Strauss-Kahn (Fmi): Stimuli Ancora Indispensabili, La Republica.It…345 159

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 90º ANEXO VII

Alvaro Espina Vocal Asesor 1 de Marzo de 2010

BACKGROUND PAPERS:

1. New Articles, The Economists’ Voice: Ferguson, Thomas and Johson, Robert (2010), “The God that failed: free market fundamentalism and the Lehman Bankruptcy”; Schularick, Moritz (2010) “The End of Financial Globalization 3.0”;Hahn, Robert and Passell, Peter (2009), “Is trillion the new billion?,” New Articles The Economists’ Voice by The Economists’ Voice …6 2. Good and boring, The New York Times by Paul Krugman…7 3. Morgan Stanley Europe chairman says bankers were as unpopular in Davos as “terrorists”, , Finfacts Ireland by Finfacts Team …9 4. China’s manufacturing PMI hit a survey high in January; India’s manufacturing sector expanded at fastest pace for nearly one-and-a-half years, Finfacts Ireland by by Finfacts Team …13 5. Bankers try to fight off wave of controls, FT.com by Patrick Jenkins and Gillian Tett…16 6. Mania on the Mainland, BusinessWeek by Dexter Roberts…18 7. Irish manufacturing output fell in January as freezing weather conditions hit operations, Finfacts Ireland by Finfacts Team…22 8. EU wants Greece to cut wages, Collegio Carlo Alberto…24 9. EU call for Greece to cut public sector pay, FT.com by Tony barber and Kerin Hope…26 10. Paris pledges cuts to reduce deficit, Ft.com by Peggy Hollinger…27 11. What the eurozone must do if it is to survive, FT.com by Wolfgang Munchau…28 12. Europe set to be worse hit by loan drought, FT.com by Ralph Atkins…30 13. IMF chief says many of world’s leading economies fooling themselves on foreign export demand driving their recoveries, Finfacts Ireland by Michael Hennigan…32 14. Henry Paulson’s book offers a glimpse inside the economic crisis by Zachary A Goldfarb…36 15. Eurozone annual inflation is expected to be 1.0% in January; ECB says bank lending will remain tight in Q1 2010; M3 was negative again in December, Finfacts Ireland by Finfacts Team …38 16. Eurozone economic sentiment still buoyant, FT.com by Stanley Pignal…40 17. The Ring of Fire, Investment Outlook by Bill Gross…41 18. Beef Bowl Economics, The New York Times by Hiroko Tabuchi…46 19. Where exit should be an oxymoron: The Bank of Japan, Global Central Bank Focus by Paul McCulley and Tomoya Masanao…49 20. Let’s get fisical, Investment Outlook by Bill Gross…53 21. España cotiza a la baja en Davos, El País.com de Claudi Pérez…57 22. Pensiones: la hora de la reforma es ahora, El País.com de Luis Garicano y César Molinas…59 23. La reforma de las pensiones amplía la base de cálculo de la cotización, El País.com …60 24. ¿Podemos permitirnos no reformar el mercado laboral?, El País.com de Javier Andrés y Rafael Doménech…61 25. Las actividades que más puestos de trabajo ofrecen son educación y servicios, El País.com de Carmen Sánchez-Silva…63 26. ¿Qué reforma laboral?, El País.com de Valeriano Gómez, Ignacio P Infante, Santos M Ruesga Fernando Valdés…65 27. Las pensiones revolucionan el diálogo social, El País.com de Lucía Abellán…67 28. ¿Qué explica la resistencia a la reforma laboral?, El País.com de JJ Dolado F. Felgueroso y M .Jansen …69 29. Los contratos indefinidos y sus costes, El País.com de C. García Serrano y M. A Malo…71 30. La marcha de los pavos reales, El País.com de Paul Krugman…73 31. Parece que el Gobierno se pone las pilas, El País de Angel Laborda…75 32. 4.326.500 problemas sin resolver, El País.com de Manuel V. Gómez…77 33. Cortejo nupcial entre gestoras, El País.com de David Fernández…82 34. Hay riesgo de repetir errores por el dinero barato, EL País.com de Alicia González…85 35. Regreso al futuro en las finanzas, El País.com de Harold James…88

