com/articulo/economia/suspenso/estresa/cajas/catalanas/castellanas/elpepiec o/20100724elpepieco_7/Tes/

El examen de la banca europea - El resultado global La banca europea suspendida necesita 3.500 millones de euros Las instituciones europeas defienden el balance de la gran prueba - Londres recibe con escepticismo la nota de las entidades financieras W. OPPENHEIMER / R. M. RITUERTO - Londres / Bruselas - 24/07/2010 La banca europea superó ayer mejor de lo esperado el ejercicio puesto en marcha por las autoridades de la Unión Europea para examinar la fortaleza de su sistema bancario. Pero el hecho de que tan solo siete de los 91 bancos examinados suspendieran el examen fue recibido con escepticismo La banca europea superó ayer mejor de lo esperado el ejercicio puesto en marcha por las autoridades de la Unión Europea para examinar la fortaleza de su sistema bancario. Pero el hecho de que tan solo siete de los 91 bancos examinados suspendieran el examen y de que el conjunto de la banca europea solo necesite una inyección adicional de 3.500 millones de euros en caso de crisis fue recibido con escepticismo en Londres, ciudad en la que fueron presentados los resultados del ejercicio llevado a cabo por el Comité de Supervisores Bancarios Europeos (CEBS, en sus siglas en inglés). La entidad que más dinero necesita es la alemana Hypo Real State, que precisa de una inyección de 1.245 millones. Las cinco suspendidas españolas van de los 1.032 millones para la fusión de cajas catalanas hasta los 127 para la fusión de Caja Duero y España. El banco griego Ate Bank requiere 242 millones. El Financial Times, por ejemplo, considera que se trata de "un resultado que amenaza con socavar la credibilidad de un ejercicio diseñado para restaurar la confianza de los mercados en el sector bancario de la zona euro". El calibre de ese escepticismo se verá el lunes, cuando abran los mercados europeos tras el fin de semana. Los resultados de ese examen teórico fueron defendidos con firmeza por Vítor Constâncio, vicepresidente del Banco Central Europeo, en una rueda de prensa en Londres junto a representantes de la Comisión Europea y del CEBS. "Si se quiere poner en duda la credibilidad de este ejercicio hay que atacar los supuestos y los escenarios que contempla, no los resultados", enfatizó Constâncio. "Quisiera subrayar que las asunciones asumidas en términos de estrés son mucho más severas que las incluidas en el estudio realizado en Estados Unidos", aseguró el presidente del CEBS, Giovanni Carosio. "Los resultados de las pruebas confirman la resistencia generalizada del sistema bancario de la UE a los impactos macroeconómicos negativos y a los choques financieros", señalaron con satisfacción en un comunicado conjunto publicado en Bruselas la

249 Comisión Europea, el Comité de Supervisores Bancarios Europeo y el Banco Central Europeo (BCE). Las tres instituciones celebraron la transparencia del ejercicio y el hecho de que los bancos hagan públicas sus respectivas posiciones de capital y previsiones de pérdidas en un escenario adverso. También valoraron la detallada información ofrecida sobre las exposiciones a la deuda pública, tanto de alcance nacional como local. Comisión Europea, supervisores y BCE, coordinadores del experimento, subrayaron que estaba diseñado para saber "qué pasaría" en las peores circunstancias y que, "por lo tanto, no es probable que tal cuadro se haga realidad". El ejercicio ha consistido en aplicar tres escenarios distintos para medir la capacidad de resistencia de las 91 entidades analizadas. En el escenario más negativo, en el que se contempla un retorno de la recesión y además una crisis de la deuda soberana, los bancos han de acabar el ejercicio con al menos un 6% del llamado capital Tier 1, un indicador que mide el capital garantizado con que cuentan los bancos para afrontar inversiones no fiables, para considerarse a salvo de cualquier problema. Según los resultados presentados ayer, siete de los 91 bancos analizados no alcanzarían ese 6%, de los que cinco son cajas o bancos españoles formados por cajas, además de uno griego (Atebank) y otro alemán (Hypo Real Estate). Para valorar este dato hay que tener en cuenta que España ha querido que casi la totalidad de su sistema financiero se someta al examen, mientras que en el resto de países solo se han incluido las llamadas entidades sistémicas, es decir, aquellas que por su tamaño pueden poner en peligro el sistema si tienen problemas. De los restantes bancos analizados, otros 11 se quedarían entre el 6% y el 6,5%, 19 entre el 6% y el 7% y los 54 restantes estarían por encima del 7%. El banco mejor parado ha sido el húngaro OTP Bank Nyrt (16%) y el peor, el Hypo Real State alemán (1,2%). El resultado agregado del ejercicio revela que en el escenario más extremo la resistencia de los bancos caería de un Tier 1 del 10,3% en el año 2009 al 9,2% en 2011. En términos brutos, eso significa unas pérdidas de hasta 565.900 millones de euros en dos años, de los que 67.200 millones corresponderían al impacto de una crisis de la deuda soberana. Como resultado de ese impacto, los bancos tendrían unas necesidades adicionales de capital de un total de 3.500 millones de euros para reforzar sus fondos Tier 1 y elevarlo al límite considerado saludable del 6%. El informe subraya que hay que tener en cuenta que el actual nivel de solvencia de la banca europea se debe en gran medida a los 169.600 millones de euros con que los Gobiernos han apoyado al sector. http://www.elpais.com/articulo/economia/banca/europea/suspendida/necesita/3500/millones/e uros/elpepieco/20100724elpepieco_9/Tes/

250 El examen de la banca europea - Los criterios aplicados y los resultados España aplica en su examen el mayor ajuste inmobiliario El test contempla caídas del 55% en las oficinas y del 23% en los pisos MIGUEL JIMÉNEZ - Madrid - 24/07/2010 El Banco de España ha sido el supervisor que ha contemplado en las pruebas de resistencia a la banca un ajuste más duro de los precios en el mercado inmobiliario, lo que se ha traducido en una mayor severidad para las entidades examinadas. El Banco de España ha sido el supervisor que ha contemplado en las pruebas de resistencia a la banca un ajuste más duro de los precios en el mercado inmobiliario, lo que se ha traducido en una mayor severidad para las entidades examinadas. El Comité de Supervisores Bancarios Europeos (CEBS) advierte que no hay datos de precios inmobiliarios de referencia que permitan crear un modelo homogéneo, de modo que los escenarios de precios de la vivienda los ha establecido cada país. El resultado es que las diferencias son enormes. Por poner un ejemplo, en el escenario más adverso contemplado, el Banco de Francia prevé una caída de precios de las oficinas del 4,5% en 2010 y de la misma cuantía en 2011, mientras que el Banco de España ha previsto un desplome de los precios del 35% este año y del 30% en 2011, según la información facilitada por el organismo europeo. Obviamente, el impacto que eso tiene en las pruebas de resistencia es enorme. El gobernador del Banco de España puso ayer el acento en la mayor dureza de los supuestos españoles, lo que, unido a que se ha examinado a prácticamente todo el sector financiero, es lo que explica que cinco de las siete entidades que han suspendido el examen sean españolas. Las pruebas de estrés tratan de ver cuál sería la solvencia de las entidades ante escenarios adversos. Como referencia se ha tomado el coeficiente de solvencia Tier 1 o de nivel 1. Ese coeficiente se calcula como la proporción de capital, reservas, beneficios no distribuidos, cuotas participativas (en el caso de las cajas) y participaciones preferentes perpetuas en relación con los activos ponderados por riesgo (principalmente créditos). El nivel que se ha establecido para medir la salud es el 6%. Convencionalmente, los que superan ese nivel aprueban y los que no, necesitan capital adicional para estar preparados para un agravamiento de la crisis. Los escenarios macroeconómicos considerados por las autoridades europeas son dos, uno de referencia y otro adverso. El "escenario tensionado de referencia" toma como referencia las variables macroeconómicas previstas, pero añadiendo supuestos de tensión. Es un ejercicio de resistencia en circunstancias claramente difíciles, pero no extremas. El "escenario tensionado adverso" se traduce en el caso español en una caída del PIB acumulada en 2010-2011 de 2,6 puntos porcentuales, que se añade a la fuerte contracción de la economía española en 2009 (-3,6%). "Esta hipótesis de caída del PIB está fuera de los rangos de predicción actuales de los diferentes organismos nacionales e internacionales y analistas privados", advierte el Banco de España. Aún hay un tercer escenario que añade al segundo una crisis de la deuda, siendo el que se usa para determinar las necesidades de capital adicionales En cuanto al ajuste inmobiliario previsto, se han considerado deterioros hipotéticos de los activos, que son coherentes con caídas del precio desde el máximo del ciclo actual del precio de la vivienda terminada del 28%, de la vivienda en curso del 50% y del suelo del 61%, según explica el Banco de España.

251 Más en concreto, la información facilitada por el CEBS señala que en el escenario de referencia, España prevé una caída de los precios de la vivienda del 3,8% en 2010 y del 5,2% en 2011, que en el escenario de tensión se convierten en descensos del 8,8% en 2010 y del 15,2% en 2011, es decir, una caída acumulada del 23% en dos años. En cuanto a la caída de los precios de las oficinas, se prevé un descenso acumulado del 55% en dos años. Esos supuestos españoles contrastan con los que han asumido otros supervisores. Alemania, Holanda o Reino Unido prevén en el peor de los casos caídas de precios del 10% anual tanto en oficinas como en vivienda y Francia, solo del 4,5% al año. Italia es aún más conservadora y prevé que los precios apenas caigan en el escenario más adverso (1,6% en 2010 y 2% en 2011), sin apenas diferencia con el escenario base. En Grecia, un país con una crisis mucho más grave que la española, las caídas de precio previstas tanto para los pisos como para las oficinas son de menos del 7% en dos años, frente al 55% español de las oficinas y el 23% de las viviendas. Por no hablar de Austria, que tanto si las cosas van según lo previsto como si se da el escenario más adverso, toman para sus supuestos una subida de las oficinas y de los pisos del 2% en 2010 y del 2,7% en 2011. http://www.elpais.com/articulo/economia/Espana/aplica/examen/mayor/ajuste/inmobiliario/elp epieco/20100724elpepieco_10/Tes/

252 07/23/2010 06:25 PM Stress Test One German Bank and Six Others Across Europe Fail For the most part, German banks fared well in the results of a Europe-wide banking stress test published on Friday. Munich's Hypo Real Estate failed the test and two other banks -- Postbank, one of the country's largest consumer banks, and state investment bank Nord LB in Hamburg -- barely made the grade. In total, seven banks across Europe failed. The German banking system proved to be robust in a test of Europe's most important banks, the results of which were released on Friday evening. Thirteen out of 14 banks in Germany passed in each of the scenarios they were tested under. Even under scenarios reflecting extreme upheavals in financial markets and the economy, none of those 13 banks would slide below the 6 percent capital ratio used as a benchmark in the test. "German banks prove to be robust and resilient," Germany's central bank, the Bundesbank, said in a statement early Friday evening. The Bundebank said the banks "cope very well" with one of the most important crisis scenarios tested. The only bank with an insufficient core capital ratio, the key measure used in the tests, was Hypo Real Estate, which it showed would, in an extreme event, slide to 4.7 percent, well below the limit set by banking regulators. The bank teetered on the verge of bankruptcy in the autumn of 2008 as a result of risky speculative investments and had to be bailed out and nationalized by the government in Berlin. The bank is currently undergoing a massive restructuring that is being guided by its sole owner, the government's Federal Agency for Financial Market Stabilization (SoFFin). It had been widely expected that the bank would fail the test. Officials at ailing HRE said in a statement on Friday that the bank would need additional capital as a result of its poor showing in the stress test. The company said it would need €10 billion, but that the first 7.87 billion in aid had already been approved. If that money had been on the banks books at the time the stress test was taken, it said it would have had a sufficient core capital ratio to pass the test under each scenario. German Finance Minister Wolfgang Schäuble said he was pleased with the results of the stress tests, despite the fact that HRE was one of only a handful of banks across Europe that failed the test. He noted that HRE's core capital ratio of 4.7 percent in the most difficult scenario tested still fulfiled the international limit of 4 percent for banks. "It is a positive signal that, without exception, all participating German banks met the supervisory demands -- even in the unlikely event of a serious economic collapse," Schäuble said. Poor Marks for Postbank and Nord LB Although they managed to pass the test, two other banks performed poorly. State-government owned Nord LB in Hamburg would slide to 6.2 percent under a "additional sovereign shock scenario," barely above the minimum level. Partly government-owned Postbank would have a Tier 1 capital ratio of 6.6 percent under that scenario. "If a bank is close to the 6 percent limit," a high-ranking investment banker told the Süddeutsche Zeitung on Wednesday, "it will be perceived as a failure in the test."

253 Postbank officials, however, reacted positively to the tests, saying they have "proven that a business model that is aimed at private customers is robust enough to hold its ground under stronger burdens," CEO Stefan Jütte said in a statement. State-owned West LB would be at 7.1 percent; and another powerful Landesbank, Helaba, would be at 7.3 percent -- a slightly safer level. All other German banks covered in the stress test would have core capital ratios of over 8 percent, even in the most extreme scenario tested. The stress tests are intended to test banks in Europe for their resilience to further crises. A total of 91 European banks were included in the test, representing 65 percent of the banking sector in terms of total assets. Fourteen of the banks probed were German. The European banking regulators tested to see how banks would respond if Europe fell into a recession for two years and stock markets fell by 20 percent, the Committee of European Banking Supervisors (CEBS), which carried out the tests, stated on Friday. It said banks were considered to have passed the stress test if their core capital quota did not fall beneath 6 percent in any of the scenarios tested. CEBS had been given a mandate to conduct the EU- wide stress test by the finance ministers of member states, the EUropean Central Bank, the European Commmission and EU national supervisory authorities. Spanish Central Bank Defends Madrid's Financial System The economic developments used in the test scenarios were hypothetical and not based on real forecasts of the future capital needs of the banks. In addition to Germany's HRE, six other banks across Europe failed the stress tests, including five in Spain -- Espiga, Diada, Banca Civica, Cajasur and Unnim -- as well as Greece's ATEbank. Officials at the country's central bank in Madrid said that four of the five banks would need an estimated €1.835 billion in fresh capital infusions. In Spain, 27 banks took part in the test -- far more than any other country, and the head of the country's Banco de España central bank, Miguel Angel Fernández Ordóñez, described the country's banking system as "solid." "Under normal and predictable conditions, the Spanish financial system it totally solid," he said. In a statement, CEBS said that "for the institutions that failed to meet the threshold for this stress test exercise, the competent national authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalization." One of the main reasons German banks performed so robustly is that they have already increased their core capital ratios. During the past two years, they have undertaken considerable efforts to clean up their balance sheets and they have also received fresh infusions of capital from their owners or government institutions. At the start of 2008, the core capital ratio for the entire German banking system was 9 percent to a current level of 10.8 percent. Were Tests Rigorous Enough? One scenario used in the stress test was a drop in the value of European government bonds -- massive amounts of these bonds are on the balance sheets of banks across the continent. According to CEBS, the auditors assumed a 23.1 percent drop in troubled Greek bonds relative to their levels at the end of 2009. Five-year German government bonds, on the other hand, dropped just 4 percent in the scenario. CEBS said the writedowns, only done on paper, were based on the securities that are already listed in the banks' account books in which all securities that are meant for sale must be listed

254 at their market values. But most government bonds are held in the so-called bank book, meaning they are not intended for sale but will be kept until they mature. Bonds held in the bank book were not included in the test. Crucially, CEBS also did not include the possibility that an EU member state would go bankrupt and be unable to pay interest on its bonds, a scenario that nearly happened in Greece this year. Those key exclusions in the test created doubts on financial markets about the validity of the stress test. A number of banking experts don't believe the tests' criteria was rigorous enough. Wolfgang Gerke, a banking specialist at the state-government sponsored Bavarian Financial Center in Munich, told public broadcaster ARD he was concerned "that what is being called a stress test here doesn't even simulate a real stress scenario." The results of the tests were first released after European markets had closed on Friday, but it no impact on Wall Street. Some had feared the release of the stress tests could create nervousness on the West's biggest financial market, but those fears failed to materialize on Friday. dsl -- with wires

URL: • http://www.spiegel.de/international/business/0,1518,708221,00.html RELATED SPIEGEL ONLINE LINKS: • Waiting for D-Day: Europe's Financial Giants Nervous Ahead of Stress Test Release (07/22/2010) http://www.spiegel.de/international/business/0,1518,707957,00.html • Too Weak?: Concerns Grow over Rigorousness of EU Stress Tests (07/21/2010) http://www.spiegel.de/international/business/0,1518,707746,00.html

255 COMPANIES Seven banks fail EU stress tests By Patrick Jenkins, Banking Editor Published: July 23 2010 17:46 | Last updated: July 23 2010 17:46 Only seven out of 91 European banks failed a long-awaited stress test, regulators announced on Friday night, a result that risks undermining the credibility of an exercise designed to restore the market’s confidence in the eurozone banking sector. Five of the seven were local Spanish savings banks, or cajas, sparking nervousness in Spain that the pan-European exercise that they had campaigned hard for might backfire. The Bank of Spain was last night discussing what kind of emergency liquidity measures could be put in place to reassure caja customers and see of the threat of a run on account withdrawals. Overall, the Committee of European Banking Supervisors said there was a capital shortfall of €3.5bn at the seven banks that failed the test. Germany’s Hypo Real Estate and Greece’s Atebank were the only non-Spanish institutions to fail. A ragbag of some of Europe’s most-stretched banks announced a combined €1.3bn of capital raisings on Friday, just hours before regulators divulged the results of the test, although two of them – National Bank of Greece and Slovenia’s NLB – both passed the test. The third, Spain’s Banca Civica, secured €450m of convertible bond finance from JC Flowers, the US buy-out firm that has a record of investing in troubled banks. http://www.ft.com/cms/s/0/c14b9464-9678-11df-9caa-00144feab49a.html EU banks seek funds ahead of stress tests By Kerin Hope in Athens and Chris Bryant in Vienna Published: July 23 2010 15:17 | Last updated: July 23 2010 15:17 Three European banks have revealed capital-raising plans as they sought to reassure markets hours before the results of stress tests on the financial health of 91 of the region’s lenders were due to be made public National Bank of Greece, Greece’s biggest bank, on Friday announced that it had strengthened its capital base by €450m ($579m) through a private placement of a lower tier two note, while Slovenia’s NLB confirmed that it would seek to raise €400m via a rights issue. In Spain, Banca Civica, which was formed from the merger of three smaller savings cajas, said on Friday it planned to place €450m in convertible bonds. The lender said it had signed an agreement with JC Flowers, the US private equity group, which will subscribe to the full amount of the issue. European banks were mostly lower ahead of the results of the tests, expected after the market closes on Friday. HSBC was down 2.1 per cent, Standard Chartered was 2 per cent weaker and Barclays was 1.8 per cent lower in London. Deutsche Bank was 1.2 per cent lower in Frankfurt, while BNP Paribas and Crédit Agricole, the French banks, were also lower. Santander and BBVA, Spain’s

256 largest banks, also fell. Unicredit, Europe’s third-largest bank by market value, fell more than 1 per cent. On the currency exchanges, the euro slumped against the dollar after a draft document said the 91 banks being stress-tested were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity. The announcement by National Bank of Greece followed last-minute revisions by Athens banks on Wednesday after the criteria for Greece on bond portfolios and non-performing loans were unexpectedly tightened. Analysts said concern was mounting that several of the six Greek banks included would fail the stress tests under the revised criteria. If a Greek bank fails the test, it would be able to seek a capital injection from a €10bn financial stability fund set up this month under the terms of Greece’s €110bn bail-out by the European Union and International Monetary Fund. NBG said its tier two note would be issued on August 3 by a UK-based subsidiary. Last week the bank denied Greek media reports that it was planning a capital increase. The issue would strengthen NBG’s total capital ratio by 66 basis points under Greek central bank regulations in tier two securities. Greek banks have transferred the bulk of their bondholdings, estimated at about €45bn, from trading to hold-to-maturity portfolios. With estimated bondholdings of about €22bn, NBG has the largest portfolio of sovereign debt of any Greek bank. Banca Civica’s bond deal with JC Flowers carries an initial interest rate of 7.5 per cent. Banca Civica said that was 25 basis points cheaper than accessing funds from the government’s bank restructuring fund, or FROB. The deal follows concerns in Spain that several of the country’s 18 savings banks would fail the stress tests and would need more capital. This month Madrid decreed new rules allowing unlisted regional savings banks, or cajas, to issue a form of share, including voting rights and making it easier for them to issue debt. In Slovenia, NLB, with a tier one capital ratio of 7.2 per cent, is widely expected to underperform in the stress tests compared with its peer group. NLB has for months made no secret of its desire to raise capital. If the new plan fails, the bank said it would adjust its operations to its present capital capacities, acknowledging that its balance sheet used capital instruments that were “essentially debt instruments and so far still included in equity, but will fall due in the following years”. The group made a €34.6m loss in the first half of this year because of large provisioning. Switzerland’s regulators were also preparing to publish the results of their banking stress tests on Friday, an exercise the country’s bankers said was “twice as tough” on Credit Suisse and UBS as the EU stress tests. http://www.ft.com/cms/s/0/85b1b2be-9658-11df-96a2-00144feab49a.html

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ft.com/alphaville All times are London time The Stress Test Guide Posted by Tracy Alloway on Jul 23 08:15. Stress test Friday is upon us. At 5pm London time/6pm Central European time, the Committee of European Banking Supervisors is scheduled to publish an aggregate summary of the results of the European bank tests. From then on, individual results will be published on an ad hoc basis by the banks or their national regulators. At around 5.30pm the CEBS plans to publish all the individual results on its website. FT Alphaville will be holding an extra-special stressed-out session of Markets Live from just before 5pm London time (12 noon NYC) onwards, which will see the fabulous and predictively-gifted Paul Murphy handle market and analyst reaction to results. He’ll be joined by whichever unfortunate London-based FT AV reporter chooses to stay past 5pm on a Friday to cover the results. In the meantime though — here’s a handy Q&A courtesy of Goldman’s Nick Kojucharov. To, you know, remind us all of what it is exactly that we’re waiting for. On this eve of the eagerly-awaited European bank stress tests, details about the underlying assumptions and scenarios used are still hard to come by, which is somewhat ironic given that that a core aim of the exercise was to bring clarity to the cloud of uncertainty that currently prevails, and to promote transparency in the banking system. To bring our readers up to speed on the little information that is available, we have compiled a brief Q&A guide to what we think are the key issues. 1. Why are banks being stress tested? Over the past few months, European banks have seen sharp rises in their funding costs and a significant sell of their equity. Uncertainty about the capital positions of these banks has certainly been a driver of this negative market reaction, but, as we discussed in detail in last week’s European Weekly Analyst 10/26, the close correlation between bank CDS and sovereign CDS in recent months (Chart 1) suggests that concerns about the sovereign debt situation have also contributed significantly. The relative scarcity of information about all these risks and exposures has engendered a lack of trust within the system, and polluted investors ability to distinguish the good banks from the bad ones. The stress tests are an active effort by the authorities to address this prevailing uncertainty and distrust, and are partly guided by the belief that analogous tests in the US a year ago were a catalyst for the improvement in public sentiment. Although officially the aim is to “assess bank’s ability to absorb further credit and market shocks” and to gauge “their dependence on public support measures,” we think the real power of the tests is the increased clarity and transparency that they will bring. 2. Who is conducting the tests? The Committee of European Banking Supervisors (CEBS) and the national banking authorities are taking the lead in coordinating the design and implementation of the test, in cooperation with the ECB. In line with its mandate, the CEBS regularly monitors and tests

258 the vulnerabilities of the banking sector, but this is the first time the results of these analyses will be released to the public on such a wide scale. 3. How many banks are involved and in which countries? The test will cover 91 banks in 20 countries, which collectively account for 65% of total assets in the EU banking system. This sample is noteworthy in that it is designed to cover at least 50% of each national banking sector, and to incorporate a significant share of public banks (most notably the German Landesbanks and Spanish Cajas) for which we have the least financial clarity. 4. When will the results be released? The CEBS will publish the results tomorrow on both an aggregated and bank-by-bank basis starting at 18:00 CEST. A press conference will follow an hour later. 5. What are the “stresses” applied and are they harsh enough? The resilience of banks will be tested under two macroeconomic scenarios –baseline and adverse – each of which assumes a predetermined path for key economic and financial variables. The CEBS has not revealed the full range of variables, but GDP, unemployment, inflation, and interest rates are the ones explicitly mentioned (presumably house prices will also play an integral role). Details about the magnitudes of the various parameters and their differences between the two scenarios are also sparse, but we do know two tidbits: •* The baseline GDP path for each country will be the European Commission’s latest economic forecast for 2010 and 2011 (Table 1). The adverse scenario will then assume a -3% growth deviation from this baseline for the EU as a whole, but we don’t know how this 3% shock will be distributed among the member states. •* To simulate an increase in sovereign risk, the test will (if we understand it correctly) mark down sovereign securities to prices observed at the trough of the selloff in May of this year. We think the GDP shock used in the adverse scenario is sufficiently negative to generate significant hits to banks’ loan books and other portfolio holdings, and is actually even more severe than the assumption used for the US bank stress tests in 2009. The shock to sovereign securities is somewhat limited in the sense that it stress tests only for trading (i.e. mark-tomarket) hits and not for losses to securities which banks may have in their hold-to-maturity portfolios. But given that the focus of the exercise is on regulatory capital, and gains and losses on the hold-to-maturity books are generally not counted as part of this capital, the design of the shock is reasonable. 6. Are losses to banks sovereign securities the only market shock considered? No, but it is the only shock for which we have any logistical details, even though it is probably the least important. Indeed, sovereign securities account for only about 5% of total assets on Euro-zone bank balance sheets, while the bulk are in the form of loans (57%), corporate securities (13%), and other assets (25%). In this sense, although sovereign debt exposure will be an important determinant of banks’ vulnerability to adverse shocks, we think their ability to pass the stress tests will primarily be a function of their resilience to credit hits on their loan portfolios. For a 3% drop in GDP growth, our best estimate is that resulting credit losses would amount to 1.5% of loans on aggregate EU balance sheets, or 0.7% of total assets (see European Weekly Analyst 10/26). 7. What benchmarks will be used to determine who “passes”?

259 Banks generally carry protection against credit and trading losses in the form of credit and capital buffers. The former refers to the retained earnings and reserves that banks have over and above what they have already provisioned for expected losses, while the latter is defined as the stock of capital that banks hold in excess of the minimum legal requirement. As far as we know, the CEBS and other parties conducting the stress test have not set a credit buffer threshold under which banks will be deemed to be “at risk.” The main test criterion therefore appears to be a capital buffer, and according to the FT and other sources, the minimum tier 1 capital ratio used to assess this buffer will be 6%. Banks that fall short of this ratio will have raise additional capital, although there is no deadline specified at this point. 8. Isn’t this benchmark capital ratio too low? It is difficult to determine an “appropriate” threshold ratio – i.e. one that does not overstate the buffer of banks who are actually undercapitalized, but is at the same not too strict so as to force too many banks to go through the costly process raising new capital. That said, in the context of the European banking system, we do feel a 6% threshold ratio is a bit on the low end, and our bank analysts estimate that, at this ratio, very few banks will fail the stress test, and will, on average, be able to sustain a cumulative loss 10.2% on their loans (4.7% of total assets). 9. How should the results be interpreted? If a bank passes, does it mean it is solvent? Not necessarily. Since the passing rate of banks will be a function of performance criteria and assumptions used in the exercise, banks which are deemed financially sound under these parameters may obviously fail under alternative specifications. 10. So does that mean that even “successful” results will not restore some order in financial markets? There is obviously the risk that if too many banks pass and do so with a comfortable margin, the test may be judged as too easy to have actually been informative about the strength of the banking system, and markets may not draw any new comfort or optimism from the exercise. But if the test assessment criteria turn out to be objectively strict and the simulated shocks sufficiently “stressful”, then there may certainly be due cause for believing that the banking system is in better shape than most analysts believe. In any case, we think the main value of these stress tests in the first place is not the ultimate pass/fail marks assigned by the CEBS, but rather the clarity gained from having detailed and consistent information (capital positions, loss estimates) about the banks under consideration (especially the less transparent public banks). Such information should allow investors and market participants to better distinguish between banks, and, at the minimum, identify those which are at the extremes of the risk spectrum. This ability to separate the clearly good from the clearly bad will be important in mitigating problems of adverse selection, and thus keep risk premia and funding costs rise for the system as a whole from rising. 11. Do we have any indication of the results so far? Although they will not be officially confirmed until tomorrow, recent comments by various European officials and press agencies suggest that the overwhelming majority of tested banks passed, and that the required capital raising will be limited. Spanish Minister of Finance Salgado, for example, announced on Tuesday that of the 8 private banks and 18 cajas tested, none failed, and that the Spanish banking will therefore not require additional capital.” This statement did not seem to jive with various outside estimates that anticipated

260 capital raising in the range of €10-50bn (the IMF assumed €22bn in its worst-case scenario), but the Spanish newspaper El Economista reported today that the discrepancy seems to come from the fact that the Bank of Spain has allowed banks to count funding from its FROB facility as tier 1 capital.4 In any case, the balance of news is still consistent with better-than-expected stress test results, and so far we have only heard of two banks as being reported to have failed – the German bank HRE, and the Slovenian bank NLB. Bring it on! The incredible restructured stress test Posted by Joseph Cotterill on Jul 22 17:22. Analysts are down to their last gasps of stress-test commentary before we finally get the official results on Friday. Credit Suisse had a useful contribution on Thursday, tackling the queasy ‘everyone’s a winner!’ hints that politicians have been dropping. Basically — we should hope so, given the bailouts already in the system. Here’s a helpful Credit Suisse summary of said bailouts:

■ The Greek banks have raised €9.4bn via government injection, convertibles and rights issues in the last 18 months or so.

■ Irish banks are likely to pass the stress test because the stress test is likely to take into account the capital raising planned/completed (€2.9bn for Bank of Ireland and €7.4bn for AIB…)

■ The Spanish government has indicated that the financial aid to the Spanish banking industry won’t exceed €22bn, but already €12bn has been committed and funded by the FROB. This €12bn should help some of the players avoid failing the stress test.

■ Concerning the Spanish Cajas the stress results will be released at the group level after (and not before) the recently announced mergers including BBK and Cajasur. For example, when talking about Cajamadrid (future name of merged group not yet decided) the results will reflect the combined solvency position of the seven institutions that form the new group (Cajamadrid, Bancaja and five others). The solvency position of the institutions will already include the €5bn capital injections committed by the FROB. It is conceivable that some of these entities may have failed the stress test if it had been conducted pre-merger. Finally the mergers are a way to transfer capital from the stronger to the weaker players, thus also contributing to supporting entities which might otherwise have failed.

■ HSH Nordbank has a “risk shield”, guaranteeing losses up to €10bn on a €172bn portfolio of its assets, subject to a €3.2bn first loss tranche which has partly been consumed. WestLB has a similar deal for an amount of €5bn.

■ Hypo Real Estate is in the process of transferring up to €210bn of its assets into a “bad bank”. They would likely be deemed as failing pre transfer but passing the test post the transfer, Without listing exhaustively all the schemes it becomes clear that already €50bn+ of funds has been provided to a number of institutions that would arguably otherwise have failed.

261 Plus a good €220bn of capital-raising by European banks since the US stress tests back in May 2009, according to Credit Suisse’s estimates. So everyone can be a winner and retain credibility, since banks were made to get plastic surgery before the stress-testers smashed their faces in. Well-played, European regulators. Well-played. Meanwhile, Unicredit’s Marco Annunziata is less enthusiastic, starting with this ironic observation (emphasis ours): Perhaps never before has such a major transparency effort been prepared and launched with such secrecy. With less than twenty-four hours to go before the publication of the stress tests results, we know very little about the assumptions and methodology. Even worse, in the last few days there have been concerns that the results might not be easily comparable across countries, partly because of heterogeneous assumptions on government bonds—the very concern that forced the publication of the stress tests in the first place. As the whole purpose of the exercise is to increase transparency and bolster confidence, we have definitely started on the wrong foot. The only thing that has been strengthened so far is the impression that the Eurozone is plagued by a lack of coordination that risks undermining even the best intentions, and that national interests continue to trump the common good. The silver lining however is that this should have served as pragmatic expectation management: very few investors now expect the European stress tests to provide a silver bullet or to even approximate the positive impact that the US stress tests had a year ago. The scope for disappointment should therefore have been reduced. Realistically, it will take some time for the market to absorb and process the information, given that we will have one release by the Committee of European Banking Supervisors (CEBS) followed by individual national releases. Depending on the extent (if any) to which assumptions and methodologies differ across countries, and on the extent to which the level of details released differs across countries, it might require quite a bit of work to figure out the implications for the different banking systems and the Eurozone financial sector as a whole… Oh, we can’t take much more of this. Stress-test rumours and reality Posted by Gwen Robinson on Jul 22 09:30. We’re sure things are very – err, stressful right now at the London headquarters of the Committee for European Banking Supervisors, ahead of the Friday publication of stress test results for 91 financial institutions across Europe. Ahead of “S Day”, leaks and rumours abound, not least that the test results could include more information than earlier thought. As Bloomberg reports on Thursday, the European banks may divulge breakdowns of their sovereign-debt holdings in their stress-test results, as well as other information demanded by regulators in their assessment of how the banks might fare under bouts of renewed economic weakness and bankruptcies in the household, corporate and sovereign sectors. Right now, no one has a clear idea of the extent and composition of these sovereign bond holdings, what potential losses the banks might have to absorb on those holdings and, as

262 CNBC notes on Thursday, what discounts will be applied to those debts, which markets have already deeply discounted. Citing a confidential CEBS draft template (known as the “template for disclosure of sovereign exposures”), Bloomberg says that European regulators have asked the banks to publish a list of each lender’s gross and net exposure to central and local governments in 30 countries in the region, including Greece, Spain, Ireland, Italy and Portugal. The banks are also being asked to provide details of whether they booked their sovereign-debt holdings in the banking or trading book, according to the template, which Bloomberg says will show debt holdings for the 27 EU members as well as Liechtenstein, Norway and Iceland. Extra data aside, big questions remain, as the FT noted on Thursday, about how rigorous the tests will be, particularly regarding European banks’ exposure to Greek, Spanish and other eurozone sovereign debt. Such scepticism – and suspicion that the stress tests are being engineered to produce a favourable outcome – will no doubt be fuelled on Thursday by a report in Le Monde that the four major French banks subjected to the tests (BNP Paribas, Société générale, Crédit Agricole and BPCE) as well as Dexia have all passed with flying colours. And now, as FT Alphaville noted a bit earlier, CNBC is reporting on Thursday that EU regulators are likely to release the results earlier than planned, which would mean during European trading hours. European markets will be closed when the CEBS releases results on Friday, according to the last published schedule. That, we noted, would leave just the stress- test reaction to the US and FX markets. Meanwhile, the IMF is adding to the regulators’ “stress-test stress”, urging Europe to ensure its stress tests are transparent to guarantee their credibility, as the FT reports on Thursday. Ultimately, however, Europe may already have passed its biggest stress test, notes Bloomberg in a separate report on Thursday: The euro has rallied 8 percent from a four-year low last month. Greece, Spain and Portugal have managed to sell 50 billion euros ($64 billion) of debt since May 10 when the need to save the single currency forced finance ministers to create a nearly $1 trillion rescue fund and European Central Bank President Jean-Claude Trichet to begin buying bonds. It continues: The extra costs investors demand to buy Spanish and Portuguese bonds instead of comparable German securities declined after debt sales this week and those spreads have narrowed 24 percent and 19 percent respectively from euro-era highs in May. The cost of insuring against sovereign default has also slid and the Frankfurt-based ECB last week bought the lowest amount of bonds since its asset-purchase program began. “The recent evolutions on the markets show we are in the process of winning back the confidence that we’ve lost, but the path will be long,” German Finance Minister Wolfgang Schaeuble said yesterday in Paris. “To advance on this path and to avoid a repeat of this sort of crisis, we cannot sit on our laurels.” Still, as Marco Annunziata, chief economist at UniCredit in London warned in the report, the stress tests are a “crucial reality check”. He concludes: If they prompt a negative market reaction, the ECB may face greater demand for liquidity from banks and have to extend the

263 timeframe it lends unlimited amounts of cash to six or even 12 months, potentially delaying interest rate increases. Stressful for the ECB, too, then. http://ftalphaville.ft.com/blog/2010/07/22/294396/stress-test-rumours-and-reality/

264

Merkel pide a Europa un esfuerzo para ganar competitividad

La canciller alemana elogia el recorte del gasto y la reforma laboral de España

JUAN GÓMEZ - Berlín - 22/07/2010 La canciller de Alemania, Angela Merkel, defendió ayer las políticas de austeridad presupuestaria en la Unión Europea, que a su juicio se arriesga a quedar relegada por sus competidores internacionales. La mandataria democristiana, que acaba de regresar de un viaje por Rusia, China y Oriente Próximo, aseguró que Europa sufre de "debilidades significativas a ojos del mundo". La canciller de Alemania, Angela Merkel, defendió ayer las políticas de austeridad presupuestaria en la Unión Europea, que a su juicio se arriesga a quedar relegada por sus competidores internacionales. La mandataria democristiana, que acaba de regresar de un viaje por Rusia, China y Oriente Próximo, aseguró que Europa sufre de "debilidades significativas a ojos del mundo". "Tenemos que tener cuidado. Desde fuera se nos ve como un continente viejo y con muchas dificultades para la innovación", afirmó. Cristalizaron estas debilidades durante la reciente crisis del euro y demostraron el fracaso de las estrategias -la llamada Agenda de Lisboa- que aspiraban a hacer de Europa "el continente más competitivo del mundo". Hoy "es fácil darse cuenta de que no lo somos". Merkel destacó la necesidad de "no dormirse" y recordó que, cuando se desencadenaron la crisis griega y la del euro, "las debilidades objetivas estaban ahí", así que "no puede culparse solo a los especuladores". La crisis económica "volvió a barajar las cartas" y reveló quién tenía las peores manos. Como método para combatirla, la canciller puso como ejemplo "el enorme esfuerzo político" español, que no se limita a reducir el déficit, sino que "emprendió la necesaria reforma de un mercado laboral que blindaba puestos de trabajo mientras el paro juvenil ascendía al 40%". Con su rueda de prensa de ayer, Merkel cumplió su costumbre anual de despedirse de los corresponsales en Berlín con una masiva comparecencia que concede antes de marcharse de vacaciones. Ofreciendo su mejor cara, Merkel empezó ayer su encuentro con la prensa subrayando el "pequeño milagro" del mercado de trabajo alemán. Comparó la cuota de paro del 7,5% con "otras partes de la Unión Europea" y celebró que la economía alemana se "mostrara más robusta de lo esperado" durante la crisis. El desempleo afecta a 3.153.000 personas en Alemania y podría caer en otoño por debajo de los tres millones. No obstante, Merkel advirtió de que el "cambio demográfico" y el consiguiente envejecimiento de la población presentan otros retos para el país. La canciller no ve margen económico para posibles recortes fiscales. De modo que la economía permite a Merkel despedir el curso político con una de cal y otra de arena. Otra cosa es su Gobierno. Democristianos y liberales ganaron las elecciones de septiembre prometiendo que bajarían los impuestos. El fracaso de estas promesas explica en parte la erosión del Gobierno y, en particular, la del socio liberal FDP. Su intención de voto se ha reducido a un tercio del 15% que obtuvieron en las generales. En solo nueve meses, el tripartito entre la Unión Demócrata Cristiana de Merkel, su partido hermano bávaro CSU y el FDP se ha hundido en una sima demoscópica. Pero a la canciller, que cumplió 56 años hace

265 unos días, no se le torció la sonrisa cuando le preguntaron si no empieza a hartarse de la alta política tras 20 años de ejercicio. Si bien dijo alegrarse "siempre que se aproximan las vacaciones", Merkel aseguró que su trabajo le "divierte" y pronosticó que "volverán a verme aquí" tras la pausa veraniega. Con su bléiser blanco y su excelente humor, la canciller parecía levitar sobre sus graves problemas políticos. Que se resumen en la última encuesta del semanario Stern, publicada unas horas antes de la rueda de prensa y que da a CDU/CSU y FDP una intención de voto del 34%. Los democristianos se quedan en el 30% y los liberales ni siquiera alcanzarían el 5% necesario para acceder al Parlamento federal (Bundestag). Es el peor resultado desde que empezaron a publicarse estas encuestas, allá por 1986. Una coalición de centro-izquierda entre socialdemócratas (SPD) y Los Verdes obtendría, según la encuesta, la mayoría absoluta. Otros sondeos dan cifras parecidas. El asueto veraniego puede servirle a la canciller para preparar un otoño previsiblemente aciago. Ella misma disponía ayer a los ciudadanos para unos meses de duras negociaciones, tanto en el seno de la coalición como por las tensiones financieras entre los Ayuntamientos, los länder y el Gobierno central. Además de los problemas derivados del ajuste presupuestario emprendido, el Gobierno encara la reforma de las Fuerzas Armadas (Bundeswehr), la polémica y compleja reestructuración de la Seguridad Social, la impopular prolongación de la vida útil de las centrales nucleares y la disputa internacional por la introducción de tasas bancarias y del impuesto a las transacciones económicas. Una agenda difícil que podría agravarse si volviera a colear la crisis del euro. Merkel destacaba ayer que su Gobierno "se ganó el reconocimiento internacional con su actuación" en la crisis. De ser así, este no se ha extendido entre sus votantes. Un mal año - Oleada de dimisiones. Desde las elecciones de 2009, de las que surgió la coalición con los liberales, el partido de Merkel, la CDU, ha sufrido varias renuncias. La última, la del gobernador de Hamburgo, sexto líder regional y séptimo alto cargo de la CDU que dimite. - Doble revés. En mayo la coalición pierde el Gobierno en Renania del Norte -Westfalia y la mayoría en la Cámara alta federal, donde se ratifican el 70% de las leyes. Pocos días después dimite el presidente federal, Horst Köhler. La accidentada elección de su sucesor confirma los problemas de liderazgo de Merkel. - Intención de voto. Según un sondeo de 'Stern', el partido de Merkel tiene el 30% de intención de voto. Los liberales no llegan al 5% necesario para acceder al Parlamento.

http://www.elpais.com/articulo/internacional/Merkel/pide/Europa/esfuerzo/ganar/competitivid ad/elpepuint/20100722elpepiint_1/Tes

266 Versión para imprimir

Las pruebas de resistencia a la banca

Todos los bancos españoles aprueban las pruebas de resistencia en Europa

España, que es el único país que ha sometido a todo su sector al examen, acapara cinco de los siete suspensos.- Son cuatro grupos de cajas y la intervenida Cajasur

WALTER OPPENHEIMER | R. MARTÍNEZ DE RITUERTO - Londres | Bruselas - 23/07/2010 Todos los bancos españoles han superado las pruebas de resistencia a la banca europea para soportar un grave choque financiero, según los resultados divulgados esta tarde en Londres por el Comité de Supervisores Bancarios Europeos (CEBS). En el caso de las cajas, sin embargo, España acapara cinco de los siete suspensos, cuatro de ellas son grupos de entidades y, la última, Cajasur. Banca Cívica, Banca Espiga, la unión en torno a Caixa Catalunya, Unimm y la intervenida caja cordobesa, aunque en este último caso las pruebas se realizaron antes de su absorción por la BBK. Las otras dos entidades que no han superado las pruebas son el alemán Hypo Real State y el griego ATEBank. Los resultados también ofrecen los niveles de capital que necesitarían las entidades suspendidas para reforzar su capital para estar a salvo ante un eventual empeoramiento de la situación: Caixa Catalunya y sus socios necesitan 1.032 millones; la fusión de Caja Duero y Caja España (Espiga), 127 millones; Banca Cívica, la integración en torno a Caja Navarra, Caja Canarias y Caja Burgos, 406 millones; Unimm (la otra fusión catalana), 270 millones y Cajasur, 208 millones, que ya han están previstos en el Fondo de Reestructuración Ordenada Bancaria (FROB). En total, los grupos españoles que suspenden las pruebas necesitarían 1.835 millones sin contar con los de Cajasur. Hay que señalar que Banca Cívica se ha adelantado hoy a la presentación de las conclusiones al anunciar esta mañana un acuerdo con el fondo J.C. Flowers&Co para incorporar capital privado. Si a esta necesidad de capital que han revelado las pruebas se le suman los fondos públicos ya librados para reestructurar el sector a lo largo de la crisis, bien por parte del FROB o del Fondo de Garantía de Depósitos, el total asciende a 18.263 millones de euros. Para hacer frente a ello, el Gobierno aprobó la reforma de la ley de cajas, que por primera vez en sus dos siglos de historia se abrirán al capital privado con la emisión de cuotas participativas con derechos políticos. Sistema europeo Según los datos del CBES, en un escenario de nueva crisis económica acompañado de una crisis de deuda soberana provocaría un impacto en todo el sistema europeo de 566.000 millones de euros en la banca europea y el ratio Tier 1 de esos bancos, que mide su capacidad de resistencia a los choques económicos, caería del 10,3% en 2009 al 9,2% al final de 2011, muy por encima del 4% que es actualmente obligatorio y del 6% que se considera suficiente para pasar el ejercicio teórico de resistencia. Pero ese agregado teórico incorpora los aproximadamente 169.000 millones de euros de capital público inyectado durante la crisis financiera por los Gobiernos europeos a 1 de julio pasado, lo que representa el 1,2% del total agregado de ratio Tier 1 de la banca europea. En siete de los 91 casos estudiados, las entidades de quedan por debajo de ese umbral del 6%, por

267 lo que se considera que no han logrado superar el examen de resistencia y han de inyectar capital adicional para consolidar su futuro. Los supervisores celebran los resultados "Los resultados de los pruebas confirman la resistencia generalizada del sistema bancario de la UE a los impactos macroeconómicos negativos y a los choques financieros", han señalado con satisfacción en un comunicado conjunto la Comisión Europea (CE), el propio CEBS y el Banco Central Europeo (BCE). Las tres instituciones celebran la transparencia del ejercicio y el que los bancos hagan públicas sus respectivas posiciones de capital y previsiones de pérdidas en un escenario adverso. También valoran la detallada información ofrecida sobre las exposiciones a la deuda pública, tanto de alcance nacional como local. Los coordinadores del experimento han subrayado que estaba diseñado para saber 'qué pasaría' en las peores circunstancias y que, "por lo tanto, no es probable que tal cuadro se haga realidad". http://www.elpais.com/articulo/economia/Todos/bancos/espanoles/aprueban/pruebas/resistenc ia/Europa/elpepueco/20100723elpepueco_9/Tes

268

German business sentiment hits three-year high By Quentin Peel in Berlin Published: July 23 2010 10:57 | Last updated: July 23 2010 10:57 The improvement in German economic sentiment was confirmed on Friday by a surge in business confidence, which reached the highest level in July for three years. The business climate index produced by the Munich-based Ifo institute jumped from 101.8 in June to 106.2 in July, against general expectations of a slight decline. “The German economy is in a party mood,” said Professor Hans-Werner Sinn, president of the Ifo institute. The increase in the index was the largest recorded since German unification in 1990. Publication of the index comes just as stress tests are due to be published for 91 European banks, including 14 German institutions. In response, the euro rose against the dollar and the yen, and European stocks rallied for a fourth day in succession. The respected monthly Ifo survey of 7,000 German business executives, normally one of the most reliable tools used by economic analysts for forecasting, reported expectations for the coming half year were also more optimistic than in June, contrary to general concern about a renewed economic slowdown. In manufacturing, “the business outlook has brightened strongly,” said Prof Sinn, with improved capacity utilisation of plant and machinery and export opportunities seen to be as positive as in June. “Firms’ employment plans are more favourable and point towards slight increases in staff levels.” The export-led recovery of the German economy also seems to be spreading gradually into the domestic economy, with wholesale, retail and construction sectors all reflecting the improved business climate. “An increasing number of wholesalers and retailers have assessed the current business situation as good,” the institute reported. “Business expectations … for the coming six months are now more positive in both distribution sectors.” The figures, coming on top of the publication of positive purchasing managers’ indices on Thursday, were greeted with surprise and delight by many analysts, even as they continued to caution about a slowdown towards the end of the year. “These are fantastic numbers,” said Andreas Scheuerle of DekaBank. “It’s incredible what is going on.” He said there were reports of some German factories shortening their summer holiday breaks to deal with improving demand. Ralph Solveen of Commerzbank told Reuters: “We expected an increase, but we did not expect this. The companies are not letting themselves be distracted by all the negative discussions going on, such as the bank stress tests, the debt crisis, or the threat of a double-dip recession in the US.” There was further evidence on Friday of sentiment improving outside the German economy in the eurozone, with an index of Italian consumer confidence showing stronger growth than expected. The index produced by the ISAE research institute rose from a revised figure of 104.5 for June to 105.6 for July, compared with analysts’ forecasts of 103.9. http://www.ft.com/cms/s/0/36f6705e-963c-11df-96a2-00144feab49a.html

269 Opinion

July 22, 2010 Addicted to Bush By PAUL KRUGMAN For a couple of years, it was the love that dared not speak his name. In 2008, Republican candidates hardly ever mentioned the president still sitting in the White House. After the election, the G.O.P. did its best to shout down all talk about how we got into the mess we’re in, insisting that we needed to look forward, not back. And many in the news media played along, acting as if it was somehow uncouth for Democrats even to mention the Bush era and its legacy. The truth, however, is that the only problem Republicans ever had with George W. Bush was his low approval rating. They always loved his policies and his governing style — and they want them back. In recent weeks, G.O.P. leaders have come out for a complete return to the Bush agenda, including tax breaks for the rich and financial deregulation. They’ve even resurrected the plan to cut future Social Security benefits. But they have a problem: how can they embrace President Bush’s policies, given his record? After all, Mr. Bush’s two signature initiatives were tax cuts and the invasion of Iraq; both, in the eyes of the public, were abject failures. Tax cuts never yielded the promised prosperity, but along with other policies — especially the unfunded war in Iraq — they converted a budget surplus into a persistent deficit. Meanwhile, the W.M.D. we invaded Iraq to eliminate turned out not to exist, and by 2008 a majority of the public believed not just that the invasion was a mistake but that the Bush administration deliberately misled the nation into war. What’s a Republican to do? You know the answer. There’s now a concerted effort under way to rehabilitate Mr. Bush’s image on at least three fronts: the economy, the deficit and the war. On the economy: Last week Mitch McConnell, the Senate minority leader, declared that “there’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.” So now the word is that the Bush-era economy was characterized by “vibrancy.” I guess it depends on the meaning of the word “vibrant.” The actual record of the Bush years was (i) two and half years of declining employment, followed by (ii) four and a half years of modest job growth, at a pace significantly below the eight-year average under Bill Clinton, followed by (iii) a year of economic catastrophe. In 2007, at the height of the “Bush boom,” such as it was, median household income, adjusted for inflation, was still lower than it had been in 2000. But the Bush apologists hope that you won’t remember all that. And they also have a theory, which I’ve been hearing more and more — namely, that President Obama, though not yet in office or even elected, caused the 2008 slump. You see, people were worried in advance about his future policies, and that’s what caused the economy to tank. Seriously. On the deficit: Republicans are now claiming that the Bush administration was actually a paragon of fiscal responsibility, and that the deficit is Mr. Obama’s fault. “The last year of the Bush administration,” said Mr. McConnell recently, “the deficit as a percentage of gross

270 domestic product was 3.2 percent, well within the range of what most economists think is manageable. A year and a half later, it’s almost 10 percent.” But that 3.2 percent figure, it turns out, is for fiscal 2008 — which wasn’t the last year of the Bush administration, because it ended in September of 2008. In other words, it ended just as the failure of Lehman Brothers — on Mr. Bush’s watch — was triggering a broad financial and economic collapse. This collapse caused the deficit to soar: By the first quarter of 2009 — with only a trickle of stimulus funds flowing — federal borrowing had already reached almost 9 percent of G.D.P. To some of us, this says that the economic crisis that began under Mr. Bush is responsible for the great bulk of our current deficit. But the Republican Party is having none of it. Finally, on the war: For most Americans, the whole debate about the war is old if painful news — but not for those obsessed with refurbishing the Bush image. Karl Rove now claims that his biggest mistake was letting Democrats get away with the “shameful” claim that the Bush administration hyped the case for invading Iraq. Let the whitewashing begin! Again, Republicans aren’t trying to rescue George W. Bush’s reputation for sentimental reasons; they’re trying to clear the way for a return to Bush policies. And this carries a message for anyone hoping that the next time Republicans are in power, they’ll behave differently. If you believe that they’ve learned something — say, about fiscal prudence or the importance of effective regulation — you’re kidding yourself. You might as well face it: they’re addicted to Bush. http://www.nytimes.com/2010/07/23/opinion/23krugman.html?_r=1

July 22, 2010, 4:25 pm More On Reinhart-Rogoff I’ve received some interesting correspondence on my Rogoff post; basically, it turns out that there’s more controversy than I realized over the dates of past financial crises. More on that when I’ve digested the information. Meanwhile, I thought I could flesh out my critique with a picture. In the now widely cited paper Growth in a Time of Debt (pdf), R-R claim to find a strong relationship between debt in excess of 90 percent of GDP and slow growth. They specifically highlight the case of the United States. But as I tried to point out, when it comes to the US case, all of the high-debt slow-growth years in their sample come from the post-World-War-II demobilization era. So here’s a picture that makes the point; data from 1941 to 2001. On the horizontal axis is the ratio of gross federal debt to GDP in the previous year; on the vertical axis the growth rate. (Wanna bet I get comments complaining that the axes aren’t labeled?) I’ve linked the points, with arrows indicating the direction of evolution over time. As you can see, all — all — of the high debt/negative growth observations come from 1945 (when demobilization started) and the few years thereafter. You might say that this is just one country — but it’s the country R-R themselves chose to highlight as illustrating their point. And I know that at least one other high debt/slow growth story has similar problems: Japan’s high debt years all lie in the era of deflation, and the

271 natural presumption is that the country’s macro problems caused high government debt, not the other way around. So this just isn’t careful work. And it should not be coloring policy discussion the way it is. More On Reinhart-Rogoff July 22, 2010, 4:25 pm http://krugman.blogs.nytimes.com/2010/07/22/more-on-reinhart-rogoff/ July 22, 2010, 11:16 am Joe Gagnon Is Right He calls on the Fed to implement a plan based on the ideas of someone the central bank seems to have been ignoring — a macroeconomist by the name of Ben Bernanke. We don’t know how well the Gagnon plan would actually work — but there’s no harm in trying, and large potential benefits. The only possible reason for the Fed not to be more aggressive now is fear of embarrassment, of not getting big results. And that’s no reason to sit still while the Fedfail Index keeps deteriorating. http://krugman.blogs.nytimes.com/2010/07/22/joe-gagnon-is-right/ July 21, 2010, 6:37 pm The Fedfail Index: http://krugman.blogs.nytimes.com/2010/07/21/the-fedfail-index/ Ben Bernanke’s testimony today, as expected, lacked all sense of urgency. Hey, the economy’s a bit disappointing, and maybe someday we might think about doing something about it … In my view, the Fed is too optimistic. When Bernanke says that Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010, and roughly 3-1/2 to 4-1/2 percent in 2011 and 2012. he’s telling the truth — but haven’t those forecasts already been overtaken by events? Less than 3 percent growth in the 1st quarter; probably only around 2 in the 2nd; to make more than 3 we’d have to see accelerating growth from here on, and all signs point the other way. Not to mention the fact that stimulus is going into reverse. But forecasts aside, we really have to bear in mind that the Fed is failing in fulfilling its dual mandate, price stability and full employment. I thought it might be convenient to have a simple measure of just how big the failure is; let’s call it the Fedfail Index. It’s related to the Taylor rule, but instead of offering a rule of thumb for the Fed funds rate, it measures how far unemployment and inflation are from their presumed targets. The rule I’ve chosen takes its coefficients from the Rudebusch version of the Taylor rule; 1.3 times the deviation of unemployment from 5 percent + 2 times the deviation of core inflation (CPI) from 2 percent. So it’s 1.3* ABS(unemployment – 5) + 2* ABS(core inflation – 2). You can make up your own version; I don’t think it will look very different. Here’s what you get: El indice se mueve entre 0 y dos entre enero de 2006 y octubre de 2008. Para empezar a creces hasta llegar a ocho a mediados de 2010 What this little exercise conveys is that the situation is deteriorating, not improving: unemployment is down slightly, but we’re drifting closer to deflation. Bernanke’s answer to all this seems to be that the Fed is doing a lot. But it’s obviously not enough — the central bank is supposed to deliver results, not get an A for effort. And those results aren’t coming.