1 36. La resaca va a ser dura, pero España no es Grecia, El País.com de C.P.…90 37. Financial system reform from first principles, Vox de Alberto Giovannini…92 38. Too interconnected to fail = too big to fail: what is in a leverage ratio?, Vox de Daniel Gros…94 39. Who fell in 2009: those with current account deficits or with extra froth?, Vox by Ashoka Mody…98 40. The recession will be over sooner than you think, Vox de Nicholas Bloom and Max Floetotto…103 41. Obama needs to teach the public how to get out of the mess we’re in, but he’s not, Beta roubini Robert Reich…106 42. Obama wants to limit government spending despite high unemployment and a fragile economy, Beta Roubini by Mark Thoma…108 43. The People’s Bank of China and the Road not taken, Roubini Global Economics by Adam Wolfe and Rachel Ziemba…110 44. The Greece Dilmma: sovereign debts imperiling the euro and challenging EU ties by Arnab Das, Elisa Parisi-capone and Natalia Gurushina…113 45. Comparing 2010 growth forecasts for major economies by Rachel Ziemba, Elisa-Capone, Christian Menegatti, Arpitha Bykere, Bertrand Delgado and Mikka Pineda…113 46. Monetary policy and asset bubbles in 2010, Beta Roubini Global Economics by Joseph E Gagnon…114 47. Bailout time, Collegio Carlo Alberto…116 48. Greek burdens ensure some Pigs won’t fly, FT.com by Daniel Gros…118 49. Vice-premier defends Chinese policy, FT.com by David Pilling …120 50. Leadership questions shape Davos talks, FT.com by Gideon Rachman…122 51. Trichet holds cards in finance debate, FT.com by Chris Giles…124 52. Calls for a new Bretton Woods not so mad, FT.com by Gillian Tett…126 53. Martin Wolf in Davos: The French world orden, Financial Times by Martin Wolf…128 54. Calls for a new Bretton Woods not so mad, FT.com by Gillian Tett…130 55. Volcker has the measure of the banks, FT. com by John Gapper…132 56. An early warning system for asset bubbles, FT.com by Charles Roxburgh and Susan Lund…134 57. The looming deleveraging challenge, McKinsey&Company by MCKinsey Global Institute…136 58. How not to select the ECB President, Collegio Carlo Alberto by Franceso Giavazzi…140 59. It’s crunch for the euro area. The markets are turning on Greece and Portugal, Collegio Carlo Alberto…142 60. Chinese whispers drive up Greek yields, FT.com by Tony Barber, David Oakely and Kerin Hope…144 61. Why we should expect low growth amid debt, FT.com by Carmen Reinhart and Kenneth Rogoff…154 62. British Central Banker favors splitting bib banks, The New York Times by Landon Thomas Jr…156 63. China Central Banker Zhu says stable Yuan important (Update1), Bloomberg.com by Rob Delaney…158 64. Housing recovery could take a decade, economists warn, The Washington Post, by Renae Merle…159 65. Reino Unido sale a duras penas de la recesión, El País de W. Oppenheimer…161 66. Greece woes China to buy bonds, Collegio Carlo Alberto… 67. Juncker ne veut pas porte le chapeau du désaccord franco-allemand, Les Echos.fr de Georges Gobet…164 68. Wolfgang Munchau- Griechenland ist uberall by Wolfgang Munchau…166 69. Wolfgang Munchau –Griechenland ist uberall by Wolfgang Munchau…167 70. A principled Europe would not leave Greece to bleed, Guardian.co.uk by Joseph Stiglitz…168 71. Roubini never more pessimistic on euro area, calls Spain a Risk, Bloomberg.com by Simon Kennedy and Thomas R Keene…170

2 72. Swaps Trading surges as nacional deficits rise: Credit markets, Bloomberg.com by Shannon D Harrington and Abigail Moses…172 73. Weber says ECB may take further exit steps in first half, Bloomberg.com by Francine Lacqua and Simone Meier…175 74. Banks reviving synthetic bets as Volcker blasts default swaps, Bloomberg.com by Shannon D Harrington and Pierre Paulden…176 75. Existing-home sales take a big fall in December, The Washington Post by Renae Merle…179 76. Greek crisis over, Collegio Carlo Alberto…181 77. Greece Raises $11.3 billion offering “Generous” Bonds yields, Bloomberg.com by Caroline Hyde, Anchalee Worrachate and Sonja Cheung…183 78. German Business Confidence May Rise to 18-Month high in January, Bloomberg.com by Gabi Thesing…185 79. The Californian solution for the Club Med, FT.com by Charles Goodhart and Dimitrios Tsonomos…187 80. A Payroll tax break for Jobs, The New York Times by Charles E. Schumer and Orring G Hatch…189 81. Obama’s credibility gap, The New York Times by Bob Herbert…191 82. Fareed Zakaria Obama should act more like a president than a primer minister, The Washington Post, by Fareed Zakaria…193 83. Supreme court ruling calls for a populist revolt, The Washington Post by E.J. Dionne Jr… 195 84. New DLC report: census data exposes lost decade’ for United States, …197 85. European Commission says survival of euro at risk, Collegio Carlo Alberto…198 86. The Bernanke Conundrum, The New York Times by Paul Krugman…200 87. Know your feds, The Conscience of a Liberal…201 88. Geithner: Banks with privilege must limit risk, PBS Newshour…204 89. New Yok fed documents reveal more detail about AIG bailout, The Washington Poste by Brady Dennis…207 90. Banques: le plan Obama correspond aux positions de la France, Les Echos.fr…209 91. Expectativas cautelosas, El País.com…210 92. Pedagogía de la crisis, El País de Emilio Ontiveros…211 93. Malos, pero mejores tiempos, El País de Carlos Gómez…213 94. Las empresas anuncian nuevas reducciones de empleo en 2010, El País de C.G.…218 95. La asignatura del cambio climático, El País de C.G.…220 96. Suspenso mayúsculo al Gobierno, El Pais de Carlos Gómez…223 97. Obama marca el camino, El País de Peter Thall Larsen…226 98. Aprietos para modernizar las cajas, El País de Miguel A Noceda…227 99. Malos presagios para Portugal, El País de Francesc Relea…229 100. Los mercados castigan en exceso a Grecia, El País de Alicia González…231 101. La deuda familiar y empresarial empieza a reducirse, El País de Angel Laborda…233 102. Crisis y negociación colectiva, El País de Antonio Ferrer Sais…236 103. Diálogo, pero en voz baja, El País de Lucía Abellán…238 104. Alemania promueve un pacto internacional sobre finanzas, El País.com de AFP…242 105. Wall Street sufre su peor semana desde marzo por el plan de Obama, El País de Sandro Pozzi…243 106. La vuelta de Paul Volcker, El País de S.P.…245 107. A modest proposal, Vox de Axel Leijonhufvud…246 108. Do the right thing, The New York Times by Paul Krugman…249 109. Glass-Steagal, Part Deux, The Conscience of a Liberal…250 110. Wall St. Weighs a Challenge to a Proposed Tax by Eric Dash…253 111. See on the Finance & Markets Monitor, Beta Roubini Global Economics …255 112. Obama’s Volcker Rule shifts power away from Geithner, The Washington Post by David Cho and Binyamin Appelbaum…256

3 113. La casa torcida de Fernando Suárez…258 114. Greek liquidity speculation reaches fever pitch, Collegio Carlo Alberto…260 115. Obama Bank Plan Shows Global Coordination Dearthc (Update1), Bloomberg.com by Gavin Finchm Andrew MacAskill and Caroline Binham…262 116. Greece to sell bonds in near future, debt chief says (Update1), Bloomberg.com by Maria Petrakis…264 117. BOE’s Tucker calls for shadow banking regulation overhaul by Svenja O’Donnell and Scott Hamilton…266 118. Morgan Stanley’s roach says Obama is bank bashing (Update1) by Mark Deen and Andrea Catherwood…267 119. Obama backs Volcker regulatory plan in dramatic about face, Credit Writedowns by Edward Harrison…268 120. US rules could boost Europe banks, Financial Times by Gwen Robinson…270 121. Failure risk of governments higher than from firms…271 122. Greece will fix itself from inside the eurozone, FT.com by George Provopoulos…272 123. China losing to US among investments of choice (Update1), Bloomberg.com by Mike Dorning and Catherine Dodge…274 124. Emerging stocks head for steepest two-day drop in 2010 on China by Laura Cochrane…277 125. China’s GDP Growth accelerates to fastest since 2007 (Update4), Bloomberg.com …278 126. German supports Constancio for ECB VP. Guess why?, Collegio Carlo Alberto…281 127. Quand les déboires de la Grèce mettent la pression sur l’ensemble de la zone euor, Les Echos.fr…283 128. How strong will Global Growth be in 2010?, Beta Roubini Global Economics…285 129. Spain gets frobbed-off by the EU Commission, Beta Roubini, Edward Hugh…285 130. Government cuts bonuses at ABN Amro bank, NRC Handelblad …290 131. ECB’s Weber sees refinancing operations normalizing during year, Bloomberg.com by Chirstian Vits and Frances Robinson…291 132. Greece won’t need rescue package on debt, Papaconstantinou says by Natalie Weeks and maria Petrakis…292 133. Greek bonds slide on concern investors may shun new debt sales, Bloomberg.com by Mathew Brown and Keith Jenkins…294 134. Obama says no bank should have proprietary trading (text), Bloomberg.com …296 135. Obama calls for limiting banks’ size, trading (Update 1), Bloomberg.com by Nicholas Johnston and Julianna Goldman…297 136. Obama to propone new rules on banks’ size, proprietary trading by Nicholas Johnston and Julianna Goldman …298 137. Obama to propose limits on risks taken by banks, The New York Times by Jackie Calmes and Louis Uchitelle…300 138. At SEC, the system can be deaf to whistleblowing, The New York Times by Zachary A Goldfarb…302 139. Obama wighs paring goals for health bill, The New York Times by Sheryl Gay Stolberg and David M Herszenhorn…305 140. Merkel’s muppet show may upset E.ON’s nuclear plans (Update1), Bloomberg.com by Tony Czuczka …307 141. Greek crisis is hitting confidence in euro area, Collegio Carlo Alberto…309 142. Euro weakens to five-month low versus dollar on Greece concerns, Bloomberg.com by Yasuhiko Seki and Ron Harui…311 143. No new normal on Wall Street as economists dismiss Pimco’s GDP, Bloomberg.com by Michael Mckee…313 144. A Better way to manage knowledge, Bloomberg..com by John Hagel III and Hohn Seely Brown…317 145. Beware global economic imbalances, Mervyn King warns, Guardian.co.Uk by Ashley Seager…319