272 July 21, 2010, 2:51 pm Notes On Rogoff (Wonkish) After posting a brief note on Ken Rogoff’s piece in today’s FT, I realized that it might be helpful to say a bit more about where I differ from him. Regular readers will know that I’m a huge admirer of Ken’s work, both theoretical and empirical. Obstfeld and Rogoff is the definitive work on New Keynesian open-economy macro; Reinhart and Rogoff the definitive empirical history of financial crises and their aftermath. It was largely thanks to my study of Obstfeld-Rogoff that I realized, from the get- go, that many of the arguments we were hearing about how modern macro had proved Keynesianism wrong were just ignorant; it was largely thanks to my reading of Reinhart- Rogoff that I realized, early in the game, that this was going to be a prolonged slump rather than a V-shaped recovery. And yet I believe that Ken has been giving seriously bad policy advice lately. Why? First, he’s showing a surprising failure to understand why the original Reinhart-Rogoff project worked; second, he’s exhibiting an equally surprising reluctance to do the math on current policy options. So, about the first point: economic history is a great source of evidence about how the economy works – in fact, pretty much our only source. And the RR project, drawing on evidence from much further back and farther afield than usual among economists, was a great idea. But there are usually major problems with historical analysis, no matter how much data you have, because it’s very difficult to isolate the things you’re interested in. There’s an old line to the effect that everything in the economy affects everything else, in at least two ways; this gives enormous room for spurious correlation. Econometrics is supposed to provide ways to disentangle the effects of multiple factors, but it’s difficult, and my sense is that few big arguments in economics have ever been settled by multiple regression analyses, let alone by all the sophisticated techniques developed these past three generations. But Reinhart-Rogoff is relatively robust to these problems. Why? Because it focuses on extreme events. Financial crises are very big things, sharply concentrated in time. As a result, it’s reasonably certain that the economic developments in the aftermath of a financial crisis were driven by that crisis, not by other stuff that may have been going on. So the original RR book was able to tell us a great deal without any fancy statistical analysis, because it was a study of extreme events. Unfortunately, the Reinhart-Rogoff paper now being cited all over the place – the one that suggests that there’s a critical level of government debt, at around 90 percent of GDP — doesn’t follow that strategy. All it does is look at a correlation between debt levels and growth. And since debt levels are not sharp extreme events, there’s no good reason to believe that they’re identifying a causal relationship. In fact, the case they highlight – the United States – practically screams spurious correlation: the years of high debt were also the years immediately following WWII, when the big thing happening in the economy was postwar demobilization, which naturally implied slower growth: Rosie the Riveter was going back to being a housewife. It’s just not up to the standard of the other work. And yet Ken is leaning hard on that paper to justify his pro-austerity position. Which brings me to my second problem: not doing the math.

273 Yes, the United States has a long-run budget problem. Dealing with that problem is going to require, first of all, sharply bending the curve on Medicare costs; without that, nothing works. And second, it’s going to require some combination of spending cuts and revenue increases, amounting to at least 3 percent of GDP and probably more, on a permanent basis. I’d argue for doing most of that through higher taxes – and yes, I’m willing to go along with a VAT, as long as it’s used to pay for maintaining the social safety net, not to make room for tax cuts on high incomes. But what I’d like to know with regard to Ken Rogoff is, what would he like to do? If you’re going to worry a lot about deficits, I think you’re obliged to say, first and foremost, what your long-term solution is – you have even more obligation to do that than those of us who are relatively relaxed about the current deficit. And then the question is, given whatever long-term solution you’re proposing, how much difference does a few percent of GDP more or less in current spending make to the feasibility of that solution? The answer, almost surely, is not much: at current interest rates, a trillion dollars of spending would add at most around 0.1 percent of GDP in real interest payments, and might actually improve the long-run budget position if a stronger economy now means less long-run damage So where does Ken’s call for short-run austerity come from? As best I can tell, it comes from a generalized sense that debt is dangerous; but surely, given the hard choices we’re facing, we need more than this – and as I’ve already said, that 90 percent red line is nonsense. And there’s also the invisible bond vigilante thing, the claim that markets are going to demand that you have immediate austerity even though the math says that it’s more or less irrelevant to the real fiscal problem. What bothers me here is that Ken is using the authority of a fine, careful empirical study to support policy recommendations that aren’t actually grounded in that study, and also happen to be at odds with his own economic models. Notes On Rogoff (Wonkish) July 21, 2010, 2:51 pm http://krugman.blogs.nytimes.com/2010/07/21/notes-on-rogoff-wonkish/#more-10782 July 21, 2010, 12:40 pm Remote Control This AP story on Bernanke’s testimony contains editorializing disguised as reporting: Even though the prospects of deflation — a widespread and prolonged drop in prices for goods, the value of stocks and homes and in wages — is remote, some Fed officials are worried about it. Keeping rates low would help prevent deflationary forces from taking hold. How does the AP know that the prospects for deflation are remote (and note the implicit suggestion that worried Fed officials are a bit strange)? In the face of high unemployment over the past two years, core inflation has fallen from more than 2 percent to less than 1 percent. All mainstream forecasts call for unemployment staying high for at least two more years, and probably more than that. Maybe that won’t lead to deflation — but it’s surely not outlandish to say that it will. You keep getting things like this in economics reporting; things that are just opinions – and not even consensus opinions, by a long shot — get reported as fact. And strange to say, it’s always one side of the debate that gets this kind of treatment.

274

Daily Morning Newsbriefing The rating agencies are no longer rating

23.07.2010 A new US law makes rating agencies liable for the quality of their ratings; panicked rating agencies now advise their clients not to use their ratings; Structured bonds, which are obliged to have a rating, can no longer be issued; EU banks may give breakdown of their sovereign debt holdings with stress test results later today; Eurozone PMI rises stronger than expected, driven by strong performance of services; Spanish government cancels or postpones 231 infrastructure projects as part of their austerity programme; Jean Claude Trichet presents some tough arguments in favour of immanent fiscal consolidation; Martin Feldstein argues also in favour, but says that this does not avoid a double dip; German banknotes, meanwhile, will soon be printed abroad. 23.07.2010 The rating agencies are no longer rating

The three dominant credit-ratings providers in the US have requested their clients not to use their credit ratings, reports the Wall Street Journal. This is the direct consequence of a new law, in particular a small paragraph that made it into the law in the very last moment (FT Deutschland). The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies are now refusing to let bond issuers use their ratings until they get a clearer understanding of their legal position and no one knows how long this will take. Many structured products cannot be issued now, as the law obliges them to include a rating in the documentation. “That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down.”

275 S Day Bloomberg has the story this morning that Europe’s banks may give breakdowns of their sovereign debt holdings, when they release the stress tests results later today. The source of the story is a document from the Committee of European Banking Supervisors. The document shows that the tests were based on a template that evaluates exposures to central and local governments in 30 countries. The same template will be used by the disclosure of individual banks and supervisory authorities. What is clear already, is that the stress do not include any notion of a sovereign default, or a restructuring. The only assumption implicit in the tests is the fall in the value of some sovereign bonds, but this is not really a test, since this has to be accounted for under mark-to-market rules on the trading book in any case, and not accounting for in the banking book. Eurozone PMI growth better than expected Both manufacturing and services output in the eurozone grew faster than expected in July, according to the latest purchasing managers’ indices, driven by a strong performance in both sectors in Germany and in the services industry in France, writes the FT. Markit’s Flash Eurozone PMI composite index rose to a three-month high of 56.7, compared with 56.0 in June, against expectations of a decline to 55.5. Despite slower growth of export orders, the strong performance of the service sector suggests improving private consumption in the heart of the eurozone. Analysts are now optimistic that a double dip recession can be avoided. Austerity debate: the day of the hawks Jean Claude Trichet presented a series of tough arguments in favour of imminent consolidation. He makes three points. First, if fiscal consolidation is accompanied with reforms, the short-term costs are containable. Second, the standard linear economic models used to project the impact of fiscal restraint may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. Third, systemic economic stability relies on the ultimate capacity of public finances to intervene in difficult circumstances. Martin Feldstein agrees that a fiscal austerity is called for, but disagrees with the standard European argument of a Ricardian equivalence, according to which public saving would generate private consumptions. He writes this is unlikely to occur. He says a double dip recession is indeed possible in some countries, but this is a price worth paying. Spanish government cuts infrastructure projects As part of their austerity drive the Spanish government announced the cancellation of 32 infrastructure projects, worth €926m, and a delay of 1-4 years for 199 projects, worth €8.7bn, reports El Pais. In total 20% of the projects are affected. Spanish construction and infrastructure companies, have warned that the cuts could add more than 100,000 workers to the 4.2m already unemployed. Euro bank notes no longer printed in Germany Euro banknotes are now a subject of a “Standortdebatte”(dislocation debate), at least for the trade union Verdi, as the winner of this year’s Bundesbank tender for printing new banknotes for Germany goes abroad, according to the Frankfurter Allgemeine. Up to now, two printers in Germany shared the job, but this time the Bundespresse in Berlin will go out

276 empty handed and the private printer in Munich will only get half of the order. Verdi protests that 400 jobs will be lost, legal steps are not excluded. http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2863&tx_ttnews[ backPid]=901&cHash=60c1960121 Economist's View Thursday, July 22, 2010 Am I Being Unfair to the Fed, or is the Fed Being Unfair to Those Who Need Its Help? Robin Harding at the Financial Times blog Money-Supply says I'm being unfair: Why the Fed’s options are still under review, by Robin Harding: In his testimony today Ben Bernanke said that the Fed has not yet decided on its leading option in the event that it has to ease policy further. Mark Thoma asks, why? After all this time, and after all the calls for the Fed to do more, they don’t even know what the leading options are? Bernanke says they are prepared to do more if conditions warrant it, but if there was a sudden disruption in financial markets tomorrow, they wouldn’t even know which policy option to prefer. I expected better than this from Bernanke and the rest of the Fed. I don’t think that’s fair. I think the Fed knows exactly what it would do if there was a sudden disruption in financial markets tomorrow: liquidity programs like those we saw during the crisis and then probably asset purchases if they didn’t work. I think the Fed is still pondering for a few reasons. First, the best response would depend on the conditions at the time, e.g. asset purchases will deliver better results if markets are stressed and the effect of communications will depend on the yield curve. Second, the FOMC is quite split about the effectiveness of asset purchases, how much they distort markets, and the risks to the Fed’s credibility. Those debates are reasonable enough. It’s hard to expect a consensus to form unless it has to, because the Fed has decided to act (whether it should already be acting is a separate debate). Third, I think the Fed is keen to keep revisiting all possible options, including those it has decided against in the past. That seems healthy enough to me. I'll accept that the Fed may know what it would do if financial markets have a sudden breakdown tomorrow, but I'm not sure they know "exactly" what to do. That requires that they've worked out the uncertainties that plagued them the first time they faced a sudden financial crisis, and I don't think we know for sure that they have. But the point is that what the Fed needs to do in the case of a sudden financial disruption is different from what it needs to do to give a boost to an economy struggling to recover, and that they can know one without knowing the other. That's fair. But isn't it also fair to expect the Fed to be prepared for both?

277 So I don't accept that the Fed should not know what its best option is for dealing with the situation as it exists today. The first rationale for this given above, that the best response is state dependent (i.e. that it will depend upon the conditions at the time), is not an excuse for waiting to figure out what to do. If the Fed faces different possible future outcomes, then it should develop state contingent policy responses, i.e. it should know what it will do under all of the future scenarios it can imagine. It's a mistake to wait until you know what the conditions are before starting to figure out what to do. Instead, there should be a plan that says what the best response is to a variety of potential future states of the economy. A black swan could always appear and that would require policy to be developed on the fly, but the response to most potential future economic conditions should already be known. The second objection, that the Fed is split, is not a very compelling excuse either. Policy splits are common, nothing new there. Take a vote or institute a process for resolving this. Better to get the disputes resolved now than trying to resolve them in the middle of a crisis when quick action is needed. The third excuse is that the Fed may discover a better policy as it revisits its options. The Fed should revisit its options, no disagreement there, and if a better option presents itself later, the Fed should certainly adopt it. But how does that stop the Fed from making the best choice given what it knows right now? There's always the possibility of finding a better solution in the future, and the Fed shouldn't stop trying to improve, but it should also know what the best options are given present conditions. Being able to say what they'd do if they had to act today doesn't seem to be too much to ask. So the answer I expected from Bernanke was something like, "while we continue to try to fine- tune and improve policy, as always, we are fully prepared to react to a wide variety of future conditions, and could act today if we thought we needed to do so." What this really says, to me anyway, is that the Fed does not believe conditions are bad enough right now, or can possibly get bad enough in the near future, to make the Fed feel the need to be ready to act. It also says that six months ago, or however long it takes to figure this out, they were convinced that the economy would not need more help today, so there was no need to be ready. But how did they know then that they wouldn't want to act today? Members of the Fed think they have plenty of time yet to weigh their options carefully, and in the unlikely event things really do get worse, measurably worse than they are now, then they'll figure out what to do. But, apparently there's no rush. That they haven't even felt the need to be ready to react to conditions like we are seeing today - - unemployment staying persistently high, deflation month after month, and so on, conditions worse than the Fed expected six months ago -- is the disappointing part. The main problem I have with the Fed's position is that they haven't told us what they are so worried about if they do act now. Is it inflation? Even after recent data showing deflation? Is it credibility? The Fed has an obligation to address both inflation and unemployment, and it's a mistake to base their credibility on just one component of its dual mandate. The Fed is losing credibility with the public daily, and its not because of worries over inflation. They've tossed out a variety of possibilities regarding the things they are worried about, but the specifics have been lacking. What, exactly is the cost if they do act now? Until the Fed has a good answer to that question, and so far I haven't heard it, I will continue to wonder not only why they aren't ready to act now, which is bad enough, but why they haven't tried to do more to help an economy that is clearly struggling. We're in danger of a lost decade or worse, and the Fed is not responding adequately to that threat. http://economistsview.typepad.com/economistsview/2010/07/am-i-being-unfair-to-the-fed-or- is-the-fed-being-unfair-to-those-who-need-its-help.html

278 COMMENT The austerity debate Published: July 18 2010 19:56 | Last updated: July 22 2010 19:58 Over this week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy. This page allows you to see the highlights from each contribution and join the discussion in the comment box at the end of this page. You can also click through to read each piece as a whole and comment on that specific contribution. Jean-Claude Trichet , president of the European Central Bank The acute fiscal challenges across all industrial economies are no surprise. Our economies are emerging from the worst economic crisis since the second world war, and without the swift and appropriate action of central banks and a very significant contribution from fiscal policies, we would have experienced a major depression. But now is the time to restore fiscal sustainability. The fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope. >> Keep reading Jean-Claude Trichet, Stimulate no more – it is now time for all to tighten Montek Singh, deputy chairman of the Indian government’s planning commission In India we follow the stimulus versus austerity debate extremely closely and with concern. Our anxiety about an austerity drive in industrialised countries is clear. Manmohan Singh, prime minister, warned in Toronto that while concerns about debt sustainability normally suggested a need for fiscal contraction, ‘circumstances are not normal’. The recovery is still fragile. Contractionary policies, if followed by many industrialised countries, could provoke a double-dip recession with ‘very negative effects on developing countries’. He went on to say the situation calls for careful co-ordination among the G20 countries. >> Keep reading Montek Singh, Message from Delhi: don’t cut too soon David Miliband, MP for South Shields and candidate for the leadership of the Labour party The public finances need addressing. Labour’s plans would halve the budget deficit and remove the bulk of the structural deficit in four years. It is the sensible, credible middle-ground between extreme cuts and unchecked spending. But the government’s proposals, designed without an escape hatch in the event of slowing growth, reflect ideology, not realism. >> Keep reading David Miliband, To grow, Britain must solve its jobs deficit Martin Feldstein, George F. Baker Professor of Economics at Harvard University If the timing of the fiscal consolidation were just a technical economic problem, the right policy would be to enact a multi-year budget that starts with little or no deficit reduction for the first two years, followed by a rapid return to budget balance. But such a gradual adjustment strategy cannot work politically in countries where voters are sceptical about government promises of future deficit reductions. >> Keep reading Martin Feldstein, A double dip is a price worth paying Andy Xie, independent economist based in Shanghai When people from China visit the west, they see economic paradise in these supposedly stagnant economies. After all, stagnation at such a high income level isn’t so bad; just ask the Japanese. But whatever happens in the current economic debate, relative stagnation in the west is inevitable in the medium term. >> Keep reading Andy Xie, More stimulus won’t stop Asia’s rise

Jeffrey Sachs, director of The Earth Institute at Columbia University It is wrong to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending >> Keep reading Jeffrey Sachs, Sow the seeds of long-term growth

279 David Pilling, Asia editor of the Financial Times Unlike in the west, there is little debate in Asia about how well the stimulus worked. It has been spectacular. Asian output is well above pre-crisis levels. HSBC is predicting growth for Asia ex-Japan of 8.6 per cent this year >> Keep reading David Pilling, Asia’s Keynesians take pride in prudence Tim Harford, FT columnist and Undercover Economist blogger Keynes’s General Theory may well be a work of genius, but I have always been more attracted to his short 1930 essay, “Economic Possibilities for Our Grandchildren”, in which, in the teeth of the Great Depression, Keynes reminded us that the long-run trend was inexorable growth. “I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day,” he wrote. After 80 years, a world war, and a depression, citizens in the US and western Europe are about five times richer than when Keynes was writing. We seem to be on track. >> Keep reading Tim Harford, A sunlit Keynesian paradise awaits our grandchildren http://www.ft.com/cms/s/0/dc3ac844-9010-11df-91b6-00144feab49a.html

COMMENT Stimulate no more – it is now time for all to tighten By Jean-Claude Trichet Published: July 22 2010 20:47 | Last updated: July 22 2010 20:47

The acute fiscal challenges across all industrial economies are no surprise. Our economies are emerging from the worst economic crisis since the second world war, and without the swift and appropriate action of central banks and a very significant contribution from fiscal policies, we would have experienced a major depression. But now is the time to restore fiscal sustainability. The fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope. By the end of this year, government debt in the euro area will have grown by more than 20 percentage points over a period of only four years, from 2007-2011. The equivalent figures for the US and Japan are between 35 and 45 percentage points. The growth of public debt has been driven by three phenomena: a dramatic diminishing of tax receipts due to the recession; an increase in spending, including a pro-active stimulus to combat the recession; and additional measures to prevent the collapse of the financial sector. Because we avoided the catastrophic scenario of a financial meltdown, the third element does not represent a very significant volume of spending for most countries. But calculations by the

280 European Central Bank show the volume of taxpayer risks earmarked to support the financial sphere, including all options – recapitalisation, guarantees, toxic assets etc – was as high as 27 per cent of gross domestic product. It is, remarkably, the same gigantic proportion on both sides of the Atlantic. Taking account of these facts, there is a strong unity of purpose among the world’s policymakers to address our fiscal fragilities. It is reassuring that the consensus on the need for credible fiscal exit strategies, along with profound financial sector reform, is very broad. But the timing remains disputed. In the waiting camp, some argue that it would be desirable to maintain or even increase the fiscal stimulus to avoid jeopardising the economic recovery. Others claim that fiscal consolidation will have a negative systemic impact on the global economy by damping the growth environment. I disagree with both these views. We have to avoid an asymmetry between bold, if justified, loosening and unduly hesitant retrenchment. There are three main reasons for starting well-designed fiscal consolidation strategies in the industrial countries now, precisely to consolidate the present recovery. First, we have the experiences of fiscal consolidation episodes in less exceptional times, which make clear the long-term benefits of reducing sizeable fiscal imbalances. These experiences also suggest that, provided consolidation is pursued as part of a comprehensive reform strategy, the short-term costs for economic growth tend to be contained or very limited. The success of a fiscal consolidation strategy strongly depends on its design. Adjustment on the spending side, accompanied by structural reforms to promote long-term growth, has typically been the best strategy, especially when combined with a credible long-term commitment to fiscal consolidation. Second, given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances. Third, systemic economic stability – and therefore sustainable growth – relies on the ultimate capacity of public finances to intervene in difficult circumstances. Fiscal buffers are essential when our economies are in a typical business cycle. They are even more necessary when our economies are coping with exceptional circumstances. Had our public finances not been credible when that 27 per cent of GDP of taxpayer risk was mobilised, we would not have avoided a financial meltdown and a second Great Depression. We are doing all that is possible to avoid a future economic catastrophe resulting from the extreme malfunctioning of the financial sector. And I am convinced that we will succeed. But even with the best G20 financial reform there may be many different triggers for economic and financial dislocation. Other unexpected events, including natural catastrophes, may need emergency fiscal support. Sound public finances are a decisive component of economic stability and sustainable global growth. With hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: “stimulate”, “activate”, “spend”! A large number fortunately had room for manoeuvre; others had little room; and some had no room at all and should have already started to consolidate. Specific strategies should always be tailored to individual economies. But there is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now.

281 In the extraordinary circumstances we have experienced since 2007, central banks across the Atlantic, the Channel, the Pacific and all over the world have demonstrated a remarkable capacity to analyse unprecedented situations and take appropriate decisions. They have designed their monetary policy stance to preserve the credibility of price stability in the face of both inflationary and deflationary risks. They have implemented transitional non-standard measures aimed at improving the functioning of certain segments of financial markets that are essential for the transmission of monetary policy. And they have engaged in unprecedented international co-operation. The ECB, which acted at the very start of the financial turmoil on August 9 2007, will contribute to consolidate a confident economic environment by ensuring price stability in the euro area as we have done for more than a decade. We expect governments to confirm their determination to consolidate their public finances. That commitment is as important today for the G20 paradigm of “strong, sustainable and balanced” growth as yesterday were their exceptionally bold decisions to avoid a depression. The writer is president of the European Central Bank http://www.ft.com/cms/s/0/1b3ae97e-95c6-11df-b5ad-00144feab49a.html

Message from Delhi: don’t cut too soon By Montek Singh Published: July 22 2010 22:22 | Last updated: July 22 2010 22:22 The stimulus versus austerity debate has become much more heated since last month’s summit of the Group of 20 industrialised and developing nations. Political polarisation in industrialised countries has fuelled a resurgence of fiscal conservatism. On the other side, with growth weakening as the effect of stimulus wears off and with high unemployment, there are calls for more stimulus. Academics on each side are lambasting the opposing arguments as voodoo economics. In India we follow this extremely closely and with concern. Our anxiety about an austerity drive in industrialised countries is clear. Manmohan Singh, prime minister, warned in Toronto that while concerns about debt sustainability normally suggested a need for fiscal contraction, “circumstances are not normal”. The recovery is still fragile. Contractionary policies, if followed by many industrialised countries, could provoke a double-dip recession with “very negative effects on developing countries”. He went on to say the situation calls for careful coordination among the G20 countries. For developing countries the need for the G20 to co-ordinate policies is paramount but past experience is not encouraging. In 2006, the International Monetary Fund tried to get the US, Germany, Japan, Saudi Arabia and China to co-ordinate their policies to deal with the build-up of current account imbalances. As Raghuram Rajan, then IMF chief economist, writes in his book Fault Lines, each country recognised there was a problem, but each felt others must act differently, and that its own policies were just right. Will the G20, which did very well at the start of the crisis, do better at Seoul in November? The need for co-ordination today is actually more compelling than in 2006. Then the world was experiencing a boom and it was widely assumed that if there was a problem, markets would have signalled it. Today, the industrialised countries face slow growth and high unemployment and no one believes the market will resolve that. But uncoordinated action,

282 with countries following their own policies based on domestic political agendas, is unlikely to be the best option. Emerging market countries will follow the outcome with keen interest. They have weathered the crisis exceptionally well. China and India have both returned to high growth. Emerging markets are projected to grow much faster than industrialised countries, and so contribute significantly to global growth. They have an important role to play in global co-operation but they are surely right that industrialised countries must bear the main responsibility for coordination. It is there that the crisis began, and it is there that growth and employment are most threatened. The extent to which industrialised countries co-operate will undoubtedly affect the willingness of developing countries to play their part. What are the outlines of a consensus? The fiscal deficits of many industrialised countries have expanded to levels unseen before, except in times of war. This urgently needs correcting but it must be as a process rather than in a rapid correction. Market nervousness over the Greek crisis is not a credible reason for haste. There is no danger of loss of confidence in either the US or the UK. What markets need is the assurance of a medium-term path for consolidation, not immediate contraction. Olivier Blanchard, chief economist of the IMF, and Carlo Costarelli, director of the IMF’s fiscal affairs unit, have suggested G20 industrialised countries should aim to cut the underlying deficit by 1 percentage point of gross domestic product per year over the next four to five years. It is unclear whether agreement can be reached on these lines in November. The quality of fiscal correction is equally important. The G20 has spoken of “growth friendly” consolidation. For fiscal correction to be politically acceptable domestically, it must be seen to be fair. Each country has to handle this problem as best as it can. Structural reforms that enhance productivity must be a critical element of any strategy to ensure sustainable growth in industrialised countries. Developing countries, including India, have long accepted the need for such reforms, with a well-defined agenda of reforms. If we are entering a period where demand is weak, we need to push supply-side reform on the supply side to give an impetus to growth through increased competitiveness. This in turn will produce investment opportunities. The missing link is action on trade talks. Developing countries have long recognised trade is more important to them than aid. It is, of course, difficult to push the trade agenda at a time of unemployment. But the logjam has to be broken. The Doha round has been in suspended animation for too long. It is difficult to believe we can make progress on difficult areas such as climate change, if we cannot on trade. India has been fortunate in being able to maintain fairly strong growth, officially projected at 8.5 per cent in 2010-11. We too will suffer from lack of global demand although we hope to stimulate investment in infrastructure, That is why we follow this debate with care. The writer is deputy chairman of the Indian government’s planning commission http://www.ft.com/cms/s/0/f01cda18-95c5-11df-b5ad-00144feab49a.html

283 To grow, Britain must solve its jobs deficit By David Miliband Published: July 22 2010 22:42 | Last updated: July 22 2010 22:42 By committing to the largest fiscal retrenchment in living memory the coalition has gone for broke. The prime minister says it will “change our way of life”. That’s the problem. Ken Clarke used to say that good economics is good politics. The government has turned this on its head. Framing the debate as a choice between the public and private sectors is certainly good politics, but it is bad economics. The Budget will force 600,000 public sector workers into unemployment. With recent surveys suggesting rapidly worsening business confidence and no evidence of an emerging hiring spree, their prospects of finding work in the private sector are bleak. The independence of the Office of Budget Responsibility has rightly been called into question; a matter that can only be addressed by its reporting directly to parliament. But even it has joined the International Monetary Fund and private sector economists in downgrading the UK’s 2011 growth forecasts, to just above 2 per cent, below the rate required to lower unemployment. I am an economic realist. The public finances need addressing. Labour’s plans would halve the budget deficit and remove the bulk of the structural deficit in four years. It is the sensible, credible middle-ground between extreme cuts and unchecked spending. But the government’s proposals, designed without an escape hatch in the event of slowing growth, reflect ideology, not realism. The government also has no plan for jobs: cancelling the loan to Sheffield Forgemasters, stalling on the Green Investment Bank and still lacking a trade minister (in spite of George Osborne’s hopes for an export-led recovery). Instead, it should focus on the jobs deficit: the 2.5m people looking for work. Sweden made halving unemployment its priority during its 1990s fiscal consolidation. But Britain is repeating Japan’s response to its crisis: pulling stimulus too early, raising value added tax and relying too heavily on monetary policy – leading to unemployment and stagnation. Our economy must be greener, more innovative and more balanced. In the face of a widening current account deficit we must play to our strengths in manufacturing, services, universities and creative industries – as well as a properly regulated financial sector. This needs the public and private sectors to work in tandem, starting with five steps to end our jobs deficit. First: create a British Investment Bank to facilitate investment into infrastructure, support good small businesses struggling to access funding and provide capital for export industries. The bank would be owned by the public, but would raise money on capital markets and be controlled by a commercially-orientated board. For decades similar banks in Germany and the Nordic region have helped their private sectors flourish. Financial reform gives us an opportunity to join the party. Second: set and achieve a goal of having 60 per cent of 18-30-year-olds in university, higher level vocational learning or an apprenticeship by 2025. Growth depends on improving our skills base, not condemning our population to long-term unemployment by abolishing the Future Jobs Fund.

284 Third: deploy the public sector to invigorate local economies by maximising the multiplier effect of public services. Cutting Building Schools for the Future is not just bad for education, it will hit construction jobs. Fourth: focus on increasing productivity and the quality of work in low pay, low value sectors of the economy. This requires a new workplace settlement, based on hard work, innovation and fair pay. Reformed corporate governance and models of ownership can give employees a greater stake in the success of their companies. Fifth: pursue an industrial strategy for the 21st century, marshalling the state’s tools of procurement, regulation, planning and taxation to attract the private sector where it is needed most. We can learn from Portugal’s initiative on infrastructure for electric car-charging, a viable commercial case for investment in manufacturing. Germany’s renewable energy policy combined feed-in tariffs with regional development areas and research, creating more than 300,000 jobs. Israel’s incentives-based approach to commercialising university research has taken it to the top of the innovation charts. Globally, governments are helping to expand the economic pie. Ours can too. At the last election Labour could not find a single business to support its economic policy. I am determined to put this right – and lead Labour into again becoming the party of spreading wealth creation, not just spreading wealth. It is not good politics to have bad economics. The writer is MP for South Shields, and a candidate for the leadership of the Labour party http://www.ft.com/cms/s/0/d72f4ce8-95c5-11df-b5ad-00144feab49a.html

COMMENT A double dip is a price worth paying By Martin Feldstein Published: July 22 2010 17:37 | Last updated: July 22 2010 17:37 Critics of the European countries’ decisions to front-load their deficit reductions miss the importance of seizing the current moment of crisis to take politically difficult budget actions. If the timing of the fiscal consolidation were just a technical economic problem, the right policy would be to enact a multi-year budget that starts with little or no deficit reduction for the first two years, followed by a rapid return to budget balance. The slow start would be particularly appropriate in those countries where aggregate demand is now very weak. But such a gradual adjustment strategy cannot work politically in countries where voters are sceptical about government promises of future deficit reductions. Immediate action is necessary to make future deficit cuts credible. And painful cuts in government pensions and in public payrolls as well as increases in personal taxes may only be possible while there is a sense of crisis throughout Europe. Unfortunately, the front-loaded deficit reductions may push economically weak countries into recession for the next year or two. That is the cost of achieving the needed long-term deficit reduction in the current economic and political environment. The countries are nevertheless right to accept that bitter medicine in order to get on the right longer term path. However, government officials are not warning the public that this is the choice that they have made. Instead they are claiming that the front-loaded fiscal deficit reductions will not weaken the economy in the short run. They argue that the increased confidence that will

285 result from the prospect of lower deficits will lead to enough increased spending by consumers and businesses to actually raise the short-term pace of economic activity. I think that is unlikely to occur. Although the increased confidence may eventually lead to increased spending, it will not be strong enough in the short run to outweigh the immediate contractionary effects of reduced government spending and higher taxes. It is even possible that the resulting economic slowdown will cause the cyclical component of the budget deficits to rise temporarily, offsetting part or all of the legislated reductions in the structural part of the fiscal deficits. Although a country like Germany may avoid the downturn because the recent fall in the value of the euro will boost its exports to the rest of the world, other eurozone countries that trade mainly within the eurozone will not see a boost in exports from the lower value of the euro. The result will be double dip downturns that raise unemployment. How will voters react in 2011 and 2012 if they see an economic downturn and relatively little deficit reduction after being promised that the cuts in government programs and increases in taxes would have immediate favourable effects? There is a danger that they will pressure governments to cut back on the future fiscal consolidation. It would be better for European officials to warn voters that fiscal consolidation will bring with it the risk of a temporary decline in economic activity and a rise in unemployment. The writer is George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research Martin Feldstein A double dip is a price worth paying July 22 2010 17:37 http://www.ft.com/cms/s/0/2447452e-95af-11df-b5ad-00144feab49a.html?ftcamp=rss The writer is George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research http://www.nber.org/feldstein/ft07222010.pdf

COMMENT More stimulus won’t stop Asia’s rise By Andy Xie Published: July 22 2010 12:52 | Last updated: July 22 2010 12:52 The current debate in Europe and America over the need for stimulus seems strange to most Asians. When people from China visit the west, they see economic paradise in these supposedly stagnant economies. After all, stagnation at such a high income level isn’t so bad; just ask the Japanese. But whatever happens in the current economic debate, relative stagnation in the west is inevitable in the medium term. At the moment the global economy appears to be double-dipping, and many (including those in this Financial Times debate) have argued for another round of stimulus. But another round of spending would support growth only temporarily, while increasing the risks of more sovereign debt crises, more overheating in emerging economies, and pushing the global economy into high inflation down the road.

286 There are well-known arguments against unlimited stimulus. The bond market could freak out over excessive national debt. Currency values could collapse. When an economy faces structural imbalances like now, the impact of stimulus on employment is low. But there is a new and perhaps more powerful case for austerity: globalisation has made even large economies such as America, which used to operate under special rules, behave as if they were small, open economies. This is because the main players in today’s globalisation are not countries, but multinational companies. These large businesses now allocate investment and production across the world, taking cost and regulation levels into account. Because companies can now move their investments across borders, government spending to boost demand in one country now leaks across borders into others. This leakage dramatically decreases the effectiveness of any Keynesian stimulus. Put simply, it now costs more to produce the same growth, and the growth does not become self-sustaining. This same trend also explains the recent pattern of weakening economies in the west and the strengthening trade performance in emerging economies. During the big downturn in 2008 many multinational companies closed factories in the high-cost west, and expanded their operations in low-cost countries such as China. Hence, today, more stimulus in the west will have a more limited growth impact at home. That said, it will increase inflationary pressure in emerging economies, where average inflation is already above 5 per cent and rising. As their inflation transmits back to the west through trade and currency market, the west will suffer stagflation. One might argue that rising costs in the emerging economies will eventually make the west competitive again. But it will be a very long wait. The average labour cost in the west remains over 10 times higher than in the emerging economies. Emerging economies also have five times as many people as the developed economies. Globalisation is creating an insurmountable headwind for growth in the west. As a result, even with huge new stimulus, it is quite likely that the west will experience a growth pattern like Japan’s for a decade or longer. Of course, globalisation is not a lose-lose proposition for the west. Its multinational companies will make far more than in the past. It is possible that western stock markets will decouple from their economies in the decade ahead, and fare well. This would be a big boon for the western societies that are struggling with the cost of ageing. Some argue for trade protectionism to promote growth in the west. As high levels of unemployment persist, such calls will strengthen. But that is not a solution either, in particular because it would cause a sharp drop in the value of the west corporate sector just at a time it might be about to boom. It is even possible that western living standards will decline in the next decade. But, as those looking from Asia will tell you, one should not focus on growth and ignore the level. While the west looks enviously at booming Asia, people here would much rather stagnate at income of $40,000 per capita than boom at $4,000. It enjoyed decades of high living standards because the emerging economies were not organised to compete. It was a lucky break. Now the luck is over. And no amount of stimulus will bring it back. The writer is an independent economist based in Shanghai Andy Xie More stimulus won’t stop Asia’s rise July 22 2010 12:52 http://www.ft.com/cms/s/0/14e6ee9e-957e-11df-a2b0-00144feab49a.html

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Sow the seeds of long-term growth By Jeffrey Sachs Published: July 21 2010 14:59 | Last updated: July 21 2010 15:18

The world economy is entering a new phase after the failure of fiscal stimulus to create a sustained recovery in either the US or Europe. In the US, consumers have retrenched, housing starts have crashed and a double-dip recession is possible. In Europe, fiscal retrenchment is under way after intense market pressures. A new approach to recovery is needed. The striking feature in the current debate about austerity and stimulus has been the lack of attention to investment. Consumers will not provide the engine of recovery, nor should they after overspending for a decade. Instead, the US and Europe should be using the recent corrective boost in saving rates to promote long-term investments in physical and human capital as the proper way back to sustained growth. Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America’s two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians. By contrast, the administration’s interest in boosting investment has been haphazard. Mr Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more. It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.

288 Businesses, for their part, are distressed by the lack of direction. The US Chamber of Commerce was not simply lobbying when its director of government affairs recently declared to the Financial Times that: “When businesses try to plan out what their tax liabilities will be next year, or game out credit availability or the investment climate, they just don’t know what it will look like. Uncertainty is a real killer.” A proper US investment recovery plan has five parts. The first is a significant boost in investments in clean energy and an upgraded national power grid. These should be promoted through guaranteed price subsidies to clean energy to be financed by gradually rising carbon taxes, as the clean energy capacity comes on line during the coming decade. The alternative cap and trade system is cumbersome, unnecessary and politically dead. The second is a decade-long programme of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading, co- financed by the federal government, local governments and private capital. Such projects are complex, requiring government leadership in land management, project design, public-private co-operation and partial subsidy or credit guarantees. New tools can help, such as a national infrastructure bank – championed last year before plans were strangely downplayed. The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognise the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers – many of whom should still be learning – and older workers who lack a degree. The penultimate part of the plan is boosting infrastructure exports to Africa and other low- income countries. China is running circles around the US and Europe in promoting such exports of infrastructure. The costs are modest – essentially just credit guarantees – but the benefits are huge, in increased exports, support for African development and a boost in geopolitical goodwill and stability. The fifth and final element should be a medium-term fiscal framework that will credibly reduce the federal budget deficit to sustainable levels within five years. This can be achieved partly by cutting defence spending by two percentage points of gross domestic product, meaning ending the Iraq and Afghanistan occupations and cutting wasteful weapons systems. Other measures should include gradually phasing out the tax subsidy on high-end health insurance, taxing Wall Street bank profits and bonuses, raising high-end marginal tax rates and, if necessary, introducing a small value added tax. Public investment costs could be financed mainly by public tolls, gradually rising carbon taxes and by repayments of international loans to finance the export of infrastructure. The Obama administration and Republican opposition are both guilty of irresponsible short- termism and lack of forward-thinking. Both would dangerously prolong the budget deficit, the first through a combination of increased fiscal transfers and tax cuts, and the latter through even larger and more unsustainable tax cuts. Neither would do what America needs and China is doing better: investing for the future through serious attention to sustainable energy, cutting- edge infrastructure, enhanced labour-force skills and the promotion of international development through the export of infrastructure. The author is director of The Earth Institute at Columbia University Jeffrey Sachs Sow the seeds of long-term growth July 21 2010 14:59 http://www.ft.com/cms/s/0/01d88b16-94cd-11df-b90e-00144feab49a.html

289 Asia’s Keynesians take pride in prudence By David Pilling Published: July 21 2010 22:26 | Last updated: July 21 2010 22:26 He that has no money might as well be buried in a rice tub with his mouth sewn up – Chinese proverb No wonder China’s respect for the US and Europe has dwindled. The Chinese take a dim view of poverty. That is because, historically, it has had so much of it to go round. Fear of destitution has underpinned the country’s high savings rate, though these days companies actually account for a bigger share of national savings than households. Still, Chinese people – like those in many parts of Asia – remain wary of debt. In China, a high proportion of cars, even houses, are paid for in cash. Chinese officials talk scornfully about US consumers’ proclivity to buy now and figure out the consequences later. Through this prism, the made-in- America crisis is seen as a modern morality tale in which reckless governments and citizens got their comeuppance. Asian policymakers have been reasonably restrained about shoving this view down western gullets, though at times the temptation has been irresistible. After the collapse of Lehman Brothers, the Chinese went through a phase of lecturing the US on the virtues of frugality. Just as Washington – and for that matter Beijing – was cranking up its mammoth stimulus, Zhou Xiaochuan, governor of China’s central bank, was urging the US to rein in excess. “Over- consumption and a high reliance on credit is the cause of the US financial crisis,” he pronounced. “The US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.” Such remarks may have been partly tactical rather than a policy recommendation. Chinese officials were fed up with being badgered about the renminbi. By going on the offensive, they hoped to deflect criticism of their policies. In recent months, there has been less US bashing, possibly because Asian economies remain dependent on exports, however well they have done in stimulating domestic demand. In so far as there is a consistent Asian message, it is: “Be virtuous. But not quite yet.” However much Asians trumpet the value of parsimony, their governments have been as bold as any in opening the fiscal sluices. One reason is the bitter memory of the 1997 Asian financial crisis when the International Monetary Fund imposed fiscal austerity on several Asian countries. Those measures are now almost universally seen as a blunder that unnecessarily exacerbated economic misery. Asian governments have taken the lesson to heart. According to Fitch Ratings, fiscal stimulus packages as a percentage of gross domestic product amounted to 6.9 per cent for Vietnam, 7.7 per cent for Thailand, 8 per cent for Singapore, 13.5 per cent for China, and a whopping 14.6 per cent for Japan. Taiwan, with a relatively modest stimulus of 3.8 per cent, gave $100 spending vouchers to each of its 23m inhabitants, including convicts. The Singaporean government subsidised businesses that retained staff. In China, the mother of all stimulus packages funnelled $585bn of spending into the economy, and even more through directing state-controlled banks to increase credit. The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997

290 crisis, building a formidable pool of reserves. Such “prudence” meant, rather bizarrely, that poor countries such as China were foregoing spending and investment in order to facilitate rich foreigner’ binge-buying. But it also meant that, when the crunch came, they had the wherewithal to spend. Unlike in the west, there is little debate in Asia about how well the stimulus worked. It has been spectacular. Asian output is well above pre-crisis levels. HSBC is predicting growth for Asia ex-Japan of 8.6 per cent this year. Rather than contemplating more stimulus, authorities are trying to cool things down. Banks have been raising interest rates for months. China and others have introduced measures to take the heat out of the housing market. Fears about unemployment have given way to concerns about labour shortages and spiralling wage demands. Thus the question in most of Asia is not whether to remove stimulus, but how fast. Asia is in orthodox territory, balancing well-trodden trade-offs between growth and inflation. The exception is Japan, physically located in Asia but economically closer to the west. Richard Jerram at Macquarie says Japan would like to follow Europe’s path of fiscal reduction, but lacks the will. This month, Naoto Kan’s government was punished by an electorate that didn’t much like the sound of his plans to double sales tax. Japan looks like a cautionary tale for the west. But those peering into the Japanese mirror will see the reflection they want to find. Keynesians will argue that Japan’s fiscal stimulus was not wrong in principle, but badly implemented and undermined by half-hearted policy. For the fiscal hawks, Japan is proof that everlasting stimulus does not work. Japan’s nominal output has hardly budged in two decades, but its gross debt pile now towers at nearly 200 per cent of GDP. Twenty years after its bubble collapsed, Japan has still not crawled from the rubble. Western governments pondering what to do next must worry that this could be their fate. [email protected] More columns at www.ft.com/davidpilling David Pilling Asia’s Keynesians take pride in prudence July 21 2010 22:26 http://www.ft.com/cms/s/0/7ec7882c-94f3-11df-af3b-00144feab49a.html

291 A sunlit Keynesian paradise awaits our grandchildren By Tim Harford Published: July 20 2010 22:40 | Last updated: July 20 2010 22:40

It says a lot about the talents of John Maynard Keynes – and just as much about the shortcomings of modern macroeconomics – that when the financial crisis struck, policymakers instinctively reached not for their fancy models, but for the Keynesian idea of fiscal stimulus. These pages have been filled with eminent thinkers arguing over whether it is time to bring the stimulus to an end. Perhaps we should turn the question around: if stimulus were to be the solution, what would be the problem? The problem would be that too many of us wanted to save money or pay off debts; that is, we wanted others to pay for our services but weren’t so keen on paying for theirs right now. Simple arithmetic suggests this would leave slack in the economy. In addition, the problem would be that businesses, pessimistic about prospects for recovery, didn’t harness all the spare savings floating around and plough them into new investment projects. The slack would stay slack, possibly for a long time. If that was the problem then government stimulus would be the solution. And the above paragraph doesn’t seem to be a bad description of the US or UK economy, which suggests the case for stimulus is strong. True, the patience of the bond markets is surely not boundless (and say what you like about kowtowing to the markets, if we’d like them to lend us money we have good reason to care whether they are willing to lend it). And there already is an awful lot of stimulus spending going on right now, so it’s not absurd to suggest we could get by with less as the economy bounces back. I realise that I am sitting on the fence here, but it’s part of my new maxim, which is never to stand in the middle of a fight between Paul Krugman and Niall Ferguson. Fiscal multipliers are certainly fun. If the fiscal multiplier is 0.5, we’re getting government projects at half price: the government project draws half its resources away from private-sector activity, but the other half is just soaking up slack. If the fiscal multiplier is 1.6, as President Barack Obama’s Council of Economic Advisers has estimated, we get a free government project and a larger private sector. And if the multiplier is 2.5, as Keynes believed of the US economy in the 1930s, government spending soaks up slack like a sponge, and also catalyses the private sector into a frenzy of action. (I beg your indulgence while you picture a slack- soaking catalytic sponge; patent pending.)

292 The quality of government spending still matters. If you think the multiplier is 2.5 then you can gladly follow Keynes’s suggestion of burying banknotes down mineshafts and leaving it “to private enterprise on well-tried principles of laisser faire to dig the notes up again”. If you think it is 0.5 or zero, you might want government projects chosen with more care. And as Keynes himself remarked, no matter what the multiplier, “it would, indeed, be more sensible to build houses and the like” if only politics would allow. Keynes’s General Theory may well be a work of genius, but I have always been more attracted to his short 1930 essay, Economic Possibilities for Our Grandchildren, in which, in the teeth of the Great Depression, Keynes reminded us that the long-run trend was inexorable growth. “I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day,” he wrote. After 80 years, a world war, and a depression, citizens in the US and western Europe are about five times richer than when Keynes was writing. We seem to be on track. Keynes’s essay explored something his modern disciples often ignore, namely what would happen when “the economic problem” was solved. By the standards of the 1930s, this problem has been solved. But our response has not been what Keynes expected. He acknowledged that human beings had an insatiable desire to feel superior to each other, and that some people would always blindly pursue wealth. But he felt that most of us would adjust, albeit grudgingly, to a life of plenty. We would work less and amuse ourselves in other ways. We have not, and civilisation continues to depend on the production, purchase, consumption and disposal of the kind of stuff you can see anywhere from the shelves of Walmart to the pages of How To Spend It. One of the multiple causes of the crisis, after all, was that so many people wanted to borrow more than they could repay. It is true that we do choose to work a little less. According to the economists Mark Aguiar and Erik Hurst, despite a large increase in women’s participation in the workforce, in the US they have at least four hours a week of extra leisure compared with 1965. Men have at least six extra hours. And there is the time we spend studying and travelling before our careers, or in early retirement, to say nothing of the many hours spent goofing off at work and looking at Facebook. But if you want to work a three-day week, your boss and colleagues will assume it is because you are caring for a baby or studying for a PhD, rather than because the weather is lovely at this time of year. So while the debate of the day is rightly about how quickly and how severely governments should tighten their belts, I hope that when the crisis is over we will remember to come back to Keynes’s long-run forecast. Keynesianism may be about trying to maintain full employment, but Keynes understood that full employment could mean everybody who wanted a job working up to three hours a day, at which frenetic pace we should still have twice the wealth of Keynes’s generation. It was in this future paradise that Keynes famously imagined that the economics profession might be thought of as “humble, competent people, on a level with dentists”. We economists have a way to go yet. [email protected] http://www.ft.com/cms/s/0/5c600ac6-942a-11df-a3fe-00144feab49a.html

293 These anti-Keynesian arguments look flimsy Published: July 22 2010 06:10 | Last updated: July 22 2010 06:10 From Lord Skidelsky. Sir, In 1929-30 and 2008-09 global gross domestic product fell for five successive quarters, the fall amounting to 5 per cent in both periods. But whereas the fall of GDP was arrested after five quarters in the second period, it continued for a further eight quarters in the first period. That is why the years 1929-32 are known as the Great Depression and the years 2008-09 as the Great Recession. A Keynesian would have no problem in explaining the divergence between the two periods. Between 1929 and 1930 monetary and fiscal policy was not used to fight the contraction; in 2008-09 it was. Between 1929 and 1931 expansionary monetary policy was ruled out in the UK by adherence to the gold standard, in the US by policy mistakes. In both countries expansionary fiscal policy was ruled out by adherence to the doctrine of the balanced budget; in the US a large part of the banking system was allowed to collapse. Public policy, that is, was not used to counteract the fall in private spending. In 2008-09 all the tools available to government were brought into play – bail-out of banks, open-market operations, fiscal stimulus. The reason for this different response was the change of theory associated with the name of Keynes. Niall Ferguson (July 20) accuses the Keynesians of having learnt nothing since the 1930s. But he has learnt nothing since the 1920s. His economics is of the same vintage as supporters of the “Treasury view”, who argued that bond-financed government spending was bound to “crowd out” private sector spending. He cites Robert Barro to the effect that the Keynesian multiplier is a “myth”. However, the consensus view is that multipliers are small, but positive. Recently, the Congressional Budget Office calculated that each dollar spent to help the unemployed created up to $1.90 dollars in economic output. Prof Ferguson’s other argument is that though there is no evidence of mistrust of US (or for that matter UK) government bonds so far, “one piece of bad news” could trigger a sell-off. While many may hold this belief, academics do not normally just accept the “wisdom” of the crowd. They usually consider it part of their brief to ask whether beliefs are held for good or bad reasons, in this case whether policy carries a real risk of default or inflation in the US and the UK, irrespective of market sentiment. Prof Ferguson never comes clean on this point: this makes his anti-Keynesian argument intellectually inadequate. Robert Skidelsky, Emeritus Professor of Political Economy, University of Warwick, UK Lord Skidelsky, “These anti-Keynesian arguments look flimsy” July 22 2010 06:10 http://www.ft.com/cms/s/0/37e68e38-9518-11df-b2e1-00144feab49a.html

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Harvard’s Feldstein Sees Risk of ‘Double- Dip’ Recession in U.S. By Bob Willis and Betty Liu - July 21, 2009 09:36 EDT

Martin Feldstein, Harvard professor July 21 (Bloomberg) -- The U.S. recession may not be coming to an end and there is a risk the economy may experience a “double-dip” contraction, said Martin Feldstein, a professor of economics at Harvard University. “There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” Feldstein, the former head of the National Bureau of Economic Research and Reagan administration adviser, said today in an interview on Bloomberg Television. “We could slide down again in the fourth quarter.” The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said. “There isn’t going to be enough to sustain a really solid recovery,” he said, even though recent data has provided some “good news” on the economy. Feldstein said Federal Reserve Chairman Ben S. Bernanke, whose term in office as chairman expires Jan. 31, should be reappointed to a second four-year term by President Barack Obama. Bernanke has “done a very good job and I think he should be reappointed,” Feldstein said. Bernanke is due to present his semi-annual monetary-policy testimony to Congress today. Feldstein said Bernanke in his testimony today would have to “reassure the Congress and the public” that inflation won’t be allowed to get out of control following the reduction in interest rates and the addition of liquidity to credit markets. He said there “are a number of technical ways” that the Fed can contain inflation and that it would be politically difficult to increase borrowing costs at a time of high unemployment, Feldstein said. To contact the reporters on this story: Bob Willis in Washington [email protected]. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3IpfKeeveVM

295 Edition: U.S. Budget cuts and reform will help growth: Trichet

European Central Bank Chairman Jean-Claude Trichet appears before the Committee on Economic and Monetary Affairs of the European Parliament in Brussels June 21, 2010. Credit: Reuters/Thierry Roge Sun Jul 4, 2010 2:11pm EDT AIX-EN-PROVENCE, France (Reuters) - Budget cuts and structural reforms will help cement economic recovery, while bank stress tests will help restore confidence, European Central Bank President Jean-Claude Trichet said on Sunday. Government austerity drives and deficit cuts would not choke growth but rather restore confidence, he said, and repeated his opposition to Europe-wide debt issuance to spur growth. "I have no positive view of such an idea. We are in a period where we have to manage very carefully all the budgets," he told reporters on the sidelines of an economic conference in Aix- en-Provence in the south of France. "We see structural reforms as fundamental if we want to increase the economic growth potential of Europe," he added. He said he did not think Europe was facing another period of recession. Plans to stress-test European banks would also be an "important element" in restoring market confidence, Trichet said. "(For) durable growth that is sustainable in the long term, you must strengthen confidence, and that means having budgetary policies that are balanced and sustainable in the eyes of everyone," Trichet said. Trichet reiterated his call to strengthen budgetary surveillance rules under the European Stability and Growth Pact as much as possible, especially where sanctions were concerned, before envisaging changes to the treaty. "There could later be a change in the treaty, but first, within the framework of the current treaty, we need to do the maximum on strengthening prevention, on sanctions, on the quasi automatic nature of sanctions; that all is very important," he said. He also said indicators of competitiveness should be monitored as well as budget deficit levels. "At the global level it is clear that we are experiencing a recovery, which is confirmed particularly in the emerging world but also in the industrialized world" (Reporting by Lionel Laurent, Jean-Baptiste Vey and Matthias Blamont, Editing by Marcel Michelson) http://www.reuters.com/article/idUSTRE6630L020100704

296 Economist's View « Tucker Punched | Main | Paul Krugman: Addicted to Bush » Friday, July 23, 2010 Fed Watch: Bernanke Post Mortem Tim Duy looks at the Fed's likely course of action: Bernanke Post Mortem, by Tim Duy: Federal Reserve Chairman Ben Bernanke's Congressional testimony should leave little doubt about the stance of monetary policymakers. Swift reaction came from Mark Thoma, Paul Krugman, Scott Sumner, and Joe Gagnon. Simply put, an incipient second half slowdown and fears of an outright double dip are insufficient to prod additional action on the part of the Federal Reserve. Policymakers are comfortable with the idea that neither objective of the dual mandate will be met in the foreseeable future. And even should the economy deteriorate such that they are forced into additional action, the likely policy candidates are woefully insufficient to meaningfully change the path of economic activity. For all intents and purposes, the Fed is done. To be sure, the Fed would roll out its new set of lending facilities in response to another financial crisis. But setting the possibility of crisis aside, it is not clear what data flow short of a significant drop in activity would prompt a change of heart at the Fed. Market participants set themselves up for disappointment. The set up began back with the Washington Post article suggesting that policymakers were actively considering the next set of policy options in light of recent data. I suggested the threshold for such actions was actually quite high, but the story fed upon itself until it became rumored that Bernanke would signal an end to providing interest on reserves. As Neil Irwin and Ryan Avent pointed out, the Fed Chair was simply not going to make a major policy announcement of that sort in Congressional testimony. Worse, Bernanke did not appear overly concerned with the incipient second half slowdown. To be sure, he acknowledged the relatively weak data flow, but incoming information has only made the outlook "somewhat weaker," implying very little real shift in the fundamental view that the recovery is self-sustaining and sufficient to consume excess capacity over time and thus provides little reason to consider new policy options. Indeed, a substantive portion of the prepared remarks were devoted to tightening mechanisms, with the notion of additional easing left to the throwaway lines: Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability. Participants may also have been rattled by Bernanke's seemingly nonchalant attitude regarding additional easing options. From the Q&A: SHELBY: Thank you. Mr. Chairman, the minutes of the June FOMC, the Federal Open Markets Committee, meeting stated, and I'll quote, "The committee would need to

297 consider whether further policy stimulus might become appropriate if the Outlook were to worsen appreciably," end quote. Aside from taking the federal funds rate and the interest rate paid on reserves to zero, it's not clear to me what further policy stimulus would mean. If further stimulus were to involve more asset purchases that you alluded to by the Fed, would the Fed buy treasuries or would they try to channel credit to specific segments of the financial market, such as housing or perhaps even municipal debt? BERNANKE: Senator, I think it's important to preface the answer by saying that monetary policy is currently very stimulative, as you, I'm sure, you're aware. We have brought interest rates down close to zero. We have had a number of programs to stabilize financial markets. We have language which says that we plan to keep rates low for an extended period. And we have purchased more than $1 trillion in securities. So certainly, no one can accuse the Fed of not having been aggressive in trying to support the recovery. You know, that being said, if the -- if the recovery seems to be faltering, then we would at least need to review our options, and we have not fully done that review, and we need to think about possibilities. But broadly speaking, there are a number of things that we could consider and look at. One would be further changes or modifications of our language or our framework describing how we intend to change interest rates over time, giving more information about that. That's certainly one approach. We could lower the interest rate we pay on reserves, which is currently one- fourth of 1 percent. The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases. We have not come to the point where we can tell you precisely what -- what the leading options are. Clearly, each of these options has got drawbacks, potential costs. So we are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have, recognizing that, as I said, the policy is already quite stimulative. The aforementioned Washington Post article suggested that plans for additional easing were pretty well fleshed out. A subsequent interview with Boston Fed President Eric Rosengren in the Wall Street Journal cemented that inference. Bernanke is much less clear: "…we have not fully done that review." Why have they not fully done that review? Because they are simply less concerned about a second half slowdown than most of the rest of the free world, instead considering the flow of data to simply be choppy, not worrisome. From New York Fed President William Dudley today: “U.S. economic activity has expanded for four consecutive quarters, but at rates that can only be described as modest when compared with early stages of past recoveries,” he said. “The road to recovery is turning out to be a bit bumpy as relatively weak consumer spending and the ongoing problems in financial markets are keeping growth far less robust than we would like.”

298 Still, like Bernanke, Dudley views policy as quite stimulative. Why are Fed officials not willing to do more in the face of what is obviously suboptimal outcomes? First, consider the three options Bernanke lays out. The first two - committing to sustained low rates and cutting the interest on reserves - are not likely to have much impact. The implicit promise of low rates is likely already reflected in the short end of the yield curve. And while in a perfect world the Fed wouldn't charge interest on reserves, that last 25bp is likely not stifling much if any lending activity. Moreover, Bernanke appears to believe it is important to market functioning: Each of those options carries drawbacks, he told a Senate committee Wednesday. Testifying before the House Financial Services Committee today, he elaborated on the risks of doing one of them: Lowering the interest rate it pays on excess reserves — now at 0.25% — could create trouble in money markets, he said. “The rationale for not going all the way to zero has been that we want the short-term money markets, like the federal funds market, to continue to function in a reasonable way,” he said. “Because if rates go to zero, there will be no incentive for buying and selling federal funds — overnight money in the banking system — and if that market shuts down … it’ll be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.” In short, promising an extended period of low rates and ending interest on reserves would be minimally positive, but would not meet up with the expectations that would surround such moves. Indeed, the failure to meet expectations would be the real cost to the Federal Reserve. Taking these two off the table leaves expanding the balance sheet. Option 3a, not letting securities runoff, is more of an effort to maintain the status quo rather than provide additional stimulus. Again, I suspect relatively little impact. Which then brings you to Option 3b, purchase of additional securities - the only real option in my opinion. Optimally, the Fed would tie those purchases to some numerical target, such as Joe Gagnon's suggestion that the Fed purchases Treasury securities to target a 25bp target on the 3 year bond. You have to go out to three years to get some traction - at least there you have a whopping 90bps to play with. Why will the Fed ignore Gagnon? Perhaps David Wessel has the answer: Why wait? Put yourself in Mr. Bernanke's chair. When the Fed began buying mortgages, the gap between yields on mortgages and Treasurys was wide; now it isn't. Mortgage rates are very low and the housing sector is still moribund; it isn't clear pushing mortgage rates down another one-quarter percentage point would do much. The Fed could buy more Treasurys, trying to push yields on 10-year Treasurys below the already low 3%. But that could backfire. With all the deficit angst around, a Fed move to buy Treasurys could provoke cries of "they're monetizing the debt" and push up long-term rates rather than lowering them. As scary as this sounds, the Fed can't be sure of the net effect of buying more assets. It might not make things better. It would be, in short, a Hail Mary pass. And Mr. Bernanke isn't ready—yet—to throw it.

299 When it comes down to it, fear of the being seen as monetizing the debt will keep the Fed on the sidelines unless it becomes clear that the economy is actually trapped in a deflationary spiral. The bond vigilantes win again. It is worth noting that the fear of high long-term rates is somewhat irrational. Wessel continues on with a discussion of inflation expectations: Mr. Bernanke's former Princeton University colleague, Nobel laureate Paul Krugman, has become the loudest critic of Mr. Bernanke's inaction, calling the Fed "feckless" (lacking in vitality, unthinking, irresponsible) in his New York Times column. In a prescient 1998 paper about Japan, Mr. Krugman warned that other countries might similarly confront the feared "liquidity trap," the circumstance at which the central bank has cut interest rates to zero and the economy remains very weak. His advice then: "Monetary policy will be effective…if the central bank can credibly promise to be irresponsible"—by promising to create inflation in the future. The textbook point: Interest rates that matter are the inflation-adjusted ones. In recessions, the Fed effectively pushes inflation-adjusted rates below zero. But with nominal interest rates at zero, the only way to get inflation-adjusted rates lower is to get everyone believing that inflation will go up. So far so good. But then Wessel makes an odd detour: The practical point: This is easier to advise than to do safely. It would, at the very least, be hard to explain to a public already suspicious of the Fed. And it, too, could backfire. Manipulating inflation expectations is hard to calibrate. And the move would mean higher nominal (though lower inflation-adjusted) long-term interest rates. And outside of economic textbooks, higher nominal rates can hurt, pinching cash-strapped households for instance. It's risky. So economic textbooks are wrong? The nominal, not the real rate, of interest is the relevant variable? Was he sourced this view from the Fed? And would high nominal rates really pinch cash-strapped households? Perhaps we can think of an alternative view: Higher inflation expectations lifts wage growth, which in turn lowers the real cost of sustaining current debt loads and reduces the urge to reduce that debt via foregoing current consumption. Rising long rates would indicate that policy is getting traction - that policy is actually stimulative. If there is no pressure for long rates to rise, then policy is not very stimulative. Fear of inflation and rising long nominal rates look sufficient to make policymakers accept a suboptimal outcome. Sad given that neither of these are an obvious problem now. At the risk of making an already long post longer, I would point out a disturbing outcome of Scott Sumner's last two posts. In his review of the Bernanke testimony, Sumner opines: The Fed has reduced its implicit inflation target below 2%, indeed below even 1.5%. Marry that with Sumner's concerns about the Fed's pursuit of opportunistic disinflation. You quickly get to the conclusion that the Fed is not reacting to disinflation concerns because they are secretly happy, and have no intention of accelerating the healing of the labor market if that entails any risk the latest round of opportunistic disinflation is lost. So what the rest of us see as a failure to meet either of the dual mandates, the Fed

300 really believes they are meeting the most important mandate, a strict definition of price stability. Bottom Line: The Fed shows no sense of urgency with respect to the current economic situation, and appears prepared to endure a weaker second half with no policy shift. Moreover, even if the economy does worsen more than they expect, the likely candidates for policy action are more smoke than fire. The Fed knows this, and doesn't want to lose credibility on actions with little likelihood of success. A more aggressive policy stance Gagnon-style appears off the table as long as the Fed fears the possibility that such policy might actually work and push up long term rates. That means more significant action only after outright deflation expectations are evident. Appears extreme, but central bankers tend to be a conservative lot. Lacking a financial crisis, the need for more action is not apparent to them. They fundamentally believe they have done pretty much all that can be reasonably expected. Moreover, we need to reassess the Fed's inflation comfort level; they may think they are hitting one mandate just fine. http://economistsview.typepad.com/economistsview/2010/07/fed-watch-bernanke-post- mortem.html

Business Day July 22, 2010 Mortgage Securities It Holds Pose Sticky Problem for Fed By BINYAMIN APPELBAUM WASHINGTON — The Federal Reserve provided most of the money for new mortgages in the United States last year, effectively lending more than $1 trillion to American homeowners. Now the legacy of that extraordinary intervention is hanging over the central bank as it faces growing demands for an encore to help revive the flagging economy. While officials and economists generally regard the program as successful in supporting the housing market, it has left the Fed holding a vast pile of mortgage securities — basically i.o.u.’s from homeowners — that it does not want and cannot sell. Holding the securities could cost the Fed a lot of money and hamper its ability to fight inflation, while selling the securities could drain needed money from the still-weak economy. Fed officials have expressed confidence that they can finesse the dilemma by gradually selling the securities as the economy starts to recover. But they are not eager to expand the challenge they face by beginning a new round of asset-buying, one tool the Fed could use to try to stimulate growth. “In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny,” Kevin M. Warsh, a Fed governor, said in a speech last month in Atlanta. He warned that new purchases could undermine the Fed’s “most valuable asset”: its credibility.

301 Some Democrats want the Fed to pump more money into the economy to help reduce unemployment, one of the central bank’s basic responsibilities. In testimony before Congress this week, Chairman Ben S. Bernanke said that the Fed retained that option, but did not now plan to expand on the steps it had already taken. In part, Bernanke and other Fed officials say they believe that new asset purchases would be less effective now that private investors have returned to the market. The Fed became one of the world’s largest mortgage investors because no one else was interested. During the fall 2008 financial crisis, investors stopped buying the mortgage securities issued by the housing finance companies Fannie Mae and Freddie Mac. The two companies buy mortgages made by banks and other lenders, providing money for new rounds of lending, then package those loans into securities for sale to investors, replenishing their own coffers. Two days before Thanksgiving 2008, the Fed announced that it would buy $500 billion in securities issued by the two companies. By the time the program wound down in March 2010, it had spent more than twice that amount. The central bank now owns mortgage securities with a face value of $1.1 trillion. A wide range of economists say the Fed’s program — so big that purchases outstripped the issuance of new securities in some months — helped to preserve the availability of mortgage loans and helped to hold interest rates near record lows. Rates that exceeded 6 percent in late 2008 remain below 5 percent today. But the Fed now must deal with the cleanup. The central bank could hold the securities until the borrowers repaid or refinanced their loans. Brian P. Sack, an executive at the Federal Reserve Bank of New York, estimated in March that borrowers would repay $200 billion by the end of 2011. And in the meantime, the Fed is collecting regular interest payments. “We’ve been earning a fairly high income from our holdings and remitting that to the Treasury,” Mr. Bernanke told Congress on Wednesday. But holding the securities could make it harder to control inflation as the economic recovery gains strength, said Vincent Reinhart, the former head of the Fed’s monetary policy division, now a resident scholar at the American Enterprise Institute. The Fed bought the securities by pumping new money into the economy, stimulating growth. It could be difficult to reverse that effect without draining the money from the economy by selling the securities, Mr. Reinhart said. “They created reserves, and those reserves ultimately can be inflationary,” Mr. Reinhart said. “The chief risk of keeping the balance sheet big and raising rates is that you might not be able to raise rates successfully” because the impact would be mitigated by the effect of the extra money still sloshing around the system. Holding the securities also could cost the Fed a lot of money. The Fed paid some of the highest prices on record for mortgage securities, basically accepting very low rates of interest on its investments. As the economy recovers and interest rates rise, the Fed will need to accept increasingly large discounts to make the securities attractive to other investors. David Zervos, head of global fixed-income strategy at the investment bank Jefferies & Company, estimates that the value of the portfolio will drop almost $50 billion each time interest rates increase by one percentage point.

302 Selling the securities at a loss would reduce the Fed’s ability to transfer profits to the Treasury Department. Large enough losses could reduce the amount of capital held by the Fed, although it can always create more money. But perhaps the greatest risk is that investors will begin to doubt the Fed’s willingness to raise interest rates, knowing that each increase will damage its own balance sheet. “It compromises their integrity and their inflation-fighting mandate, because fighting inflation would be a direct detriment to their portfolio,” Mr. Zervos said. The Fed could avoid these problems by selling the securities now, before interest rates start to rise. But doing so would reverse the benefits of the original program, draining money from the economy while it still is weak. It would also fly in the face of the demands for the Fed to do more for the economy. A fire sale also could damage the banking industry by driving down the value of the comparable mortgage securities that banks hold in large quantities. So far the Federal Open Market Committee, comprising the board of governors and a rotating selection of presidents from the regional reserve banks, has chosen to wait. The approach favored by most of the committee, according to the minutes of its June meeting, is to start raising interest rates before beginning to sell the securities. By waiting “until the economic recovery was well established,” the minutes said, the Fed would limit the impact of the asset sales on the broader market. http://www.nytimes.com/2010/07/23/business/23banks.html?th&emc=th

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MONEYBOX Restore the Estate Tax! The billionaire, the union leader, and the heiress trying to bring back the tax on inherited wealth. By Daniel Gross Posted Wednesday, July 21, 2010, at 5:30 PM ET

So, a Treasury secretary, a labor union leader, a hedge-fund billionaire, and an heiress walk into a conference call. It's not a Catskills joke. It was the teleconference staged Wednesday morning by United for a Fair Economy's Responsible Wealth Project to discuss the need to reinstate the estate tax. The situation surrounding the estate tax is truly bizarre. The excellent book Death by a Thousand Cuts, by Michael Graetz and Ian Shapiro, describes how a tax that falls on the slimmest minority of Americans was set on the path to extinction in 2001. Legislation called for the tax to decline to the point at which it disappears entirely in 2010. Then it would bounce back to its pre-2001 level in 2011. The Republican advocates of the legislation assumed that Congress would act in the interim to permanently abolish the tax. But they didn't, in large measure because—shocker!— Republicans in 2009 refused to cooperate on a compromise. And so 2010 is turning into an excellent time for rich people to die. Sens. Jon Kyl, R-Ariz., and Blanche Lincoln, D-Ark., are working on a proposal to reduce estate taxes going forward. (They are an odd pair: The number of Arkansans subject to the estate tax each year could fit into the master bathroom of a Greenwich, Conn., mansion, and Kyl is one of those foolish deficit faux-hawks who can't abide increases in debt but is happy to push legislation that would increase the deficit by a few hundred billion dollars.) The purpose of the press conference was to show that abolishing the estate tax massively increases the deficit in order to help a few very wealthy people. Former Treasury secretary and former Citi chairman Robert Rubin opened the call, playing the role of the wise establishmentarian. He argued that the current deficits are unsustainable, and public investments in infrastructure and education are necessary to keep America strong. "Our country faces tremendous unemployment and shortfalls in investment, and we have a fiscal path that is unsustainable and dangerous in many different respects," he said. And since the estate tax "supplies revenues with no adverse supply-side effects," the proceeds could be used for deficit reduction, for public investments, or to help people afflicted by the economic crisis. Second on the call was the union leader. You know the type: barrel-chested, tough-talking, confrontational, very much into class warfare. In the union leader's worldview, the top 1 percent have been bogarting all the economic gains for the past few decades. Richard Trumka, president of the AFL-CIO, appealed not just to reason, but to emotion. He started by reading a quote from Theodore Roosevelt about the evils of inherited wealth. Speaking with disdain of the Kyl-Lincoln proposal, he said, "We think it's ludicrous that some in Congress are proposing to end the estate tax at the same time they oppose action to create jobs. Anyone who pretends to care about cutting deficits while opposing reinstatement of estate tax is clearly residing on a different planet than working people." Trumka was followed by the hedge fund magnate, one of those self-made, public-minded billionaires who can be found here and there in the tech and financial industries. These guys

304 are acutely aware of the differences between people who make money (them) and people who receive it (rich kids), between the multipliers (them) and the spenders (rich kids). To Julian Robertson, the founder of hedge fund giant Tiger Management and a major philanthropist, the economic and moral case for an estate tax increase was simple. "You get out of a credit crisis by getting your house in order, and in America's case bringing your deficit down. This implies tax increases." The fairest way to do it, he said, is to tax "the least deserving recipients of wealth, which are the inheritors." The tax is not just good for America, he said, but even for the heirs and heiresses. Robertson noted that "there are indicators that inheritors have difficulty adjusting to their inheritance." (I guess he watches Gossip Girl too.) Finally came the inheritor, on whom the mantle of great inherited wealth frequently weighs heavily. Heirs who favor an estate tax are motivated less by liberal guilt than by unease, realism, and historical perspective. They've seen how their families amassed, preserved, and passed down wealth in spite of income and estate taxes that were far higher than they are today. "My life of great comfort was made possible in spite of the estate tax," said Abigail Disney, the grandniece of Walt Disney, a filmmaker and philanthropist. "And my grandfather [Roy Disney, brother of Walt] would be the first to tell you that he was able to amass his fortune not in spite of, but because of, the American system."—the roads that enabled people to get to Disneyland, the patents that protected Mickey Mouse and Donald Duck, and the Marshall Plan, which helped provide a vast European market for the company. Heirs know that while charity has its own rewards, the estate tax and charitable deductions provide huge spurs to philanthropy. Coming from far different places, the quartet arrived at the same destination. In an era of rampant inequality, low taxes on owners of assets and capital, and record deficits, the estate tax's impending revival couldn't come at a better time. Like Slate on Facebook. Follow us on Twitter. Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at [email protected] and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback. Article URL: http://www.slate.com/id/2261254/ http://www.slate.com/toolbar.aspx?action=print&id=2261254

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The Great Recession is just the beginning By Matt Miller Wednesday, July 21, 2010; Here's a cheery midsummer thought. You know those 15 million unemployed, and that sluggish growth, and the debt hangover and de-leveraging, and those soaring deficits? Well, these woes aren't our biggest economic problems. The real test for the U.S. economy starts once we get past the fallout from the burst housing and banking bubbles that triggered the Great Recession. And when it comes to that challenge - - which involves preserving U.S. living standards in a world of global competition -- we either (1) don't know what to do, or (2) we do know but seem to have little intention of doing it. A brief trot through history places this moment in context. After World War II, when the United States was the only economy left standing, we began an unprecedented economic run. "You had a 60-year period where every new industry of huge value-added or breakthrough innovation or high risk -- whether it was pharma, biotech, software, personal computing or semiconductors -- were all totally U.S.-based," Bill Gates said in 2007. The shared prosperity this dominance made possible built the middle class. But the age of U.S. supremacy had to end sometime, and, starting two decades ago, rising powers such as India and China began the reforms that would make them genuine competitors. From the point of view of humanity, these nations' rise has been fantastic news. Hundreds of millions of people have been lifted from poverty, with billions hoping to follow. But for workers in advanced countries, the wage strains were inevitable, as it became feasible to locate more work with low-cost (and, increasingly, high-quality) labor anywhere on the planet. It was at this point in the saga, when research already showed that up to 100 million Americans were living in households earning less than their parents did at a similar age, that -- bam! -- the housing and financial bubbles burst. Historians may therefore think of the Great Recession as Decline, Interrupted. The thing to remember is that these are different kinds of events. The bursting bubbles, and the associated market panic and credit freeze, was a heart attack, to which the authorities responded with emergency measures. But "the fate of the middle class" in a global era is different. It's more like cancer -- a slower yet more profound threat, requiring a fundamental renewal of American competitiveness. And without a galvanizing "emergency." Broadly speaking, there are two big things we need to do. The first, put well (if not in a sexy slogan) by economist Michael Spence in the Financial Times recently, is "to create capital- intensive jobs that have labor productivity levels consistent with advanced country incomes." The second big thing is to make sure Americans have the skills to perform these jobs. How are we doing on this agenda? Dismally. For starters, U.S. elites simply don't think in terms of a national economic strategy of the kind Spence states so simply. To be sure, the stimulus funded some energy technologies with real promise -- advanced storage and lighting technologies, and power conversion devices, for example -- that are poised to lift productivity

306 in these areas dramatically. Such productivity gains can make higher wages sustainable. But we're not yet close to the needed scale of public- and private-sector effort here. And, in any event, why will firms that can locate work anywhere manufacture these breakthroughs in America? As former Intel CEO Andy Grove argued in Bloomberg Business Week recently, it's not enough to do the product innovation in the United States; we need to do the manufacturing, too. That's the only way, Grove says, to gain the hands-on experience with products that leads to all subsequent innovations. Surrender the manufacturing and you lose this virtuous cycle -- a logic that leads Grove to call for protectionist measures if need be to make sure America keeps this innovation-to-manufacturing-to-good-jobs link here. On education, meanwhile, the administration's agenda, though "bold" by historic standards, isn't nearly ambitious enough. In terms old SAT-takers can understand, "Race to the Top" is to "needed education reform" as "little seed" is to "giant oak." At this pace we're looking at a decades-long fix. No politician will talk about the prospect of declining living standards. Business leaders who know what's afoot abroad talk privately about it all the time. The defining question of our era may be this: What do we do if incremental change isn't equal to renewing American competitiveness, but our political system isn't capable of producing more than incremental change? What if waiting for our "Sputnik moment" turns out to be a lot like waiting for Godot? Matt Miller, a senior fellow at the Center for American Progress and co-host of public radio's "Left, Right & Center," writes a weekly column for The Post. He can be reached at [email protected]. Matt Miller The Great Recession is just the beginning July 21, 2010http://www.washingtonpost.com/wp- dyn/content/article/2010/07/21/AR2010072103052_pf.html

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America needs a growth strategy By Michael Spence Published: July 8 2010 21:53 | Last updated: July 8 2010 21:53 As the International Monetary Fund warned on Thursday, America’s economy shows worrying signs of weakness. Worse, and in common with other developed countries, it also lacks a credible strategy for longer-term growth. Without such a strategy, a strong global recovery is unlikely. The structural evolution of the US economy over the past 15 years has been driven by excess consumption, enabled by debt-fuelled asset inflation. The crisis put a stop to this, but structural deficiencies remain. America’s export sector is too small and underdeveloped. The financial sector became outsized, and is down-sizing. A pattern of underinvestment in infrastructure has left the economy less competitive than it should be. Energy pricing issues have been ignored, causing underinvestment in urban infrastructure and transport. The education system has widespread problems with efficiency and effectiveness. Elsewhere, state budgets are in distress as a result of insufficiently conservative budget policies. Even with a fiscal strategy that balances short-term stimulus and longer- term stability, America must still address the composition and size of expenditures, investments and revenues. To finance growth-supporting long-term investments, domestic private consumption has to shrink. This means higher taxes. In addition, existing government expenditure must be shifted away from consumption and towards investment, meaning fewer government services. Restoring fiscal balance in a way that supports longer-term growth will therefore be painful. But even that is not enough. The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove, the long-time chief executive of Intel. He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how. There is little doubt that America’s social contract is starting to break. It had on one side an open, flexible economy, and on the other the promise of employment and rising incomes for the motivated and diligent. It is the second part that is unravelling. Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully for an adequate share of the tradable sector. The employment effects of these trends over the past 15 years have been masked by excess consumption and the overdevelopment of sectors such as finance and real estate. The latter are now set to shrink, as multinational companies grow where they have access to high-growth emerging markets in Asia and Latin America. Such companies will locate their operations where market and supply chain opportunities lie. In the tradable sector, in manufacturing and in a growing group of services, that means outside advanced countries.

308 The availability of low-cost, disciplined labour forces in developing countries reduces the incentive for these companies to invest in technologies that enhance labour productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking. The shrinkage creates problems. Over-specialisation could threaten independence and national security. Spillovers between R&D, product development and manufacturing will be lost if manufacturers leave. Employment will stagnate. Income distribution will move adversely and the social contract will erode further. Solutions to these problems are not easy to find. The unequal distribution of income can be dealt with through the tax system, although this does not attack the underlying problem. Protectionism could alter the pattern of out-migration of manufacturing, but only by imposing costs on domestic consumers and risking the breakdown of the open global economy model. To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council, announced on Wednesday, is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of technology in parts of the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labour productivity levels consistent with advanced country incomes. Would this damage developing countries? Clearly not. The US (or even developed economies combined) does not have hundreds of millions to employ. A targeted programme would leave the vast majority of labour-intensive manufacturing right where it is now: in the developing world. With new credible growth strategies in America (and other advanced countries) developing countries may even be willing to play an important complementary role in restoring global demand through, for example, the reduction of excess savings. We are already on a lengthy and bumpy road to a new normal. That is unavoidable. The risk is that without a new direction in American economic policy, the new normal may be as unpleasant as the journey. The writer received the 2001 Nobel memorial prize in economics and chairs the Commission on Growth and Development Michael Spence America needs a growth strategy July 8 2010 21:53 http://www.ft.com/cms/s/0/675c2508-8ac1-11df-8e17-00144feab49a.html?ftcamp=rss

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U.S. goes from leading to lagging in young college graduates By Daniel de Vise Washington Post Staff Writer Thursday, July 22, 2010; 6:07 AM The United States has fallen from first to 12th in the share of adults ages 25 to 34 with postsecondary degrees, according to a new report from the College Board. Canada is now the global leader in higher education among young adults, with 55.8 percent of that population holding an associate degree or better as of 2007, the year of the latest international ranking. The United States sits 11 places back, with 40.4 percent of young adults holding postsecondary credentials. The report, to be presented Thursday to Capitol Hill policymakers, is backed by a commission of highly placed educators who have set a goal for the United States to reclaim world leadership in college completion -- and attain a 55 percent completion rate -- by 2025. The campaign mirrors President Obama's quest to reclaim world leadership in college graduates by 2020, although it gives the country five more years to get there. The Commission on Access, Admissions and Success in Higher Education set its goal in December 2008, seven months before Obama's American Graduation Initiative. "I don't think what we're saying and what the president's saying are that different," said Gaston Caperton, president of the College Board, the New York nonprofit agency responsible for the SAT and AP tests. The United States ranks somewhat higher, sixth, among all nations when older adults are added to the equation, according to the report, which Caperton said would be the first of many annual reports charting progress toward the 2025 goal. But the report focuses more heavily on younger adults, who are feared to be the first generation in the modern era that will be less well-educated than their parents. Educational attainment has risen gradually among 25- to 34-year-olds in recent years, according to census data, with the share holding associate degrees or better rising from 38.1 percent in 2000 to 41.6 percent in 2008, the latest figure available. The report is tailored to state leaders and ranks states by college completion among young adults. The District of Columbia ranks higher than any state, with 62.2 percent of 25- to 34- year-olds holding postsecondary degrees. Maryland ranks 12th among states, with a 38.6 percent completion rate; Virginia ranks 17th, with a 36.5 percent rate. The commission is urging state and national leaders to pursue a 10-part "action agenda," which recommends such initiatives as universal pre-kindergarten for low-income families, better college counseling and dropout prevention, and streamlined college admissions, all of which might raise college completion rates. The group is led by William E. Kirwan, chancellor of the University System of Maryland. "We have a real, objective way every year to look at every state and see how they're doing," Caperton said, "and we're doing this with legislators all over the country." http://www.washingtonpost.com/wp- dyn/content/article/2010/07/22/AR2010072201250.html?wpisrc=nl_pmheadline

310 TRIBUNA: JOSÉ MARÍA ZUFIAUR Inestabilidad laboral contraproductiva La reforma laboral de Zapatero generaliza la inestabilidad, abarata y facilita el despido y debilita la negociación colectiva. No es buena para los trabajadores ni para el desarrollo de la economía ni para nuestra cohesión social JOSÉ MARÍA ZUFIAUR 22/07/2010 Desde que, en 1980, se aprobara el Estatuto de los Trabajadores en España se han realizado más reformas laborales que en ningún otro país europeo. Tres de ellas han configurado el actual modelo laboral. Las tres fueron realizadas sin consenso con los sindicatos. Las tres se han superpuesto, agravando cada vez más las disfunciones del sistema. Su autoría es la responsable del modelo laboral que tenemos: precario, volátil, dual, con alto porcentaje de bajos salarios y corresponsable de la baja productividad. Estos antecedentes deberían haber llevado al actual Gobierno, artífice de la nueva reforma, a tener en cuenta las experiencias del pasado, con un análisis más objetivo de la realidad, sin utilizar de nuevo la crisis para imponerla, con un enfoque totalmente diferente y en sintonía con el modelo productivo y de sociedad que queremos construir. Aduciendo la rigidez del mercado de trabajo que, se argüía, explicaba las altísimas tasas de paro españolas, la reforma de 1984 instauró, bajo el lema de "más vale un trabajo precario que ninguno", la contratación temporal sin causa y la finalización del contrato con una mínima indemnización. La temporalidad pasó a cronificarse y afectar a un tercio del mercado de trabajo. La reforma de 1994, afirmando que la flexibilización del despido y el aumento de la discrecionalidad empresarial corregirían la temporalidad de la anterior, amplió las condiciones del despido individual y transfirió importantes parcelas de las condiciones de trabajo a la decisión empresarial. Sin que la temporalidad bajara, el incremento de la arbitrariedad empresarial debilitó la negociación colectiva y bajó los salarios. La reforma de 2002, con parecidos argumentos, convirtió en superfluo el recurso a la tutela judicial en el despido improcedente y redujo, mediante la eliminación de los salarios de tramitación, los costes del mismo. Esa reforma sumó a la altísima temporalidad acarreada una penetración suplementaria de la inestabilidad laboral en el universo de los contratos indefinidos, al crecer de manera exponencial los despidos objetivos improcedentes. Aproximándose paulatinamente al mantra de la reforma laboral total, los sucesivos Gobiernos han dejado de abordar problemas esenciales de la economía española. En lugar de dedicarse a darles respuesta, el Gobierno de Zapatero la ha encarrilado también por donde los anteriores. Usando como pretexto el muy real problema de la dualidad entre trabajadores temporales y fijos, en lo que realmente centra su reforma es en un drástico abaratamiento del despido y en hacerlo más automático, en el debilitamiento de la negociación colectiva y en el reconocimiento de las agencias privadas de colocación. Esta reforma cierra el bucle de las anteriores y generaliza la inestabilidad. Su propuesta de "máximos" (aún sin descartar) es el "contrato único", idea propuesta en 2004 por dos economistas franceses y jamás concretada en ninguna parte. Hasta ahora. Aquí lo quieren introducir, en su versión integral o a través del ensamblaje de piezas sueltas. Las consecuencias de tal reforma son totalmente previsibles: despido mucho más barato y fácil, fundamental vaciamiento de la negociación colectiva, extensión de la "selección adversa" en la intermediación laboral. La dualidad que pretende "solucionar" haciendo a todos, temporales y fijos, igual de inestables en realidad se mantiene

311 creando, al tiempo, una nueva y darwinista segmentación entre antiguos y nuevos contratados fijos, entre cualificados y no cualificados, entre contratados de corta y de larga duración, entre "viejos y "jóvenes". Una amalgama de intereses empresariales, de apriorismos ideológicos, de diagnósticos sesgados, de argumentos económicamente poco fundados, ha sido la principal causa de esta obsesión por la reducción del precio del despido y del coste del trabajo en las sucesivas reformas. Esto ha alimentado, a su vez, una cultura empresarial centrada en el ajuste del factor trabajo y no en la flexibilidad interna pactada, la innovación y la productividad. Estos 30 años de reformas laborales nos han demostrado, entre otras cosas, que no era cierto que la mayor tasa de paro se debiera al modelo laboral, sino a la obsolescencia de nuestro aparato productivo y a la incorporación, sin parangón con otros países, de población activa al mercado de trabajo: mujeres, trabajadores del campo, inmigrantes. No era cierto tampoco que nuestra economía no fuera capaz de crear empleo: cuando la economía crecía, creábamos más empleo que nadie. Ni siquiera era verdad que nuestra denigrada legislación laboral impidiera la creación de empleo fijo: entre 1995 y 2007 se ha creado mucho más empleo fijo que temporal. No es cierto que nuestra tasa de paro estructural sea más elevada que las de otros países (las tasas de paro masculinas y las de varias CC AA llegaron prácticamente al pleno empleo en 2007). No era cierto que los obstáculos para despedir fueran los mayores del mundo: según el Banco Mundial son de los menores de la UE. No es cierto que nuestra regulación del despido sea la más severa y cara: la OCDE nos sitúa en una posición intermedia y muy por debajo de países como Alemania, Suecia, Holanda, Francia. Tampoco es cierto que en nuestro mercado laboral no haya movilidad ni flexibilidad. Tenemos demasiada, pero de la nociva: estamos a la cabeza de Europa en rotación del empleo y en despidos, según la UE y la OCDE. No es creíble, igualmente, que con la generalización de la inestabilidad vaya a aumentar la productividad. Porque es nuestra gran inestabilidad laboral la que provoca la baja y contracíclica productividad que tenemos. Por ello, esta reforma laboral, que provoca más inestabilidad, es mala para los trabajadores pero también para el desarrollo de la economía y para nuestra cohesión social. Necesitamos cambiar de enfoque. Ello debería significar tres cosas. Para empezar, colocar la productividad, el cambio del modelo productivo y el tipo de sociedad a la que aspiramos en el frontispicio del debate sobre la reforma laboral. Implica un diagnóstico compartido, el desarrollo del capital humano, la apuesta por la innovación y el desarrollo sostenible y por un modelo de empresa que crea en el empleo de calidad y en relaciones laborales concertadas y cooperativas. En segundo lugar, una decidida apuesta por la estabilidad laboral. La precariedad, la inestabilidad y la volatilidad son antagónicas con el aumento de la productividad, con la implicación del trabajador, el aprendizaje organizacional y estrategias a largo plazo que aumenten el valor añadido. Los modelos laborales que promueven la confianza, la seguridad en el empleo, la formación y la autonomía estimulan la productividad. Todo ello requiere apostar por sindicatos fuertes, con implantación y participación en el seno de las empresas. Hace falta, además, repensar qué se entiende por protección del empleo. No es la mejor protección, por ejemplo, que aunque el precio del despido improcedente sea alto se despida mucho y fácilmente. Menos aún puede proteger un despido más fácil, más barato y subvencionado, como establece esta reforma. Lo que quieren los trabajadores y sus sindicatos es que la combinación de la ley, del poder sindical y de la protección social les proteja más, aunque la indemnización sea menor, para evitar en lo posible el despido y, en su caso, hacer más fácil una buena recolocación. Es la lógica iniciada con la reforma de 1997 y

312 que luego se desnaturalizó. Esa es también la axiología del derecho del trabajo: dar prioridad absoluta al empleo como valor. Cambiar el enfoque representa acercarnos a lo que sucede en los países europeos más competitivos y cohesionados, en los que el despido improcedente o injustificado es más barato, pero muy infrecuente; los sindicatos son más fuertes e intervienen mucho más que aquí en los despidos individuales y colectivos; es más difícil que un juez declare un despido socialmente justificado; las empresas optan por reducir la jornada en vez de despedir; sus obligaciones en la recolocación de los excedentes laborales son más exigentes y efectivas, los sistemas de protección del desempleo más extendidos; la obligación de formación y el reconocimiento de la experiencia profesional más establecidas, los servicios públicos de intermediación y las políticas activas de empleo mucho mejores. Esta reforma, en cambio, no nos acerca, en el ámbito laboral, a los países más avanzados de Europa sino a Estados Unidos o a los países del Este. http://www.elpais.com/articulo/opinion/Inestabilidad/laboral/contraproductiva/elpepuopi/2010 0722elpepiopi_11/Tes

313 Tribuna - Federico Navarro Nieto Tiempo de reformas en la negociación colectiva Federico Navarro Nieto - 21/07/2010 Bajo la aparente calma del proceso de diálogo social, el marco jurídico de la negociación colectiva experimenta cambios sutiles cuya traducción en una más ambiciosa política de reformas queda a la espera de que finalice el periodo fijado por los interlocutores sociales en el Acuerdo para el Empleo, de febrero de este año. Un ambiente acelerado e imprevisible de reformas hace presagiar cambios sustanciales en un sistema de negociación ineficiente económica y laboralmente. Por lo pronto, el Decreto-Ley 10/2010 refuerza el papel de los acuerdos de empresa, en sintonía con las presiones hacia la descentralización del sistema negocial. El ejemplo lo encontramos en la regulación de las cláusulas de descuelgue del artículo 82.3 de la Ley del Estatuto de los Trabajadores (LET). La nueva versión del precepto legal mantiene una redacción escueta y genérica, que no contribuye a despejar la incertidumbre sobre la causalidad y los riesgos de judicialización propios de la situación anterior, pero presenta matices importantes. Aparte de ciertas mejoras técnicas, con esta nueva redacción se abre la posibilidad del descuelgue no sólo a las empresas con pérdidas actuales, sino también a aquellas que previsiblemente las tendrán en el futuro. Lo relevante es que la justificación y las reglas del descuelgue se acuerdan dentro de la empresa, lo que probablemente facilite un menor rigor y permita una mayor flexibilidad en las respuestas a las contingencias empresariales (en condiciones, duración del descuelgue), frente a la lógica centralizadora de la comisión paritaria del convenio sectorial con la regulación anterior. Pero la autonomía de la negociación empresarial requiere ciertas cautelas allí donde es discutible el poder negociador de los trabajadores (pequeñas empresas), donde debieran mantenerse funciones de asesoramiento y control de los contenidos de los acuerdos por la comisión paritaria del convenio. Es importante subrayar que sin una exigencia real de acreditación causal y de control del contenido de los acuerdos, las cláusulas de descuelgue pueden constituirse en un peligroso instrumento de competencia desleal y de dumping salarial. Como decimos, la situación de ineficiencia económica y laboral del sistema negocial requiere cambios en aspectos nucleares, entre ellos la estructura de la negociación. Su reforma debe dirigirse a facilitar un modelo articulado, como regla general, sobre el binomio sector/empresa. La opción de un modelo que sitúe a la negociación de empresa como eje del sistema conlleva el riesgo de hacer de la negociación un Far West incompatible con el objetivo de regulación de la competencia de la oferta de trabajo y de tutela de los trabajadores mediante la garantía de ciertas condiciones laborales mínimas, que son al fin y al cabo funciones históricas de la negociación sectorial y garantía de cohesión del sistema de relaciones laborales. Por otro lado, un objetivo legislativo de racionalización de la negociación pasa por acabar con el modelo provincial imperante en España, que ha demostrado ser un ámbito con dificultades para coordinar los efectos macroeconómicos de la negociación y, al mismo tiempo, alejado de las exigencias de dinamismo negocial de las empresas. Sobre todo ha demostrado ser un ámbito refractario a la modernización propugnada desde el ámbito confederal. La reforma debería orientarse a garantizar la capacidad de los convenios sectoriales estatales para establecer reglas de articulación de la negociación de sector, y su preferencia aplicativa en la regulación básica de determinadas materias (en la línea del artículo 84 párrafo tercero

314 vigente). Este ámbito podría articularse con convenios autonómicos de eficacia general (dependiendo de las peculiaridades del sector productivo y del ámbito autonómico). Los convenios sectoriales provinciales deberían quedar desprovistos de eficacia general, aplicándose únicamente a los representados en el convenio (salvo extensión de sus contenidos conforme a las reglas de articulación que fije el convenio estatal). En tercer lugar, en la línea trazada por el decreto-ley, debe reforzarse el espacio en el que tengan autonomía reguladora los convenios o acuerdos de empresa siguiendo el modelo del nuevo 82.3 LET. En definitiva, se trata de hacer efectivo un modelo de descentralización coordinada que proporcione racionalidad y dinamismo a la negociación, salvaguardando la autonomía como elemento vertebrador del gobierno de la negociación colectiva. Federico Navarro Nieto. Catedrático de Derecho del Trabajo y de la Seguridad Social de la Universidad de Córdoba http://www.cincodias.com/articulo/opinion/Tiempo-reformas-negociacion- colectiva/20100721cdscdiopi_8/cdsopi/

315 Business Day

July 21, 2010 No Fed Plans to Give More Support, Bernanke Says By SEWELL CHAN WASHINGTON — The chairman of the Federal Reserve, in saying that it had no immediate plans to provide additional support to the economy, dashed the hopes of some economists and executives who have been pushing for action to add momentum to the sluggish recovery. The chairman, Ben S. Bernanke, said Wednesday that the recovery was continuing at a modest pace, though with a “somewhat weaker outlook.” He projected that the unemployment rate would remain well above 7 percent through the end of 2012, and the duration of President Obama’s current term. That, too, was a discouraging note to Washington incumbents facing tough re-election fights. Mr. Bernanke’s statement that the Fed had no imminent plans to go beyond its current strategy of keeping short-term interest rates exceptionally low pushed stock prices down. The Dow Jones industrial average fell 1.07 percent, or 109.43 points, to close at 10,120.53. In presenting the Fed’s semiannual monetary policy report to Congress, Mr. Bernanke said that it would take “a significant amount of time” to restore the 8.5 million jobs lost in the United States in 2008 and 2009, and that “the economic outlook remains unusually uncertain.” He also warned that financial conditions, particularly the European debt crisis, had “become less supportive of economic growth in recent months.” Testifying before the Senate Banking Committee, Mr. Bernanke for the first time publicly discussed additional monetary policy tools the Fed could use to prop up the economy, having lowered short-term interest rates as far as they can go and purchased nearly $2 trillion in mortgage-backed securities and Treasury debts to push long-term rates down. First, he said, the Fed could signal to the markets that it intended to keep its benchmark federal funds rate, the rate at which banks lend to one another overnight, at zero to 0.25 percent for even longer than the “extended period” the Fed has been projecting. Second, the Fed could lower the interest rate it pays on excess reserves, the deposits that banks keep at the Fed in excess of what they are required to keep, from its current level of 0.25 percent. Third — and the mostly widely discussed option — the Fed could again expand the size of its balance sheet, which stands at about $2.3 trillion, by buying additional Treasury debts or mortgage-backed securities, or even other classes of assets, like municipal bonds. On a smaller scale, the Fed could also reinvest the cash it received when the underlying principal on mortgage bonds on its books was repaid, a step that would also keep the Fed’s balance sheet from shrinking. “We have not come to the point where we can tell you precisely what the leading options are,” Mr. Bernanke told Senator Richard C. Shelby of Alabama, the top Republican on the Banking Committee. “Clearly, each of these options has got drawbacks, potential costs. So we’re going to continue to monitor the economy closely and continue to evaluate the alternatives that we have, recognizing, as I said, that policy is already quite stimulative.”