4 146. The Greek tragedy deserves a global audience, FT.com by Martin Wolf…321 147. King calls for G20 metamorphosis, FT.com by Chris Giles and Tony Barber…323 148. Unwinding crisis policies in Europe: Are we there yet?, Beta Roubini by Marek Belka…325 149. China and eurozone fears hit risk appetite, FT.com by Jaime Chisholm…327 150. Is China an Enron? (Part2), The New York Times by Thomas L Friedman…329 151. The shift index 2009, Edgeperspectives…330 152. Cloud computing A collection of working papers, www.deloitte.com …332 153. Munchau-Die ewigen Irrtmer der erbsenzahler, Financial Times …333 154. Shock: decisión about the ECB-vice presidency will not be a backroom stitch-up, but be taken by a vote, Collegio Carlo Alberto…337 155. Werner Hoyer: nous avons besoin d’une meilleure coordination des politiques économiques en Europe, Les Echos.fr…339 156. Merkel’s halo slips, FT.com …342 157. Greece may need to do more on debt, EU Ministers say (Update1), Bloomberg.com by Simone Meier and Lorenzo Totaro…343 158. Strauss-Kahn (Fmi): stimuli ancora indispensabili, La Republica.it…345 159. Anchalee worrachate Europe Hits Bonds with sales above pre-lehman levels until 2018, Bloomberg.com by Anchalee Worrachate…346 160. La Xunta, en pie de Guerra ante la visita de MAFO a Galicia la próxima semana, Cotizalia de Eduardo Segovia…349 161. Why America and China will clash, FT.com by Gideon Rachman…351 162. Henry Ford Raising wage may give China Tip on worker prosperity, Bloomberg.com …353 163. France and Germany raise growth forecasts, FT.com by Ben Hail and Ralp Atking…356 164. A bank levy will not stop the doomsday cycle, FT.com by Peter Booner and Simon Johnson…357 165. German investor confidence may fall for fouth month in January, Bloomberg.com by Gabi Thesing…359 166. Swiss banker blows whistle on tax evasion, The New York Times by Lynnley Browing…361 167. The risky rich, Beta Roubini Global Economics, by Nouriel Roubini…364 168. Bernanke and the beast, The New York Times by Gregory Mankiw …366 169. Why such a deep recession?, Library Econmics and Liberty by Arnold Kling…368 170. A Wall Street pay puzzle, The Washington Post by Robert J Samuelson…370 171. ECB prepares legal ground for euro rupture as Greek crisis escalates, http:// www.telegraph.co.uk, by Ambrose Evans-Pritchard…372 172. For safe investors, this may be a challenging year, The New York Times by Jeff Sommer…374 173. Merryn somerset webb: China’s going the way of Spain, Irelan and Japan, FT.com by Merryn Somerset…376 174. China`s Reserves: The Challenges of US$2.4 trillion, Beta Roubini, by Rachel Ziembla…378 175. Double-Dip worries in Japan and Germany, Beta Roubini de Edward Hugh…380 176. Mr.Bean meets the three wise men, Beta Roubini by Edward Hugh…384 177. Facebook blogging, Greece Economy Watch by Edward Hugh…389 178. Joseph Stiglitz Stiglitz’s 5 lessons from 2009, New Deal 2.0 by Joseph Stiglitz…394 179. How markets fail: the logic of economic calamities by John Cassidy: review, www.telegraph.co.uk by Jeff Randall…396 180. Debating the global roots of the current crisis, Vox by Brad Setser…398 181. Uncertainty and the credit crisis, Vox by Michelle Alexopoulos and Jon Cohen…402 182. 2009 will be the nightmare on Main Street, Vox by Nicholas Bloom…406 183. Guided by an invisible hand, NewStatesman by Joseph Stiglitz…410