316 When Mr. Shelby asked whether the Fed was “running out of options,” Mr. Bernanke replied, “I think we do still have options, but they’re not going to be the conventional options.” Mr. Bernanke told Senator Jim Bunning, Republican of Kentucky, that the Fed had no plans to take those actions “in the near term,” but added, “I do think that there is some potential for some of those steps to be effective, and we’ll continue to look at them.” Minutes from the June meeting of the Federal Open Market Committee, the Fed’s main policy-making arm, indicated that a few officials had a new worry: deflation. Those officials believe that inflation — which is running at about half the Fed’s desired range of 1.7 to 2 percent — has been so low that it could turn into a dangerous spiral of falling prices like the one that has plagued Japan since the mid-1990s. “Forecasts are very uncertain, but I don’t view deflation as a near-term risk for the United States,” Mr. Bernanke told Mr. Shelby, noting that inflation expectations had remained stable. “I think the Federal Reserve does have the capacity, the tools, should deflation occur — which, again, I don’t believe is very likely — to reverse it, and we would be very assiduous in doing that,” the chairman added. “I don’t consider that to be a very high risk at this point.” Mr. Bernanke’s testimony took a more cautious tone than he did in February. The chairman noted weakness in the housing market, “with the overhang of vacant or foreclosed houses weighing on home prices and construction.” He called the slow recovery of the job market “an important drag on household spending.” And he noted that the growth in private payrolls — about 100,000 jobs a month in the first half of the year — was “insufficient to reduce the unemployment rate materially.” The Fed expects the economy to grow this year by 3 to 3.5 percent, picking up only slightly, to 3.5 to 4.5 percent, in 2011 and 2012. The unemployment rate is projected to drop to 7 to 7.5 percent by the end of 2012 — still far higher than the 5 to 5.3 percent that the Fed now considers to be full employment. Mr. Bernanke said of the committee’s last meeting: “Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as weighted to the downside.” Hours before his testimony, Mr. Bernanke had looked on as President Obama signed into law a far-reaching overhaul of the financial regulatory architecture. In his appearance before the senators, he said the new law, along with tougher standards for bank capital and liquidity now being developed by international regulators, “will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years.” As has become common, senators of both parties pressed Mr. Bernanke to weigh in on the fiscal questions that have bitterly divided Congress. Mr. Bernanke held to his view that additional small-scale fiscal stimulus could be beneficial to the economy now, if combined with medium-term measures to rein in the high deficits. “I would be reluctant to withdraw that support too precipitously in the near term,” Mr. Bernanke told the committee’s chairman, Senator Christopher J. Dodd, Democrat of Connecticut. “At the same time, to maintain confidence and keep interest rates low, it’s important that we have a strong and credible plan to reduce deficits ove the coming years.” SEWELL CHANNo Fed Plans to Give More Support, Bernanke Says July 21, 2010 http://www.nytimes.com/2010/07/22/business/22fed.html?_r=1&th&emc=thr

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Subject: JPMorgan Private Bank - Eye on the Market - July 21, 2010 Attached is our "Eye on the Market" update written by Michael Cembalest, Chief Investment Officer for the J.P. Morgan Private Bank. The summary includes our latest thoughts on the financial markets, the economy, and investment recommendations. Please do not hesitate to call or email us with any questions, comments and ideas. Let us know if you wish to be removed from this email going forward. Eye on the Market, July 21, 2010 Topics: Market and M&A update, taxes and Future Shock Market update. European bank stress tests will be released July 23. Many securities firms conducted their own analyses in advance, to anticipate potential capital needs. J.P. Morgan Securities published their version last week, estimating that across listed and unlisted banks, capital needs would be around 80 bn EUR. Taken at face value, that should not be challenging for Europe, since in the U.S., similar levels of capital were needed in May 2009 on top of an equity base that was half the size (see first chart). However, there are a truckload of unanswered questions, including: * Does it make sense that the adverse case will use GDP assumptions that are only 3% below EU Commission forecasts? * Will investors recapitalize Spanish Cajas and German Landesbanken, which are not strictly run as for-profit enterprises? * How adequate are their loss assumptions? For Germany, defaulted commercial real estate loans are assigned a 30% loss, but only 5.2% are assumed to default (Barclay’s capital shortfall estimates for Landesbanken are 10x higher, given harsher assumptions). In Spain, assumed losses on defaulted residential mortgages are 25%, but only 3.6% are assumed to default. There are more recourse loans in Europe than in the U.S., but these default assumptions may be light given deflationary pressures we have written about often over the last few months. • Will adverse case losses only be applied to sovereign bonds held in trading accounts, or also to bonds held in “hold to maturity” accounts, which represent 40%-60% of sovereign holdings at Spanish and Greek banks?

We believe that European banks have lost access to debt markets primarily due to [a] excessive reliance on wholesale funding, and [b] questions about respective sovereigns being

318 able to bail them out. More Tier 1 capital always helps, but does little to address either of these concerns. More next week, after the results are announced. U.S. corporate profits remain a bright spot. We anticipate another strong quarter in Q2, and P/E multiples are low, even after adjusting for excess optimism by analysts. But that sound you heard last week was the shredding of overly optimistic GDP forecasts for Q2 and the rest of 2010 across the industry. A slowdown in spending, labor, housing, manufacturing, confidence, small business sentiment and exports began in June. Globally, semiconductor sales hit a 25-year high relative to world GDP, a sign the global economy may be in for a slower pace. A constructive outlook from here rests on better spending and payroll data. The basis for such a view: business spending has been a reliable leading indicator of employment for much of the last 50 years (2nd chart). All things considered, we remain concerned about the growth impulse in a post-stimulus world, and have positive but muted expectations for growth and equity market returns for the remainder of the year. Given this outlook, we have been allocating less to directional equities and more to credit and hedge funds, including merger arbitrage [EoTM March 15]. We’ve been watching merger arb since last year, when corporate cash balances hit a 50-year high relative to tangible assets. Merger arb strategies tend to benefit from more transactions, and premiums paid in excess of 15%. As shown, we are seeing both trends in place. Recent transaction premiums have been even higher than in Q1; in the last 2 weeks, the average premium has been above 30%. Recent deals include: Aon - Hewitt; United Financial-LSB-Smithtown; Carlyle - NBTY; J&J - Micrus Endovascular; Tyco Electronics - ADC; Honam Petrochemicals - Titan; TPG – Healthscope

Twilight I took a couple of days off last week to attend a spousal family reunion in northern Wisconsin. One of the attendees is well-versed in both economics and taxation, having worked in and around DC for many years with politicians on both sides of the aisle. The conversation on the U.S. fiscal deficit was sobering:+ * Next steps are likely to include removal of the tax cuts on the wealthy (through both higher rates and the reduction of allowable deductions). This would run counter to history, given the tendency for easier fiscal policy in year 3 of the Presidential cycle. But the current US public debt is at levels not seen in the last 60 years, with little improvement in sight. * This is the first act of a well-rehearsed play. All of Washington knows that raising income and capital gains taxes on the wealthy won’t solve the deficit problem; there aren’t enough of them. Raising capital gains tax rates also runs into the problem of reduced gains realization, which happened in 1986 (gains realizations rose by 90% before the tax hike).

319 * The administration is considering changes to corporate taxes (e.g., tighter interest allocation rules which raise effective tax rates on multinationals). These changes run counter to what other countries are doing (lowering corporate tax rates, and encouraging overseas expansion). * Tax increases are already underway at the state/local level, and are misleading some analysts into seeing cyclically-driven growth in state tax revenues. According to the Rockefeller Institute, after excluding the impact of legislated tax increases in NY and California, tax revenues across all states are still down 1.5% vs 2009. * A Value Added Tax could raise revenue, stimulate investment and dampen consumption (150 other countries use them, the U.S. and Saudi Arabia being the only exceptions in the G- 20). But a VAT has historically been opposed by Congress, in part since it’s harder to manipulate than income taxes to favor certain constituencies via exemptions, preferences and credits * The simplest and least economically distortive way to raise tax revenue is to raise all brackets by 3%-5%. But this is likely to be opposed for as long as possible. Why? Globalization (in particular, the rise of China and India beginning in the 1990s) set in motion an irreversible process of downward wage convergence of US workers with the rest of the world. Isolationism is a failed strategy, and worker retraining programs can only do so much. As a result, supporters of wealth redistribution see an (even) more progressive tax code as a critical part of maintaining the social fabric. * The health care bill complicates the problem. The bill did not introduce any mechanisms for reducing future health care spending, and its “savings” come from promised reductions in future growth, making them highly suspect. While none of this is groundbreaking, I was struck by the presumption of its inevitability. On the insufficiency of high net worth individuals to solve the deficit problem, we knew that already. In the September 8, 2009 EoTM, we showed how a 5% tax increase on adjusted gross incomes over $250k barely makes a dent in the OMB’s deficit forecast (see first chart). On wage convergence and the decline in America’s advantage, per capita GDP relative to the rest of the world does show a declining trend beginning in the mid 1990s, coinciding with the rise of China and India. It’s the speed of the decline (a), rather than the level, that is the issue here.

The most jolting part of the discussion was about what’s not captured by the OMB: the impact of entitlements on future generations. A research paper prepared for the European Commission Directorate-General for Economic and Financial Affairs examined unfunded entitlements in both Europe and the U.S (b). This problem has been well-advertised, but has

320 always existed in the abstract. Horizons are getting shorter, making near-term tax policy decisions hostage to promises made in the past. The charts below are pretty disturbing. They show the magnitude of unfunded entitlements, relative to the size of each country’s existing public debt. Unfunded entitlements dwarf the size of today’s public debt (c), usually by a ratio of 8 or 9 to 1.

How much might it cost to pay these entitlements when they come due? * By 2020, the average EU country would need to raise its tax rate to 55 percent of national income to pay promised benefits * The U.S. could fund its shortfall by doubling the 15.3 percent payroll tax on employers and employees (forever) * Alternatively, the U.S. could reduce discretionary spending by 80%, on things like education, defense and environmental protection. Why so high? There’s not enough discretionary spending left (the OMB estimates that mandatory spending will make up 71% of government expenditures by 2016) * Of course, the other option would be the printing press (inflation), which would be worse given how much would be needed Some politicians and think tanks (e.g. the Tax Policy Center) have argued that tax revenues and government spending as a % of US GDP are not that high, so there’s room for both to rise. The analysis above renders such claims disingenuous at best. Measures of current spending do not capture the scope and size of government programs that already exist, and which will have to be paid for, although no one knows how. Richard Fisher (Dallas Fed President (d)) likens the US entitlement burden to German attacks on the UK in the 20th century, the costs of which eventually sunk the British pound; except this time, the wounds are self-inflicted. If actual Wall Street and oil industry misdeeds did not exist, politicians would have to invent them, so as to distract the public from what they have created, a leviathan of poorly-disclosed obligations which are 10 times the cost of all wars since the American Revolution (e).

Talking about the vapid Twilight film series over dinner was bad enough. Talking about the Twilight some of our children will inherit was far worse.

Michael Cembalest Chief Investment Officer

321 J.P. Morgan Private Banking

Notes: (a) The rise of under-developed countries is a good thing for the world, and in the abstract, suggests a larger amount of global output that everyone benefits from. But much higher wages and entitlements in developed countries make for a much more complicated outcome. This issue is covered by Clyde Prestowitz in "Three Billion New Capitalists: The Great Shift of Wealth and Power to the East". (b) “Unfunded”, meaning not already paid for by Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays and all other revenue collected under current rules. Medicare Part D (prescription drugs) added several trillion to the problem. (c) Future fiscal imbalances are a function of demographics, fertility, entitlement programs for health and social welfare, and labor productivity growth. Most governments use cash rather than accrual accounting (exceptions: Sweden and New Zealand). Why cash accounting? FDR originally conceived of social security as a system whereby individuals would fund their own retirements through payroll tax contributions. But Congress realized this would not help those suffering from the Depression, so pay-as-you-go system was used, making each generation’s retirement the responsibility of its children. Medicare was also conceived as a self-funded plan; that did not last long. (d) As per Richard Fisher: how much would it cost for each American family to pre-fund these entitlements? Answer: $1.3 million. (e) “Costs of Major U.S. Wars”, Congressional Research Service, June 2010, which computes costs in constant FY 2011 US$. CEBS Commission of European Bank Supervisors OMB Office of Management and Budget SCAP Supervisory Capital Assessment Program For additional information on the entitlement time bomb, see: "The Looming Entitlement Fiscal Burden," Gary Becker (Nobel Laureate, University of Chicago) and Richard Posner (United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School) http://uchicagolaw.typepad.com/beckerposner/2010/04/the-looming-entitlement-fiscal- burdenbecker.html "Toward a Different Fiscal Future: Tax increases can't plausibly address the coming entitlement crisis," Glen R. Hubbard, Dean of the Columbia University College of Business, The Wall Street Journal, February 8, 2010 http://online.wsj.com/article/SB10001424052748704041504575045250168889076.html

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Dear...... , Greetings, I hope this finds you well. I am pleased to provide you with our latest research piece, Emerging Markets: Strength in a World of Indebted Nations. I have excerpted from the Executive Summary below to give you a taste of its contents, but hope you will take the time to read the attached document. Excerpt from the Executive Summary: As we approach the third anniversary of the global financial crisis, the world economy, by most accounts, is staging a moderate recovery. This recovery is occurring at a faster pace in emerging market economies than in industrialized economies. In fact, some emerging economies are now growing at or above capacity. Despite the encouraging signs of a global economic recovery, the crisis left behind an uneven legacy of fiscal challenges for policy makers. In many developed countries private sector deleveraging over the last two years has coincided with large increases in fiscal deficits and national debt. These challenges and the need to address them are likely to be a lasting burden on economic growth for these countries. Fiscal adjustment will also be a critical policy issue for most of the developed world in the years to come. At the extreme, a failure to address fiscal imbalances in the most heavily-indebted nations could pose systemic threats to the global banking and financial sectors. In this report we discuss the fiscal legacy of the financial crisis and extend a framework we have previously used to rank countries according to the size of the fiscal shocks faced and the degrees of freedom afforded to policy makers. We use this framework to differentiate not only between developed and emerging economies but within the latter as well. We refine these results further by estimating the required fiscal adjustment effort needed to bring indebtedness ratios to sustainable levels in the medium term for a universe of 50 developed and emerging economies. The conclusions of our analysis are generally favorable to emerging economies. These countries came into the crisis with clean balance sheets relative to developed economies, and the crisis accentuated this differentiation. For several years to come, growth is likely to prove stronger and more stable in emerging economies than in the developed world. This has powerful medium-term investment implications which we believe are not yet fully factored into asset prices. These include: (i) Divergent emerging/developed country growth paths will likely sustain “carry trade” flows and pressure for emerging market currencies to appreciate relative to those in developed markets. (ii) Foreign exchange reserves will continue to accumulate in emerging market central banks supporting narrow spreads (over US Treasuries) for hard-currency emerging market sovereign debt. In addition, sovereign bonds denominated in local currency will increasingly be accepted as substitutes for developed market fixed-income securities. (iii) Within emerging markets, Asian and Latin American economies and assets will outperform those in the periphery of Europe

Nicolas S. Rohatyn Emerging Markets: Strength in a World of Indebted Nations, The Rohatyn Group, Julio 2010

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Daily Morning Newsbriefing IMF says EU stress tests not transparent enough

22.07.2010 Fund says full disclosure necessary to make the tests credible; says uncertainty about the stringency of the tests remain; advocates fiscal consolation and growth enhancing reforms; also a unified labout market critical for long-term success of monetary union; Schauble takes part in French cabinet meeting, and hears Sarkozy calling for a complete tax harmonisation between the two countries; the two sides agree on a framework for more sanctions, and withdrawal voting rights for deficit sinners (in other words on something that stands no chance of adoption); Calculated Risk reports that the US housing market is about to suffer a double-dip recession, as inventories are rising again; James Hamilton reports on research, according to which Chinese land prices rose 400% over the last two years; Jeffrey Sachs, meanwhile, says the austerity vs stimulus debate misses the point that investment, not consumption spending, is what matters.

22.07.2010 IMF says EU stress tests not transparent enough

This looks like an exercise that is already backfiring. Even the IMF has now lined up among those who criticise the EU’s stress tests. In a “health check” report, the IMF recommends full disclosure of stress test results to guarantee credibility of the tests. The IMF's annual health check on the eurozone economy said that while the markets seemed to have taken a positive view of the process so far, “some uncertainty regarding the stringency of the tests is likely to remain”. Too many banks were still dependent on government support and were vulnerable

324 to lapses in confidence. The FT mentioned that in another report The IMF staff had called for a more “detailed disclosure of inputs and outcomes, possibly at the institution level.” The board directors wouldn’t go so far but said that the fear of EU supervisors that stress test results could be too market sensitive is outdated. Other subjects raised by the report: · With respect to public finances the report says countries should follow Germany and define a graduate and sustained consolidation path to calm down market concerns; · Immediate actions is also expected to stimulate growth, with Lisbon type reforms not only in countries with excessive imbalances but throughout the eurozone; · Finally with respect to coordination within the eurozone, the IMF says fiscal discipline needs to become enforceable, for example by issuing binding deficit limits, an EU institution for crisis management and resolution and key reforms towards harmonization of labor taxation, employment protection, and unemployment benefit systems, essential for a successful monetary union. Here is the IMF report in full. France and Germany reach agreement on economic coordination – one that stands no chance in hell of adoption In an effort to demonstrate the virility of the Franco-German relationship, the two countries agreed on a list of policy co-ordination proposals that stand no chance of adoption, as Wolfgang Schauble took part in a French cabinet meeting, duing which Sarkozy called for a complete harmonisation of tax systems. On the substantive issue of policy co-ordination, the two sides agreed that they want to co-ordinate more and better, according to Le Monde, they also want deficit sinners to be punished through a withdrawal of voting rights in the Council, and the imposition of a fine for member states with excessive deficits, and the imposition of an interst-bearing deposit for member states that fail to bring their fiscal deficits in order. In other words, France and Germany to continue to the same dysfunction regime, except that they strengthen those parts that have prove the most dysfunctional. The US housing market is about to hit a double-dip decline This is an important news because of the impact of the US housing market on the US economy, and the impact of the US economy on the global economy. Calculated Risk – the best source of information on the US housing market - comments on the latest survey by the Wall Street Journal, according to which inventories have gone up in 28 large metropolitan areas, and that newly signed contracts have plunged. Calculated Risk says the general problem is excess supply at current prices. Market clearing will only occur if prices fall again. The blog also makes the point that Obama’s housing tax credit was an unmitigated failure because it only benefited those buyers who would have bought anyway. The outcome of this constellation is now another period of falling house prices. And we all know what that means for the stability of the financial system, and the economy at large. (Please also note that house price have fallen by even less in the UK and in Spain, and that the situation in both countries is not too dissimilar from that in the US. The UK real estate market is maintain by ultra-cheap , and easily available mortgages. The same goes for the Spanish market. In both countries, the majority of mortgages is fixed to the short-term interest rate. If

325 that goes up –which is only a matter of time – we will see another double dip) ... and China’s property market may be about to crash A very interesting article (hat tip and discussion by James Hamilton) produce a proper metric for China’s land price – by sampling 300 land auction prices. A new NBER working paper by Jing Wu, Joseph Gyourko, and Yongheng Deng finds that since 2003, China’s property price rose by 800%, with half the increase coming in the last couple of years. Hamilton’s article also notes that the Shanghai stock market has fallen by a lot more than European stock markets this year – down 20% as opposed to down 10% in Europe. This shows that the bubble is already deflating. Jeffery Sachs on why investment matters In the FT austerity vs. Stimulus debate, Jeffrey Sachs makes the point that this debate omits the importance of investment. He says Obama has not focused at all on investment, and has not yet launched a single meaning investment programme, unlike China. “At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more." http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2861&tx_ttnews[ba ckPid]=901&cHash=5773e99d52#

22.07.2010 Stress test for major European Banks: what is it good for? By: Jan Pieter Krahnen

This Friday, July 23rd, the results of a Europe-wide stress test for 91 major European banks will be revealed. The test is intended to reduce the prevailing uncertainty about the stability of the national financial systems, and possibly to encourage confidence among banks. The institutions included in the test cover two thirds of Europe’s banking sector, reaching at least 50% of all domestic markets. Many people have doubted that such a stress test will be of great help in stabilizing the financial system. After all, the stress is only on paper, the stress scenarios underlying the results have been negotiated for some time between supervisors and central banks, and it is widely believed that all major banks will pass the test by a comfortable margin anyway. Considering these limitations, is there any deeper value in the stress test? I think the contribution of the stress test can nevertheless be significant, if its results are not discarded lightly. First of all, the stress test measures the resilience of an individual bank’s capital to withstand a well- defined shock to its assets and liabilities. However, passing the test should not be mistaken for a signal

326 of financial system stability as individual default risk is considered rather than systemic or collective risk. Furthermore, the test design does not allow for simultaneous variation of all relevant risk factors, but it assumes a particular set of risk factors realizations, including changes of macroeconomic factors like GDP or the consumer price index, an increase in credit spreads and a downward shift of sovereign bond prices. Therefore, failing the test is a sign of institutional weakness, while passing it is not automatically a sign of general financial health. For this reason a stress test cannot substitute for a more systematic approach towards systemic risk, as it has been widely discussed in the context of the current G-20 agenda (see for example the recent report to the German government by the Issing Commission). However, the stress test can single out some weak institutions, measured by the standards defined by the stress test characteristics. Since revealing the information about the stress test failure will almost certainly increase the funding problems for these banks, a capital increase is the most likely consequence of poor stress test results. In the US in 2009, the results of the stress test were the basis for defining the level of required recapitalization of several banks, among them prominently Bank of America. With respect to German banks, we have not heard much about contingency plans, but its overall strength and efficiency will probably also be judged by the resoluteness with which recaps and capital restructurings are addressed subsequent to July 23. In this sense, the stress test results are an excellent opportunity for the German regulator to demonstrate its willingness and its ability to strengthen capital standards on the bank level, as well as the financial architecture at a national level. Is this view shared by the public, particularly by senior management in the financial industry? To find this out the Goethe University’s Center for Financial Studies (CFS) has conducted a representative survey among 500 top managers in the German financial industry, including among others banking, insurance asset management, consulting, auditing and supervision. The participants were asked to judge the likely effect of the current stress test on German banking. Interestingly, a clear majority of respondents state that this test will bolster the confidence of market participants in the safety and soundness of the financial system. Respondents who believe that the publication of stress test results will contribute to the stability of the financial system also predict banking supervision to increase its role subsequently. Furthermore, a strong majority of all participants believes that a predefined strategy how to deal with those institutions that fail the test is essential. Almost half of those requesting a strategy how to deal with ‘failing’ institutions believe that there is a need for restructuring the German banking sector. This view may prove particularly relevant in the case of the German State banks (Landesbanken), most of which are still looking for a viable business model. Because of its fast implementation and its strong signalling character, a stress test may become a catalyst for industrial change, overriding obstacles that otherwise would delay substantial changes in ownership and corporate control. Taken together, we find two good reasons for cheering the ongoing stress test of banks in Europe. Provided that there is government backed support in capital restructuring –either directly via capital injection or indirectly via insisting on additional equity issues-, the test is expected to raise the confidence of market participants, and to stabilize the interbank market. In addition, the test offers the opportunity for preventive capital restructuring, thereby strengthening the country’s financial architecture. Realizing these two good reasons for a financial stress test will impose some political stress on the government, on the state and on the national level. Let us hope that governments in Europe have prepared for this event. The author is professor at the Goethe University Frankfurt and is director of the Center for Financial Studies at House of Finance

Jan Pieter Krahnen Stress test for major European Banks: what is it good for? 22.07.2010http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2862&tx_ttn ews[backPid]=901&cHash=cca934430c#

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Excess Capacity and Housing by CalculatedRisk on 7/21/2010 07:39:00 PM Fed Chairman Ben Bernanke was asked today why he thought companies with significant cash weren't investing. His answer was that most companies currently have excess capacity.

Bernanke was also asked about small companies having trouble getting financing, and he pointed out that small companies reported their number one problem is "lack of customers", not difficulties in obtaining financing. This excess capacity or lack of demand - and therefore lack of new investment - is a key reason why the recovery is sluggish. One of the few sectors seeing new investment is the semiconducter equipment manufacturers - Intel, Taiwan Semiconducter and others are making new investments in equipment to meet increased demand - and Applied Material, LAM Research, KLA-Tencor, Cymer and others are all seeing a boom in business. I've spoken with companies in the semiconducter equipment sector, and they are hiring like crazy (probably all of these companies are). But this is a small part of the economy ... Most other sectors, from autos to commercial real estate, and especially residential real estate have too much capacity. Away from equipment and software, investment is still very weak. As we've discussed many times, usually residential investment is the key investment sector for the economy in the early stages of a recovery. But not this time because of the oversupply of existing housing units. There is some good news: Homebuilders are on track to deliver the fewest housing units this year since the Census Bureau started tracking housing starts in 1959 (1see analysis below). The U.S. population is still growing and new households are being formed. Based on normal household formation to population ratios, there would usually be over 1.1 million net new households formed per year. Because of financial distress, the number of households formed in 2010 will probably be lower then normal. But this is real pent up demand - people don't want to double up with friends or live in their parent's basement forever! However the bad news is: There are still a substantial number of excess housing units (my estimate is around 1.7 million as of Q1). Usually the key sector for job creation and household formation in the early stages of a recovery is residential investment. But this sector isn't participating (as expected), and this weakness is contributing to the sluggish labor market. Eventually this excess supply will be absorbed, and new residential investment will increase - but that will not happen until the excess inventory is reduced significantly.

328 1Analysis: Housing Units added to stock in 2010 Yesterday the Census Bureau reported housing starts fell in June to a 549 thousand seasonally adjusted annual rate. As I noted yesterday, this is good news for the housing market longer term (because of the excess housing units), but bad news for the economy and employment short term. The table below is based on the data through June, and shows an estimate of the number of housing units that will be added to the stock in 2010 (based on completions from the Census Bureau). Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock (note: demolitions are the hardest to estimate).

(in thousands) 2009 First Half 2010 2010 Estimate

1 to 4 units 534.6 243.8 500

5+ units 259.8 86.8 150

Mobile Homes1 53 26 55

Sub-Total 848.4 356.6 705

Demolitions2 200 100 200

Added to Stock 648.4 256.6 505

1 Actual through May 2010, June estimated. 2 estimated.

Notice that the number of "5+ units" completed in 2010 is about to collapse. This is already in the works as shown in the following diagram:

The blue line is for multifamily starts and the red line is for multifamily completions. All the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects. Since multifamily starts collapsed in 2009, completions will collapse in 2010.

329 In June 2010, builders started 8,200 apartment units (NSA), and completed 18,200 units. This level of starts has been steady all year, and completions should drop sharply in the next few months. As an aside, this suggests that construction employment will decline further over the next few months. Similar logic applies to single family units, although these only take around 7 months to complete. Most of the housing units that will be completed this year have already been started. Builders completed 243,800 units (1 to 4 units) in the first half of 2010. Based on starts, builders will probably complete about the same number of units in the 2nd half of the year.

The manufactured homes data is from the Census Bureau through May (and demolitions are estimated). Excess Capacity and Housing 7/21/2010 07:39:00 PM http://www.calculatedriskblog.com/2010/07/excess-capacity-and-housing.html

JULY 21, 2010 Housing Market Stumbles Construction Slows, Inventories Build Amid Weak Job Growth, Tax-Credit End By NICK TIMIRAOS and ROBBIE WHELAN The housing market, whose collapse pulled the economy into recession in late 2007, is stalling again.

Nick Timiraos discusses why, in markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. The expiration of a federal home-buyers tax credit at the end of April is weighing on the market. On Tuesday, the U.S. Census Bureau said single-family housing starts in June fell by 0.7%, to a seasonally adjusted annual rate of 454,000. The U.S. started 1.47 million homes in 2006, before the housing bubble popped. Future construction looks even weaker. Permits for single-family starts fell 3% in June, following big declines in both May and April. "We're hovering at post-World War II lows," said Ivy Zelman, president of Zelman & Associates, a research firm. Experience WSJ professional Editors' Deep Dive: Builders Face Uncertain Outlook

330 STANDARD & POOR'S INDUSTRY INVESTMENT REVIEWS Confidence Key to Housing Recovery Barron's (Online and Print) Is Mr. Market Being Too Harsh on KB Home? Dow Jones News Service Hovnanian Second Quarter Loss Narrows Access thousands of business sources not available on the free web. Learn More Economists aren't singling out one reason for the stalling housing market. A variety of factors have led to flagging confidence, they say, including sluggish labor markets, global economic turmoil and falling stock prices. While the housing downturn dragged the economy into a recession nearly three years ago, now it is the economy that is pulling down housing, says economist Patrick Newport at IHS Global Insight. Without sustained job growth, the housing market likely won't improve. That in turn will ricochet across manufacturing, retail and other trades heavily dependent on home building and consumer spending. The Wall Street Journal's quarterly survey of housing-market conditions in 28 major metropolitan areas shows that inventory levels have grown in many markets. But inventory fell in some of the weakest ones, including several Florida markets, Atlanta, and Charlotte, N.C. Where Housing Is Headed

The Wall Street Journals' quarterly survey of 28 major metro areas shows it's a buyer's market in much of the country. See full graphic. At the end of June, inventory was up 33% from year-ago levels in San Diego, and by 19% and 15% in Los Angeles and Orange County, Calif., respectively, according to data compiled by John Burns Real Estate Consulting. Rising inventory can lead to price declines later. Jeff Gans, a 45-year-old engineer from Baltimore who designs software for car manufacturers, has contemplated buying a house or condo for more than a year. But concerns about job stability have kept him on the sidelines. Even falling interest rates aren't enough to whet consumer appetites for housing. Last week, the average rate on a 30-year fixed-rate mortgage was quoted at 4.57%, according to Freddie Mac, the lowest since its survey began in 1971. But demand for home-purchase mortgages sits near 14-year lows, according to the Mortgage Bankers Association, down 44% over the past two months. The government last fall extended tax credits worth up to $8,000 to home buyers who signed contracts by April 30, causing sales to surge early this year. Those buyers had until June 30 to close their sales until Congress, concerned that the backlog of sales wouldn't close in time, extended the deadline through September.

331 Analysts long expected the withdrawal of a federal tax credit, which had juiced sales, to lead to a slower-than-usual summer. "It's the magnitude that's been the issue,'' says Douglas Duncan, chief economist at Fannie Mae. "The drop-off in activity has surpassed expectations.'' More Anti-Foreclosure Program Still Losing Homeowners Housing's Woes Reverberate Vote: Which way are home prices heading? Reports should show that completed transactions of home sales held up through June. But newly signed contracts in May and June have plunged. To be sure, some housing markets show signs of healing. Home-sales activity in New York, Washington, D.C., and parts of California continue to improve. But other markets, including Tampa, Fla., and Chicago, face rising foreclosures and weak job growth. Low mortgage rates and falling prices have made homes more affordable in many markets than at any time in the past decade. But those affordability gains have been offset for many buyers by tighter lending standards, particularly for "jumbo" loans that are too large for government backing. Banks are requiring down payments of 20% and more and strong credit scores because they must hold jumbo loans in their portfolios. View Full Image

European PressPhoto Agency Rising inventories could eventually push down home prices in parts of the country. Above, Potomac, Md. More broadly, the housing market faces two big problems: too many homes and falling demand. More than seven million borrowers are 30 days or more past due on their mortgage payments or in some stage of foreclosure. Rising foreclosures will keep pressure on prices as banks put more homes on the market. Last month, nearly 39,000 borrowers received government-backed loan modifications, but more than 90,000 borrowers fell out of the program, the Obama administration said on Tuesday. Moreover, the pool of potential buyers remains constrained by the unprecedented number of homeowners who are underwater, or who owe more than their homes are worth. That's making it particularly hard for traditional "trade up" homeowners like Maria Billis to pull the trigger on a home purchase. Ms. Billis can't sell her townhouse in Boynton Beach, Fla., because its value has fallen by a quarter. That puts it below the $160,000 that she owes the bank.

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Journal Community discuss “ Depressed home prices were originally thought to be a 3 to 5 year problem. Unfortunately for many owners, builders, investors, and speculators, it's beginning to look like a 25-year problem. ” —Larry O'Bobba The 31-year-old human resources consultant, who married last month and wants to start a family, found a half-dozen homes in her price range but doesn't want to sell her current home for less than the amount owed. She has considered buying the new home and renting the townhouse, but concedes, "It's a big risk." Mortgage-finance giants Fannie Mae and Freddie Mac also are starting to push more repossessed homes onto the market. The companies owned 164,000 homes at the end of March, up 80% from a year ago. Another reason inventory is rising: "Unrealistic sellers have flooded the market" after reports of bidding wars and home-price increases earlier in the year, says Steven Thomas, president of Altera Real Estate, a brokerage in Orange County. The amount of time that homes there have sat on the market there has swelled to 3.78 months, up from 2.35 months in April. "The sellers think the market's coming back. They've tacked on an extra 5 to 10 to 15%. The buyers aren't going for it," says Jim Klinge, a real-estate agent in Carlsbad, Calif. Over the next six months, "it's going to feel like a double-dip because sellers are going to have to lower their prices." Not all sellers will take that step. Jerry Anderson has listed his four-bedroom home in Dana Point, Calif., on and off the market for the last two years. He's cut the price to $1.25 million, down from $1.75 million, but hasn't had any offers on the home, which has three fireplaces and ocean views. Mr. Anderson, who bought the home in 1987, says he'll take it off the market in December if it doesn't sell rather than cut the price. Matt Carney listed his Moreno Valley, Calif., home for $337,000 in February, and lowered the price on Tuesday for the third time, to $297,000. He says he can't go any lower because he owes $274,000 on the home and doesn't want to dip into savings to pay for transaction costs.

333 Write to Nick Timiraos at [email protected] NICK TIMIRAOS and ROBBIE WHELAN Housing Market Stumbles Construction Slows, Inventories Build Amid Weak Job Growth, Tax-Credit End JULY 21, 2010 http://online.wsj.com/article/SB10001424052748704723604575379463676740680.html

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Senate votes, 60-40, to advance jobless benefits legislation By Lori Montgomery Washington Post Staff Writer Wednesday, July 21, 2010; A01 The Senate broke a months-long stalemate Tuesday over a plan to restore emergency jobless benefits to millions of people who have been out of work for more than six months, voting to advance the measure over Republican objections that it would add $34 billion to the nation's bloated budget deficit. The 60 to 40 vote all but assures that the bill will pass the Senate when a final vote is taken Wednesday. The measure would then go back to the House, where leaders expect to quickly approve it and send it to the White House for President Obama's signature later this week. Once signed, the bill would revive benefits for more than 2.5 million people whose checks were cut off when the program expired June 2. It also would ensure that up to 99 weeks of income support would be available to a broader universe of jobless workers through the end of November. While jobless benefits have traditionally received bipartisan support in periods of high unemployment, the current round has been caught in a crossfire of partisan sniping about the deficit as lawmakers position themselves for this fall's midterm elections. In the wake of the recession, U.S. policymakers and their counterparts abroad have struggled to create jobs and bolster a sluggish recovery without adding unduly to national debt. Rising debt loads have sparked a crisis in Europe. Pointing to growing public anxiety about U.S. debt, which now stands at more than $13 trillion, most Republicans refused to back the extension of jobless benefits unless Democrats agreed to cover its cost using unspent funds from last year's economic stimulus package. "There's no debate in the Senate about whether we should pass a bill -- everyone agrees that we should," said Senate Minority Leader Mitch McConnell (R-Ky.). "What we do not support -- and we make no apologies for -- is borrowing tens of billions of dollars to pass this bill at a time when the national debt is spinning completely out of control." President Obama and fellow Democrats, meanwhile, have accused Republicans of turning their backs on the unemployed while pushing to extend tax cuts for the rich that would increase deficits by 20 times as much over the next decade. "I will continue to fight for economic policies that will lead us out of this mess, and press Congress to act on more proposals to create new American jobs and strengthen our recovery," Obama said in a statement. "Americans who are struggling to find a job and get back on their feet deserve more than the same political game-playing and failed policies that helped cause this recession." In the end, two Republicans -- Sens. Olympia J. Snowe and Susan Collins of Maine -- voted with Democrats to break the impasse; a lone Democrat, Sen. Ben Nelson of Nebraska, voted to continue the GOP filibuster. The clinching vote was cast by Sen. Carte Goodwin (D-W.Va.), who was appointed Friday to replace Robert C. Byrd, who died last month at the age of 92.

335 Moments after Vice President Biden swore him into office, the chamber's newest member walked onto the Senate floor with Sen. John D. Rockefeller IV (D-W.Va.), approached the clerk's desk at the front of the chamber and soberly mouthed the word "aye." Friends and family in the Senate gallery broke into applause. "That will be a vote that helps millions of Americans," Goodwin said afterward, adding he was "privileged to have played a small role" in passing the legislation. With the unemployment rate at 9.5 percent, 8.7 million people were receiving jobless benefits at the end of June. A little more than half received state benefits, which are typically available for 26 weeks. The rest were receiving extended benefits financed by the federal government, which are due to run out soon unless the bill before the Senate passes. The Labor Department estimates that 2.5 million people had been cut off by the end of last week. The bill before the Senate would extend benefits retroactively. While state laws vary, Labor officials and advocates for the unemployed said some people could expect to see lump-sum payments covering lost income back to June 2. Even if the bill passes, many people will have to wait two to four weeks before checks are restored, said Rick McHugh, a staff attorney for the National Employment Law Project, which advocates for jobless workers. "I'm sure it seems important to people in Washington, who are fighting over these budget points of order, but it doesn't look very important to people in the real world," said McHugh, who works in Michigan, where the jobless rate is more than 13 percent. "It's not a pleasant process to get calls from these folks who are losing their houses and losing their health insurance and taking their kids out of college and making the choices people are being forced to make in this economy." Passage of the jobless benefits bill would mark a modest victory for Obama and congressional Democrats, who have been struggling since February to push through a significant extension of the program. The provision was originally part of a much larger package of fresh spending on the economy, but Democrats have been forced repeatedly to pare it back as conservative Democrats joined Republicans in arguing that the nation could ill afford another big hike in the national debt. Democrats have dropped from the bill an extension of $25-a-week bonus payments that were added to unemployment checks under last year's stimulus package, and have little hope of extending subsidies that pay up to 65 percent of COBRA health insurance premiums. Obama's push for billions of dollars in state aid has also been scaled back, and Senate Democrats were in talks with Republicans late Tuesday about ditching Obama's proposal to increase lending to small businesses from another pending initiative. Staff writer Perry Bacon contributed to this report. Lori Montgomery Senate votes, 60-40, to advance jobless benefits legislation July 21, 2010; A01http://www.washingtonpost.com/wp- dyn/content/article/2010/07/20/AR2010072000556.html?wpisrc=nl_pmheadline

336 OPINION JULY 21, 2010 Obama's Economic Fish Stories On unemployment, the president claims that the stimulus bill was several times more potent than his chief economic adviser estimates. Such statements hurt his credibility. By MICHAEL J. BOSKIN A president's most valuable asset—with voters, Congress, allies and enemies—is credibility. So it is unfortunate when extreme exaggeration emanates from the White House. All presidents wind up saying some things that make even their own economists cringe (often the brainchild of political advisers unconstrained by economic principles, facts or arithmetic). Usually, economic advisers manage to correct these problematic statements before delivery. Sometimes they get channeled into relatively harmless nonsense, such as President Gerald Ford's "Whip Inflation Now" buttons. Other times they produce damaging policies, such as President Richard Nixon's wage and price controls. The most illiterate statement was President Jimmy Carter's late-1970s plea to the Federal Reserve to lower interest rates to combat high inflation, the exact opposite of what it should do. Not surprisingly, the value of the dollar collapsed.

Martin Kozlowski President Obama says "every economist who's looked at it says that the Recovery Act has done its job"—i.e., the stimulus bill has turned the economy around. That's nonsense. Opinions differ widely and many leading economists believe that its impact has been small. Why? The expectation of future spending and future tax hikes to pay for the stimulus and Mr. Obama's vast expansion of government are offsetting the direct short-run expansionary effect. That is standard in all macroeconomic theories. So, as I and others warned in 2008, the permanent government expansion and higher tax rate agenda is a classic example of what not to do during bad economic times. Worse yet, all the subsidies, bailouts, regulations and mandates are forcing noncommercial decisions on the economy, which now awaits literally thousands of new diktats as a result of things like ObamaCare and the financial reform bill. The uncertainty is impeding investment and hiring. The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy. (The University of Chicago's Harald Uhlig estimates $3.40 of

337 lost output for every dollar of government spending.) Either the president is not being told of serious alternative viewpoints, or serious viewpoints are defined as only those that support his position. In either case, he is being ill-served by his staff. Mr. Obama's economic statements are increasingly divorced not only from competing viewpoints but from those of his own economic advisers. It is surprising how many numerically challenged pronouncements come from this most scripted and political of White Houses. One slip is eventually forgiven, but when a pattern emerges, no one believes it is an accident. For example, on the anniversary of the stimulus bill, Mr. Obama declared, "It is largely thanks to the Recovery Act that a second Depression is no longer a possibility." Yet his Council of Economic Advisers just estimated the stimulus bill's effect on GDP at its trough was 1%-2%. The most common definition of a depression is a long period in which GDP or consumption declines at least 10%. The decline in GDP in the recent recession was 3.8%, in consumption 2%. No one disputes the recession was severe, but to reach a 10% GDP decline requires tripling the administration's estimate (three times their 2% effect) added to the actual 3.8% decline. On the alternative consumption standard, the math is even more absurd. The depression statement isn't credible. The stimulus bill has assumed certain mystic powers in administration discourse, but revoking the laws of arithmetic shouldn't be one of them. The recession would have been worse if not for the Fed's monetary policy and quantitative easing. Also important were the unmentioned automatic stabilizers—taxes falling more than income, cushioning declines in after-tax incomes and consumption—which were far larger than the spending and tax rebates in the stimulus bill. Arguing that all these policies (including injecting capital into banks, which was necessary but done poorly) may have prevented a depression is perhaps still an exaggeration but at least is within hailing distance of plausibility. On that scale, the effect of the stimulus was puny. On his recent "Recovery Tour," Mr. Obama boasted, "The stimulus bill prevented the unemployment rate from "getting up to . . . 15%." But the president's own chief economic adviser, Christina Romer, has estimated that the stimulus bill reduced peak unemployment by one percentage point—i.e., since the unemployment rate peaked at 10.1%, it prevented the unemployment rate from rising to just over 11%. So Mr. Obama claims that the stimulus bill was several times more potent than his chief economic adviser estimates. Perhaps the most serious disconnect concerns the impending expiration of the 2001 and 2003 tax cuts, which will raise the top two income tax rates and the rates on dividends and capital gains. If these growth inhibiting tax increases occur—about $75 billion in tax increases next year, $1.4 trillion over 10 years—there will be serious economic damage. In the most recent issue of the American Economic Review, Ms. Romer (and her husband David H. Romer) conclude that "tax increases are highly contractionary . . . tax cuts have very large and persistent positive output effects." Their estimates imply the tax increases would depress GDP by roughly half the growth rate in this so-far-anemic recovery. If Mr. Obama is really serious about a second stimulus, by far the best thing he can do is have Congress quickly extend the expiring Bush tax cuts, combined with real spending cuts set to take effect as the economy improves. The president badly needs to make more realistic pronouncements. No one expects him to say his policies have failed (although most have delivered far less than claimed at large cost). A little candor about the results of experimentation in uncharted waters would go a long way. But at the very least, his staff needs to avoid putting these exaggerations on the teleprompter.

338 It undermines confidence and raises concerns about competence. It's doing nobody any good— not the economy and certainly not Mr. Obama. Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush. http://online.wsj.com/article/SB10001424052748703724104575378751776758256.html

For Obama's reform agenda, counterterrorism excess is a timely warning By Steven Pearlstein Wednesday, July 21, 2010; A15 The Post's splendid and eye-opening series of articles on the government's counterterrorism empire ought to be required reading for those in charge of implementing the sweeping reforms of financial regulations and the health-care system, and for those still crafting legislation to deal with global warming. The series is a powerful reminder that it's not only bleeding-heart liberals who fall into the trap of trying to solve seemingly urgent problems by throwing too much money at them. It turns out that supposedly tough-minded conservatives are no less prone to runaway spending when their top priorities are involved. Sometime in the next week I expect some Republican who has railed against the scope and complexity of the Democrats' domestic initiatives to stand up in the Senate and, with Goldwater-like conviction, declare that profligacy in defense of security is no vice. One of my favorite features of the series so far has been the organizational chart of the 66 different counterterrorism command centers in the Washington area, not counting the White House Situation Room, each with its secure bunkerlike facility, its 24/7 staff, its high-tech control room, secure database, command staff and cadre of outside contractors. Looking at that chart, you don't have to be a McKinsey consultant to understand that the 9/11 Commission's dream of streamlined coordination has lost to the imperative of bureaucratic survival. Perhaps all this was inevitable given the urgency of ramping up the counterterrorism effort after the Sept. 11, 2001, attacks. For years, the message from the public and political leaders was to get it done fast and don't worry about the cost -- the bureaucracy and the contracting community were only too happy to oblige. An optimist might argue that now that we know what works and what doesn't, we can move on to Phase II, the rationalization and consolidation. But the realist would point out that that rarely happens. For those setting out to fix health care or the financial regulatory system, the takeaway should be that it is a lot easier to do it right the first time. Doing it right means, first and foremost, keeping things simple, even when the work to be done is complicated. Setting up complex structures not only increases cost and reduces speed, it tends to badly blur the lines of authority and responsibility. And by insisting on simplicity right from the start, organizations are forced to step up and make the difficult tradeoffs that, if not addressed structurally, will become a constant drain on people's time, attention and patience, or will never be addressed at all.

339 The second lesson is that bigger is not the same as better. In the wake of the financial crisis, there was a consensus that one problem was that the resources of the Securities and Exchange Commission had failed to grow with the size and complexity of the financial markets it was supposed to oversee. Although inadequate resources were surely a factor, it doesn't really explain why the agency basically sat back and failed to respond to the dangerous leverage taken on by investment banks, or ignored flagrant ratings- shopping by issuers, or did nothing about widespread use of undisclosed off-balance- sheet vehicles by public companies. Nor can it explain how several sets of inspectors managed to look in on Bernie Madoff and never notice that he never actually traded any stocks. In government or in private industry, what sometimes lies behind the call for additional resources is that the people already assigned to perform a task are not very good or very productive. An example of this is the National Security Council staff, which over the decades has grown from a small, elite group at the White House charged with coordinating policy on international issues to what amounts to a mini-State Department, with a staff of 200 to 300. The unspoken rationale for this growth has been that, at various times, presidents and top advisers were unhappy with the work done in the agencies, or didn't trust the people doing it. But the result is not only wasteful duplication of effort, but diminished morale and sense of purpose in the agencies. Similar complaints are heard about the new empire growing around the director of national intelligence. Problems with the government's counterterrorism complex also stem from its reluctance to get comfortable with the 80-20 rule -- the remarkably robust observation that organizations often achieve 80 percent of what they want to accomplish with 20 percent of their people and resources. The ethic in counterterrorism is that the stakes are so high that anything less than 100 percent success is unacceptable. But the problem with 100 percent is that in trying to detect and foil any conceivable threat from any terrorist anywhere in the world, you wind up not only spending enormous sums, but creating an operation so vast and complex that it is impossible to manage. In the end, as the Post series suggests, we run the risk of missing things that almost surely would have been picked up with a smaller, simpler and more focused structure. The 80-20 rule, for example, is crucial when thinking about reforming the health-care system, where it turns out that relatively few diseases and a minority of patients account for the vast majority of the care and the spending. By focusing efforts on those diseases and patients, huge gains can be made in controlling costs and improving health outcomes while minimizing the backlash about government rationing and meddling. What my colleagues Dana Priest and William Arkin have discovered is that there can be powerful diseconomies of scale and scope when organizations get too big, too broad and too complex. It's not just government -- Citigroup and AIG learned that lesson as well. In the real world, it turns out, there are limits to how many hours there are in a day for the leaders of an organization, how much information human beings can process, how many balls we can juggle and how many dots we can connect, even with the help of powerful new technologies. As the Obama team sets out to reshape health-care, financial and environmental regulation, it would do well to remember this final lesson from the Bush team's war on terror: Along with all the ambition and conviction, bring along a good supply of patience and humility. Steven Pearlstein will host a discussion at 11 a.m. on washingtonpost.com. http://www.washingtonpost.com/wp- dyn/content/article/2010/07/20/AR2010072005786.html?wpisrc=nl_wonk

340 WSJ Blogs REAL TIME ECONOMICS Economic insight and analysis from The Wall Street Journal. July 20, 2010, 7:21 AM ET ECB Economists on Why Austerity Is Better Than Stimulus By Brian Blackstone ECB officials have taken a strong stance against government stimulus to support the economic recovery, arguing that austerity is the better means to boost confidence, investment and spending. That has put them at odds with many economists in the U.S. who have warned against pulling the plug on stimulus too soon. An ECB paper explains their reasoning. “Our findings suggest that the effectiveness of spending shocks in stimulating economic activity has substantially decreased over time,” ECB economists Jacopo Cimadomo and Sebastian Hauptmeier wrote with Markus Kirchner of the University of Amsterdam. The authors conclude that aggregate demand is “increasingly being crowded out” by fiscal expansion, and “the response of private consumption to government spending shocks has become substantially weaker over time.” “The effectiveness of spending based fiscal expansions in stimulating economic activity thus appears to be particularly low in the current decade,” the ECB economists wrote. The authors suggest a variety of forces behind the waning fiscal multiplier, which they say was much more pronounced in the 1980s. For one, better household access to credit means less juice from government spending. Meanwhile, “a lower share of government investment and a larger wage component in total spending may have contributed to the documented decline in short-term multipliers.” “Finally, our results indicate that rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions,” the authors wrote, arguing that higher debt raises expectations of fiscal tightening in the longer run, “which, in turn, depresses private demand and output.” http://blogs.wsj.com/economics/2010/07/20/ecb-economists-on-why-austerity-is-better-than- stimulus/ Markus Kirchner , Jacopo Cimadomo, y Sebastian Hauptmeier, Transmission Of Government Spending Shocks In The Euro Area Time Variation And Driving Forces, ECB WORKING PAPER SERIES Nº 1219, Julio 2010, disponible en: http://www.ecb.int/pub/pdf/scpwps/ecbwp1219.pdf

Paredes, Joan, Pedregal, Diego J. and Perez, Javier J., A Quarterly Fiscal Database for the Euro Area Based on Intra-Annual Fiscal Information (January 15, 2010). Banco de Espana Working Paper No. 0935. Disponible en: SSRN: http://ssrn.com/abstract=1537065

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JULY 21, 2010 Bond Sale? Don't Quote Us, Request Credit Firms By ANUSHA SHRIVASTAVA The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings. The odd plea is emerging as the first consequence of the financial overhaul that is to be signed into law by President Obama on Wednesday. And it already is creating havoc in the bond markets, parts of which are shutting down in response to the request. Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law. The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings. That is important because some bonds, notably those that are made up of consumer loans, are required by law to include ratings in their official documentation. That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down. There have been no new asset-backed bonds put on sale this week, in stark contrast to last week, when $3 billion of issues were sold. Market participants say the new law is partly behind the slowdown. "We are at a standstill right now," said Bingham McCutchen partner Ed Gainor, who specializes in asset-backed securities. Several companies are shelving their bond offerings "indefinitely," according to Tom Deutsch, executive director of the American Securitization Forum, which represents the market for bonds backed by assets such as auto loans and credit cards. He said he knew of three offerings scheduled for coming weeks that are now on hold. The change caught the ratings agencies by surprise. The original Senate version of the bill didn't include the provision. It was only on June 30, when the Dodd-Frank bill was passed, that the exemption was removed. The Senate passed the amended version on July 15. The offices of Sen. Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) didn't immediately respond to a request for comment. Rating firms have warned that sections of the legislation concerning ratings' firms legal liability could cause them to pull back from certain parts of the market. In an April 21 conference call, Moody's Chief Executive Raymond McDaniel told investors that "we remain concerned that the bill's liability provisions would lead to unintended consequences that could negatively impact the credit markets."

342 If greater liability provisions were passed, he continued, "we would implement appropriate changes." He added that Moody's, a unit of Moody's Corp., would rethink whether it still made sense in a new regulatory environment to give ratings "for as many small and perhaps marginal issuers as possible." The confusion comes as investors, bankers and ratings companies across Wall Street seek to digest the intricacies of the new law, the most sweeping since the 1930s. The overhaul touches on virtually every part of the financial-services world, part of an effort by lawmakers to head off another financial crisis. Ratings providers became a lightning rod for criticism after the financial crisis. Their overly rosy assessments of many bonds, particularly complex securities and bonds backed by subprime mortgages, were blamed for helping fuel the meltdown of the credit markets. In response, the Dodd-Frank bill revamped how the government treated credit-ratings firms, which receive a special government designation that allows them certain privileges and market access Once the bill is signed into law, advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating. That is a change from the current law, which considers ratings merely an opinion, protected like any other media such as a newspaper. Prior to the Dodd-Frank bill, issuers were allowed to include the description of the ratings in the offering documents without the consent of the rating firms. Now, they will have to get written permission. And the rating providers are concerned that giving such consent exposes them to liability they haven't been exposed to in the past. Unlike many parts of the larger financial-overhaul bill, these changes go into effect as soon as it is signed into law. The speed of the move has spooked the three firms. All issued statements in recent days saying they will continue to issue bond ratings. But they said they won't allow those ratings to be used in formal documents accompanying bond sales, known as prospectuses and registration statements. One solution to the logjam is for sellers of bonds to offer their deals privately. That means they would offer ratings that can be used in private transactions but not in deals registered with the SEC and sold to the general public. The private market is much smaller and more expensive than the public one. On Friday, S&P, a unit of McGraw-Hill Cos., issued a release saying it would "explore mechanisms outside of the registration statement to allow ratings to be disseminated to the debt markets." —Aaron Lucchetti contributed to this article. http://online.wsj.com/article/SB10001424052748704723604575379650414337676.html#

343 Opinion

July 20, 2010 What 7 Republicans Could Do By THOMAS L. FRIEDMAN The hour is late, but there is still a sliver of time to pass a serious energy bill out of this Congress. To do so, though, would require President Obama to rustle up votes with a passion that he has failed to exhibit up to now, and, more importantly, it would require at least seven Republican senators to put the national interest above party and politics. Yes, I know that is all unlikely. You can laugh now. But just remember this: If we don’t get a serious energy bill out of this Congress, and Republicans retake the House and Senate, we may not have another shot until the next presidential term or until we get a “perfect storm” — a climate or energy crisis that is awful enough to finally end our debate on these issues but not so awful as to end the world. But, hey, by 2012, China should pretty much own the clean-tech industry and we’ll at least be able to get some good deals on electric cars. The energy bill now being discussed in the Senate — which would raise energy-efficiency standards, require utilities to get 15 percent or more of their power from renewable sources, like wind and solar, and create a limited cap on carbon emissions from power plants — is already watered down just to get 53 or so Democratic votes. But at least it gets us started on ending our addiction to oil and mitigating climate change. Unfortunately, right now it is not clear that a single Republican senator will even vote for this watered-down bill. That is pathetic. Rather than think seriously about our endless dependence on oil, the G.O.P. has focused its energies on making “climate change” a four-letter word and labeling any Democrat who supports legislation that would in any way raise energy prices to diminish our dependence on oil as a “carbon taxer.” Unfortunately, Obama and the Democrats never effectively fought back. They should have said: “O.K., you Republicans don’t believe in global warming? Fine. Forget about global warming. That’s between you and your beach house. How about this? Do you believe in population growth? Do you believe in the American dream? Because, according to the U.N., the world’s population is going to grow from roughly 6.7 billion people today to about 9.2 billion by 2050. And in today’s integrated world, more and more of those 9.2 billion will aspire to, and be able to, live like Americans — with American-size cars, homes and Big Macs. In that world, demand for fossil fuels is going to go through the roof — and all the bad things that go with it. “If we take that threat seriously now and pass an energy bill that begins to end our oil addiction, we can shrink the piles of money we send to the worst regimes in the world, strengthen our dollar by keeping more at home, clean up our air, take away money from the people who finance the mosques and madrassas that keep many Muslim youths backward, angry and anti-American and stimulate a whole new industry — one China is already leapfrogging us on — clean-tech. Nothing would improve our economic and national security more, yet Republicans won’t lift one finger to make it happen. “They would rather we send more Americans to fight terrorism in the Middle East, let petro- states hostile to our interests get richer and let China take the lead in the next great global industry than ask Americans to pay a little more for the gas they use or the carbon pollution

344 they put into the air. If OPEC, China and Russia could vote, they would be 100 percent supportive of the Republicans. “How about we stop honoring our soldiers and our military families and start helping them? Nope. The Republican view of fighting the war on terrorism is that rather than ask all of us to make a small sacrifice to weaken our foes and buttress our troops, we should ask only a few of us to make the ultimate sacrifice. And that’s called being tough?” It gets worse. As Fred Krupp, the president of Environmental Defense Fund, notes: U.S. utility companies today “are sitting on billions of dollars in job-creating capital — but they will not invest in new energy projects until they have certainty on what their future carbon obligations will be. In just one state, Indiana, there are 25 power plants 50 years old or older. The fleet needs to be modernized, and Senate paralysis is keeping it from happening. A recent study from the Peterson Institute projects annual investment in the sector in the next 10 years would rise by 50 percent as a result of climate legislation — an increase of nearly $11 billion a year.” That’s new employment from a private sector stimulus. Can you imagine how high the stock market would soar and how easy a compromise with Democrats would become if Republicans offered an energy policy consistent with their values and our interests? What if the G.O.P. said: We will support a carbon tax provided one-third of the revenue goes toward cutting corporate taxes, one-third toward cutting payroll taxes for every working American and one-third toward paying down the deficit. The G.O.P. would actually help us get a better energy policy. Surely there are seven Republican senators who can see this. Aren’t there? http://www.nytimes.com/2010/07/21/opinion/21friedman.html?_r=1

345 Expansion.com Invest Inmobiliarias y constructoras, responsables del fuerte estirón del endeudamiento de España21.07.2010 M. G. M. 0 La deuda bruta de España frente al resto del mundo alcanzó a finales de 2009 un 166,6% del PIB. Aunque el nivel está mas o menos en línea con la media europea, el elevado incremento en los últimos años contrasta con otros países de la región, debido en gran parte al fuerte apalancamiento de empresas inmobiliarias y de construcción. La situación de las AA.PP. es "mucho más saludable y sostenible", según Funcas. La Fundación de Cajas de Ahorros (Funcas), en un pormenorizado estudio sobre el endeudamiento de todos de los sectores institucionales de la economía española, señala que esta cifra "no destaca especialmente en el contexto de las mayores economías europeas y del mundo. No obstante, es llamativo su crecimiento, ya que en 1995 esta tasa se situaba en el 42,8% del PIB".

Fuente: Funcas Eso sí, en términos netos, es decir, si se descuenta de la deuda de agentes españoles frente al resto del mundo la deuda emitida por el resto del mundo en manos de agentes nacionales. En el caso de España, esta cifra se encontraba en 2009 en el 89,7% del PIB. "El crecimiento también ha sido llamativo, desde un 5,1% en 1995". Además, ahí sí que hay una fuerte brecha respecto al resto de países (ver gráfico), es de los más elevados por debajo sólo de Portugal e Irlanda.

346 Pese a ello, Funcas no ve señales para el alarmismo. "El volumen de deuda no ha alcanzado un nivel que no se pueda justificar desde el punto de vista de la solvencia, en el sentido de que el valor del patrimonio total de la economía, incluso asumiendo un deterioro importante en el valor de la vivienda, sigue siendo muy superior a nuestros pasivos financieros netos frente al exterior", explica en el último número de 'Cuadernos de Información Económica'. Si se desagregan estos datos, Funcas destaca dos aspectos, "en el caso de las sociedades financieras", la diferencia con respecto a dicha media no es significativa (España, 336,2% del PIB; media zona euro 326% del PIB; Francia, Holanda, Irlanda, Reino Unido o Japón superan la ratio de España). En segundo lugar, "en el caso de las sociedades no financieras, la elevada ratio de endeudamiento (95,7% del PIB en 2008), por encima de la media de la eurozona, se explica en gran medida por el fuerte volumen de deuda contraída por los sectores de la construcción e inmobiliario, mientras que en los sectores industriales y de servicios no inmobiliarios el crecimiento de la deuda ha sido bastante más moderado". Además, indica que a pesar de que la deuda de hogares (61,4% del PIB en 2008, pero inferior a Portugal, Holanda, Irlanda, Reino Unido y EEUU) y empresas no financieras es elevada, "estos agentes están realizando un importante esfuerzo de ajuste y reduciendo dicho endeudamiento en términos nominales". Las AA.PP., más sanas que otras "Todas las comparaciones son muy favorables a España", sentencia Funcas. "Tanto en términos de deuda bruta, como neta o de pasivos financieros netos, las ratios de España se encuentran entre las mejores y la evolución desde 1995 ha sido también mucho más ventajosa que en los países de referencia", señala En 2008, el endeudamiento público bruto de la zona euro se encontraba en el 72,5% del PIB, muy por encima del 46,5% de España. Todas las grandes economías de la UE, además de Japón y Estados Unidos, superaban a España en tasa de endeudamiento público, "situación que se ha mantenido en 2009, aunque Eurostat no ha publicado las cuentas financieras completas para ese año". Así, este centro de análisis económico, concluye que el problema del endeudamiento se circunscribe, por tanto, al sector privado: hogares y empresas, y, dentro de éstas, sobre todo a los sectores construcción e inmobiliario. "Las AA.PP. se encuentran en una situación financiera mucho más saludable y sostenible, aunque el problema en este caso es que, si la economía no es capaz de crecer a un ritmo suficiente, esta situación puede deteriorarse acercándose a la posición media de la zona euro". http://www.expansion.com/2010/07/21/economia/1279703411.html

347

Consolidadores frente a estimuladores Robert Skidelsky 2010-07-20

LONDRES – Todos los sistemas intelectuales se basan en supuestos que no es necesario explicar, porque todos los miembros de esa comunidad intelectual particular los aceptan. Esos axiomas “profundos” están implícitos también en la economía, pero, si se dejan sin examinar, pueden conducir a los encargados de la formulación de políticas a un callejón sin salida. Eso es lo que está ocurriendo actualmente con las medidas adoptadas en un país tras otro para reducir drásticamente el gasto y disminuir los déficits presupuestarios. La misión principal que John Maynard Keynes se fijó al escribir su Teoría general del empleo, el interés y el dinero fue la de descubrir los axiomas profundos subyacentes a la ortodoxia económica de su época, que daba por sentada la imposibilidad de un desempleo en masa persistente. La pregunta que formuló sobre sus oponentes fue la siguiente: “¿Qué han de creer para afirmar que el desempleo en masa persistente es imposible, que el ‘estímulo’ estatal para aumentar el empleo no puede ser positivo?” Al responder esa pregunta, Keynes reconstruyó la teoría ortodoxa... y después pasó a desmontarla. En la actualidad, pese a la revolución keynesiana, la misma pregunta requiere una respuesta. ¿Qué deben creer sobre la economía quienes piden una rápida “consolidación fiscal” en medio de un gran desempleo para dar coherencia a su política? No es una pregunta trivial, porque el cilicio ha llegado a ser la prenda de vestir favorita entre quienes ahora dictan las recetas económicas. Organismos como el G-20, el FMI y la OCDE se unen a los “mercados” y a los articulistas económicos para pedir que los gobiernos liquiden sus déficits. Según dicen, cualquier otra vía significa desastre; el equilibrio de los presupuestos lo antes posible es la única vía para volver a la prosperidad Unos pocos economistas keynesianos se oponen a esa estampida hacia la reducción de gastos: Paul Krugman, Joseph Stiglitz y Brad DeLong en los Estados Unidos; Martin Wolf, Samuel Brittan, Danny Blanchflower y yo en el Reino Unido, y Paul de Grauwe y Jean-Paul Fitoussi en la Europa continental, pero somos una pequeña minoría. De hecho, todos los gobiernos occidentales, con la excepción del de Obama, están comprometidos con la reducción del gasto... y Obama no puede conseguir un nuevo plan de estímulo en el Congreso. La pregunta que hay que hacerse es la siguiente: ¿qué deben creer los partidarios de reducciones y tajos para justificar sus políticas?

348 Cuando formulo esa pregunta, nunca recibo una respuesta coherente, por lo que voy a desandar los pasos dados por Keynes. El primero de los supuestos implícitos de la teoría ortodoxa que Keynes descubrió fue la ley de Say, la doctrina de que “la oferta crea su demanda". Eso significa que todo el dinero ganado acabará gastado, por lo que en ningún momento puede haber una “saturación general” de bienes de consumo. Keynes señaló la falacia así: si bien la renta derivada de la producción es, por definición, igual al valor de la producción, de ello no se sigue que se vaya a gastar toda esa renta. Una parte de ella puede ser “atesorada” y en ese caso la demanda será inferior a la oferta. Concretamente, Keynes negó que los ahorros sean simplemente gasto aplazado. En un pasaje muy conocido, escribió: “Un acto de ahorro significa (...) la decisión de no cenar esta noche, pero no requiere la decisión de cenar o de comprar un par de botas dentro de una semana... De ese modo deprime el negocio de la preparación de la cena de hoy sin estimular el de la preparación para algún acto futuro de consumo”.

“Llegar a esa comprensión”, dice Krugman, “fue un inmenso logro intelectual”. Aun así, la ley de Say sigue vigente entre nuevos macroeconomistas clásicos como John Cochrane y Eugene Fama. Equivale a afirmar que los factores de producción se emplearán siempre plenamente y que, como dice Cochrane, “si el Estado te toma prestado un dólar, se trata de un dólar que no gastas o que no prestas a una empresa para que lo gaste en una nueva inversión”. El segundo postulado clásico que Keynes descubrió fue el de que el “salario real es igual a la desutilidad marginal del trabajo”. Eso significa que, en un mercado laboral competitivo, los salarios reales siempre se ajustarán instantáneamente a las condiciones de la demanda. Dicho de otro modo, nunca puede haber desempleo involuntario o no deseado. Keynes negó que se fijen los salarios reales en el mercado laboral. Los trabajadores regatean para conseguir salarios en dinero y una reducción de su renta en dinero podría hacer que la demanda total fuera demasiado baja para dar empleo a todos los que deseen trabajar. Sin embargo, en la actualidad la mayoría de los economistas consideran “voluntario” el desempleo: una preferencia racional del ocio en lugar del trabajo, lo que refuerza la idea de que el “estímulo” no puede dar resultado, ya que los trabajadores tienen todo el empleo que desean. Keynes pensó que el principal supuesto implícito subyacente a la teoría clásica de la economía era el del conocimiento perfecto. “Los riesgos”, escribió, “debían prestarse a un cálculo actuarial exacto. El cálculo de probabilidades (...) debía poder reducir la incertidumbre a la misma condición calculable que la propia certidumbre (...)” Para Keynes, eso es insostenible: “En realidad (...) por lo general tenemos sólo una idea de lo más imprecisa de todo, menos de las consecuencias más directas de nuestros actos”. Así, la inversión, que es siempre una apuesta sobre el futuro, resultaba dependiente de estados fluctuantes de la confianza. Los mercados financieros, mediante los cuales se hace la inversión, siempre eran propensos a desplomarse cuando ocurriera algo que perturbara la confianza en los negocios. Así, pues, las economías de mercado eran inherentemente inestables.

349 La actual “teoría del mercado eficiente” ha restablecido en la economía el supuesto del conocimiento perfecto al sostener que todos los riesgos se reflejan correctamente en los precios. Eso significa que “la reducción del precio del riesgo a escala mundial”, que Alan Greenspan consideró la verdadera causa del desplome bancario del período 2007-08, es imposible. Aun así, ocurrió. La concepción clásica de la economía, que Keynes se propuso demoler, no sólo está vigente, sino que, además, ha predominado en los últimos años, con lo que ha alimentado la creencia de que se puede dejar que los mercados competitivos se regulen por sí mismos, pues siempre ofrecerán todo el empleo que se desee y son inmunes a un desplome en gran escala. También eso alimenta la oposición a la intervención estatal y a las políticas de “estímulo”, que son, supuestamente, innecesarias, si no perjudiciales, ya que los acontecimientos que las requerirían no pueden ocurrir (pero sí que ocurren). Mientras no empecemos a examinar la economía en un marco keynesiano, estaremos condenados a una sucesión de crisis y recesiones. Si no lo hacemos, la próxima llegará antes de lo que pensamos. Copyright: Project Syndicate, 2010. ww.project-syndicate.org Traducido del inglés por Carlos Manzano. Consolidadores frente a estimuladores2010-07-20 http://www.project- syndicate.org/commentary/skidelsky31/Spanish

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Viewpoint July 19, 2010, 10:00PM EST text size: TT The Social Security Squeeze Can Be Solved Businessweek.com's Chris Farrell says the program's shortfall is far easier to fix than Medicare or Medicaid—and smart policy could make it even stronger in the years ahead By Chris Farrell The footsteps of an aging America are hard to ignore, especially with daily alarms ringing over the federal government's debt and deficit. The leading edge of the baby boom generation is reaching its retirement years and at the core of the long-term fiscal challenge lie the three main entitlement programs, Social Security, Medicare, and Medicaid. (The other main spending items weighing on the fiscal ledger are defense and interest on the debt.) Spending on entitlements is growing faster than the economy and revenues. "This debt is like a cancer," said Erskine Bowles, co-chair of President Obama's bipartisan panel on deficit reduction, at the annual meeting of the National Governors Assn. on July 11. Little wonder Americans seem gripped with dread about an aging society. And there are no magic elixirs or fiscal wands that will painlessly put the federal government's fiscal house in order. It will take political compromise to do that, a classic mix of higher taxes and reduced benefits to accomplish the deficit-and-debt reduction task. That said, there is a fiscal carve-out maneuver that would greatly ease the job. Most commentary assumes that socialsecuritymedicaremedicaid is one word. Yes, they're all entitlement programs, yet the bulk of the long-term budget pressure comes from higher health- care spending. For instance, the benchmark 75-year projection by the Social Security Trustees guesstimates the cost of Medicare alone will swell to 11.4 percent of gross domestic product in 2083—94 percent larger than Social Security's cost. Separate and Fix Fact is, there is no Social Security crisis. The system isn't broke. There's financial trouble down the road but it's manageable. Yet the title of the House Ways & Means subcommittee on Social Security hearing on July 15 got to the essence of the matter: Social Security at 75 Years: More Necessary Now Than Ever. So, separate Social Security from the rest of the entitlement fight and deal with it on its own merits. "The health-care problem is hard," says David Cutler, economist at Harvard University and senior health-care adviser to the Obama Presidential campaign. "Social Security isn't." For one thing, it's important to remember that economic growth alone can't solve the long-term budget deficit and debt overhang, but a healthy economy will address at least some, if not all, of the projected Social Security shortfall. For instance, a critical assumption in the long-term projection of a Social Security shortfall is based on average annual productivity growth of 1.7 percent after 2018. The far more optimistic long-term scenario has productivity growth averaging 2.0 percent after 2019 and, with increased productivity boosting wages, the shortfall is put off well into the future. (The low-cost scenario assumes a number of other economic factors such as higher immigration than the baseline intermediate scenario forecast, but productivity growth is critical to the outlook.)

351 To be sure, rising wages pump up benefits as well as revenues over time. And while economists know that boosting productivity involves a mix of improving education and worker skill, investing in knowledge and innovation, encouraging entrepreneurship and a sound infrastructure, there's a great deal of uncertainty surrounding the impact of the policy mix, let alone the timing. So, prudence dictates shoring up the fiscal soundness of the system through a modest mix of changes, such as raising the retirement age and doubling the cap on annual wages subject to the payroll tax. (The Congressional Budget Office offers a list of options in its July 2010 report, Social Security Policy Options.) Improvement Proposals That's fine as far as it goes. But instead of just keeping the S.S. Social Security afloat, why not take the opportunity to make it better? The U.S. population is aging and it's well-known that Americans haven't been saving enough for their old age. One way to bolster retirement savings is to add to the Social Security system a program of voluntary additional contributions. The money could be invested in a limited menu of low-cost, broad-based options reminiscent of the federal government's Thrift Savings Plan, which offers participants five basic investment options plus a life-cycle fund. The details of such an option have been sketched out by a number of scholars, including the late Robert Eisner; Dean Baker, co-director of the Center for Economic & Policy Research in Washington; and others. Even more intriguing is the idea of a mandatory savings program advocated by Robert Fogel, Nobel laureate at the University of Chicago. Fogel believes that people should be able to retire earlier in the world's richest country, free to pursue their passions and dreams, to find "spiritual fulfillment" and community engagement. He worries that the mantra of "we can't afford it" is pushing us in the wrong direction. The policy of raising the retirement age is essentially "privatizing" the system: People are more and more responsible for saving until the official retirement age kicks in. "The principal form of privatizing is the delay in the age at which full social security income will be made available to retirees," writes Fogel in The Fourth Great Awakening and the Future of Egalitarianism. Instead, Fogel proposes the outline of a new mandatory pension system that would sharply increase freedom of choice later in life. For instance, under reasonable growth assumptions he calculates that a household that was required to put aside 14.7 percent of its annual income into retirement savings would accumulate enough at age 55 to fund a pension paying 60 percent of peak earnings. Want to cover their health-care needs in retirement as well? It would take another 9.4 percent in savings. Low-income people would get help through a progressive tax of 2 percent or 3 percent on the better-off half of households. The money would belong to the individual and be completely portable. The details are less important than the fundamental insight: The real economic resources are there to finance early retirement and freedom of choice in the last third of life; it's the financing method that needs to be made better. We can afford it. Of course, that kind of bold idea isn't on the table. But it shows the range of solutions in the marketplace that will make the woes of Social Security far easier to address than those of its entitlement cousins. If we can't get "spiritual fulfillment," financial independence and peace of mind for our elderly population will do nicely. Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on Businessweek.com. http://www.businessweek.com/print/investor/content/jul2010/pi20100719_245091.htm

352 Contemos con el FMI Luigi Zingales 2010-06-17

CHICAGO – La peor pesadilla financiera que acecha a la economía mundial es la insolvencia de un banco internacional grande. Ya sea por el impago de una deuda soberana o por pérdidas importantes acumuladas bajo normas de contabilidad permisivas, la insolvencia de un banco grande (particularmente de un banco europeo), no es una posibilidad remota. Incluso si lo fuera, la crisis financiera de 2008 nos ha enseñado que los acontecimientos poco usuales suceden. Lo que hace que esta posibilidad sea una pesadilla financiera peor que el colapso de Lehman Brothers en 2008 es el temor de que muchos Estados soberanos ya quemaron toda su pólvora y por lo tanto ya no podrían intervenir. Los instrumentos de cobertura de riesgos crediticios (CDS por su siglas en inglés) de los principales bancos europeos del Sur se negocian a un valor ligeramente inferior que los CDS de sus Estados soberanos, lo que indica que el mercado no percibe que éstos sean capaces de apoyar a aquéllos. Lamentablemente, casi dos años después del colapso de Lehman's, no se ha hecho mucho para abordar este riesgo. El Congreso de los Estados Unidos está por terminar un proyecto de ley que dará autoridad resolutiva sobre las principales instituciones financieras del país a un consejo sistémico creado recientemente. No obstante, los procedimientos para activar esa intervención son complejos y el financiamiento es tan opaco que la ley no eliminará los daños secundarios derivados de la quiebra de un banco grande ni siquiera para las instituciones estadounidenses, ya no se diga las internacionales, cuyo colapso requeriría la coordinación de varios estados con grados distintos de solvencia. Para reducir al mínimo los riesgos de un colapso desordenado, es necesario aprobar un mecanismo resolutivo internacional que tenga autoridad sobre todas las grandes instituciones financieras. El objetivo no sería rescatar a los banqueros y sus acreedores, sino minimizar los trastornos que podrían provocar los impagos descontrolados. Esta institución debe ser una versión internacional del Capítulo 11 del Código de Bancarrota de los Estados Unidos. Pero, mientras que el objetivo del Capítulo 11 es preservar el valor corriente de una empresa, el de un mecanismo de resoluciones internacionales debe ser proteger el valor corriente de las contrapartes de las instituciones financieras insolventes. El primer problema que debe solucionarse para aprobar este mecanismo es quién debe detentar la autoridad. La respuesta evidente es el Fondo Monetario Internacional. Creado después de la Segunda Guerra Mundial para financiar los desequilibrios temporales de los miembros de un sistema de tipo de cambio fijo, el FMI ha estado en busca de una causa desde la desaparición del sistema de tipo de cambio basado en el dólar en 1971. Lo que es más

353 importante, mediante sus numerosos rescates de Estados soberanos, el FMI ha adquirido experiencia en reestructuración de deuda, y al mismo tiempo ha creado una reputación de firmeza e imparcialidad que sería muy útil en estas situaciones. El FMI también tiene la ventaja de ser el único depositario de las reservas internacionales. En ausencia de una autoridad fiscal internacional, el FMI es la organización que más se acerca a serlo. Cuando una institución financiera importante es insolvente, el FMI debería hacerse cargo y garantizar sus obligaciones a corto plazo, pero eliminando a los accionistas y pagando a los acreedores a largo plazo únicamente después de haber pagado a todos los demás acreedores (incluido el FMI mismo). Algunos clamarán que eso es equivalente a una nacionalización, pero no lo es más que el proceso de bancarrota del Capítulo 11 de los Estados Unidos. El que una organización internacional se haga cargo tiene tres ventajas en comparación con una solución nacional. En primer lugar, garantiza que la comunidad internacional comparta el costo (si las pérdidas son superiores al valor combinado del capital y la deuda a largo plazo) y no que sea únicamente el país donde se encuentra esa institución quien lo pague, lo que hace que la intervención sea creíble incluso si el Estado soberano no lo es. En segundo lugar, al quitarle los poderes de decisión al gobierno nacional del país sonde se encuentra la institución insolvente, esta solución minimiza las distorsiones potenciales creadas por el poder de presión de los banqueros. ¿Confiaríamos en que el gobierno griego administrara sin corrupción un banco griego si se hiciera cargo de él? El FMI sería mejor. Por último, gracias a la participación del FMI, incluso los países menos avanzados podrían aprovechar los mejores conocimientos internacionales para abordar el problema. En caso de que hubiera un derrame de petróleo importante en Haití que amenazara el Golfo de México, ¿no desearíamos utilizar la mejor tecnología (y no únicamente la que estuviera disponible en Haití) para tratar de contenerlo? ¿Por qué ha de ser distinto en el caso de los mercados financieros? El último problema por resolver es el nivel de activación. En el caso de la autoridad resolutiva estadounidense, esta ha sido una cuestión muy controvertida. El temor era que los bancos poderosos pudieran explotar la ayuda del gobierno federal, pidiendo su intervención demasiado pronto. Dos salvaguardas pueden evitar este problema en el contexto internacional. En primer lugar, las normas rígidas que eliminan a los accionistas y castigan a los acreedores de largo plazo son un claro elemento disuasivo desde el punto de vista de los banqueros. En segundo lugar, puesto que la acción del FMI reduciría la influencia de los grupos nacionales poderosos, una intervención temprana les sería menos atractiva. El nivel de activación debería estar dado por el gobierno nacional mismo. Rechazar la ayuda internacional en esos casos significaría el suicidio electoral para cualquier gobierno que se enfrentara a un gran colapso bancario. Hay pocas esferas en las que la intervención del gobierno cree valor; reducir los efectos devastadores de una corrida contra un banco es una de ellas. Únicamente un gobierno que tenga el poder suficiente en términos de autoridad y solvencia es capaz de hacerlo. Desgraciadamente, en la arena internacional estas dos condiciones casi nunca se cumplen. Dar al FMI el poder para hacerse cargo de los bancos internacionales fallidos llenaría ese vacío – y eliminaría nuestra peor pesadilla. http://www.project-syndicate.org/commentary/zingales3/Spanish

354

Los bancos de Europa, la crisis de Europa Daniel Gros 2010-07-07

BRUSELAS – Europa sigue siendo el epicentro del Acto II de la crisis financiera global, que ahora ha mutado para convertirse en una crisis de deuda soberana dentro de la eurozona. ¿Cómo pudo pasar esto cuando, al menos en los papeles, todos los problemas aparentemente habían quedado resueltos durante la cumbre extraordinaria de la UE en mayo, que creó un Instrumento de Estabilidad Financiera Europea (EFSF por su sigla en inglés) y aseguró una financiación total de casi 1 billón de dólares? Aquellas promesas de mayo, en el ínterin, se han vuelto más concretas. En Luxemburgo se ha establecido un "vehículo para un propósito específico" (SPV por su sigla en inglés) que ya cuenta con cientos de miles de millones de euros en garantías de parte de los estados miembro. Si todos los recursos prometidos (750.000 millones de euros, incluido un financiamiento del Fondo Monetario Internacional) se utilizaran plenamente, la UE podría financiar por completo a todos los países en problemas (Portugal, España e Irlanda) durante un par de años. Es más, el Banco Central Europeo ha manifestado su voluntad de comprar bonos del gobierno (y privados) si considera que el funcionamiento del mercado se ha visto perjudicado. No obstante, esta artillería financiera oficial no ha impresionado a los mercados. Los diferenciales sobre los bonos de la deuda española siguen subiendo, y hoy están más altos que antes del anuncio del EFSF. Y existen señales fatídicas de tensión en el mercado interbancario, conforme más y más bancos -en lo que refleja una escasa confianza en que la estabilidad del sistema se haya restablecido- preferirían depositar su dinero en el BCE que prestárselo a otros bancos. La explicación es simple: los problemas que son la base de la crisis (el estado precario de las finanzas públicas griegas y del sector inmobiliario español) no han sido resueltos, aunque deberían ser fácilmente manejables en un contexto pan-europeo. Grecia representa aproximadamente el 2% de la economía de la eurozona; aunque incumpliera en el pago de su deuda pública, y el valor de recuperación fuera de sólo el 50%, las pérdidas representarían alrededor de 150.000 millones de euros, o apenas el 1,5% del PBI de la eurozona.

355 Los problemas en España probablemente sean un poco mayores, aunque las estimaciones oficiales de las pérdidas en el sistema bancario español representan apenas 100.000 millones de euros. El problema real en España, en cambio, podría residir en otra parte: la exposición de los bancos franceses, alemanes y otros al sector inmobiliario español. Muchos préstamos a empresas constructoras españolas tendrán que considerarse deudas incobrables. Pero, aún en el peor escenario, las pérdidas combinadas de bancos españoles y otros en el sector inmobiliario español no deberían exceder los 300.000 millones de euros, o aproximadamente el 3% del PBI de la UE. De modo que el verdadero interrogante es por qué los problemas de una fracción manejable en la periferia de Europa están paralizando todo el sistema bancario de la eurozona. Después de todo, uno no esperaría que el sistema bancario de Estados Unidos colapsara sólo porque hubo una burbuja inmobiliaria en California y el estado de Michigan (similar en tamaño a Grecia) se volvió insolvente. Una razón clave para que los mercados financieros de Europa sigan nerviosos es que, oficialmente, no existe ningún problema. En términos oficiales, Grecia no tiene un problema de insolvencia, y la reestructuración de su deuda pública no es una opción. De la misma manera, en España, la línea oficial es que el sector bancario doméstico está bien capitalizado. La primera regla a la hora de lidiar con la turbulencia del mercado financiero debería ser admitir la verdad y la magnitud de los problemas a mano. La experiencia de Grecia ha demostrado que simular que los problemas no existen puede resultar en una espiral de autofortalecimiento de primas de riesgo crecientes y confianza menguante. En este sentido, la publicación de los resultados de las "pruebas de resistencia" realizadas a los 100 bancos más grandes de la UE, prometidas para fines de julio, es un claro paso hacia delante. Sin embargo, existe una segunda razón, y más perturbadora, por la cual los mercados financieros siguen inquietos: grandes franjas del sistema bancario europeo aún están ampliamente subcapitalizadas. De acuerdo con las estadísticas del BCE, los bancos de la eurozona tienen alrededor de 20 euros de pasivo (incluida deuda interbancaria) por cada euro de capital y reservas. Esto implica que por cada pérdida de capital de un euro al acecho en algún banco, habrá aproximadamente 20 euros de deuda dudosa. Aún un escenario catastrófico para Grecia y España implicaría pérdidas de 450.000 millones de euros como máximo. Los fondos movilizados hasta ahora bajo el EFSF (750.000 millones de euros) bastarían ampliamente para hacer frente a todo eso -siempre que esas potenciales pérdidas se identificaran claramente y se reservaran los fondos necesarios para lidiar con ellas- . Pero no es la estrategia que se está siguiendo. Por el contrario, el financiamiento europeo se utilizará solamente para rescatar gobiernos, que a su vez necesitan el dinero para rescatar a sus bancos. Pero, dada la relación deuda-capital de 20:1 en el sector bancario, este enfoque implica que los requerimientos de financiamiento se volverán astronómicos: en comparación con la factura de 450.000 millones de euros si las potenciales pérdidas siguen ocultas y dispersas, se necesitarían 9 billones de euros en garantías de deuda para asegurar la estabilidad del sistema bancario de la eurozona. En resumen, aplicar pruebas de estrés rigurosas a los bancos de la eurozona (seguidas de una recapitalización obligatoria) exigiría mucho menos financiamiento público de lo que implicaría seguir extendiendo garantías globales a todo el mundo. Europa no puede escapar de la crisis en sus mercados financieros hasta que no recomponga sus bancos. Desafortunadamente, los estrategas políticos de Europa se han dejado engañar dos

356 veces por las opiniones políticamente convenientes de la crisis –primero en 2007/2008, al suponer que el contagio financiero provenía de Estados Unidos, y hoy, al echarle la culpa a una política fiscal imprudente en el sur de la eurozona. El problema real, más bien, es que el sistema bancario de la UE tiene una capitalización tan débil que no puede asumir ninguna pérdida, al mismo tiempo que está tan interconectado que los problemas en un país rápidamente ponen en riesgo a todo el sistema. Hasta que no se resuelvan de manera decisiva los problemas de balance de los bancos, los mercados financieros seguirán al borde. http://www.project-syndicate.org/commentary/gros10/Spanish Corriendo en el lugar en materia de comercio Jagdish Bhagwati 2010-07-20

NUEVA YORK – Las reuniones de los líderes del G-20 normalmente afirman la importancia de mantener y fortalecer la apertura comercial. La cumbre del G-20 de junio en Toronto, si bien no fue muy efusiva en materia de comercio, tampoco fue un tema del que rehuyó. Sin embargo, los hechos dicen más que las palabras y la política de pronunciamientos explícitos (generalmente a favor del comercio) nunca se tradujo en hechos concretos. La paradoja es que esto ha sido bueno para mantener el proteccionismo. Después de todo, también se necesitan acciones para “hacer retroceder” el comercio abierto. De modo que básicamente nos quedamos paralizados, para usar terminología comercial. Pero la falta de activismo comercial también significó que no estamos avanzando con la liberalización comercial. La Ronda de Doha de negociaciones comerciales multilaterales, que viene de antiguo, parece haberse suspendido indefinidamente. Los gobiernos no sufrieron una erupción de proteccionismo después de que el estallido de la crisis financiera global sorprendió a muchos. En retrospectiva, es fácil ver por qué. La política está impulsada por tres “I”: ideas, instituciones e intereses (es decir, lobbies). En estas tres dimensiones, la política proteccionista quedo sitiada. El progreso en cuanto a pensamiento económico después de 1929 condujo al argumento de que, en una depresión, los aranceles están justificados porque desvían una demanda mundial agregada insuficiente a los productos propios a expensas de los demás. Pero todos podían jugar este juego, agobiando a la economía mundial con aranceles que probablemente afectarían a todos sin lograr reanimar el crecimiento. La solución obviamente fue privarse del proteccionismo y, en cambio, aumentar la demanda agregada. Fue una lección que se aprendió muy bien. Las instituciones también ayudaron. Tras la sanción del Arancel Smoot-Hawley de Estados Unidos en 1930, los países fijaron barreras comerciales en un frenesí de ojo por ojo, diente por diente, sin reglas que limitaran su comportamiento. Los arquitectos del orden global de posguerra, en consecuencia, establecieron el Acuerdo General sobre Aranceles y Comercio (GATT por su sigla en inglés) en 1947, que contenía esas reglas –como lo hace la

357 Organización Mundial de Comercio, que absorbió y expandió el GATT en 1995-. De hecho, ningún país ha desafiado las reglas de la OMC en la crisis actual. Por supuesto, tal vez hayamos cedido a la presión por medidas proteccionistas, especialmente teniendo en cuenta que las reglas de la OMC dejan abierta la posibilidad de una respuesta de este tipo. En consecuencia, por ejemplo, las tarifas vinculantes (vale decir, los techos acordados) les permiten a los países aumentar los aranceles reales, que suelen ser más bajos, sin restricción. Lo que ha impedido la erupción de guerras comerciales complacientes con la OMC ha sido la estructura cambiada de la economía mundial, que ha creado fuertes intereses anti-proteccionistas. Por consiguiente, cuando el Congreso de Estados Unidos implementó las estipulaciones “Cómprenle a Estados Unidos” para las compras públicas, muchas firmas estadounidenses, como Boeing, Caterpillar y General Electric –por temor a una represalia en sus mercados extranjeros- hicieron lobby, con éxito, para moderar la legislación. La Ronda de Doha debería sacar provecho de alguna de estas fuerzas fundamentales que favorecen el comercio abierto e impiden el proteccionismo. De hecho, la postura convencional sostiene que, durante una depresión, los ciudadanos se vuelven reacios al riesgo y no respaldan la liberalización. Pero, en un momento en que mucha gente es consciente de que sus empleos dependen del comercio en una economía mundial estrechamente integrada, las encuestas en Estados Unidos y otras partes demuestran un continuo respaldo mayoritario al libre comercio. Mientras los negociadores de Doha han acordado muchas cuestiones importantes, las negociaciones finales se estancaron por primera vez el año pasado, debido a la negativa por parte de Estados Unidos a recortar más sus subsidios agrícolas y la insistencia de India en fijar salvaguardas especiales a fin de no exponer a sus millones de agricultores de subsistencia a una competencia estadounidense injustamente subsidiada. Hoy en día, la política interna tanto en Estados Unidos como en la India hizo que el primero se convirtiera en el único obstáculo para el progreso. La última elección liberó al Partido del Congreso de la India de su coalición con los comunistas, que se oponían al comercio, y así aumentó la flexibilidad del primer ministro pro-comercio Manmohan Singh. En cambio, la última elección en Estados Unidos dio cabida a una mayoría parlamentaria demócrata que está en deuda con los sindicatos temerosos del comercio, limitando así al presidente Barack Obama, un hombre proclive al comercio. Obama también enfrenta un respaldo menguante de parte de los lobbies empresarios en la industria y los servicios –sectores que están exigiendo más concesiones de otros países-. Si optara por cerrar la Ronda de Doha como se ha venido negociando hasta la fecha, podría convertirse en un general sin tropas. Su silencio sobre Doha en la cumbre del G-20 fue ensordecedor. Entonces, ¿cómo avanzamos en materia de comercio? Una solución, respaldada por algunos grupos de expertos de Washington, es seguir adelante y pedir más. Pero eso implicaría varios años de renegociación. La Ronda de Doha estaría así muerta de facto. La otra opción es cerrar la Ronda con la resolución del desacuerdo entre Estados Unidos y la India en materia de agricultura. Se pueden diseñar concesiones mutuas que aseguren una repercusión política insignificante para ambos líderes. Esto también exigiría mejoras marginales en las concesiones por parte de los principales países en desarrollo, y por parte de Estados Unidos y la Unión Europea en el terreno de los servicios. El problema es que los lobistas en Washington rechazarían esta solución modesta si la Ronda de Doha fuera el final del juego. De modo que, parte de la solución tendría que ser la

358 declaración de otra Ronda para negociar nuevas aspiraciones y demandas. Podríamos llamarla incluso la Ronda Obama. Después de todo, Obama debería estar a la altura de su premio Nobel como multilateralista! http://www.project-syndicate.org/commentary/bhagwati2/Spanish De las finanzas desconfiamos Michael Spence 2010-07-16