bepress Journals February 01, 2010

New Articles The Economists' Voice

http://www.bepress.com/ev

Ferguson, Thomas and Johnson, Robert (2010) "The God that Failed: Free Market Fundamentalism and the Lehman Bankruptcy," The Economists' Voice: Vol. 7 : Iss. 1, Article 1. DOI: 10.2202/1553-3832.1695 Available at: http://www.bepress.com/ev/vol7/iss1/art1

Schularick, Moritz (2010) "The End of Financial Globalization 3.0," The Economists' Voice: Vol. 7 : Iss. 1, Article 2. DOI: 10.2202/1553-3832.1551 Available at: http://www.bepress.com/ev/vol7/iss1/art2

Hahn, Robert and Passell, Peter (2009) "Is Trillion the New Billion?," The Economists' Voice: Vol. 6 : Iss. 1, Article 2. DOI: 10.2202/1553-3832.1510 Available at: http://www.bepress.com/ev/vol6/iss1/art2

February 1, 2010 OP-ED COLUMNIST Good and Boring By PAUL KRUGMAN In times of crisis, good news is no news. Iceland’s meltdown made headlines; the remarkable stability of Canada’s banks, not so much. Yet as the world’s attention shifts from financial rescue to financial reform, the quiet success stories deserve at least as much attention as the spectacular failures. We need to learn from those countries that evidently did it right. And leading that list is our neighbor to the north. Right now, Canada is a very important role model. Yes, I know, Canada is supposed to be dull. The New Republic famously pronounced “Worthwhile Canadian Initiative” (from a Times Op-Ed column in the ’80s) the world’s most boring headline. But I’ve always considered Canada fascinating, precisely because it’s similar to the United States in many but not all ways. The point is that when Canadian and U.S. experience diverge, it’s a very good bet that policy differences, rather than differences in culture or economic structure, are responsible for that divergence. And anyway, when it comes to banking, boring is good. First, some background. Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. Economists in both countries cheerfully declared that the era of severe recessions was over. But when things fell apart, the consequences were very different here and there. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently? It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis. Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene. On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

7 Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium. More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money. There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good. So what are the chances that the United States will learn from Canada’s success? Actually, the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system. It would create an independent Consumer Financial Protection Agency, it would establish limits on leverage, and it would limit securitization by requiring that lenders hold on to some of their loans. But prospects for a comparable bill getting the 60 votes now needed to push anything through the Senate are doubtful. Republicans are clearly dead set against any significant financial reform — not a single Republican voted for the House bill — and some Democrats are ambivalent, too. So there’s a good chance that we’ll do nothing, or nothing much, to prevent future banking crises. But it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door. Good and Boring February 1, 2010 http://www.nytimes.com/2010/02/01/opinion/01krugman.html?th=&emc=th&pagewanted=pr int

NEWS : INTERNATIONAL Morgan Stanley Europe chairman says bankers were as unpopular in Davos as "terrorists" By Finfacts Team Feb 1, 2010 - 1:25:14 AM

Lawrence Summers, Director, National Economic Council (NEC) - - President Obama's chief economic adviser - - and Josef Ackermann, Chairman of the Management Board and the Group Executive Committee, Deutsche Bank, are captured during the session 'Global Economic Outlook' at the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 30, 2010. © World Economic Forum swiss-image.ch/Photo by Sebastian Derungs

The Wall Street Journal reports from Davos that anger directed at bankers from all sides was palpable, acknowledged Donald Moore, chairman of Morgan Stanley in Europe, as he stood alone reading some charts amidst the hubbub at the World Economic Forum's Global Village café. Asked which other groups of people have been similarly unpopular in Davos in the past, he said: "terrorists."