MILÁN – En todo el mundo, el debate sobre la regulación financiera está madurando. Hay en juego una serie de argumentos y propuestas que muchas veces compiten entre sí –y que, por ende, concitan la confusión pública y política. Una estrategia para la re-regulación financiera –respaldada por argumentos de diverso grado de persuasión- consiste en limitar el tamaño y el alcance de las instituciones financieras. Algunos sostienen que las entidades más pequeñas pueden quebrar sin perjudicar el sistema, ahorrándoles así a los contribuyentes el costo de un rescate. Pero si surge un riesgo sistémico de alguna manera que aún no se llega a entender plenamente, los bancos más pequeños pueden quebrar o caer en una situación de emergencia simultáneamente, afectando la economía real. Un segundo argumento que se debate acaloradamente sostiene que limitar el tamaño y el alcance de los bancos tiene costos relativamente bajos en términos de rendimiento. Este punto se utiliza para favorecer un tercer argumento: las instituciones grandes tienen una influencia política indebida y, por lo tanto, “capturan” a sus reguladores. Dicho sin rodeos, las instituciones financieras grandes y rentables encontrarán la manera de conseguir el sistema regulatorio que quieran –un sistema que sea compatible con una superestructura de operaciones altamente rentable que va más allá de los requisitos de cobertura y busca maximizar las ganancias a corto plazo. Una segunda estrategia, sobre la cual existe, en principio, un acuerdo sustancial, consiste en limitar el apalancamiento. El principal argumento es que el alto apalancamiento contribuye poderosamente al riesgo sistémico –una condición en la que los precios de los activos se mueven de una manera sumamente correlacionada y la situación de emergencia, cuando se produce, se propaga rápidamente-. El apalancamiento también es causado en parte por percepciones erróneas del riesgo y un mal cálculo de la liquidez. Es deseable limitar el apalancamiento, pero no al punto de aumentar el costo del capital y la inversión. Es más, son pocos los que no coincidirían en que, a medida que aumenta la complejidad del sistema, las brechas y asimetrías en términos de información, conocimiento y pericia se

359 multiplican. Esas asimetrías afectan el desempeño del mercado de diferentes maneras, y los conflictos de interés son particularmente peligrosos en un contexto de esa naturaleza porque crean un incentivo para sacar provecho precisamente de esas ventajas. Los rigurosos requerimientos de divulgación que incluyen conflictos de interés son una manera de limitar el potencial daño. O los conflictos se pueden limitar regulando el alcance de las instituciones financieras. Por ejemplo, la gestión, distribución, colocación y securitización de activos y las operaciones por cuenta propia se separarían de diversas maneras. Este esquema tiene la ventaja adicional de impedir que los diferentes perfiles de riesgo y sus requerimientos de capital apropiados se mezclen en la misma entidad y balance. Existen otras dos maneras de lidiar con la complejidad y las asimetrías. Una, ampliamente adoptada en los países en desarrollo, consiste simplemente en imponer restricciones a los productos (por ejemplo, derivados y fondos de cobertura) con el argumento de que la ventaja en términos de evitar riesgos compensa ampliamente los costos –menos acceso al capital y menor propagación del riesgo-. La otra manera consiste en intentar reducir las brechas de información o su impacto mediante la regulación de la pericia y los incentivos que rodean el proceso de calificación (cuyo fracaso tuvo serias consecuencias en la crisis actual). En un nivel un poco más profundo, existen dos corrientes encontradas que recorren el debate público que gira alrededor de la crisis. Una es la posición de la “tormenta perfecta”: hubo muchos fracasos, malas percepciones, asimetrías de información y complejidades, así como una buena dosis de comportamiento repugnante, pero nunca se les ocurrió a los participantes del mercado, reguladores o académicos que el efecto añadido sería prácticamente un colapso del sistema. Los críticos de ese argumento sostienen que los actores sofisticados entendían los riesgos sistémicos, que no les importó y que cínicamente jugaron el juego que ellos mismos contribuyeron a crear –en algunos casos con un enorme rédito. Ahora parece aceptado universalmente (muchas veces de manera implícita) que el gobierno debería establecer la estructura y las reglas del sistema financiero, y que los participantes luego tienen que persiguen su interés propio dentro de ese marco. Si el marco es correcto, el sistema tendrá un buen desempeño. Las reglas soportan la carga de asegurar el interés social colectivo en la estabilidad, eficiencia y justicia del sistema. Pero en un sistema complejo en el que la pericia, la perspicacia y la información en tiempo real no se concentran en un solo lugar, y por cierto no en los círculos gubernamentales y regulatorios, la confianza en un marco de ese tipo parece deficiente y poco inteligente. Es más, ignora la importancia de la confianza. Un mejor punto de partida, en mi opinión, es la noción de responsabilidad compartida por la estabilidad del sistema y sus beneficios sociales – compartida, es decir, por los participantes y los reguladores. Es sorprendente que ningún ejecutivo sénior del que yo tenga conciencia haya expresado con algún grado de detalle cómo podía emplearse la pericia de su institución en la búsqueda del objetivo colectivo de la estabilidad. La sospecha detrás de gran parte del descontento público actual es que estas instituciones, habiendo influido en la formulación de las reglas legales y éticas, podrían hacer algo más en función de la estabilidad que sólo obedecerlas. La industria de las finanzas, los reguladores y los líderes políticos necesitan crear una sensación compartida de responsabilidad colectiva por el sistema en su totalidad y su impacto en el resto de la economía. Este conjunto de valores debería estar profundamente embebido en la industria –y así debería trascender cualquier disputa por la regulación-. Debería tener prioridad sobre el interés personal limitado o las potenciales oportunidades de ganancia asociadas con la explotación de una ventaja en materia de información. Y se lo debe

360 considerar un aditamento de las normas, reglas y ética de referencia asociadas con los tiempos “normales”. Algunos dirán que esta idea no va a funcionar porque va en contra de la codiciosa naturaleza humana. Sin embargo, estos valores forjan otras profesiones. En la medicina, existe una brecha gigante e insondable en cuanto a pericia e información entre médicos y pacientes. El potencial de abuso es enorme, pero está limitado por los valores profesionales que se inculcan durante toda la formación de los médicos y que están reafirmados por una forma silenciosa de control entre pares. Por sí solo, un cambio de estas características en los valores y el modelo implícito que define los roles no resolverá, con certeza, el desafío del riesgo sistémico. Tampoco lo hará restarle importancia a las reglas. Pero si se lo toma en serio, podría contribuir a ofrecer un recordatorio permanente de la importancia del sector financiero para el bienestar más extendido de la economía. Podría servir incluso para comenzar a reconstruir la confianza. http://www.project-syndicate.org/commentary/spence11/Spanish

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Irish Show Greeks Suffering Is Price of Admission to Euro Union By Dara Doyle - Jul 20, 2010 For the first time in history, the Greeks are following the Irish with the understanding that mythology has no place in the path to redemption. Facing the largest budget deficit among the 16 countries sharing the euro, Ireland began raising taxes and cutting pay for state workers 18 months ago. When decades of profligate Greek governments threatened to unravel the euro in March, Prime Minister George Papandreou belatedly embraced the Irish model and acknowledged that failing to emulate the northern Europeans would return his country to the financial underworld. “Ireland’s wage cuts are a blueprint for Greece and other European countries that lost competitiveness,” said Ralf Ahrens, who helps manage about $20 billion as head of fixed income at Frankfurt Trust and holds Irish government bonds. While Germany and France are the biggest economies in the euro region, the survival of the currency union as it stands now may depend on whether the Greeks on the Aegean can be successful in mimicking the Irish 1,800 miles away on the Atlantic. “The scale of cuts in pay and spending here are unprecedented across Europe,” said Garret FitzGerald, 84, the Irish prime minister in the 1980s who reduced budgets and raised taxes. “We’re Northern European, less emotional, and more accepting of what needs to be done in a crisis.” The cost of insuring against a default on Irish sovereign debt fell by more than a third during the past 18 months, while it more than quadrupled for Greek debt. Deficit Differential Ireland’s budget deficit will equal 11.7 percent of gross domestic product this year, the European Commission forecast on May 5. Greece aims to reduce its indebtedness to 8.1 percent of GDP. Analysts aren’t convinced that junk-rated Greece can outdo Ireland, whose creditworthiness is eight steps better even after the cut this week by Moody’s Investors Service. Ireland joined what’s now the European Union in 1973, eight years before Greece. The 1980s were characterized in part by FitzGerald’s attempts to stabilize the economy. The country’s output per capita was about $17,200 in 1995, 12 percent below the average in a survey by the Organization for Economic Cooperation and Development. As the country attracted manufacturers such as U.S. computer maker Dell Inc. with low taxes, exports started to boom. By 1999, Ireland was the fastest-growing economy in western Europe and a founding member of the euro, giving it easier access to international credit. Greece joined in 2001. Property Bubble Then came the bust as the bubble in the real-estate market burst in 2007 with prices plunging as much as 50 percent and the country’s biggest banks, led by Anglo Irish Bank Corp., faced

362 ruin. The government spent 7 billion euros ($9 billion) to rescue Bank of Ireland Plc and Allied Irish Banks Plc, and then set out to cut government spending. “Ireland talked of consolidation measures when other countries didn’t even dream of it,” said Christoph Weil, senior economist at Commerzbank AG in Frankfurt, where the euro is anchored at the European Central Bank headquarters. The country “could serve as a role model to Greece,” he said. Ireland’s economy has emerged from the worst recession of any developed nation since the Great Depression and is forecast by the European Commission to expand at the fastest pace of anywhere in the euro region next year. Greece, which was telling the world its budget was in control and its economy was growing as the Irish wielded the axe, is headed toward its sharpest contraction since the 1980s and inflation is en route to be the worst in a decade. In May, three people were killed in Athens as protesters vented their disdain for Greece’s politicians. State Salaries The Irish government will reduce its “World War-type” budget deficit next year by almost 50 percent as costs from bailing out the country’s banks recede, the Dublin-based Economic & Social Research Institute reported on July 14. The decrease is helped by extra income tax and an average 13 percent cut in public workers’ pay. By contrast, the Greek government planned as recently as November to increase state- employee wages by 1.5 percent. “We’ve got a lot of first mover advantage,” Prime Minister Brian Cowen said in a July 12 interview on Bloomberg Television’s “InBusiness” with Margaret Brennan in New York. “For a small open economy, we don’t see any options but to go the way we’re doing it.” Still Danger Ireland isn’t out of the woods, according to Karl Whelan, a professor at University College Dublin and a former economist at the Federal Reserve in Washington. The economy shrank about 10 percent in the last two years as the decade-long real-estate boom imploded and, unlike in Greece, the financial system came close to collapse. “If the government hadn’t acted, we would have ended up as a ward” of the International Monetary Fund, Whelan said. “We still might.” The cost of insuring against a default on Irish sovereign debt in the shape of credit-default swaps declined to 260 basis points from a record 396 on Feb. 17, 2009, according to data provider CMA. Greek default swaps surged to 1,087 basis points from 235 in the same period. A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. The difference in yield, or spread, between 10-year Irish government bonds and comparable German bunds, the euro-region’s benchmark, stands at 278 basis points, up from an average 39 during the past decade. The Greek spread is 772 basis points. “It’s not that clear that the worst is over, but the position compared to other countries is more favorable,” said Ahrens of Frankfurt Trust. “We like Irish bonds.”

363 Backs to Wall Pay cuts are rippling across Ireland. Workers at a plant in Cavan in northeast Ireland, run by Kingspan Group Plc, Europe’s largest maker of flooring and insulation panels, accepted pay reductions this month to ensure its survival. In the agreement, compensation for new hires will fall 13 percent to about 11 euros an hour. The existing 130 workers say take-home pay dropped to about 12 euros an hour, down as much as 40 percent from 2007 partly because overtime pay is lower. “Our backs were to the wall,” said Declan Ferry, a labor organizer who helped negotiate the deal. “A lot of other companies in the area were watching closely to see what would happen here, and almost the next day, we had a call from a neighboring company wanting to do the same thing.” Irish labor costs will drop 10 percent from 2009 to 2011, compared with an increase of 3 percent to 4 percent across Europe, according to estimates from the European Commission. No Exit In Greece, the commission forecasts costs will rise 6.7 percent in the three-year period, though Greece’s largest union for non-state workers agreed to a pay accord last week that includes a pledge to freeze salaries this year. “If you don’t have the option of a currency devaluation, there’s no other way out,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “Take the pain.” Elected in October on pledges to raise wages for public workers and step up spending to boost the economy, Papandreou’s union-supported Pasok government revised the 2009 budget deficit to more than 12 percent of GDP, or four times the EU limit and twice the previous government’s estimate. The government waited until March to lower pay for state workers, as part of deficit-reduction decisions that triggered a wave of strikes and protests across Athens and in other cities. Bond spreads at that time hovered at about 300 basis points. Austerity Outbursts “What is certain now is that people here understand what the problem is in Greece and we have to get out of this hole we’re in,” said Dimitris Maroulis, manager of the economic analysis division at Alpha Bank SA in Athens. “We have to reduce public sector debt and return to markets. That’s why they’ve accepted all these substantial reforms.” Austerity-related protests have been all but muted in Ireland. On March 31, the day after the government said it would pump as much as 22 billion euros into Anglo Irish to keep it alive, fewer than 100 demonstrators protested outside the company’s headquarters in central Dublin. “While the Irish complain about official corruption of their political and business elites, there is greater trust in those groups and the state to provide what they are supposed to,” said Scott MacDonald, head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut, which oversees $12.5 billion, in an e-mail. “The anger and mistrust in Greece is far higher.” To contact the reporter on this story: Dara Doyle in Dublin at [email protected] http://www.bloomberg.com/news/2010-07-20/irish-teaching-greeks-suffering-is-price-of- admission-to-a-monetary-union.html

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European Bank Stress Tests Said to Describe Three Scenarios By Meera Louis and Jann Bettinga - Jul 20, 2010 European regulators plan to detail three scenarios when they publish the results of their stress tests on the region’s banks this week, according to a document by the Committee of European Banking Supervisors. Banks will publish their estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes “sovereign shock,” according to a template prepared by CEBS for the banks and obtained by Bloomberg News. In the last scenario, banks will publish their estimated losses on sovereign debt they hold in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document that was dated July 15. Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said. The sovereign-shock scenario doesn’t assume a European nation will default, said a person with knowledge of the matter, who spoke on the condition of anonymity because the information is private. Instead, it will assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person. EU Stress Tests CEBS coordinates national banking authorities and makes policy recommendations to the European Union on regulation. Spokeswoman Efstathia Bouli declined to comment. EU regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a recession and a decline in the value of their government bond holdings. They are using the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal. The banks may publish how much they will need to raise in capital if their Tier 1 ratio, a key measure of financial strength, falls below 6 percent under the sovereign scenario, the draft shows. Lenders will also provide estimated loss rates for their corporate and retail holdings for the adverse cases, according to the template. To contact the reporters on this story: Meera Louis in Brussels at [email protected]; Jann Bettinga in Frankfurt at [email protected] http://www.bloomberg.com/news/print/2010-07-20/european-regulators-said-to-describe- three-scenarios-in-bank-stress-tests.html

365 naked capitalism

Wednesday, July 21, 2010 Deficits Do Matter, But Not the Way You Think Crossposted from New Deal 2.0 By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City. Budget deficits and government spending are necessary to end today’s crisis. In recent months, a form of mass hysteria has swept the country as fear of “unsustainable” budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government’s stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still — likely — years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson’s well-funded public relations campaign, fronted by President Obama’s National Commission on Fiscal Responsibility and Reform — a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness. But even deficit doves like Paul Krugman, who favor more stimulus now, are fretting about “structural deficits” in the future. They insist that even if we do not need to balance the budget today, we will have to get the “fiscal house” in order when the economy recovers. There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency- issuing sovereign governments. And, yet, there are a number of misconceptions circulating that need to be addressed. Many (often of the Austrian persuasion) interpret this simple statement as a Leninist plot to destroy the nation’s currency by flying black helicopters dumping an infinite supply of bags of money all over the planet. This is usually accompanied by a diatribe on the evils of fiat money, with a call to return to “sound money” based on shiny yellow metal. Others suggest that we are instead proposing to ramp up the size of government, until it completes Obama’s plan to gobble up the whole economy. Almost all critiques eventually produce a lecture on the lessons to be learned from Weimar Germany and from Zimbabwe.

366 The strangest criticism of all is that we MMT-ers argue that “deficits do not matter”. In a recent exchange in the New York Times, Paul Krugman put it this way: “But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency.” In that piece he took Jamie Galbraith to task for arguing that “Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks” facing a sovereign government. I won’t go into the details, but Krugman produced a simple model in which ever-larger budget deficits generate ever-rising prices. You can see the rest of that back-and-forth here. But the strange thing is that Krugman never actually addressed Galbraith’s points that insolvency, bankruptcy, or higher interest rates are non-issues for a sovereign government. Nor did Krugman even try to justify his claim that MMT-ers “say that deficits are never a problem”. In fact, MMT-ers NEVER have said any such thing. Our claim is that a sovereign government cannot be forced into involuntary default. We have never claimed that sovereign currencies are free from inflation. We have never claimed that currencies on a floating exchange rate regime are free from exchange rate fluctuations. Indeed, we have always said that if government tries to increase its spending beyond full employment, this can be inflationary; we have also discussed ways in which government can cause inflation even before full employment. We have always advocated floating exchange rates — in which exchange rates will, well, “float”. While we have rejected any simple relation between budget deficits and exchange rate depreciation, we have admitted that currency depreciation is a possible outcome of using government policy to stimulate the economy. A favorite scenario used by the critics is the ever-rising budget deficit that causes the government debt-to-GDP ratio to rise continuously. As interest payments on the debt increase, government faces a vicious cycle of rising deficits, more debt, more interest paid, higher interest rates, and even higher deficits. Our response is two pronged. First, OK, let us accept your premise. Will the government be able to make all payments (including interest paid on debt) as they come due? The answer is, of course, “yes — by crediting bank accounts”. Insolvency is not possible when one spends by a simple keystroke. The critic then quickly changes the subject: Weimar! Zimbabwe! You are a destroyer of the currency! Yes, but it was your scenario, not mine. And even in your worst case scenario, the government cannot be forced to default. Instead, Krugman argues “the government would decide that default was a better option than hyperinflation”. In other words, Krugman veers off into politics — government “decides” to default — because the economics does not give him the result he wants. Second. Your scenario is highly implausible. As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector. Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP. (In the US over the past two cycles, in the expansion phase federal tax revenue grew two to three times faster than GDP and government spending.) This reduces the government deficit (remember the Clinton boom and budget surpluses?). Even if the government spending is on interest (in Krugman’s model, the deficit is due to interest payments) that generates nongovernment income and spending. In other words, the cyclical upswing will automatically reduce the budget deficit. The scenario ignores the “automatic stabilizers” that cause the budget deficit to swing counter-cyclically.

367 What if the economy runs up against a full employment constraint, but government stubbornly keeps spending more, driving up prices toward hyperinflation? Even though incomes and thus tax revenues rise, government spending always keeps one step ahead so that the deficit rises. This is Krugman’s “infinite inflation” scenario. OK, we never claimed that a sovereign government will necessarily adopt good economic policy. The last time the US approached such a situation was in the over-full employment economy of WWII. Rather than bidding for resources against the private sector, the government adopted price controls, rationing, and patriotic savings. In that way, it kept inflation low, ran the budget deficit up to 25% of GDP, and stuffed banks and households full of safe sovereign debt. By the way, Jamie Galbraith’s father, John Kenneth Galbraith, was the nation’s chief inflation fighter. After the war, private spending power was unleashed, GDP grew relatively quickly, and government debt ratios came down (not because the debt was retired but because the denominator — GDP — grew more quickly than the numerator — debt; see here). In other words, Galbraith, senior, used rational policy to avoid the Zimbabwean fate. I do not understand why Krugman prefers to believe that our policymakers would choose hyperinflation over more rational policy. If there is anything that policymakers of developed nations in the postwar period appear to hate, it is rapid inflation. In other words, the policy choice will not be between hyperinflation and default, but rather rational use of inflation-fighting policy should the need arise in order to prevent hyperinflation. If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Unemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve. We may well need more government spending, and, yes, even budget deficits to tackle some of those problems. So, yes, deficits do matter, but not for solvency. http://www.nakedcapitalism.com/2010/07/deficits-do-matter-but-not-the-way-you-think.html

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Annals of Economics

The Volcker Rule Obama’s economic adviser and his battles over the financial-reform bill. by John Cassidy July 26, 2010

“It doesn’t have the purity I was searching for,” Paul Volcker says of the new law. On the evening of Wednesday, June 23rd, Paul Volcker, the former chairman of the Federal Reserve, was monitoring events on Capitol Hill from his office, which overlooks the ice-skating rink at Rockefeller Center. Volcker, who is eighty-two years old, works at a polished granite desk covered with correspondence, books, and financial reports. Apart from a slight loss of hearing, he is in robust health, and when he rises to greet guests he towers above them. His height (six feet eight inches) is initially intimidating, but that impression is soon mitigated by his wry manner. For a year and a half, Volcker, who serves as an economic adviser to President Barack Obama, had been waging a campaign to curb greed and speculation on Wall Street. This effort was reaching a climax, as the Senate and the House of Representatives worked to reconcile the lengthy financial-reform bills that each had passed. Volcker retired from the Fed in 1987, and during the latter years of the tenure of his successor, Alan Greenspan, he was widely regarded as an out-of-touch fuddy-duddy. In the previous six months, however, he had emerged as a de-facto arbitrator for the various factions involved in financial reform: the lobbyists, the politicians, and the public-interest advocates. Barney Frank, the Democratic congressman from Massachusetts, who helped lead the process of reconciling the House and Senate bills, told me in late May, “When the banks come to me opposing various things, I say to them, ‘If I were you, I would go and see Paul Volcker. If you can persuade him, you might have a chance. I think you are not going to see anything in this bill that Paul objects to.’ ” Frank had set June 25th as the deadline for finishing the bill, and during the final two nights of negotiations Volcker still appeared to be playing the role of esteemed referee. His main goal was to preserve the so-called Volcker rule, which barred banks from speculating in the markets—a practice known as proprietary trading—and from operating and investing in hedge funds and private-equity funds. Volcker believed that if such a policy were effectively enforced it would go a long way toward restoring the legal divide between commercial banking (the issuance of credit to households and firms)

369 and investment banking (issuing and trading securities). That split existed from the Great Depression until the repeal of the Glass-Steagall Act, in 1999. Before the repeal, commercial banks were given government protection in case things went wrong, and investment banks were given freedom to do what they wanted with their money. Afterward, everyone was given the freedom, but it was no longer clear where the government safety net ended. Volcker believes that commercial banks, such as Citigroup and Wells Fargo, are worthy of receiving government assistance—and even, in extremis, taxpayer bailouts—because firms and consumers depend upon them for credit. In return for these enterprises being sheltered, they should refrain from risky activities such as proprietary trading and sponsoring hedge funds. “If you are going to be a commercial bank, with all the protections that implies, you shouldn’t be doing this stuff,” Volcker said to me. “If you are doing this stuff, you shouldn’t be a commercial bank.” The financial industry was lobbying vigorously to weaken the Volcker rule. Shortly before dinnertime on Wednesday, a Capitol Hill staffer called Volcker’s chief of staff, Anthony Dowd, a former investment banker, to let him know that Senator Christopher Dodd, the head of the Banking Committee, had released a new compromise proposal. The Democratic leadership needed the vote of Scott Brown, the freshman senator from Massachusetts, who had demanded changes that would please the big financial firms, several of which are based in his state. Dowd wasn’t immediately alarmed, and Volcker was prepared to make some compromises. Earlier in the month, he had met with a group of bank C.E.O.s and lobbyists. Since then, he had been working with his two closest allies on the Hill, the Democratic senators Jeff Merkley, of Oregon, and Carl Levin, of Michigan, on new language that would preserve the essence of the Volcker rule while allowing the banks some flexibility in how they manage their money. Dodd’s new proposal largely stuck to this framework. In a significant concession, it allowed banks to invest up to three per cent of their capital in hedge funds or private-equity funds. But it included restrictions on this freedom, among them a specific dollar limit on investments. Dowd assured Volcker that Dodd’s proposal contained no big surprises, and Volcker went out to dinner at the Harvard Club. Dowd called again around ten o’clock to say that things were still going according to plan. But when Volcker reached his office the next morning he learned that Dodd and Frank had agreed overnight to drop some of the restrictions in the compromise proposal, including the dollar limit on hedge-fund investments. “ ‘Shock’ is too strong a word,” Volcker recalled. “But I was disappointed.” Despite Frank’s prediction, there were now going to be some things in the bill that Volcker objected to. Moreover, Senator Brown was demanding further changes, and the Democratic leadership and the Administration were determined to complete a package that President Obama could present to a G-20 meeting in Toronto on the weekend of June 26th. “I think they had priorities that were a little different from mine,” Volcker told me a few days later. “The President wanted a bill. He was going to Toronto. Everybody wanted a bill. It comes down to a squeeze play, and the sixtieth vote, or the person who’s perceived as the sixtieth vote, he’s got an awful lot of leverage.” As the deliberations on Capitol Hill extended through the night of June 24th, the financial lobby exacted several more concessions, including a change in the definition of the three-per-cent limit on investments in hedge funds and private-equity funds. To outsiders, the switch in language from “tangible common equity” to “Tier 1 capital” signified nothing. For the banks, it meant that they could increase by up to forty per cent the amount of money put into risky investment vehicles. On the morning of June 25th, after the negotiating session finally ended, Dodd and Frank described the reform legislation as the broadest and most far-reaching since the nineteen-thirties. Among the many articles contained in its twenty-three hundred pages, there were provisions that establish a new federal bureau to protect consumers against predatory financial companies; force the trading of many types of derivatives onto open exchanges; and give the federal government the power to seize control of stricken non-bank financial companies—a legal authority that had been lacking in the cases of Bear Stearns, Lehman Brothers, and A.I.G. Later in the day, President Obama announced that the bill included ninety per cent of what he had fought for.

370 Volcker, after a weekend of conspicuous silence, fell in line and issued a statement that the package “provides a constructive legal framework for reform of the financial system.” When I talked to him a day later, however, he said that he had mixed feelings, adding, “We could have done better.” Although the final bill contained many things that he supported, the last-minute weakening of the Volcker rule had confirmed some of his fears about the political process and the power of lobbyists. “The ban on proprietary trading is still there,” he said. “But I’m sorry we lost the tighter limitations on hedge funds and private equity.” He went on, “I’m a little pained that it doesn’t have the purity I was searching for.” Passage of the Dodd-Frank Bill, which President Obama was expected to sign this week, represented a messy conclusion to a debate about how to deal with the risks created by reckless finance. Since the implosion of Bear Stearns, in the spring of 2008, three broad approaches to reform had emerged. One, associated with the Treasury Department and the Federal Reserve, emphasized the importance of reducing the amount of leverage in the system. For every dollar of capital that investment banks have, they sometimes have twenty or thirty dollars invested in various markets. Raising the amount of cash that the banks are required to hold can help them survive in the event of sudden losses. The second approach, supported by Volcker, was to tightly restrict the risky activities that banks could engage in. The third approach, which was championed by some independent economists, called for breaking up the biggest financial firms. The idea is that no financial firm should be so large, and so connected to the others, that it is too big to be allowed to fail. The Dodd-Frank legislation is an ungainly hybrid that contains elements of the first two approaches but ignores the third. It orders firms to hold more capital for derivatives trading and other risky business lines—something Volcker supported—but doesn’t say how much. It prohibits proprietary trading but doesn’t explain how the ban will be enforced. And if these restrictions don’t work, and another crisis ensues, it says that stricken firms will be taken over and wound down rather than rescued—another Volcker priority—but it doesn’t rule out the possibility of bailouts. “There is a great amount of ambiguity about how the bill will evolve in practice,” Raghuram Rajan, a University of Chicago professor who was one of the few economists to warn about the risks of a financial blowup, told me. “It has tremendous promise, but also tremendous scope for disappointment.” Volcker began talking about financial reform in March of 2008, when, as part of the takeover that prevented Bear’s collapse, the Fed agreed to absorb any future losses on some twenty-nine billion dollars’ worth of the firm’s mortgage assets. Volcker remarked publicly that the Fed was operating at the edge of its legal authority. Six months later, Volcker’s unease about bailing out Wall Street speculators resurfaced when, after the collapse of Lehman Brothers and A.I.G., Congress appropriated seven hundred billion dollars to rescue the entire banking system, and the Fed granted commercial- banking licenses to Goldman Sachs and Morgan Stanley, the two largest remaining Wall Street investment banks—thereby giving them access to federal loan guarantees and emergency-lending facilities operated by the Fed. Given the scale of the crisis, Volcker viewed the taxpayer-funded recapitalization of the banking system as unavoidable, but he didn’t like the additional supportive measures for Wall Street firms that were primarily engaged in the business of trading. “When the U.S. government made Goldman and Morgan bank-holding companies, to Volcker that was like the gates of Hell had opened, although he knew it was part of trying to quell the panic,” a senior Administration official recalled. During the transition between the Bush and the Obama Administrations, Volcker was mentioned as a possible Treasury Secretary. His principal rival for the post, Timothy Geithner, who was the president of the New York Federal Reserve Bank, had helped formulate the policy response to the financial crisis. Volcker told me that he never wanted a full-time job, but some of his friends insist that he could have been persuaded. “He would have taken it on the basis that he wouldn’t necessarily stay for a full four years,” said Michael Bradfield, a former colleague of Volcker’s at the Fed, who is now general counsel to the Federal Deposit Insurance Corporation. After President Obama made his choice, Volcker expressed his support for Geithner, but tensions lingered. In January, 2009, a group of experts led by Volcker published a report for the Group of Thirty, an organization of senior business executives and academics, which made a number of recommendations, including one that stated, “Large, systemically important banking institutions should

371 be restricted in undertaking proprietary activities that represent particularly high risks and serious conflicts of interest.” In June, the President’s Economic Recovery Advisory Board, the group of business executives and economists that Volcker heads, sent the White House a four-page document supporting a ban on proprietary trading by banks, which involves their bets on the directions of interest rates, currency movements, and securities prices. In recent years, many big financial firms have expanded their “prop desks,” which can generate huge profits but also significant losses. At Goldman Sachs, proprietary trading accounts for about ten per cent of the firm’s revenues. The Treasury published a white paper on financial reform later that month, but made no mention of banning proprietary trading, or of stopping banks from investing in hedge funds. It said that any financial firm that posed a potential threat to the system would have to raise more capital and hold more money in reserve against possible losses. As long as it did this, it would be allowed to take risks as it saw fit. These firms would be subject to one set of regulations, and a legal mechanism would be set up to enable them to be safely wound down in a crisis. When the white paper was published, the Treasury Department asked Volcker to go to Washington for the press conference. He refused. “What am I supposed to do if a reporter asks me if I agree with everything in it?” he asked a colleague. “Say, ‘No I don’t’?” Volcker insisted to me that he gets on fine with Geithner and that the differences between them came down to competing philosophies. After the demise of Lehman (an investment bank) and of A.I.G. (an insurance company) brought the entire banking system to the edge of collapse, many policymakers concluded that the labels attached to big financial firms didn’t matter much anymore: once they reached a certain size and level of interconnectedness with other firms, they were too big to be allowed to fail. With all of them regulated in the same manner, imposing capital requirements would be a better way to prevent excessive risk-taking than prohibiting proprietary trading, which is sometimes difficult to distinguish from other types of trading. Geithner held this view, as did Lawrence Summers, the director of the White House’s National Economic Council. Many independent analysts agreed, arguing that Bear and Lehman had been destroyed by excessive borrowing and by their sunny view of the subprime-mortgage market. Their proprietary-trading desks had not been the problem. Benn Steil, an economist at the Council on Foreign Relations, told me that, if bank deposit insurance didn’t exist, he would consider an investment with Goldman’s prop-trading desk safer than one with a Midwestern bank that would turn around and lend it to local businesses. If Volcker’s recommendations had been in effect before 2008, Steil said, “the crisis would have unfolded precisely as it did.” Volcker countered that the Treasury’s approach risked exacerbating the likelihood of future bailouts. In proposing to grant the biggest financial firms special legal status as “Tier 1 financial holding companies,” the Treasury came close to designating them as too big to fail, thereby encouraging them to take more risks. He much preferred the older idea of limiting government assistance to commercial banks that don’t engage in speculative activities. Such a policy necessarily involved drawing a clear distinction between them and other financial institutions, and that was what a ban on proprietary trading would do. “If we are going to put ‘too big to fail’ back in the bottle, the first question is: Whom are we going to protect?” Anthony Dowd explained. “The answer is: We are going to protect the banks. The second question is: What is a bank? The Volcker rule is a way of defining that, and it doesn’t include speculative activities. Why should the government protect those?” During the summer and fall of 2009, Volcker continued to push his ideas, but he didn’t appear to be getting far. When he testified before the House Financial Services Committee, in September, there were many empty chairs. In October, the Times published a front-page story about his lack of clout in the Administration and quoted him saying, “I did not have influence to start with.” Volcker’s skepticism about bankers and other financiers dates back to his days at the Fed, where he opposed the Reagan Administration’s efforts to deregulate the banking system. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act, which gave struggling thrift banks (also known as savings and loans) the right to make commercial loans. (Previously, they had been restricted to residential lending.) The legislation was intended to enable thrifts to earn higher profits, and it was strongly supported by Treasury Secretary Donald Regan, the former head of Merrill Lynch. Volcker

372 repeatedly disagreed with Regan and with other members of the Administration. Referring to the S. & L.s, he told his staff, “Give ’em commercial lending power, and they’ll end up with all the bad loans.” This is precisely what happened, and Volcker regards the S. & L. crisis, which ended up costing taxpayers about a hundred and eighty billion dollars in today’s money, as a template for the financial catastrophe of 2007-08. Unlike many economists, who regard financial innovation as generally a good thing, he is suspicious of many things that today’s big financial institutions do, such as creating complex securities and building elaborate mathematical models. Last December, at a conference in England for banking executives, he said that the most important banking innovation of recent decades was the A.T.M. Volcker is driven by a sense of moral urgency. For years, financiers motivated by the prospect of short- term gains—traders, investment bankers, quantitative analysts, hedge-fund and private-equity-fund managers—have been extracting outsized monetary rewards, while insisting that they earned them by creating wealth for their clients and making markets more efficient. Then came the crisis of 2007-08, in which misguided financial engineering brought down the entire economy. Speaking to the conference in December, Volcker said, “Wake up, gentlemen. Your response, I can only say, has been inadequate.” In an era accustomed to the circumlocutions of Alan Greenspan and the anodyne public statements of Ben Bernanke, the chairman of the Federal Reserve, Volcker’s outspokenness insured that his statements were widely noticed. “He’s got a well-defined view of finance that is very refreshing,” notes Austan Goolsbee, a University of Chicago professor who is the chief economist of the White House advisory board that Volcker chairs. “He says, ‘You’ve gotta keep an eye on these guys. If you give them the chance, they will use their market position to line their pockets.’ That’s an important world view.” It’s also an attitude that Volcker extends to his family. A few years ago, Volcker’s eldest grandson, who is a math whiz, informed him that on graduating from college he was planning to become a financial engineer. “My heart sank,” Volcker told me. (After working for a couple of years on Wall Street, the young man has now moved on, much to Volcker’s relief.) Ultimately, it was Wall Street’s recidivist tendencies that put new life into Volcker’s reform campaign. By the end of 2009, firms that had been bailed out a year earlier were making hefty profits and setting aside big bonuses. Goldman Sachs, for example, granted its employees a total of sixteen billion dollars in compensation and benefits. The public was furious, and people were demanding that the profits and bonuses be taxed. But the Treasury Department was refusing to support those ideas. Inside the White House, the President’s political advisers were alarmed by the growing populist backlash. So was Vice- President Joseph Biden, who expressed support for Volcker’s ideas, which had picked up endorsements from a number of veteran financiers. Michael Bradfield, of the F.D.I.C., telephoned Volcker and said, “You should call Biden.” Volcker took Bradfield’s advice. Shortly after that, Jared Bernstein, Biden’s economic adviser, contacted Anthony Dowd and asked for details of Volcker’s reform proposals. Dowd wrote memos explaining what a ban on bank proprietary trading would mean and how such a policy could be worked into the Administration’s existing reform plans. The White House invited Volcker to come down for a meeting. On Christmas Eve, he had a long working lunch in the West Wing with Geithner and Summers, both of whom sensed that it was time for a policy switch. The financial-reform bill that had passed in the House in early December included an amendment from Paul Kanjorski, a Pennsylvania Democrat, giving the Fed the power to order individual banks to cease certain activities, including proprietary trading, if they were taking too many risks. Adopting Volcker’s proposal would go much further than that, and it would also serve an important political purpose. “We decided there was a way to do it that was O.K. policy and which had a bunch of tactical advantages,” the senior Administration official told me. “It would allow Volcker to align himself more fully with us. Because he was a little separate, people could project all sorts of things onto him. . . . They thought he was for all sorts of stuff he never was. That was damaging for the President, and it just wasn’t good strategy for us.” On January 21, 2010, President Obama, with Volcker towering over his right shoulder in the White House’s Diplomatic Reception Room, urged Congress to enact “a simple and common-sense reform, which we’re calling the Volcker rule—after this tall guy behind me.” Volcker smiled and looked

373 sheepish. The term hadn’t been in the speech draft that the White House had forwarded to Volcker’s office the previous night. David Axelrod, the President’s political adviser, had inserted it at the last minute, framing it with some populist language about the “army of industry lobbyists” that was fighting reform. “The Volcker rule” immediately entered the political lexicon, thus associating the White House with a figure known for his independence and integrity. “The other advantage of it,” Volcker joked to an associate, “is that if it doesn’t fly they can throw me under the bus.” In February, the financial debate moved to the Senate, where two factors gave the reformers some momentum. One was Volcker himself. As chairman of the Fed, during the early nineteen-eighties he forced the prime rate to more than twenty per cent, bringing about a deep recession. Angry farmers blockaded the Fed with their tractors. Congressmen called for him to resign, and the Reagan White House urged him to cut rates. Until price increases came down, he did neither. He conquered inflation and, after the subprime crisis destroyed Alan Greenspan’s reputation, Volcker was left in the role of the nation’s senior financial authority. “He’s a respected voice,” Jeff Merkley, who serves on the Senate Banking Committee, said last month. “That comes from his experience inside the system, but also his independence. . . . He wants to see a financial system that will have a robust foundation, and he wants to put the life experience he had to work in that effort.” Merkley went on, “You have Goldman Sachs and others hiring legions of lobbyists to come down here and spin the story so they can keep on doing business as usual. People were asking, ‘How valid is the stuff we are hearing from the big banks on Wall Street?’ . . . We needed that type of honest broker, and Volcker filled that role. He would say, ‘No, the banks are wrong about that.’ ” The second key development that helped Merkley and other Democrats was the passage of health-care reform, in March, which meant that the issues of bailouts and bonuses returned to the headlines and the public began to clamor again for tougher regulation. On Capitol Hill, delays in passing bills often give lobbyists the opportunity to gut them. This time, though, the longer the debate about financial reform continued, the stronger the Senate bill became. “There is this narrative going around that big money runs everything,” Barney Frank said to me. “But public opinion will defeat big money. Last year, when we debated the bill in the House, there was no public opinion for us to rally. . . . When the Senate did the bill, there was no more health care as an issue, and public opinion came to bear.” In March, Volcker threw his support behind Merkley and Carl Levin, who had formulated a more explicit statement of the Volcker rule than the somewhat vague language in the bill that Dodd was proposing. Anthony Dowd worked closely with the staffs of Merkley and Levin, making sure that their amendment didn’t contain any loopholes. Volcker also joined with the Treasury and the Democratic leadership to head off some more far-reaching proposals. After Senator Blanche Lincoln, a Democrat from Arkansas, put forward an amendment that would force the big banks to move their derivatives- trading desks into separate subsidiaries backed by more capital, Volcker wrote a letter to Dodd saying that such a move was unnecessary, providing that the Merkley-Levin amendment was enacted. And, when the Democratic senators Sherrod Brown, of Ohio, and Ted Kaufman, of Delaware, called for size limits that would have forced many big banks to split up, Volcker made it known that he didn’t favor going that far. “I’m not a barn burner,” he said to me. In May, the Brown-Kaufman amendment was put to a vote and was roundly defeated. By late May, the Merkley-Levin amendment appeared to have gained the support of Dodd and other Democrats, and even some Republicans. In the House, the entire Republican delegation had voted against the financial-reform bill, which it portrayed, somewhat misleadingly, as a device to perpetuate bailouts. Mitch McConnell, the Republican leader in the Senate, took a similar approach. But the decision in the White House to back Volcker’s efforts to limit the financial safety net helped to win over some moderate Republicans, including Susan Collins and Olympia Snowe, both of Maine. Before the full Senate could vote on the Volcker rule, however, the Republican leadership sneaked it out. Senator Sam Brownback, of Kansas, withdrew an amendment he had proposed, to which the Merkley-Levin measure had been appended. The strict version of the Volcker rule disappeared from the bill, which the full Senate passed later the same day. “It got outmaneuvered,” Volcker said. “I don’t know all how it happened.” Merkley put the responsibility squarely on the Republican leaders who, he said, wanted to protect the big banks without having the record of having voted for such protection.

374 In early June, as Congress prepared to start work on reconciling the House and the Senate bills, Volcker went to Barcelona for the annual meeting of the Bilderberg Group, an élite organization of financiers, politicians, and journalists. After he returned to New York, he told me that his aim was to resurrect the Merkley-Levin amendment and make sure it was included in the final legislation. “It will take a lot of parliamentary maneuvering, but, if people really want to do it, it can be done,” he said. The next morning, Volcker was leaving for Washington for the second time in a week, having postponed a vacation in order to monitor the House and Senate negotiations. “I don’t trust those guys down there,” he said with a guffaw, his long legs poking out from the bottom of his desk. “I am feeling reasonably good about where we are, but I’ve never trusted the Congress—what comes out of the sausage factory at the last minute. There are conflicting interests. People are going to try to amend it up and down and sideways. I don’t want them to amend it to the point of ineffectiveness.” Volcker and his associates also suspected that some Administration officials were willing to make too many concessions to Wall Street, including on the Volcker rule. “I know the President, and I heard him say in a group that this is an essential part of the bill,” Volcker told me. “I think some other members of the Administration may be somewhat less enthusiastic about it.” While we were talking, an assistant came into Volcker’s office and said that Timothy Geithner was on the line. I went outside into the hallway so that Volcker could take the call. About ten minutes later, he came to the door. “We are in total agreement,” he announced, with a smile that suggested that that might not be the whole truth. Last week, having had time to dwell on the unhappy developments of June 24th and 25th, Volcker was somewhat more upbeat. “We are much better off with it,” he said of the final bill. “It does show leadership in the United States, which will help encourage actions abroad. Without the U.S. stepping up, you’d never get a coherent response.” He pointed out that the language banning proprietary trading was strong and that even the much weaker language on hedge funds and private-equity funds still contained some safeguards that would force big banks to change how they do business. He also cited the crackdown on derivatives trading and a clause, which he had campaigned for, that creates a position for a second vice-chairman of the Fed, who will be explicitly responsible to Congress for financial regulation. “I think that might turn out to be one of the most important things in there,” he said. “It focusses the responsibility on one person.” Anthony Dowd added, “We both felt like we got kind of excluded at the very end. But, when you step back, there were fifty-four lobbying firms and three hundred million dollars spent against us. So we didn’t do too badly.” Yet a larger question remains: Will the reform package be sufficient to prevent future bailouts? Among economists, there is considerable skepticism about the Volcker rule. “If you have the incentive to take risks, there are so many ways that you can do it, and banning one specific activity is not very useful,” Raghuram Rajan said. “If I am a bank and I want to load up on risk, I can give loans to walking wrecks, and that will give me all the risk I want.” In fact, prohibiting banks from proprietary trading could “give you false confidence that they are not taking risks when they are.” Volcker has pointed out that professional economists didn’t do a very good job of predicting the most recent crisis. The Volcker rule was intended not as a substitute for broader reform but as a supplement to it, and as a way of grasping the too-big-to-fail problem. If the stricter version contained in the Merkley-Levin amendment had survived, Goldman Sachs and Morgan Stanley, the last two big Wall Street firms, would probably have given up their banking licenses in order to protect their lucrative trading operations. In his mind, Volcker would have succeeded in re-creating a strict dividing line between those institutions which can rely on a government safety net (the biggest commercial banks) and those which can’t (all other big financial firms). The weaker version of the Volcker rule that was passed into law leaves many things, as Volcker says, “in a holding pattern.” Goldman Sachs and Morgan Stanley appear determined to retain their current status and to try to squeeze as much proprietary trading and hedge-fund sponsorship as they can under the new rules. The big commercial banks, such as JPMorgan Chase, could well hold on to their in-house hedge funds and private-equity funds, albeit with smaller ownership stakes. Volcker may have won the intellectual debate, but, as he readily concedes, the practical challenge lies ahead. Two years from now, when the Volcker rule goes into effect, some firms may well try to skirt it,

375 by, for example, placing big proprietary bets and trying to define them as something else. Without the legislative purity that Volcker was hoping for, enforcing his rule will be difficult, and will rely on many of the same regulators who did such a poor job the last time around, particularly those at the Fed. If the Obama Administration had been able to force the banks to hold a lot more capital in perpetuity, this would not matter very much: a financial system with low leverage can survive the occasional implosion. But international negotiations on a new set of capital requirements are going slowly, and there is no assurance that they will yield meaningful results. If they don’t, once the next credit boom gets going, leverage ratios will start rising again. In this area, as in many others, the Dodd-Frank Bill is at most a useful beginning. As Volcker told me, it doesn’t really deal with a number of issues that contributed to the crisis, such as extravagant Wall Street compensation practices, misleading accounting, and incompetent credit rating. Ultimately, it also leaves open the question of what would happen if one of the biggest financial firms got into the same sort of trouble that brought down Bear Stearns and A.I.G. As a legal matter, the federal government could now euthanize such a firm instead of bailing it out. But is the threat of closure credible? If in five years Goldman, say, were to suffer a catastrophic trading loss, then, regardless of whether it had given up its banking license, the Treasury and the Fed would come under great pressure to save the firm. Volcker says that the temptation to launch another bailout could be resisted. “I would say we are not going to do it,” he said simply—and, doubtless, if he held authority, he wouldn’t. In reality, though, the challenge of confronting the next Bear or A.I.G. will fall on less independently minded men, and, despite the passage of the Dodd-Frank Bill, it might not be very long delayed. “I do not think that anybody can tell me that there is not going to be another financial blowup of some kind,” Volcker said. “I hope we don’t have another big one—at least in my lifetime.” ♦

Read more: http://www.newyorker.com/reporting/2010/07/26/100726fa_fact_cassidy?printable=true#ixzz0uIqUQ4 pO

http://www.newyorker.com/reporting/2010/07/26/100726fa_fact_cassidy

376 News N Economics Daily analysis of global economic and financial conditions

The answer is the domestic private sector

MONDAY, JULY 19, 2010 Posted by Rebecca Wilder at 8:10:00 PM

Jim Hamilton used the Federal Reserve Flow of Funds data to present a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO's alternative fiscal scenario.”

I thought that the analysis was curious and too "partial". If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious…

1962Q1/2009Q3 Let’s say that consumption goes back back to the 1960’s-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury's liabilities.

A simple example illustrates my point. If the Treasury’s book doubles to $16.5 trillion, and the household share of Treasury holdings rises to 30% – as of Q1 2010 the stock of Treasuries outstanding was just about $8.3 trillion (see L.209 here) – then households will accumulate over $4 trillion of those new Treasuries. That's just households, and holding all else equal (like financial funds and businesses).

So the answer is: the domestic private sector. http://www.newsneconomics.com/2010/07/answer-is-domestic-private-sector.html

377 Grasping Reality with Both Hands Tom Levenson: The fact that leaps out at me is that Weber was a liberal within the German intellectual milieu of the time. Cf. the manifesto of 93 (An appeal to the Cultured World) for a reading of "mainstream" German academic opinion July 19, 2010 Lemmings Marching Off a Cliff... Wolfgang Mommsen on Max Weber: Max Weber was not unprepared for the misfortune that befell Germany and Europe in August 1914. He was nevertheless deeply disturbed that the Reich had to face a superior coalition in the battle to retain its position as a world power. He had viewed a war for German equality to be unavoidable, and he was in principle inclined to support such a way. The war turned out to be a struggle to preserve Germany's national existence. The catastrophic diplomatic situation that isolated Germany at the war's outset clouded Weber's prophetic eyes. How can we think of a peace? And when? Hundreds of thousands are bleeding because of the embarrassing incapacity of our diplomacy. We cannot deny it. Therefore I do not expect a lasting and fruitful peace for us even in the event of a favorable outcome. In the most favorable circumstances, he did not expect this war would permit Germany to enter the ranks of the world powers. For this reason the World War seemed to make little real sense. It was above all the bloody reckoning for a quarter of a century of a boasting and arrogant German foreign policy that had offended all the powers equally. Max Weber did share the national enthusiasm of the late summer of 1914. He had frequently criticized the German people for quietism and apolitical attitudes. He was now deeply affected by the national élan and the willingness for sacrifice with which the entire nation took up the fight for national preservation. He was fascinated by the event itself, independent of the fearful question of what it would lead to: "Whatever the outcome, this war is great and wonderful." The nation's patriotic enthusiasm, its willingness to make sacrifices, its national unity--Weber sensed all this as of final and permanent value. To this extent he was able to find inner meaning in the bloody event, whatebver the outcome might be. "We have proved we are a great cultural nation," Weber wrote to his mother in April 1915. People who live in a civilized milieu and are nevertheless able to rise to the horrors of war (no achievement for a black man

378 from Senegal!) and to return as honorably as most of our people do--that is real humanity. We cannot overlook this even in the light of much that is unpleasant. This experience will remain, no matter what happens in the end, and indeed it does not look good if Italy cannot be pacified.... Although Max Weber attributed the rise of a "world coalition" against Germany primarily to the failure of German foreign policy, he also rejected the view that Germany could have avoided the World War through a better and more modest foreign policy. We have to be a world power, and in order to have a say in the future of the world we had to risk the war.... Responsibility before the bar of history demanded that Germany resist the division of the world between the "Anglo- Saxon convention" and "Russian bureaucracy"; otherwise the foundation of the Reich would have been meaningless and Germany should have remained divided into small states.... Weber was convinced that the only justifiable objective of the war was the preservation of the German Reich as a great power among "European world powers"... It is never clear to me to what extent the fact that faithful translations from the German seem evasive of agency to nos Anglo-Saxons is an artifact of translation, a reflection of truth about German habits of thought, or an accurate view into authorial decisions. The use of the passive in the translation of Mommsen: • "the misfortune that befell Germany and Europe..." • "the Reich had to face a superior coalition..." • "the war turned out to be..." • "the catastrophic diplomatic situation that isolated Germany..." • "It was above all the bloody reckoning..." cannot help but strike this one forcefully... Brad DeLong on July 19, 2010 at 05:48 Lemmings Marching Off a Cliff... July 19, 2010 http://delong.typepad.com/sdj/2010/07/lemmings-marching-off-a-cliff.html

379 Wednesday, July 21, 2010 Business July 20, 2010, 6:00 am Regulators Are Human, Too By EDWARD L. GLAESER Edward L. Glaeser is an economics professor at Harvard. Once upon a time, economists and political scientists could accept the assumption that humanity was more or less rational and that we made relatively good decisions in the marketplace and in the voting booth. Over the last 35 years, the plausibility of that assumption has been shattered by laboratory evidence, like the work that earned Daniel Kahneman his Nobel Prize in 2002, and by market-shattering events like the dot-com and housing bubbles. Humans are not hyper-rational automatons. We make all sorts of mistakes, both when we are buying a house and when we are electing a senator.

But should people’s propensity to err make big government more or less appealing? Are we better off with an active state that will lean against our private excesses? Or will big government be subject to so many of humanity’s flaws that we’re better off without it? This question, which I asked five years ago in an essay on paternalism and psychology, seems particularly relevant as the Obama administration works to develop the Bureau of Consumer Financial Protection. The consumer “mistake” that has gotten the most attention has been people’s propensity to borrow more than they could pay back — in some cases, perhaps, because they were misled and did not understand the terms of the loan. The odd thing about this “mistake” is that borrowing money and not paying it back can actually look pretty rational — at least for a relatively impatient person. Economics 101 has no trouble explaining why borrowers would like to spend a lot of cash or live for a while in a nice, big home if someone else is paying for it. The bigger puzzle is why lenders would be so foolish as to make these loans.

380 The more obvious consumer error — made by home buyers and lenders alike — was to have wildly unrealistic expectations about housing prices. Karl Case and Robert Shiller surveyed recent home buyers in four cities in 2003. They found that, on average, home buyers in Boston, Los Angeles, Milwaukee and San Francisco thought that over the next 10 years prices would rise each year by 14.6, 13.1, 11.7 and 15.6 percent, respectively. These price expectations certainly seem wrong after the fact — prices are lower today in Boston and San Francisco than they were at the end of 2003 (see chart below) — but economists typically thought that these expectations were exaggerated and unrealistic in 2003, as well.

Overly optimistic expectations were particularly present in places like Phoenix and Las Vegas, where land was abundant and regulation tended to be light. As a result, until 2003, prices had long stayed close to the cost of constructing housing. But from 2003 until 2006 a storm raged and the price of housing in these places skyrocketed. Builders responded quite rationally to the price boom and flooded these markets with new housing. Today prices are back down to where they were at the start of the last decade.

But can a government agency really stop people from believing silly things about future price growth, especially when there are thousands of people – entrepreneurs of error – working hard to convince prospective home buyers that a new home would be a great investment? While it is easy to look around and see plenty of examples of private folly, there is also plenty of public error that should make us cautious about increasing the public role in private decision-making. A recent book by Bryan Caplan, “The Myth of the Rational Voter: Why Democracies Choose Bad Policies,” documents the myriad ways in which voters get things wrong about economic policy. Decisions in the voting booth have none of the checks – like strong incentives and making the same choice over and over again – that somewhat discipline many private market decisions. In our own time, the government itself is not without blame for the housing debacle. Politicians egged on home buyers during the boom with policies such as the tax deduction for home-mortgage interest and with pro-ownership rhetoric. The risks involved with Freddie Mac and Fannie Mae were often ignored despite a loud chorus of Cassandras. Over the last 10 years, neither consumers nor politicians (nor economists for that matter) displayed any great stores of sagacity. Much of financial regulation is appropriate because of externalities. If taxpayers are going to be bailing out bankrupt banks, our representatives had better be reining in the banks’ inclination to gamble with our money. A consumer protection agency, however, is based on the view that a regulator can help offset the errors made by private individuals. In some cases, regulatory agencies really do make things better; I treasure the caloric information available in supermarket aisles. But history has seen plenty of bad regulation, whether in railroads or financial markets, that privileges insiders and restricts innovation. The best way to avoid these missteps is for the Bureau of Consumer Financial Protection to have modest, well-defined goals, like providing clear information to borrowers. Clear, limited objectives will reduce administrative overreach and respect the fact that politicians and regulators are people, too, and make the same kinds of mistakes as lenders and home buyers. http://economix.blogs.nytimes.com/2010/07/20/regulators-are-human- too/?partner=rss&emc=rss

381 The Burning Platform WELFARE & WARFARE (Featured Article) Posted on 19th July 2010 by JimQinn in Economy Afghanistan war, collapse, Democratic party, depression, Iran, Iraq war, James Madison, medicaid, medicare, Military industrial complex, Obama, Republican party, Social Security, Thomas Sowell, Warfare, Welfare

Most people in America associate the Democratic Party with spending on welfare programs and the Republican Party with spending on warfare. Until reading Niall Ferguson’s brilliant The Ascent of Money, I never realized that welfare and warfare have gone hand in hand for over a century. The immortal German warmonger Otto von Bismarck was the first politician to introduce social insurance legislation in the 1880s. His reasoning was not strictly humanitarian. According to Bismarck, “A man who has a pension for his old age is much easier to deal with than a man without that prospect.” Bismarck was a shrewd politician who realized that when you provide people something for nothing, they will vote for you. When you go to war with France, a population sedated with entitlements is more easily malleable and controllable. David Lloyd George rolled out pensions and national insurance in Great Britain prior to World War I in order to win votes. Politicians began a century of addiction to welfare programs, as the poor voted for those that promised them the most. The world has now reached its limit of unfunded promises. The financial crisis in the last two years was caused by politicians throughout the world promising benefits to their citizens and paying for these benefits with borrowed money. Margaret Thatcher aptly summed up what has happened: ”The problem with socialism is that eventually you run out of other people’s money.” The world has run out of other people’s money.

Britain expanded their social welfare state during and after World War I. With demobilization in 1918, they introduced unemployment insurance as a method to keep former soldiers from disrupting their country. Winston Churchill rolled out an ever growing array of social

382 programs to keep the lower classes from revolting. The Japanese government, after World War II, initiated national insurance for sickness, injury, childbirth, disability, death, old age, and unemployment. Nations began to cover all citizens against everything that could possibly go wrong. Is it a coincidence that the largest expansions of the U.S. welfare state occurred in the 1930’s before a World War, in the mid 1960’s in the midst of the Vietnam War, in 2003 at the outset of the Iraq invasion, and in 2010 as we continue to fight wars in Iraq and Afghanistan? It was essential for politicians to buy off the populace before conducting undeclared wars in far off lands. Why? Who has benefitted from entitlement spending and endless warfare? Politicians and the Military Industrial Complex benefit. The way to get elected in the U.S. since the 1930s has been to promise voters benefits while ignoring the long-term costs. The defense industry and their lobbyists benefit by creating phantom enemies around the globe and stirring up the masses through fear and propaganda. The other beneficiary has been the banking syndicate and their owned printing press called the Federal Reserve. The welfare promises and constant warfare over the last century wouldn’t have been possible without the Federal Reserve and their ability to create constant inflation.

Guns & Butter

Politicians discovered that the populace will go along with their never ending military adventures if they were bought off with promises of generous pensions, free medical insurance, subsidized housing, unlimited drug benefits, farm subsidies, tax loopholes, and thousands of other voter boondoggle payoffs. The Federal Reserve printed the fiat currency, the military industrial complex created the enemies, young Americans fought and died in foreign countries in undeclared wars of choice, and corrupt politicians promised unlimited benefits to the masses in search of votes while rigging the tax system to benefit the rich and powerful. The creation of the Federal Reserve and the Federal Income Tax in 1913 unleashed politicians from the chains of fiscal responsibility. The “guns versus butter model” was turned upside down. Before the Federal Reserve was created the U.S. had to choose between two options when spending its finite resources. It could buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both. Politicians handed out butter to the masses and M-16 rifles to our young men. All of the New Deal and Great Society social programs are dependent upon unlimited amounts of debt to be issued for all eternity or until the entire corrupt house of cards collapses.

383

The beauty of socialism and the welfare state is that when a country is young and vibrant, with a rapidly growing economy, the many pay for the benefits of the few. The baby boom that occurred throughout the modern world after World War II granted politicians the means to expand their welfare pledges. The more politicians promised, the more votes they received. It was a beautiful scheme, until reality struck. Ferguson provides the reality check in The Ascent of Money: “Yet there was a catch, a fatal flaw in the design of the post-warfare welfare state. What had started out as a system of national insurance had degenerated into a system of state handouts and confiscatory taxation which disastrously skewed economic incentives.” The larger the welfare state becomes, the lower economic growth, higher inflation and lower productivity overcome the social benefits. As unions become stronger, the economic system becomes more dysfunctional and warped. The economy in a welfare state becomes bogged down in misallocation of resources, mal-investment, rules, regulations, and distorted pay structures. Incentives to increase profits are eliminated. Incentives to create new businesses and to boost efficiency are purged as bureaucracy gains increasing power. As the populations of the welfare states age, there are only a couple of alternatives for the politicians who never looked beyond the next election when passing legislation to hand out more entitlements. Politicians increase taxes on the productive to pay entitlements for the unproductive. The entitlement promises are so great in the United States that politicians couldn’t possibly raise taxes high enough to pay for them. This is where a willing Central Bank steps in and prints money and allows politicians the easy out of borrowing to pay the entitlement promises. This method works until it doesn’t. Ask Greece and Spain. Turning Japanese The welfare state really gained momentum after World War II with Japan and Great Britain leading the way. Ferguson describes the beliefs that overtook the developed world:

384 “From now on, the welfare state would cover people against all the vagaries of modern life. If they were born sick, the state would pay. If they could not afford education, the state would pay. If they could not find work, the state would pay. If they were too ill to work, the state would pay. When they retired, the state would pay. And when they finally died, the state would pay their dependents.” With a post-war worldwide baby boom, the taxes easily paid for the benefits in the early years. The myopic politicians and bureaucrats failed to consider that life expectancy would increase from 62 years old in 1935 to 78 years old today, a 26% increase in 75 years. They also failed to anticipate that the Baby Boomers would have fewer children. The average family size has plunged from 3.5 in 1935 to 2.5 today, a 29% decline. After the implementation of Johnson’s Great Society programs in the late 1960s, the percentage of families with 2 or more children plummeted from 36.7% in 1970 to 23.7% in 2007.

As usual, any program conceived by politicians always has unintended consequences because they have not properly considered the potential scenarios. A properly run Ponzi scheme like Social Security, Medicare, and Medicaid requires that enough new money come into the system from new suckers to pay off the old suckers. With the old suckers living much longer than anticipated and not enough new suckers being born, politicians have resorted to doing absolutely nothing. Any politician who proposes any adjustment, restriction or cut in these programs is immediately ridiculed, spat upon and run out of office by the AARP and the entitled classes. The U.S. is about to experience what Great Britain and Japan have already experienced. The major difference is that Japan and Great Britain did not have to fund warfare along with welfare like the U.S. has been doing for half a century. This experiment of delusion will not end well. Great Britain’s experiment in socialism came crashing down much sooner than Japan, as their population was much older. Their system degenerated into a system of state handouts, high taxation, no economic incentives, slow productivity, high inflation, and economic stagnation.

385 Social transfers rose from 2.2% of GDP in 1930, to 10% in 1960, 13% in 1970 and 17% by 1980. Unions controlled the politicians and resisted all efforts to institute incentives based upon traditional capitalistic principles. Margaret Thatcher was able to slow the advancement of the welfare state for awhile, but was unable to put a stake through its heart. Great Britain continues its long-term decline with a GDP equal to Italy today. Japan, on the other hand, appeared to have figured it out, with the most dynamic welfare state economy in the world from 1970 until 1990. But, then the wheels came off. Demographics have a way of ruining the best laid plans of politicians.

As the life expectancy of the Japanese has risen to the highest in the world at 83 years old, the birth rate in the country plunged. There are more people dying than are being born every year in Japan. They are the oldest society on earth, with 21% of the population over the age of 65, versus 12.8% in the United States. Japan has been in a two decade long slump and has squandered their national wealth on wasteful stimulus programs while failing to address the

386 impossibility of fulfilling their welfare state promises. Japan’s welfare budget is equal to three quarters of tax revenues. Its debt exceeds one quadrillion yen, or 170% of GDP. On its current path toward 240% of GDP, Japan is doomed. As recently as the early-1970s, social expenditures amounted to only about 6% of Japan’s national income. In 1992 that portion of the national budget was 18%, and it was expected that by 2025, 27% of national income would be spent on social welfare. Niall Ferguson sums up the situation for most of the developed world: “Longer life is good news for individuals, but it is bad news for the welfare state and the politicians who have to persuade voters to reform it. The even worse news is that, even as the world’s population is getting older, the world itself may be getting more dangerous.” Dangerous Liaison The United States has hit the proverbial jackpot, with a rapidly aging population, a $106 trillion unfunded liability, an administration that has piled more unfunded healthcare obligations upon our future unborn generations, spineless politicians that refuse to address the crisis, and as icing on the cake 700 military basis spread throughout the world and an annual defense budget of $895 billion equaling the total spending of the next 11 countries combined. The number of Americans over 65 will surge by 35% over the next 10 years and then by an additional 30% in the following decade. Baby Boom demographics have caught up with politician promises. Therein lays the dilemma. Every day 10,000 Americans turn 50 years old. They will not vote for anyone who promises to cut their entitlements. It is the American way to ignore long term problems until the crisis arrives. Politicians could have proactively addressed the out of control entitlement issue ten years ago. They did not. Now it is too late. The crisis is upon us.

387

“The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.” – David M. Walker The United States of America is the modern day Roman Empire. Any reasonably intelligent person with a calculator can figure out that this will end in economic collapse. And still, we do nothing. Not only do we do nothing, we push our foot down on the accelerator by spending $2 trillion on wars of choice, commit $16 trillion to new drug coverage for seniors, and national healthcare for all at an unknown cost. There is one law that cannot be skirted. An unsustainable trend will not be sustained.

America’s welfare state delusions have been built upon decades of indoctrination, misinformation and the ridiculous belief that heavily taxing the productive and redistributing it to the non-productive benefits society. A nation of 310 million people cannot be governed based on emotional sob stories, but this is the tactic used by liberals to enact ever more entitlements and safety nets without consideration of cost. Steven F. Hayward describes the liberal mindset: “Liberalism’s irrepressible drive for an ever larger welfare state without limit arises from at least two premises upon which the left no longer reflects: the elevation of compassion to a political principle (albeit with other people’s money) and the erosion of meaningful constitutional limits on government on account of the imperatives of the idea of Progress.” Liberals have used these tactics to jam through unemployment benefits now reaching 99 weeks. They used these tactics during the healthcare debate. Emotion based sob stories always overcome rational debate, discussions of cost, and overall impact on society. The problem with making decisions with long term fiscal implications based upon compassion only is that you

388 will run out of money before you run out of compassion. Author William Voegeli points out that there is no end to the liberal compassion-fest: “Because compassion is an emotional response rather than a moral principle, it defeats every attempt to make wise choices about which sufferers do and don’t deserve governmentally dispensed solace.” The more programs that are created and expanded the larger the constituency for never ending the program. There is no example in the history of the country where a program has been deemed a failure and scrapped. Entitlement programs never die. The current lot of myopic, bought by special interests politicians do not have the guts to cut or even reduce the growth rate of entitlements. Thomas Sowell captures the essence of America today in this quote: “The problem isn’t that Johnny can’t read. The problem isn’t even that Johnny can’t think. The problem is that Johnny doesn’t know what thinking is; he confuses it with feeling.” Fallacies & Fear

The chart below paints a picture of impending disaster. There are no easy choices left. Massive tax increases, enormous benefits cuts, or some combination of the two will be required to avert a catastrophe. Greek like demonstrations, protests and strikes are in our future.

389 The mindset of close to 50% of the U.S. population is exactly the same as the socialists in Greece. In the latest edition of The Casey Report reporter Jayant Bhandari describes the mindset of the entitled class: “While sitting in a coffee-shop in Athens, I struck a conversation with a very smart-looking, confident girl while we sipped our rather expensive Euro 4 coffee. She was proud of spending time lying on the beaches and buying expensive clothes. By not taking on too much, she was contributing to the world’s peace and happiness. She claimed to be doing a good deed by spending money, which kept the economy going through increased money circulation. Saving money, she said, was bad, something only a selfish person would resort to. “Fewer working hours mean work for other people and hence less unemployment,” she said. While I was thinking that she was likely a spoiled child of rich parents, she added, with bright, clear eyes, that the rich should be heavily taxed. Realizing something was missing, I couldn’t help but ask if she was on public assistance. Without a blink, with supreme confidence and a complete absence of any guilt, she said, “Yes.” The reason she didn’t lie is because she did not feel an iota of guilt for being on dole. Those memes have been systematically annihilated. This is a life in complete contradiction to the natural principles. Not only does the educational system teach falsehoods, the machinations of the system are such that there are seemingly no consequences to misguided living.” The same attitude about saving versus spending took root in the United States in the early 1980s. Citizens became consumers. The only way for a country to achieve long-term growth is for its citizens to save more than they spend. These savings can then be invested within the country to insure that prosperity would continue for future generations. A country of only consumers will eventually collapse under the weight of debt and lack of investment.

Two generations of Americans have been brought up to believe they are owed a pension, owed tax subsidized housing, owed free healthcare and owed the right to happiness provided by Big Brother. The conviction that government can coddle and provide for all the underachievers, disadvantaged and un-ambitious in society has taken root like a weed. This belief is a fallacy. The other fallacy that has been bought hook line and sinker by the American public is that American style democracy can be spread around the globe through force by utilizing the most powerful military in the history of mankind. In 2000 the U.S. expenditure on Defense was under $400 billion. The Obama 2011 budget proposes military spending of $895 billion. That

390 level is 8 times the next highest country. The country that we are supposed to fear as the biggest threat to world peace, Iran, spends $10 billion per year on their military. This is 1.1% of the annual U.S. spending level. The “War on Terrorism” has cost over $2 trillion since 2001. Do you feel safer than you did on September 10, 2001? The neo-conservatives like Dick Cheney, Donald Rumsfeld, Paul Wolfowitz, and Josh Bolton have used fear tactics to scare the American public into never ending war in the Middle East, Big Brother like “security” measures like passage of the Patriot Act, and visions of mushroom clouds if we don’t attack our perceived enemies before they attack us. The citizens of the U.S. have not heeded the wisdom of our founders: “War should only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits.” – James Madison

The country has been in constant military conflict across the globe since the 1940s and Congress has never carried out their Constitutional duty to declare war. The military industrial complex and the politicians they control have subverted the U.S. Constitution in order to enrich themselves at the expense of the citizens. The United States of America in 2010 is Greece, but with the biggest baddest military machine ever conceived as our backstop. The only difference between our socialist state and those that are tottering towards collapse is that we are also burdened with policing the world. This guarantees that our empire will not collapse with a whimper, but with a big bang.

The U.S. welfare-warfare state is not the result of any one political party’s agenda. The Republican Party and the Democratic Party have cooperated to achieve this result. Republicans passed the largest entitlement expansion since LBJ in 2003. Democrats have just proposed the largest military budget in the history of mankind. It isn’t easy to run the National Debt from $5.7 trillion in 2000 to $13.1 trillion today. It takes cooperation and mutual ineptitude on the part of both parties to achieve such a spectacular result. $30 billion unfunded unemployment extensions are attached to bills to pay for the war in Afghanistan. If you vote against the bill, you are not supporting our troops and you want to kick people out into the street. The two sides pretend to offer alternatives to the American people, but their agendas coincide:

391 “Mystical references to society and its programs to help may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.” – Thomas Sowell The hard truth is that every human life ends in a tragedy. There is no amount of money that can be spent by government bureaucrats to alter this fact. Baby Boomers can keep running on their treadmills, popping vitamins, and trying to stay a step ahead of the grim reaper, but the grave beckons. The real tragedy is that because of the fiscal irresponsibility of politicians and the Boomer generation, future generations of Americans will for the first time in U.S. history have a lower standard of living than their parents. The wealth of the nation has been frittered away by statists and war mongers. The current fiscal path of the country is unsustainable. The immediate actions required to avoid a catastrophic collapse are: 1. At least a 50% reduction in annual military spending. 2. A drastic scaling back of Social Security, Medicare, and Medicaid benefits based on age, means testing and instituting real market competition. 3. Scrapping the entire income tax system and replacing it with a VAT or flat tax. 4. Eliminating useless government agencies like the Department of Energy and Department of Education because they are complete and utter failures. 5. An across the board 25% reduction in every government program. 6. The elimination of the Federal Reserve and the linking of the U.S. dollar to a basket of commodities including gold, silver, oil, and agricultural products, in order to restrict corrupt politicians from spending money we don’t have. These six steps are the talk of a crazy man. There is no chance of any being implemented today. We all know that the American way is to ignore imminent problems until they morph into a crisis. Unless we act now, this may be our last crisis. The choice is ours. WELFARE & WARFARE (Featured Article) 19th July 2010 http://theburningplatform.com/blog/2010/07/19/welfare-warfare-featured-article/

My name is Jim Quinn. I’m a senior director of strategic planning for a major university. I’ve held financial positions with a retailer, homebuilder and university in my 24-year career. Those positions included treasurer, controller, and head of strategic planning. I’m married with three boys and I’m writing these articles because I care about their future. I earned a BS in accounting from Drexel University and an MBA from Villanova University. I’m a certified public accountant and a certified cash manager. These articles reflect my personal views. They do not represent the views of my employer, and are not sponsored or endorsed by my employer.

392 Thoughts on Macro Comments on Economic Issues and Macroeconomic Theory (mostly)

« Equilibrium and Meltdown A Macroeconomics Parable Once upon a time, there was a tribe living near a forest with berries and boars. The people gathered berries and hunted boars with spears. The people were happy, except for when one of them let a boar get to close. One day a traveler from the next valley stopped and told of a tool he had seen that could kill a boar with a piece of metal from a distance such that the boar never saw the hunter. Some in the tribe thought they could make such a tool with some time and ingenuity…. The parable goes on to describe how a few members of the tribe were allowed to take time to invent the gun and no one ever got eaten by a boar again, and the people lived happily ever after. Or they didn’t, but everybody appreciated their efforts anyway. Clearly, I’m not a trained parable writer. My great hope is that one day this will be a story about New Keynesians and New Monetarists, with the former as the spear-throwers and the latter as the makers of guns. The newly self-dubbed New Monetarists (Williamson and Wright 2010)* are building models based on search in an effort to properly describe money’s role as a medium of exchange and a provider of liquidity. They also want to dispense with the New Keynesian feature that arbitrarily imposed nominal rigidities are crucial to most results. All noble goals. But we still need spears. To quote WW, “much remains to be learned about…short run non-neutralities…” In other words, monetary search models cannot yet give recommendations about the conduct of monetary policy. New Keynesian models have flaws but they remain rightfully popular in monetary policy circles because it’s all they’ve got. The recent crisis has shown a deep need for the incorporation of financial factors into macroeconomics models. New Monetarist models seem particularly well suited to describe the dramatic shifts in the liquidity observed in some assets such as asset back securities. However, such approaches have little to say about the current debate about the proper policy response in a zero-interest rate environment. The guns are not ready. My goal is to appeal for humility and mutual respect and to forestall the kind of posturing and invective that can arise when boundaries are declared. Journalists and politicians can easily use the resulting rhetoric to support their pet narratives, which, often and unfortunately, are ultimately misleading. Guns might save the lives of hunters someday, but gun makers should not ridicule the spears that help to feed them.

* Federal Reserve Bank of St. Louis Review This entry was posted on Tuesday, July 20th, 2010 at 12:35 pm http://my.ilstu.edu/blogs/gawater/2010/07/20/a-macroeconomics-parable/ http://my.ilstu.edu/blogs/gawater/2010/07/20/a-macroeconomics-parable/ http://my.ilstu.edu/blogs/gawater/2010/07/20/a-macroeconomics-parable/

393 Economist's View Wednesday, July 21, 2010 Defense Spending and Deficit Reduction The defense budget seems to be off the table when it comes to budget discussions, but it shouldn't be: America's Unquenchable Defense Spending, by Michael Cohen: If there's one issue that seems to unite an increasingly divided and fractured capital, it is the ever-expanding federal budget deficit. ... Except one area of the federal budget is seemingly off limits: the $692 billion elephant in the room -- America's defense budget. The calls from Republicans and Democrats for belt-tightening rarely, if ever, seem to extend to the military. Deficit hawks in the House have even demanded that an amendment to the $37 billion Afghanistan spending bill that would allocate $10 billion to prevent teacher layoffs ... be paid for with offsetting spending cuts. No such demands have been made about war spending, which since 9/11 tops more than $1 trillion. ... Yet, outside ... Social Security, Medicare and Medicaid, the defense budget is by far the biggest chunk of the nation's fiscal pie. Aside from money allocated for the Pentagon there is another more than $300 billion in additional outlays for costs like homeland security, military aid, veteran's benefits and military-related interest on the national debt. That's more than $1 trillion in taxpayer money -- or about $3 out of every $10 in tax revenue. And while the defense budget has been growing for decades, since 9/11 the numbers have jumped significantly. ... [T]he money is not just going to pay for wars in Iraq and Afghanistan. Nonwar defense spending makes up more than a third of the increase. All of this is happening at a time when the U.S. faces no major foreign rival and al-Qaida, according to the nation's intelligence chiefs, has been reduced to a mere 400 to 500 key operatives in Pakistan and Afghanistan. In Afghanistan alone, the U.S. is spending $100 billion and deploying 100,000 troops to face an enemy that has only about 50 to 100 operatives in the entire country. Trimming the defense budget will not solve the country's deficit woes, but it would certainly help. Moreover, smart spending cuts would allow lawmakers to divert money toward creating jobs and growing the economy -- steps that would, over time, do far more to reduce the deficit. A recent report by the Sustainable Defense Task Force ... found nearly $1 trillion in possible savings over 10 years. ... [I]f Congress is willing to consider cuts to Social Security and Medicare, or won't even fund money for teachers and benefits for the unemployed out of deficit fears, why should the defense budget be off the table? Of course, as the report also suggests, the surest way to truly reduce U.S. military spending would be to adopt a policy of greater "restraint" that makes the deployment of U.S. forces a true last resort, minimizes overseas commitments and stops subsidizing the defense responsibilities of our allies in Europe and Asia. ... In the short-run, cuts in defense spending (or more "restraint") could be used to temporarily fund recession fighting and job creating programs. In the longer run, as those expenditures expire, the reductions in defense spending would help with the debt problem. http://economistsview.typepad.com/economistsview/2010/07/defense-spending-and-deficit- reduction.html

394

Daily Morning Newsbriefing Hurrah, the Landesbanken have passed the stress test - financial crisis now officially over

21.07.2010 The first leaks of the stress tests are out: In Germany everybody passed, except HRE; Lex said the stress tests demonstrate that an already failed German bank is a failed German bank; if the result are confirmed on Friday, the reaction to this whitewash is likely to be negative; other leaks suggests that the imputed discount on Greek government debt was 23% - but this only affects the trading book, which accounts only for less than 10% of all sovereign bond holdings; no general haircut has been applied in the stress-tests; Lex argues that the problems faced by Ireland’s Nama suggests the difficulties associated to overcome a debt binge; Schauble tells Les Echos that a moderate public sector consolidation will increase private-sector spending; von Mirow warns of a spread of Hungarian crisis; Wolfgang Münchau sees parallels in the fall in the popularity ratings of Merkel and Sarkozy; Kenneth Rogoff, meanwhile, says the case for another stimulus now is weak.

21.07.2010 Hurrah, the Landesbanken have passed the stress test - financial crisis now officially over

The FT got the first leaks from the stress tests, which seem to confirm the worst expectations: far fewer banks than expected have failed the test. German banks, including Landesbanken, indicated in private that they had passed the test, following similar indications in recent days from regulators and politicians in France and Italy. The only German bank among the 14 tested that has so far failed the test is HRE, previously known as Hypo Real Estate. Investors and analysts say that unless there are a credible number of failures among the 91 institutions being stress tested, then the whole exercise risks backfiring. One analyst said ““If HRE is the

395 only German bank that fails, that completely discredits the tests – not just for Germany but for the whole of Europe”. Lex put it to the point saying that the stress tests need to do more than confirm that an already failed German bank is a failed German bank. Other leaks are about the parameters of the test. Banks in France and Greece told the FT that the haircut to Greek government debt were about 23%. Bankers say the impact of those haircuts is likely to be insignificant in any case because the sovereign debt haircuts are being applied only to bonds held in banks’ trading books. But 90% of banks’ Greek sovereign debt is now held not in trading books but in banking books, where they are designed to be held to maturity. Lex on Ireland Lex writes that Ireland “offers a not terribly encouraging example of how difficult it is to overcome a massive debt binge.” Ireland says it has financed 80% of this year’s €20bn borrowing target, yet the spread over German bunds is now higher than it was at the peak of the crisis in early 2009. This is shocking, but perhaps not surprising, since Ireland has a problem few other countries have – an utterly ruined banking sector. Bailing out the sector is likely to cost €25bn, on top of the sum to be spent by the NAMA, which is buying €81bn of toxic loans from five banks at an average 50% discount. Nine months after it was set up, Nama is already revising its forecasts: only 25% of the loans it will buy are performing, compared to 40% last October. Schauble on why deficits are stimulating demand Wolfgang Schauble told Les Echos in an interview that the German government is convinced that a moderate deficit reduction will contribute to more economic growth, that it is an important factor to stimulate demand. Germans are worried about the value of their money and about whether the public debt is still manageable or not. Reducing deficits is thus reducing uncertainty and thereby stimulating demand. Schauble is invited to participate in the French cabinet meeting today, on the agenda is to reach a common position for the Van Rompuy task force, in particular the reform of the Stability pact which might include Treaty changes. Thomas von Mirow warns that Hungary crisis could spread throughout the region Thomas von Mirow warns in an interview with the Handelsblatt that the quarrel between Hungary and the IMF could become a risk for the whole region. Countries can protect themselves if they continue their reforms and budget consolidation. Another risk factor is Greece. Mirow said that in case of Hungary it is not the volume but the quality of the consolidation measures that was put into question. The measures should lead to sustainable deficit reductions and not endanger the recovery. The unusually high banking levy of the new Hungarian government was not a good sign. Mirow expects Hungary to reach a solution with the IMF soon. Wolfgang Münchau on Merkel and Sarkozy In his FT column today, Wolfgang Münchau comments oft he loss in popularity ratings of Angela Merkel and Nicolas Sarkozy – who are losing popularity at the same time despite their significant differences in leadership style. The deep underlying problem both leaders share is a chronic inability to forge strategic alliance with other global leaders, and to devise joint strategies to solve the crisis. The public in both countries does not have the

396 impression that their respective government are on top of the situation. While it is still two years until the French elections, and even three until the German election, the situation may still around. Münchau, however, expects the problems of the two leaders to persist (and in Sarkozy’s case to get worse due to the Bettencourt affair) Kenneth Rogoff on stimulus Next in the FT’s series on austerity vs. Stimulus is Kenneth Rogoff, who argues that the case for another stimulus is weak. He comes down on the side of those who advocate fiscal caution. He argues that the academic evidence in favour of Keynesian’s stimulus effects is mixed, and will probably take decade to resolve. Drawing from his own research with Carmen Reinhart, he concludes that a period of subpar growth is normal after a financial crisis. Given that the Europeans suffer a sovereign debt crisis, it is totally understandable that they are beginning to consolidate. For as long as the economy continues to grow, this strategy is broadly correct. Only if there is a danger of a return to recession, should they re-consider another stimulus. http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2860&tx_ttnews[ba ckPid]=901&cHash=62f39b99f5#

397 COMMENT No need for a panicked fiscal surge

By Kenneth Rogoff Published: July 20 2010 14:02 | Last updated: July 20 2010 14:02 As it becomes increasingly evident that the recovery will remain subdued in Europe and the US, there is a growing chorus for indefinitely sustaining aggressive post-crisis fiscal stimulus. Governments that instead propose gradually reducing deficits and ultimately stabilising debt to income levels – such as both Germany and the UK – are accused of pig-headed fiscal conservatism. Had they only a better grasp of Keynesian truisms, we are told, these countries’ leaders would realise that their penury risks throwing already weak economies into double-dip recessions, or even a sustained depression. There is no question that huge uncertainty hangs over the global economy, but is the case against commonsense fiscal conservatism so compelling? I don’t see it. Yes, output growth is likely to remain tepid compared with a normal post-recession recovery. As Carmen Reinhart and I have repeatedly emphasised in our research, anaemic growth with sustained high unemployment is par for the course in post-financial-crisis recoveries. Yes, Europe’s sovereign debt and banking problems are unlikely to disappear soon. But sovereign debt problems are a typical aftershock of any wave of international financial crises. Worrisome as the current conjuncture may seem, the normality of the crisis trajectory to date hardly suggests the need for a panicked fiscal response. Indeed, it is folly to ignore the long-term risks of already record peace-time debt accumulation. Even where Greek-style debt crises are unlikely, the burden of debt will ultimately weigh on growth due to inevitable fiscal adjustment. The fact that the markets seem nowhere near forcing adjustment on most advanced economies can hardly be construed as proof that rising debts are riskless. Indeed, the evidence generally suggests that the response of interest rates to debt is highly non-linear. Thus, an apparently benign market environment can darken quite suddenly as a country approaches its debt ceiling. Even the US is likely to face a relatively sudden fiscal adjustment at some point if it does not put its fiscal house in order. Some portray Japan, with nearly a 200 per cent government debt to income ratio, as a poster child for extremely indebted countries with low interest rates. Japan’s “success”, of course, has a lot to do with its government’s ability to sell debt domestically. How the country will handle its finances as saving by retirees shrinks and as its labour force rapidly shrinks, remains to be seen. Similarly, the fact that postwar debts in the US and UK have exceeded 100 per cent of gross domestic product – a level that Ms Reinhart and I find to be above the threshold where growth might be affected – is hardly evidence not to worry about peace-time debt explosions. After a war, the natural phase-down in military expenditures combined with a surge of former soldiers into the workplace, makes it far easier to bring down debt-output ratios than after the kind of peace-time build-up we are now seeing. The risks of rising debt, while apparently far off, cannot be lightly dismissed.

398 At the same time, the stimulus benefits of massive fiscal deficits are not nearly so certain as proponents of a new surge of spending maintain. The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive. Ironically, a lot of the newfound conviction comes from the casual empiricism on the growth effects of the Bush tax cuts, evidence that few academics consider sufficient to outweigh the mass of previous results. Indeed, it will take researchers many years, perhaps decades, to sort out the effects of the massive fiscal stimulus that many countries undertook during the crisis. My guess is that scholars will ultimately decide that fiscal policy was far less important than monetary policy and measures to stabilise the banking system. Aggressive fiscal stimulus in the run-up to the financial crisis was reasonable as part of an all- out battle to avoid slipping into a depression. The risk of a second Great Depression was palpable, the huge cost of insurance arguably worth it. Today, the panic has abated, and a more sober cost-benefit analysis is required. Importantly, governments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions. Knowing that governments are serious about stabilising debt levels makes it easier for most central bankers to rationalise continued crisis measures, as some central bank governors (notably in the UK) have quite candidly stated. Otherwise, of course, they will rightly worry about being gamed into inflationary finance of runaway deficits. If a double-dip recession does threaten, then monetary policy, including aggressive measures to combat deflation, remains by far the most reliable first line of defence. Unfortunately, much of the world is going to be facing huge macroeconomic uncertainty for years to come. There is uncertainty about regulation, sovereign debt, the state of our banking and healthcare systems as well as about political fallout from the financial crisis. In this environment, measures to gradually stabilise debt burdens – to restore normality – surely make sense. If things turn radically worse for a sustained period, then yes, absolutely, further action will be necessary. But until then, a panicked government fiscal surge is far more likely to destabilise the nascent recovery than to nurture it. The writer is professor of economics at Harvard University and co-author, with Carmen Reinhart, of This Time is Different: Eight Centuries of Financial Folly Kenneth Rogoff No need for a panicked fiscal surge July 20 2010 14:02http://www.ft.com/cms/s/0/6571e6c8-93f5-11df-83ad-00144feab49a.html

399 COMMENT

Europe requires end of Merkel and Sarkozy By Wolfgang Münchau Published: July 20 2010 23:06 | Last updated: July 20 2010 23:06 Six months ago, it looked as though Nicolas Sarkozy and Angela Merkel would stay in power forever. From a macroeconomic perspective this was profoundly depressing because the euro crisis is, to a large part, a crisis of weak leadership. Since then, the two leaders have suffered drops in their popularity – albeit for different reasons. Ms Merkel is increasingly seen as a scheming tactician, focusing on her short-term gain, rather than her country’s long-term interests. Mr Sarkozy’s hyperactivity has made him look like a buffoon. Yet, despite those differences – and the fact that the two of them are evidently not close to each other – there is a common strand underlying their loss of popularity. They both lack a convincing strategy of how to get through this crisis. Elections are still two years away in France, and more than three in Germany – in other words too early for any forecasts. But the fall in the popularity of both leaders is not a fluke. I expect their problems to persist. Woerth stands ground over job scandal - Jul-20 Emancipation is mixed blessing for Merkel - Jul-18 Comment: Gridlock in Berlin is unhealthy - Jul-04 Sarkozy shake-up plan unsettles ministers - Jul-18 Merkel’s allies call for stronger leadership - Jul-01 In depth: Euro in crisis - Jun-10 Mr Sarkozy is now immersed in a party funding scandal . It is hard to judge how this will end, but it looks as if it will drag on and on. Even if it does not bring him down – and that may happen – he might still choke in the mud of the Bettencourt-Woerth affair – so named after the heiress of the L’Oréal empire, and Mr Sarkozy’s labour minister. If Mr Sarkozy was perceived as successful, he could easily brush off such a scandal. But his domestic agenda has crumbled. Three years ago he campaigned for radical economic reforms, but hardly delivered any. French university professors will tell you his reform of the university system is significant. But, from a macroeconomic perspective what he has done is irrelevant. He failed to deliver sufficient reforms in the labour market, where large sections of the workforce still enjoy almost absolute job security while others, especially the young, have none. He also failed to reform the public sector, an omission that makes post-crisis deficit reduction an almost impossible task. He behaved in a more statesmanlike fashion during the latter stages of the crisis, but this hardly makes up for what is now widely perceived to be a total lack of purpose. Ms Merkel has problems of a different kind, at least superficially. She is now domestically perceived as a weak leader. Her centre-right coalition has disappointed even loyal advocates in the business community, and delivered hardly any reforms. The Greek debt crisis has cost her many sympathies. In the end, she was simply not able to explain to the German people why she had to support Greece. There are now also signs of disintegration in her party. One of her deputies recently lost an important state election. Two others simply resigned and walked away from politics. Another has taken over the ceremonial job of the German presidency. While she is now the undisputed

400 leader of the Christian Democrats, it is getting lonely at the top of a party that seems to have lost the willingness to govern. Next March, she faces three important state elections, which could seal her fate. Between now and then, she will have to think of something. For all their differences, Ms Merkel and Mr Sarkozy have two things in common. The first is that neither are good at forging strategic political relationships. We all know the global leaders with whom Jacques Chirac, Gerhard Schröder, and Helmut Kohl did, and did not, build good relationships. But when I recently asked a senior French official whom Mr Sarkozy considered a strategic partner, I was told the president of Kazakhstan. The second is that they regard themselves as national leaders first and foremost, not European. The French and German public understand deep down that the pretence of national solutions to an international crisis is fake. The simple truth is that this crisis is global and requires leaders with a global and European mindset to solve them. In other words, it requires politicians other than Ms Merkel and Mr Sarkozy. Wolfgang Münchau Europe requires end of Merkel and Sarkozy July 20 2010 23:06 http://www.ft.com/cms/s/0/8255971e-942a-11df-a3fe-00144feab49a.html

Emancipation is mixed blessing for Merkel By Quentin Peel Published: July 18 2010 17:32 | Last updated: July 18 2010 17:32 Something is stirring in the federal heartland of Germany that is likely to be arousing both hope and fear in the heart of Angela Merkel, the chancellor. A government has emerged in the most populous Land (federal state) in the country, North Rhine-Westphalia, that will complicate life for the chancellor’s office in Berlin. It could set a new pattern for politics across the country, with worrying implications for Ms Merkel. Sixth German state premier quits - Jul-19 Lex: Dis-membering the euro - Jul-14 Koch reassures on German regulation - Jul-18 Red-green union wins North Rhine-Westphalia - Jul-14 Germany bans charity over Hamas claims - Jul-12 Comment: Gridlock in Berlin is unhealthy - Jul-04 But first the good news. For the first time in NRW, a woman will head the state government, with another woman as deputy premier and a cabinet equally divided between women and men. Ms Merkel herself scaled the treacherous slopes of German politics to preside over a male- dominated political establishment. She has proved that a woman can rise to the very top of national politics. She is the role model. Hannelore Kraft, leader in NRW of the centre-left Social Democratic party (SPD), is the first woman premier in Düsseldorf, the state capital – the German equivalent of a US governor in a state such as California. Sylvia Löhrmann, leader of the environmentalist Green party, is her deputy and the education minister.

401 There are five men and five women in the government. One of the women is responsible for “emancipation”. It amounts to a more public commitment to the promotion of sexual equality than anything Ms Merkel has attempted in Berlin. On the downside for the German chancellor is the fact that Ms Kraft’s centre-left “red-green” government, in a state where one in five Germans lives, deprives Ms Merkel of her centre- right majority in the Bundesrat, where the federal states vote. It makes legislation more difficult. And “red-green” could be a disturbing indicator of what might happen at the next general election. That is not due until 2013 but, just nine months after the last one, opinion polls show a sharp swing from the centre-right to the centre-left. Support for Ms Merkel’s Berlin coalition of the conservative Christian Democrats (CDU) and liberal Free Democrats is down from 48.4 per cent in the autumn to 35 per cent, against 45 per cent for the red-green combination. The reality of those numbers, however, is that neither side would be able to form a coalition government without involving a third party, or doing a deal for a “grand coalition” between the CDU on the right and SPD on the left. The clearest political signal from NRW was deadlock in a five-party system, with a tie between the two big parties. It took nine weeks of negotiations to produce an unstable solution: Ms Kraft was able to form a minority government with the Greens – one seat short of a majority in the state parliament – thanks only to the abstention of the radical leftwing Linke party. That is a severe embarrassment to the SPD, for the Linke are made up of former communists, leftwing trade unionists and rebels from the Social Democrat camp. Yet Ms Kraft will no doubt have to depend on their votes, or their abstention, to get any serious projects approved. School reform is top of her agenda. The outcome leaves everything to play for. If Ms Kraft can prove that a minority red-green government is a middle-of-the-road, stable solution, it would suggest to voters that such a coalition might work in Berlin. It would even give the SPD a way of involving the Linke, without bringing them into government. Sigmar Gabriel, SPD national leader, has suggested that a minority government in Berlin is conceivable. Ms Merkel and her allies will do everything, on the other hand, to show that the NRW government is unstable and dangerously dependent on far-left votes. The chancellor’s first comment on the outcome was a sharp attack on Ms Kraft, whom she accused of breaking her promise to form a stable government in Düsseldorf. The two women have intriguing similarities. Both came relatively late to party politics. Both come from outside the traditional political establishment. A report from DIW, the German economics institute in Berlin, revealed last week that only 2.5 per cent of board members in the top 200 German companies were women. Whoever succeeds in the coming contest, Ms Merkel and Ms Kraft have shown that German politics is rather more emancipated than business. http://www.ft.com/cms/s/0/c185a5be-9286-11df-9142-00144feab49a.html

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Spain, Ireland, Greece Sell Debt as `Funding Pressure' Eases By Andrew Davis and Anchalee Worrachate - Jul 20, 2010 Spain, Ireland and Greece auctioned almost 10 billion euros ($13 billion) of debt, while Hungary sold less than planned, as investors favored nations backstopped by the European Union’s 750 billion-euro aid package. The yield premiums investors demand to hold the debt of the three euro-region nations, all covered by the EU lifeline, instead of benchmark German bonds fell following the sales, while the Hungarian yield spread with bunds rose. Prime Minister Viktor Orban’s government sold 35 billion forint ($157 million) of three-month bills, 10 billion forint less than planned. Borrowing costs among the euro-region’s high-deficit nations have dropped from peaks in May after the EU devised the financial backstop in return for government-austerity measures. Hungary has refused more cuts, prompting the International Monetary Fund to break off talks over its 20-billion-euro aid program on July 17. That sent bond yields higher and the forint to a 14-month low. “Although Hungary is in the European Union, it’s a non- euro country,” said Christoph Kind, head of asset allocation at Frankfurt-Trust, which manages $17 billion. “The market seems to be much more convinced following the bailout that the euro zone is working and the peripheral countries will be able to finance their debt.” The bonds of euro-region peripheral members outperformed German debt as concern eased the countries will struggle to finance their deficits. Ireland had the area’s largest shortfall at 14.3 percent of gross domestic product last year, followed by Greece at 13.6 percent and Spain at 11.2 percent. Spreads Narrow The spread between Irish and German 10-year bonds fell seven basis points to 277 basis points. The spread between Spain and Germany narrowed five basis points to 171 basis points, the least in a month. The Greek spread with bunds also declined. Greece sold 1.95 billion euros of 13-week bills, its second sale in a week, raising money to pay 4.5 billion euros of short- term debt maturing this month. Greece has no bonds due until next year. Ireland sold six- and 10-year bonds, with investors bidding for 3.6 times the 2016 securities offered, compared with 3.1 times at a sale in June. The debt agency said the government is now fully funded until the second quarter of next year. ‘Losing Steam’ Spain sold 6 billion euros of bills, the maximum target for the auction, with increased demand pushing down borrowing costs. The government sold 4.25 billion euros of 12-month bills at an average yield of 2.221 percent, compared with 2.303 percent at the last sale on June 15. Demand was 1.95 times the amount sold, versus 1.49 times in June. It also auctioned 18-month securities.

403 “Overall funding pressure is losing steam,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “We expect the peripheral markets to enjoy even more potential outperformance against the core.” Hungary paid 5.47 percent to sell the bills, the highest level since March 2. The IMF and EU ended talks with government officials without endorsing Hungary’s plans for controlling its budget deficit. The forint fell to the lowest since April 2009. To contact the reporters on this story: Andrew Davis in Rome at [email protected]; Anchalee Worrachate in London at [email protected] Andrew Davis and Anchalee Worrachate Spain, Ireland, Greece Sell Debt as `Funding Pressure' Eases Jul 20, 2010http://www.bloomberg.com/news/2010-07-20/spain-ireland-greece-sell-debt-as- funding-pressure-eases.html

Hungary's `Foot-in-Mouth Disease' Threatens Investor Confidence, Financing By Edith Balazs - Jul 20, 2010 Hungarian Economy Minister Gyorgy Matolcsy says the International Monetary Fund’s decision to suspend talks with the government doesn’t threaten fiscal stability. Investors say he’s wrong. Six weeks after Hungary’s new ruling party roiled global markets by comparing the country with Greece, investors received another shock on July 17, when the IMF and EU walked away from negotiations without an agreement on plans to control the country’s budget deficit. IMF backing increased confidence and helped Hungary finance its debt on capital markets. Without that support, investors will demand higher yields, boosting the cost of bond sales, said Daniel Bebesy, who helps manage $1.5 billion in Hungarian public debt at Budapest Investment Management. Hungary sold 35 billion forint ($156 million) of three-month Treasury bills today, 22 percent less than planned, as yields rose from a week earlier. “Hungary needs the safety net that an IMF program provides,” Bebesy said yesterday in a phone interview. “Without this net, we could get a much bigger slap in the face if global developments turn negative.” The forint, the world’s worst-performing currency against the euro in the past three months, fell 2.9 percent yesterday, dipping to the lowest since April 29, 2009. The yield on the benchmark three-year bond surged to 7.28 percent from 6.9 percent, and the cost of protecting the country’s debt against nonpayment for five years climbed 46 basis points to 362.5 basis points, the most since the Greece comments. The forint rose 0.1 percent to 289.40 per euro as of 2:41 p.m. in Budapest. The three-year bond was little changed at 7.28 percent. ‘Tough Decisions’ The IMF suspended its review of Hungary’s 20 billion-euro ($25.8 billion) emergency bailout because “a range of issues remain open,” the Washington-based lender said in a July 17

404 statement. The government must make “tough decisions, notably on spending,” to comply with deficit requirements, the EU said. “This is just another incident of foot in mouth disease from the new government,” said Kieran Curtis, who helps manage about $2 billion in bonds, including Hungarian government debt, at Aviva Investors in London. Without the IMF, “there may or may not be enough appetite to buy Hungarian assets to make up for the lack of funding.” The government will eventually agree to the IMF’s terms, because it can’t afford the backlash from voters affected by rising payments on foreign-currency loans, Curtis said. The IMF delegation is expected to return to Budapest in September, and Hungary will eventually reach an agreement with the IMF, Economy Minister Gyorgy Matolcsy said yesterday at a news conference in Vienna. ‘Their Own Masters’ The government, which has pledged to stick to the IMF- approved budget-deficit goal of 3.8 percent of GDP this year, refused to implement further austerity measures and pushed creditors to widen next year’s target, Matolcsy said. Hungary also seeks a new “precautionary” loan from the IMF after the current credit line runs out in October. “Markets have their own masters,” Prime Minister Viktor Orban said today at a news conference in Budapest. “Hungary will fulfill its international commitments and that will make it the fifth or sixth best-performing country among the 27 EU- member states. This is what I can say for the benefit of the markets. They should use it as they may.” Hungary Debt Sales Hungary turned to international lenders in 2008 to avert a default after demand for its debt dried up. At the time, the government suspended bond auctions, relying solely on its IMF credit line to repay debt and finance the budget. Regular debt sales resumed in April 2009, and Hungary has since sold foreign-currency bonds twice. The debt management agency has missed its sales target at four forint-denominated auctions since June 3, when an official of the ruling Fidesz party said Hungary had a “slim chance to avoid a Greek situation.” The average yield on the Treasury bills sold today rose to 5.47 percent from 5.28 percent at the previous auction on July 13, according to results posted by the Debt Management Agency. Hungary’s debt management agency sees “no financing problems whatsoever” after today’s auction, Deputy Director Andras Borbely said in a phone interview. Hungary is 100 billion forint ($443 million) over its year-to-date debt sale plan as a 115 billion-forint excess in bond sales outweighs a 15 billion- forint shortfall in Treasury bills, he said. ‘It’s Questionable’ Without an IMF program to reassure investors that there is a backstop in case of financing difficulties, buyers will demand higher yields to hold the country’s debt, said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, in an interview. “Could they do it at anything else than a Greek interest rate?’ It’s questionable,” Kirkegaard said. “It’s not something they could afford to try because if that fails, they would be forced to go back to the EU and the IMF, and they would be met with austerity demands and structural reform demands that would be even harsher than now.”

405 Hungary’s central bank yesterday kept interest rates unchanged at a record-low 5.25 percent for the third month. Policy makers may need to raise borrowing costs in case of a “sustained increase in risk premiums,” the bank said. The collapse of negotiations “doesn’t help Hungary’s risk assessment” and may lead to heightened currency volatility, central bank President Andras Simor told reporters after the rate decision. “At best, Hungarian financial markets look set for an extremely bumpy ride over the coming weeks and months,” David Oxley, a London-based emerging-market economist at Capital Economics, said in an e-mailed note. “At worst, Hungary could be muddling into a future fiscal crisis.” To contact the reporter responsible for this story: Edith Balazs in Budapest at [email protected] http://www.bloomberg.com/news/2010-07-19/hungary-s-foot-in-mouth-disease-threatens- investor-confidence-financing.html

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Pimco Sells Black Swan Protection as Wall Street Markets Fear By Shannon D. Harrington, Miles Weiss and Sree Bhaktavatsalam - Jul 19, 2010 Wall Street’s hottest new product is fear. Almost two years after Lehman Brothers Holdings Inc.’s failure caused world markets to seize up, Pacific Investment Management Co. is planning a fund that will offer protection to investors against market declines of more than 15 percent. Morgan Stanley strategists estimate demand for hedges against such cataclysms helped drive as much as a fivefold increase last quarter in trading of credit derivatives that speculate on market volatility. The efforts to protect against another disaster, which helped drive up the relative costs of the most bearish credit derivatives to the highest in two years, show that investors’ psyches still haven’t recovered from the Lehman bankruptcy on Sept. 15, 2008, which erased $20.3 trillion in stock market value worldwide and caused credit markets to freeze. “Everyone is starting to realize that this is going to be a much longer, much more difficult path to recovery,” said William Cunningham, head of credit strategies and fixed-income research at Boston- based State Street Corp.’s investment unit, which oversees almost $2 trillion. “It’s really quite fragile and vulnerable in a way that we haven’t seen in our lifetime.” Demand for protection against so-called tail risks, extreme market moves that Wall Street’s financial models fail to detect, is increasing as investors react to events such as the May 6 stock market rout that briefly sent the Dow Jones Industrial Average down almost 1,000 points, or Greece’s sovereign debt crisis, which on June 7 sent the euro to a four-year low against the U.S. dollar. Black Swans For much of the year before Lehman’s collapse, Nassim Nicholas Taleb warned bankers that they relied too much on probability models and had become blind to potential catastrophes, which he labeled black swans, a reference to the widely held belief that only white swans existed -- until black ones were discovered in Australia in 1697. His 2007 book, “The Black Swan,” contends tail risks are becoming more severe. To hedge against tail risks, investors usually look for the cheapest insurance against a cataclysmic market sell-off, mainly through derivatives that are expected to multiply in value as prices plummet for everything from stocks to the Australian dollar. The Indiana Public Employees Retirement Fund, with $14.1 billion of assets, asked financial institutions in January to send information on a tail-risk management program that would protect it against “an extreme market downturn,” according to a request for information on the manager’s website. Tail-Risk Pioneer The term long-tail risk is derived from the outlying points on bell-shaped curves that forecasters use to plot the probability of losses or gains in a given market. The most probable outcomes lie at the center. The least probable, such as a decline of 5 percent in an index that most days rises or falls by less than 0.25 percent, are plotted at the “tails” of the curve. The greater the deviation, the longer the tail. Taleb helped pioneer tail-risk hedging in the 1980s, trading options for banks including First Boston Inc., now part of Credit Suisse Group AG. Taleb built what he later termed a “massive” position in options on Eurodollar futures when the stock market crashed on Oct. 19, 1987. The Dow’s biggest one-

407 day drop in history prompted the Federal Reserve to pump liquidity into the banking system, lowering interbank borrowing rates and causing the futures to surge. ‘Drop Like Flies’ Pimco, manager of the world’s biggest bond fund, Deutsche Bank AG and Citigroup Inc. are among firms offering clients tail-risk protection, either through funds or traded instruments that act as hedges. Taleb said few will have the stomach to stick with the strategy. “They will drop like flies,” said Taleb, now a professor at New York University’s Polytechnic Institute, who in 1999 set up tail-risk hedge fund Empirica LLC, which he ran for six years. “They and their customers will give up at some point. I’ve seen it before.” Besides the sovereign debt strains in Europe that led to Greece, Spain and Portugal having their credit ratings reduced, investors such as Kyle Bass, who made $500 million three years ago on the U.S. subprime collapse, are concerned that even top- ranked governments may face hyperinflation from bailing out the global financial system. The U.S. has $8 trillion of Treasuries outstanding, up from less than $4.5 trillion in mid-2007. China is grappling with a property bubble as its world- leading 11.9 percent economic expansion slows. Prices in 70 cities rose 11.4 percent in June from a year earlier following a record 12.8 percent in April and 12.4 percent in May, according to China Information News. Market Liquidity At the same time, traders say that market liquidity, or the ability of investors to easily trade in and out of positions as markets change, hasn’t fully recovered from the Lehman collapse. Even though the amount of Treasuries outstanding has increased about 75 percent the past three years, the average daily trading volume of the securities among the primary dealers has declined about 12 percent, according to Fed data. “In some of these asset classes, it’s just not practical to reduce risk by selling given the lack of risk appetite and illiquidity,” said J.J. McKoan, co-director of global credit investments in New York at AllianceBernstein LP, where he helps manage $199 billion in fixed-income assets. Improbable Occurs Investors were reminded that the improbable can happen by the events of September 2008 -- from the government seizure of mortgage-finance companies Fannie Mae and Freddie Mac to Lehman’s bankruptcy and the near-failure of American International Group Inc., once the world’s largest insurer. Defaults on mortgages given to the least creditworthy borrowers drove financial institutions worldwide to take $1.8 trillion in writedowns and losses. The seemingly growing occurrences of events that fall on the fringes of probability are prompting pension fund managers and other institutional investors -- who once shunned costly hedging strategies - - to reconsider. And they’re doing it even as economists predict the U.S. economy will grow an average of almost 3 percent through 2012 and as analysts forecast the Standard & Poor’s 500 Index will gain 17 percent through year- end. “People are trying to move beyond historic notions that tail risk events are so infrequent on the one hand, and so extreme on the other hand, that there is nothing you can do about them,” said Eugene Ludwig, who started a Washington-based risk management firm called Promontory Financial Group after serving as U.S. Comptroller of the Currency under former President Bill Clinton. ‘New Normal’ Pimco Chief Executive Officer Mohamed El-Erian developed tail-risk strategies when he was manager of Harvard University’s endowment in 2006 and 2007, and wrote about the importance of such hedging in his book, “When Markets Collide.” El-Erian, who describes America’s economic future with the term “new normal,” advocated the strategy he applied at Harvard on returning to Pimco in January 2008. Pimco, which manages about $1.1 trillion, opened its first mutual fund aimed at minimizing risks

408 from systemic shocks that October. The Pimco Global Multi-Asset Fund is co-managed by El-Erian and Vineer Bhansali. Pimco, the Newport Beach, California-based investment firm that runs the $234 billion Total Return Fund, is using strategies in many of its funds to protect against tail events, said Bhansali, chief architect of the company’s tail-risk management program. ‘Cheap Protection’ “You don’t want to try to be too smart in trying to forecast what is going to happen and which hedge is going to perform better,” said Bhansali, who holds a doctorate in theoretical particle physics from Harvard in Cambridge, Massachusetts, and ran the exotic and hybrid options trading desk at New York-based Citigroup. “What you want to do is accumulate cheap protection.” The Pimco Tail Risk Hedging Fund 1 will be the first in a potential series of partnerships, according to a private placement filed with the U.S. Securities and Exchange Commission on June 23. The initial fund will be designed to protect investors from a drop of more than 15 percent in a benchmark index that Bhansali declined to identify. ELVIS Deutsche Bank is marketing a tail-risk hedging index that gains in value when investor expectation of stock-market volatility increases, according to material the bank sent to clients. The so-called Equity Long Volatility Investment Strategy, or ELVIS, uses derivatives called variance swaps linked to the S&P 500 that bet on the index’s volatility. Derivatives are contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. Citigroup hired John Liu, a former employee of the Indiana pension fund, about two months ago for a newly formed unit that will advise pension plans, endowments and foundations on tail risk hedging, according to a prospective investor who declined to be named because the hire hasn’t been publicly announced. Liu was formerly the managing director of equity strategies at Vanderbilt University, the Nashville, Tennessee-based college that in late 2005 tried to hedge portions of its endowment by using tail-risk insurance. “This has become something of a ‘me-too’ trade lately,” said Mark Spitznagel, a former Taleb trading partner at Empirica, who now runs Santa Monica, California-based Universa Investments LP, which Taleb advises. “These guys are all very new to a difficult game that we’ve been playing for a very long time now.” Costs Rise Along with the demand, the costs of tail-risk hedging have also climbed. In June, investors buying options that paid off should the S&P 500 plunge more than 23 percent from its April high were paying 75 percent more than those speculating on gains. The premium was the highest ever, according to data compiled by Bloomberg and OptionMetrics LLC. Options give investors the right to buy or sell shares at a predetermined price. The risk premiums that investors were willing to pay for the most bearish options on a European credit index rose to the most since before Lehman’s collapse. The so-called three-month volatility skew, a measure of the risk premium for options trading far from their strike price -- known as out-of-the- money -- versus those trading close to the strike, reached 30 percentage points on June 4, the highest in at least two years, and up from 5 percentage points at the end of 2009, Goldman Sachs Group Inc. data show. The skew has since fallen back to 9 percentage points. In absolute terms, the cost of an out-of-the-money four- month option giving the right to buy protection against default by 125 European companies was $930,000 for a $100 million trade in May, compared with $630,000 yesterday. ‘Sudden Storm’

409 Goldman Sachs strategists said last month that investors were overpaying for the derivatives as fears of a sovereign default in Europe became too extreme, and not paying enough to hedge against higher- probability scenarios such as a prolonged period of low growth that spares the financial system while causing a jump in defaults among the lowest-rated borrowers. “To put it into sailing terms, investors are paying a high premium to hedge against a sudden storm,” Goldman Sachs strategist Alberto Gallo in New York said. “But they’re not willing to hedge against a prolonged period of no wind. This creates a buy opportunity for credit.” Trading in options used to speculate on price swings in benchmark credit-default swap indexes rose as much as fivefold last quarter from the beginning of 2010, according to estimates of activity at Morgan Stanley, said Sivan Mahadevan, global head of equity and credit derivatives strategy at the firm in New York. Bondholder Protection “It’s one of the most significant credit developments since 2008,” Mahadevan said. “Investors can’t just think of credit as being a low volatility asset class anymore.” Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Investors should be cautious in following the herd, said Eric Petroff, director of research at Wurts & Associates, a Seattle-based consulting firm that oversees about $30 billion on behalf of institutional investors. “Products that protect you from tail risk tend to crop up after the tail has occurred,” he said. “Back in 2007, it made a lot of sense to hedge tail risk but now it just seems brilliantly misguided.” Pine River Other asset managers that have been hedging against improbable events are creating funds to take advantage of demand. Pine River Capital Management LP, a Minnetonka, Minnesota, firm that has $2.1 billion in assets under management, started the Nisswa Tail Hedge Fund LP last month, according to a June 15 filing with the SEC. The partnership was formed at the request of investors who wanted access to the hedging techniques used by Pine River’s primary multi-strategy fund, which gained 40 percent during 2008 and 2009, according to Aaron Yeary, a co-founder. “By buying prudent hedges and staying liquid, it allowed us to be on the offense during the crisis,” said Yeary, who is running Nisswa Tail Hedge with Nikhil Mankodi. “Some sold their liquid investments and were left with garbage,” Yeary said, adding that Nisswa Tail Hedge has about $200 million in assets. Capula, Ionic Capula Investment Management started a tail-risk fund in March with about $100 million, which has grown to about $650 million, according to a person familiar with the fund, who declined to be identified because the fund details are private. It may top $1 billion in the next two months, the person said. Ionic Capital Advisors LLC, a New York-based investment firm founded by former employees of Highbridge Capital Management LLC, is offering tail risk protection through Ionic Select Opportunities Fund LLC, according to a private placement notice filed with the SEC on June 11. Mary Beth Grover, a spokeswoman for Ionic, declined to comment. Taleb said sticking with a tail-risk strategy can be psychologically challenging because payoffs, while big, are less frequent. “If you looked at numbers over a period of time -- six, seven, eight years -- there’s much higher return,” Taleb said. “But if you watch a trader in any given year, he looks like an idiot. No trader wants to feel like he’s an idiot.” To contact the reporters on this story: Shannon D. Harrington in New York at [email protected]; Miles Weiss in Washington at [email protected]; Sree Vidya Bhaktavatsalam in Boston at [email protected] http://www.bloomberg.com/news/2010-07-20/pimco-sells-black-swan-protection-as-wall- street-profits-from-selling-fear.html

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America's AAA Rating Is Cut in Land of Bubbles: William Pesek By William Pesek - Jul 19, 2010 Bloomberg Opinion Moody’s Investors Service, Standard & Poor’s and Fitch Ratings can’t be happy. Last week, the world’s credit-rating giants got scooped on the biggest rating decision: whether to strip the U.S. of AAA status. Worse, the U.S. was downgraded by a company that few people have ever heard of, and a Chinese one at that. While Moody’s and S&P ignore the wreckage that America’s finances have become, Beijing- based Dagong Global Credit Rating Co. is uncorrupted by the system that enables developed- world debt addicts to appear fiscally clean. It rates U.S. debt AA, two levels below the top grade. Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard. In its first foray into sovereign problems, Dagong raises some vital questions. One is whether ideology in favor of the West has more to do with ratings than the ability of governments to repay debt. An alien arriving from outer space might take one look at America’s balance sheet, conclude it’s an emerging nation and buy Indonesian debt instead. The same goes for Japan and its demographic time bomb. France, Germany and the U.K. possess challenges that might necessitate lower ratings if true objectivity were to enter into the mix. Dropping the Ball It has been a humbling 15 years for credit raters. They completely missed the 1997 Asian crisis. They were asleep at the controls as the dot-com bubble burst. They lavished top ratings on junk and helped turn the U.S. subprime crisis into a global one. They were slow to fathom Europe’s debt fiasco. Dagong Chairman Guan Jianzhong is absolutely right when he says: “The essential reason for the global financial crisis and the Greek crisis is that the current international rating system cannot truly reflect repayment ability.” It’s the right message, wrong messenger. Hedge-fund managers aren’t betting against China gratuitously. It’s in no one’s interest to see the third-biggest economy crash. The idea that China’s national balance sheet is sound is a reach, though. New York-based hedge-fund manager Jim Chanos of Kynikos Associates Ltd. says the massive stimulus efforts that saved China from the global crisis of 2008 are creating unbalanced growth. They are fueling bubbles and may be setting China up for a bad-loan debacle worse than Japan’s, he says. Epic Credit

411 A report by Fitch last week makes for interesting reading. The epic credit boom of 2009 was so successful that China is struggling to keep a lid on growth. Herculean efforts didn’t stop the economy from zooming along at 10.3 percent in the second quarter. The concern is that data are understating the long-term costs of this growth. In the first half of this year, Chinese bank lending was 28 percent higher than official numbers suggest, Fitch says. The reason: more and more loans are being repackaged into investment products, distorting the data. Anyone arguing China doesn’t have a housing bubble on its hands may want to reconsider. We don’t know how far the Enronization of Chinese credit goes. It seems clear that financial institutions have been engaged in complex deals that hid the nature and size of lending. Repackaging loans and moving them off balance sheet is exactly what got corporate America into trouble and almost killed Wall Street. Such practices raise the odds that China is paving the way for a wave of bad debts. Booming China No one doubts China is booming. Less clear is the quality of that growth. It’s one thing if stimulus efforts create a broad middle class of consumers to replace exports. It’s quite another if China’s growth rests on a shaky foundation of soaring asset prices. It may not be a coincidence that Agricultural Bank of China Ltd. didn’t impress the bulls last week after its initial public offering. Investors may be wondering about the ability of lenders to collect on loans. If you think Wall Street lacks transparency, just imagine investors trying to get to the bottom of China’s state-owned banks. China is working to cap housing prices, slow credit growth and halt efforts to move liabilities off balance sheets. Doing so is more art than science. Move too aggressively and the economy becomes more volatile. Act too timidly and today’s imbalances morph into tomorrow’s crisis. The biggest problem with Dagong’s decision to rate China above the U.S. -- AA+ with a stable outlook versus AA with a negative one -- may be its faith in the power of growth. Just because China is booming today doesn’t mean it will be five years from now. Japan, remember, assumed that accelerating growth would lighten its debt load. As if. Few trust our system of rating debt. Even fewer should view China’s bright fiscal outlook as a given. (William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) To contact the writer of this column: William Pesek in Tokyo at [email protected] http://www.bloomberg.com/news/print/2010-07-19/america-s-aaa-grade-is-cut-in-land-of- bubbles-commentary-by-william-pesek.html

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Tuesday, July 20, 2010 Wonkbook: Jobless benefits to pass; BP seeks new cap method; Warren for CFPB? The Senate is finally set to approve an extension of unemployment benefits over a month after they initially expired. But there's somewhat less to this than meets the eye: Though unemployment is still near 10 percent, the extension won't include the $25-a-week supplement that began with the stimulus, it won't create an unemployment tier for people who've been out of work for more than 99 weeks, and the bill doesn't include any of the state and local relief measures -- like Medicaid funding and aid to keep teachers on the job -- that were initially envisioned. In other words, the goalposts have moved: Democrats will celebrate getting one more extension of unemployment benefits, but that's a lot less than they originally hoped to get, and the retrenchment shows that the space for stimulus spending is rapidly narrowing to almost nothing even as high unemployment persists. Meanwhile, problems with BP's new oil well cap are leading it to seek new methods of stopping the leak; Harvard law professor and Congressional TARP watchdog Elizabeth Warren is under consideration to head the Consumer Financial Protection Bureau she initially proposed; John Kerry is trying to broker another deal on energy; and don't you want to know how to game 'The Price is Right'? Welcome to Wonkbook. Top Stories An unemployment benefit extension finally has the votes to pass the Senate, report Naftali Bendavid and Greg Hitt: "Sens. Olympia Snowe and Susan Collins, both Maine Republicans, are expected to support the measure, after Democrats agreed to drop unrelated items and trim the bill to $34 billion. Democrats had originally introduced a $120 billion bill that included such items as aid to cash-strapped states. The Maine Republicans would join 58 of the Senate's 59 Democrats and Democratic-leaning independents in backing the bill...Sen. Ben Nelson (D., Neb.) is opposing the legislation." But it's not a very generous extension, writes Annie Lowrey. "The bill does not include an extension of the $25-a-week Federal Additional Compensation funds, tacked onto many unemployment checks. It also does not include any of the other provisions originally included in or proposed for the jobs bill or extenders package: It does not close tax loopholes, or provide Medicare funding to states, or include funds to keep teachers and other state employees working. It also does not create an additional fifth tier of benefits; federal extensions only continue in states with higher than an 8 percent unemployment rate, and the maximum weeks of state and federal benefits remains ninety-nine." BP is considering a new oil stoppage method after inconclusive pressure tests on its well cap, report Ben Casselman, Susan Daker, and Angel Gonzalez: "Pressure tests have been inconclusive, but BP says the reservoir has depleted to the point where the company could use a new method of closing off the well by pumping heavy drilling fluid into the top--an operation similar to the 'top kill' procedure that failed in May. If successful, the procedure

413 could kill the well permanently more quickly than the relief wells that BP is drilling, which have long been seen as the only permanent solution to what is now one of the worst-ever environmental disasters in the U.S." Elizabeth Warren is on the shortlist to head the Consumer Financial Protection Bureau she helped create, reports Brady Dennis: "Warren, who chairs the congressional panel overseeing the federal bailout of the nation's banks, isn't the only candidate for the powerful post. Others include Michael S. Barr, an assistant Treasury secretary, and Eugene Kimmelman, a deputy assistant attorney general in the Justice Department's Antitrust Division. But she is easily the best-known and the most polarizing...'While there are a number of strong choices under consideration for this position, Elizabeth Warren is a champion for consumers and middle-class families, and we are confident she is confirmable,' White House spokeswoman Jen Psaki said." Neil Irwin explains why some worry Warren doesn't have the managerial and bureaucratic chops for the position: http://bit.ly/8ZBT90 Live indie interlude: TV on the Radio plays "Poppy". Still to come: John Kerry is holding closed-door meetings to craft a climate bill; local opposition to stimulus is fierce; evangelicals are joining the fight for immigration reform; and Quentin Tarantino directs the Super Mario Brothers. Energy John Kerry is leading more talks with utility and environmental groups to agree on an energy bill, reports Darren Samuelsohn: "Edison Electric Institute President Tom Kuhn, Environmental Defense Fund President Fred Krupp and David Hawkins, head of the Natural Resources Defense Council's climate center, huddled for about an hour in the Massachusetts Democrat's Senate office...Majority Leader Harry Reid still holds the reins on the climate and energy package, with plans to begin Senate floor debate next week." Brad Plumer assesses whether an energy bill that doesn't have cap-and-trade might still be an energy bill worth doing: http://bit.ly/bolj5j China has passed the US as the world's top energy consumer: http://bit.ly/bYBnY9 The chief engineer of the Deepwater Horizon rig resisted the oil spill panel's attempts at questioning, report Steve Mufson and David Hilzenrath: "In that statement, which has not been made public, Stephen Bertone said that the captain of the rig screamed at a crew member for pressing either a distress button or a disconnect button and, referring to an injured man on a stretcher, said, 'Leave him.' But at Monday's session of the joint U.S. Coast Guard and the Bureau of Ocean Energy Management, Regulation and Enforcement, Bertone said, 'I honestly don't feel anything in that statement needs to be changed,' and his attorney, Stephen D. London, resisted efforts to get him to describe the scene anew." The White House is reformulating its ocean policy: http://bit.ly/ckjnQt House Democrats are set to finalize oil spill response legislation, reports Ben Geman: "Less clear is the path forward for a much broader -- and bitterly contested -- bill that the Natural Resources Committee approved with no GOP votes Thursday. Two Democrats on the committee voted against the plan, which passed 27-21. That bill would overhaul Interior Department oversight, require many new safeguards, impose new fees on oil and natural gas production and end some royalty waivers for offshore producers, among many other measures. It also contains a provision dubbed 'use it or lose it' that empowers Interior to yank leases from companies that are not taking 'diligent' steps to develop them."

414 Bob Herbert thinks nuclear power is not ready yet: "The problem is that while the most terrible accidents are blessedly rare, when they do occur the consequences are horrific, as we've seen in the gulf. With nuclear plants, the worst-case scenarios are too horrible for most people to want to imagine. Denial takes over with policy makers and the public alike. Something approaching a worst-case accident at a nuclear plant, especially one in a highly populated area, would make the Deepwater Horizon disaster look like a walk in the park." Tarantino/NES mashup interlude: Inglourious Plummers. Economy/ FinReg Local opposition is pushing conservative Democrats away from stimulus spending, reports Lori Montgomery: "Democratic pollster Mark Mellman said disgust with the stimulus and anxiety about the deficit are 'really a metaphor for wasteful government spending.' From the perspective of many voters, 'a lot of their money has gone out the door to bail out big banks and big corporations while their jobs have been lost.'...Rep. Gerald E. Connolly (D) said job creation is 'less important' to his constituents than the 'Sophie's choice' of a double-dip recession or higher deficits." The Fabulous Fab is trying to get the federal suit against him dismissed, reports Zachary Goldfarb: "Fabrice Tourre -- also known as "Fabulous Fab," the Goldman Sachs vice president accused of committing fraud by the Securities and Exchange Commission -- asked a federal court Monday to dismiss a government lawsuit alleging that he sold to investors a subprime mortgage security that was secretly designed to fail...According to a response filed Monday to the SEC complaint, Tourre 'specifically denies that he made any materially misleading statements or omissions or otherwise engaged in any actionable or wrongful conduct.'" Columbia president Lee Bollinger will chair the board of the New York Fed: http://bit.ly/cwRLHi Martin Feldstein argues we can close the deficit by reducing tax expenditures: "Eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking. It would also increase overall economic efficiency by removing incentives that distort private spending decisions. And eliminating or consolidating the large number of overlapping tax-based subsidies would also greatly simplify tax filing. In short, cutting tax expenditures is not at all like other ways of raising revenue." Critics are attacking a subsidy for landline phone line installation as anachronistic: http://bit.ly/aSkMJp Nobel laureate Vernon Smith makes the case against stimulus: "Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies. Don't subsidize them; just reduce their taxes even as they become larger; also reduce any unnecessary impediments to their formation." Luigi Zingales argues that international financial firms need an international version of Chapter 11: http://bit.ly/aaD1FH http://view.ed4.net/v/E5QODK/NBZ8H/SPHM6GC/XH3BXA/MAILACTION=1

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Fourteen million out of work! Sixteen notable economists and historians have joined in a consensus statement for The Daily Beast demanding urgent action on unemployment and the faltering recovery. Joseph Stiglitz, Alan Blinder, Robert Reich, Richard Parker, Derek Shearer, Laura Tyson, Sir Harold Evans, and other thought leaders have produced a manifesto calling for more government stimulus and tax credits to put America back to work. GET AMERICA BACK TO WORK Fourteen million unemployed represents a gigantic waste of human capital, an irrecoverable loss of wealth and spending power, and an affront to the ideals of America. Some 6.8 million have been out of work for 27 weeks or more. Members of Congress went home to celebrate July 4 having failed to extend unemployment benefits. We recognize the necessity of a program to cut the mid- and long-term federal deficit but the imperative requirement now, and the surest course to balance the budget over time, is to restore a full measure of economic activity. As in the 1930s, the economy is suffering a sharp decline in aggregate demand and loss of business confidence. Long experience shows that monetary policy may not be enough, particularly in deep slumps, as Keynes noted. The urgent need is for government to replace the lost purchasing power of the unemployed and their families and to employ other tax-cut and spending programs to boost demand. Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s. It will prolong the great recession, harm the social cohesion of the country, and continue inflicting unnecessary hardship on millions of Americans. Signatories: Alan Blinder Alan Blinder was vice chairman of the Federal Reserve and served on Bill Clinton’s Council of Economic Advisers; he’s the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University. Daniel Kevles Daniel Kevles is the former faculty chair at California Institute of Technology and serves as a professor of history at Yale University. David Reynolds David Reynolds is an international history professor and fellow at Christ’s College in Cambridge. His latest book is America, Empire of Liberty: A New History of the United States. Derek Shearer Derek Shearer served as the ambassador to Finland from 1994-1997. He is now a diplomacy and world affairs professor at Occidental College in Los Angeles. Jim Hoge Jim Hoge is editor of Foreign Affairs and the former editor of the Chicago Sun-Times, which

416 won six Pulitzer Prizes under his tutelage. He is co-editor of How Did This Happen? Terrorism and the New War. John Cassidy A journalist and author of the book How Markets Fail: The Logic of Economic Calamities, John Cassidy has been a staff writer at The New Yorker since 1995, covering economics and business. Joseph Stiglitz Joseph Stiglitz is the former chief economist of the World Bank, and a recipient of the Nobel Prize and the John Bates Clark Medal; currently, he’s a professor at Columbia University. He is most recently the author of Freefall: America, Free Markets, and the Sinking of the World Economy and The Stiglitz Report: Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis. Laura Tyson Laura Tyson served as the chair of Council of Economic Advisers and the director of the National Economic Council during the Clinton administration. She is a professor at the Haas School of Business at the University of California, Berkeley. Lizabeth Cohen Lizabeth Cohen is the Howard Mumford Jones Professor of American Studies in the History Department at Harvard University, and author of Making a New Deal: Industrial Workers in Chicago, 1919-1939. Harold Evans Sir Harold Evans is a journalist and former editor of The Sunday Times and the Times, who was knighted in 2004 for his services to journalism. His award-winning book, They Made America, chronicled the country’s most important innovators and inventors. Nancy Folbre Nancy Folbre won a MacArthur Genius Award, is a professor of economics at the University of Massachusetts-Amherst, and recently wrote the book Saving State U: Fixing Public Higher Education. Richard Parker Richard Parker, a former congressional consultant, is a public policy lecturer and senior fellow at the Shorenstein Center at Harvard’s Kennedy School of Government. He is the author of The Myth of the Middle Class, Mixed Signals: The Future of Global Television News, and John Kenneth Galbraith: His Life, His Politics, His Economics. Robert Reich A professor of public policy at the University of California at Berkeley, Robert Reich was the 22nd secretary of Labor under President Clinton. He is the author of 12 books, including his most recent Supercapitalism: The Transformation of Business, Democracy, and Everyday Life. Sean Wilentz Sean Wilentz is the Sidney and Ruth Lapidus Professor in the American Revolutionary Era at Princeton. His book, The Rise of American Democracy: From Jefferson to Lincoln, won the 2006 Bancroft Prize. Sidney Blumenthal Sidney Blumenthal is a former senior adviser to President Bill Clinton and advised Hillary Clinton during her 2008 presidential campaign. His books include The Clinton Wars and The Permanent Campaign.

417 Simon Schama The author and host of the BBC documentary A History of Britain, Simon Schama is a historian who teaches at Columbia University.

Please, No More Government Spending! by , the George L. Argyros Professor in Finance and Economics at Chapman University, is a 2002 Nobel Laureate in Economics.

Deficit "stimulus" is not the road to economic recovery. It's the problem, not the solution, writes Nobel laureate economist Vernon L. Smith, who grew up in Depression- era Kansas. Plus, read the original manifesto to reboot America produced by top economists. Last October a Rasmussen poll was already showing that only one-third of likely voters believed that the stimulus package was helping the economy. You, your fellow citizens and Congress are now concerned that the main effect of the federal stimulus has been to increase the burden of a swollen government living beyond its means. You were told that the stimulus was justified because it would jump-start the economy, setting in motion a recovery that would increase output by more than its increased deficit cost. But you are skeptical that there has been any recovery, and think that you have been misled by the president and the economic experts. Your doubts have received bipartisan reinforcement. The $860 billion stimulus under the Obama administration was preceded by a $170 billion Bush stimulus that was said to be ineffectual because it was too small. Out of fear, people tended to use the Bush stimulus checks to pay down debt and to increase saving. Unemployment was rising, and large numbers of home owners were already living in homes worth less than what they owed the bank. It is now worse. In the five most severely affected states, here is the percentage of homeowners who owe more than their home is worth: Nevada (70%); Arizona (51%); Florida (48%); Michigan (38%); California (35%). Our current crisis was brought on by government and private programs designed to make it easier for people to buy homes. The result was an unsustainable housing bubble, and ensuing crash that put banks, businesses and households all in debt-reduction mode. “Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies.”

418 The case for government deficit spending was that idle unemployed labor and capital would be put to work to increase the output of goods and services. Hence, a dollar of government spending would produce more than a dollar of new output because of the “multiplier effect.” Robert Barro of Harvard has studied wartime and defense spending, and found a multiplier of only 0.8. But those were better times, when businesses, banks, and consumers were not primarily concerned to use new income to pay down debt or save to protect against income loss. Even in better times there wasn’t much bang for the buck. So what has been the government’s response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution. We are in times not seen since the Depression, when at its depth in 1934 my parents lost their Kansas farm to the bank. Such memories and the intensity of the current crisis led me and my colleague, Steven Gjerstad, to examine the last 14 recessions including the Depression. We have been surprised and dismayed to learn that in 11 of these 14 recessions the percentage decline in new house expenditure preceded and exceeded percentage declines in every other major component of GDP. Hence the sources of the current debacle are hardly new! Moreover, past recoveries in the housing market have been closely associated with recovery from recession. The latest data continue to tell us that the turnaround in housing, consumer durables, and business investment are all anemic. Our past housing and government spending mistakes leave us with no good choices. But please no more government spending! The deficit must now be faced. Avoid any new taxes; they are unlikely to reduce the deficit without discouraging recovery. Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies. Don’t subsidize them; just reduce their taxes even as they become larger; also reduce any unnecessary impediments to their formation. This is strongly indicated by the business dynamics program of the Bureau of Census and the Kauffman Foundation which has tracked new startup firms in the period 1980-2005. The entry of new firms net of departing firms in this period account for a remarkable two-thirds more employment growth (3 percent per year) than the average of all firms in the US (1.8 percent per year). The invigorating turmoil created by new technologies, with accompanying growth in output, productivity, and employment lead to new business formation as old firms inevitably fail. Reducing barriers to that growth encourage a recovery path which does not mortgage future output. Vernon L. Smith, the George L. Argyros Professor in Finance and Economics at Chapman University, is a 2002 Nobel Laureate in Economics. http://www.thedailybeast.com/blogs-and-stories/2010-07-19/please-no-more-government- spending/

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OPINION JULY 20, 2010 The 'Tax Expenditure' Solution for Our National Debt The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%. MORE IN OPINION » BY MARTIN FELDSTEIN When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites. These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." This year tax expenditures will ... Economist's View

Tuesday, July 20, 2010 "The 'Tax Expenditure' Solution for Our National Debt" The economy is still fragile, and now is not the time to begin solving our long-run debt problem. That would make things worse. But once the economy is on firmer footing, we will need to begin addressing this problem. Martin Feldstein argues that the elimination of special tax rules is a good way to reduce the long-run debt load: The 'Tax Expenditure' Solution for Our National Debt, by Martin Feldstein, Commentary, WSJ: When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. ... These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." This year tax expenditures will raise the federal deficit by about $1 trillion... If Congress is serious about cutting government spending, it has to go after many of them. ... Neither party has focused on controlling this kind of spending. Democrats are reluctant to cut such programs... Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a "tax increase"—even though the increased revenue is really the effect of a de facto spending cut. ... But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking. It would also increase overall

420 economic efficiency by removing incentives that distort private spending decisions. And eliminating or consolidating the large number of overlapping tax- based subsidies would also greatly simplify tax filing. ... If tax expenditures are not cut, taxes on households and businesses will have to rise to prevent an explosion of the national debt... When benefits for Social Security and Medicare are set aside, the rest of the outlay side of the budget is too small—7.5% of GDP—to provide much scope for reducing annual budget deficits that are now projected to average 5% of GDP for the rest of this decade. In contrast, total tax expenditures are now 6.4% of GDP. Not every type of tax expenditure should be cut. Some provide good incentives while others increase the fairness of the tax system. But they can be reduced by one-third or more. ... Cutting them ... 2% of GDP would reduce the national debt in 2020 by some $4 trillion, bringing the projected debt down to 72% of GDP from 90%. ... Cutting tax expenditures is really the best way to reduce government spending. And to be politically acceptable, the cuts in tax expenditures must be widespread... While some of the dozens of small tax perks should be eliminated all at once, others should be reduced gradually in order to avoid economic disruptions. Some of the biggest ones, like the deduction on federal tax returns for local property taxes (projected to cost the federal government $25 billion in the coming fiscal year) might be reduced but not completely eliminated. ... The American public wants to reduce ... deficits... A major reduction of the spending that is built into our tax code is the best way to achieve that. There aren't any easy solutions to the long-run debt problem. There are special interests attached to each of these tax breaks, so it won't be easy to eliminate enough of them to make a difference. A bill eliminating a substantial number of breaks could be portrayed as a vote against all sorts of popular and/or powerful groups and scare legislators away from supporting such legislation. I know my first thought was that care would need to be taken to ensure that we don't eliminate provisions that help to attain equity or that promote other worthy societal goals, and every group facing the elimination of their tax break will argue that it is needed for these reasons. But these arguments will be made no matter what we do, and to the extent that we can eliminate these tax provisions without harming our ability to pursue these goals, we ought to do so. However, with that said I should also note that the main driving force behind the long run debt problem is health care costs -- if we solve the health care cost problem then we also solve the debt problem, and if we don't, we don't. Since eliminating these "tax expenditures" does not help with the health care cost problem at all, there's no reason compromise our ability to promote equity or other goals by being overly aggressive in eliminating these tax breaks. Not all of these tax provisions serve a worthy purpose, but many do and those should be preserved. http://economistsview.typepad.com/economistsview/2010/07/the-tax-expenditure-solution-for- our-national- debt.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Economis tsView+%28Economist%27s+View+%28EconomistsView%29%29

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Monday, July 19, 2010 Deficit Neutral Stimulus I certainly can't disagree with this -- I posted a similar recommendation a few days ago in response to the question of whether the Bush tax cuts should be allowed to expire: Obama's Fiscal Priorities Are Right, by Alan Blinder, Commentary, WSJ: ...Let the upper-income tax cuts expire on schedule at year end. That would save the government an estimated $75 billion over the next two years. However, it would also diminish aggregate demand a bit. So, instead of using the $75 billion to reduce the deficit, spend it on unemployment benefits, food stamps and the like for two years. That would surely put more spending into the economy than the tax hike takes out, thus creating jobs. How much more? Getting a numerical estimate requires the use of a quantitative model of the U.S. economy. In recent testimony before the House Budget Committee, Mark Zandi of Moody's Analytics used his model to estimate that extending unemployment insurance benefits has almost five times as much "bang for the buck" as making the Bush tax cuts permanent. Based on his estimates, the budgetary trade I just recommended would add almost $100 billion to aggregate demand over the next two years—without adding a dime to the deficit. That translates to about 500,000 more jobs each year. Maybe Mr. Zandi's numbers are high. But the direction is clear: Redirecting money from the Bush tax cuts to unemployment benefits would be a net job creator. ... http://economistsview.typepad.com/economistsview/2010/07/deficit-neutral-stimulus.html

422 ft.com/economistsforum Laurence Kotlikoff replies to Lord Turner: Part 1 July 19, 2010 7:16pm by FT Laurence Kotlikoff, economics professor at Boston University, writes an open letter to Lord Turner, chairman of the UK’s financial regulator, the FSA. Lord Turner examines Prof Kotlikoff’s proposal for a radical reform of the institutional structure for credit extension in a new book, The Future of Finance. This a two-part open letter; the second part will be published on the FT’s Economists’ Forum on Tuesday July 20. Adair Turner’s Misplaced Concerns About Limited Purpose Banking Dear Adair, Your chapter in the just released Future of Finance is masterful. But the very strong concerns you express about Limited Purpose Banking are, I believe, misleading, misdirected, and rather surprising since LPB delivers precisely the reforms you advocate. Let me respond in italics to the specifics of what you wrote (the bold text) and then indicate why LPB does what you say you want. Abolishing banks: 100 per cent equity support for loans. Prof Kotlikoff‘s proposal, in contrast, suggests a truly radical reform of the institutional structure for credit extension. In the US, mutual fund companies already constitute one third of the financial system and facilitate/intermediate a very large volume of lending to companies, governments, and homebuyers. So “truly radical” is a bit strong for my taste. Also, individual mutual funds are, except for the letters used in their name, banks. The difference is that they are safe banks or, if you like, utility banks, which that “truly radical” economist Mevryn King has advocated. They are safe insofar as they are never leveraged in any state of nature. I chose the word “banking” in Limited Purpose Banking to convey the point that we need banks, but ones that stick to their legitimate purpose - financial intermediation, not gambling with the taxpayers chips and the economy’s performance. The fact that mutual fund companies were exempted, to my knowledge, from any additional regulation under Dodd-Frank means that the US Congress views mutual funds as a safer banking system. Their expansion relative to traditional banks is surely fostered by this bill. (This and the creation of the Consumer Financial Protection Agency are the two features of Dodd-Frank that I like.) This is not to say that mutual funds in their current form are what I advocate. As I’ve written, no mutual fund, except cash mutual funds, which hold only cash, would be backed to the buck. Open- end funds would have automatic in-kind redemption or closed-end conversion triggers in the face of redemption runs. I’m strongly opposed to the government’s guaranteeing the buck of any mutual fund besides cash mutual funds, where there is no need for the guarantee since the cash is in the vault, physically or electronically. Lending banks would become mutual loan funds, with investors sharing month by month (or even day by day) in the economic performance of the underlying loans. This is equivalent to making banks 100% equity funded, performing a pooling but not a tranching function. This is not a real difference with the current system. Under the existing system, investors in banks, be they stockholders or creditors, are sharing, day by day, in the performance of the banks’ underlying loans. Citigroup bonds, for example, float on the market. While it’s true that deposits don’t explicitly float, they do implicitly insofar as when banks fail, taxpayers have to cover the

423 insured deposits. Hence, every day that the performance of a standard bank’s loans change, the value of the contingent liability facing taxpayers changes. Also, as I discuss in Jimmy Stewart Is Dead, mutual funds with clearly defined sharing rules (a CDO is such a mutual fund) permit the mutual fund shareholders to leverage each other. So tranching is definitely part of what I’m proposing provided the sharing rules among the parties are very simple and clear and there is no liability to any parties beyond the mutual fund owners. And it would clearly exclude the possibility of publicly funded rescue: if the price of loan fund assets fell, the investors would immediately suffer the loss. I disagree. As I say in the book, under LPB the government, if it so chooses, can intervene directly to lower interest rates to particular borrowers by buying shares of the mutual funds purchasing their paper. The mutual funds, themselves, would never need to be publicly rescued, but I believe you are referring to the government rescuing particular borrowers who might not otherwise get funded at “reasonable” interest rates. The most common reason the price of a loan fund falls is that market interest rates rise. But a rise in market interest rates lowers the market price of outstanding bank debt. And, for that matter, it lowers the implicit market value of deposits to the extent that they are going to be withdrawn in the future as opposed to immediately. You appear to think that the current financial system is delivering safety for the common man because he has the assurance that his checking account is safe. Under LPB, the common man can invest in cash mutual funds or short-term government bond funds, so he can get this same type of safety. But, with all due respect, you seem to be missing the fact that risk is hitting the common man through the back door — via the potential for job loss, loss of retirement assets, tax hikes, and future inflation. But it is not clear that such a model would generate a more stable credit supply. The stability of the supply of credit is, from my reading of the current and prior credit crises, very closed tied to the stability of the financial system. When major financial companies fail, the specter of this flips the economy to a bad equilibrium (coordination failure) of the type described by Peter Diamond and others in which firms expect and, then, collectively create bad times. In addition, the credit market flips to a bad equilibrium of the type described by Stiglitz and Weiss in which lenders expect only bad borrowers and, then, set rates high enough to produce that outcome. LPB ensures that there will never again be financial failures on a small scale, let alone a large scale. As you know, Limited purpose banks can’t go bankrupt since they are 100 per cent equity financed. As Section 4 argued, a system of securitized credit combined with mark-to-market accounting can generate self-referential cycles of over and under confidence. Regardless of the accounting rules and disclosure, the market is going to mark assets to market. Lehman’s chief, Dick Fuld, said his assets were very safe and far exceeded his liabilities, but the market said otherwise. So limiting mark-to-market accounting is not really feasible and questioning it (which I’m not sure you mean to) is shooting the messenger. As for self-referential cycles of over- and under-confidence, it is the bankers, not the individual investors, who are, it seems to me, alternatively gunning the system and running it down. You want bankers to manage financial risk for individuals and the economy. They aren’t to be trusted in this role. I don’t want our children’s economic futures in the hands of the salesmen and lawyers who end up at the top of financial behemoths. Jimmy Stewart, in short, is dead. But the main factor I feel you overlook in referencing self-referential cycles is the lack of transparency. Your 86-page paper mentions this word only three times and the word disclosure only once. I think the primary reason the crash of 2008 hit with such force was not the fact that housing prices had risen too much due to irrational exuberance (indeed, they fell much less than stock prices), nor that too much credit, per se, was extended, but that too much fraud was involved

424 in the extension of credit. Had Lehman, Bears, Merrill, Countrywide, … been forced to send their mortgage applications to the Federal Financial Authority (the sole regulator I proposed under LPB) to have the applicant’s past income verified (via income tax returns), have the applicant’s current job and earnings verified, have the applicant’s credit rating verified, have the applicant’s proposed collateral (the home to be purchased) independently appraised, have the applicant’s credit rating verified, and have the applicant’s application (his mortgage) independently rated, and had all this been posted on the web in real time, trillions of dollars in toxic loans would never have been originated. It’s the systematic production of fraudulent securities that’s at the heart of what happened. Your chapter mentions the word fraud not once. This is not to claim that self-referential cycles can’t arise. As we both know from the work of Samuelson, Cass, Shell, Calvo, Farmer, and many others, models with rational agents (what I’d call neoclassical models) can exhibit multiple equilibria paths of asset prices even absent any of the information/coordination issues referenced above. LPB — a perfectly safe banking system in which all securities purchased, held, and sold by the financial intermediaries are independently vetted and disclosed - won’t keep asset prices from moving in what seem to be crazy ways (just consider today’s long-term U.S. Treasury bond prices), but it will stop bubbles spread by lies and crashes spread by panic over fraud. Under LPB, Madoff’s valuation would never had hit $60bn. It wouldn’t have hit 2 cents since Madoff’s fund would have been a mutual fund subject to third party custody and the custodian would have blown the whistle. And while Kotlikoff‘s loan funds might seem to abolish the maturity transforming bank, with investors enjoying short term access but not capital certainty, investors would be likely in the upswing to consider their investments as safe as bank deposits. There are thousands of fixed-income mutual funds whose prices fluctuate by the minute. The owners of these funds don’t view them as safe as bank deposits. And under LPB, money market funds would clearly break the buck. Indeed, I would force the mutual fund companies to reference them as short-term commercial paper funds and make every shareholder sign a one-sentence statement in giant letters - “I understand that this is not a cash mutual fund, that it is risky, that it can break the buck, and that I may, therefore, lose the money I invest.” Investments in loan funds would therefore be likely to grow in a pro-cyclical fashion when valuations were on an upswing and then to run when valuations and confidence fell, creating credit booms and busts potentially as severe as in past bank-based crises. The picture being drawn here is of the public purchasers of mutual funds seeing returns on fixed income going up and borrowing on their homes to invest more in these funds in a craze to make a few more basis points. But what we know is that households tend to buy and hold, while bankers tend to churn their portfolios. I just don’t see this as a valid objection to LPB relative to the current system. http://blogs.ft.com/economistsforum/2010/07/laurence-kotlikoff-replies-to-lord-turner-part-1/

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