9 Until the financial crash, bankers were the big spenders at Davos, lavishly entertaining clients. At this year's 40th forum, they were fighting a rearguard action to influence the avalanche of controls set to descend on them soon. The Journal reports that on the fringes of one of the many showy events that host the real business of Davos, a senior London-based investment banker offered this wager: Lloyd Blankfein, CEO of Goldman Sachs Group Inc., would be out within two years, he said, and he was prepared to back up his bet with millions of pounds. Blankfein isn't the only target of antibanker anger. But he presides over the world's most successful investment bank. Goldman has emerged from the financial crisis stronger than ever. And Blankfein has been among the most outspoken public defenders of banks and he has paid his bankers well, though the level of bonuses was cut in the last round. Asked about the wager over Blankfein, Goldman spokesman Lucas van Praag said: "It is preposterous that The Wall Street Journal would even consider publishing such effluent." Expect “tough regulation” from the Obama Administration on financial services this spring, as well as an energy package. Addressing participants in a session on “The US Legislative Agenda: A Global Perspective,” US congressmen and senators confirmed that despite bipartisan differences, there is agreement that financial regulation is imperative. “There is a degree of bipartisanship, but I don’t think it will make a difference,” said Barney Frank, US Congressman from Massachusetts (Democrat), 4th District; Chairman, Financial Services Committee. “I expect the President to be signing a financial reform package this spring.” Frank noted that the proposed regulatory reform would be done in a coordinated manner. “There will be tough regulation but it will be sufficiently coordinated so that it will not create regulatory arbitrage,” he added. “We cannot have reform of the system driven by what each country sees that it needs for itself,” Dominique Strauss-Kahn, head of the International Monetary Fund, told the Davos forum on Saturday. “We need to have co-ordination -- we cannot afford to have different solutions in different parts of the world.” “At the end, it’s an interdependent system,” said Josef Ackermann, head of Deutsche Bank, Germany's biggest.“If you lose the support of society, you are not going to achieve your corporate objectives.” A day after the confirmation of Federal Reserve Chairman Ben Bernanke's reappointment for a second term, Barney Frank, chairman of the House Financial Services Committee, told CNBC Bernanke has not been weakened and that President Obama's bank plans are death for bad financial institutions. Citi's CEO Vikram Pandit said the drive by President Barack Obama to derisk the banks was in line with Citi’s existing plans. “We are aligned with [those] principles. We’ve asked ourselves: ‘does this part of the group serve our core clients?’ and if the answer was no, we’ve sold it or plan to sell it,” he said Swiss national, Josef Ackermann, is currently head of the big banks' lobby group, the Institute of International Finance (IIF) and held meetings with fellow bankers to seek to agree a common position on regulation and lobbied policymakers on emerging plans. He told the Financial Times on Friday : “To help solve the too-big-to-fail problem I’m advocating a European rescue and resolution fund for banks. Of course, the capital for this fund would have to come from banks to a large degree.”

10 Bob Diamond, president of Barclays , also supported the idea of a global levy, which could see banks contribute tens or even hundreds of billions of dollars over a period of years. “I think every G-20 (Group of Twenty) country would like to have an insurance scheme that would help cover the cost of any future bank failure,” he told the FT in Davos. “A coordinated global system is preferable to an unlevel playing field.” “If you say that large is bad and we move to narrow banks the impact on jobs and the global economy will be very negative,” Diamond, who also heads Barclays Capital (BarCap), the group’s booming investment banking arm, told a forum panel, in Davos, in a criticism of President Obama's proposed Volcker Rule, which would impose restrictions on the activities of big banks.“I have seen no evidence to suggest that shrinking banks and making banks smaller and more narrow [will help].” The Lex column in the FT suggested that the numbers do not support Diamond's case. It says BarCap, a typical European investment bank, generated a 0.08 per cent return on its £1,600bn of assets in 2008. Risk-weight those assets, and the return was still only 0.6 per cent. Even over the past year it will deliver less than 1 per cent. By comparison, European retail banks usually generate more than 1.5 per cent. Far from being Masters of the Universe, then, investment bankers are busy harvesters of crumbs. Lex says the main way investment banks generate profit is via their huge balance sheets -- BarCap’s is 80 per cent of Barclays’ total -- and leveraging the return. Even after netting off £500bn of derivatives, BarCap is still about 25 times leveraged. This means a large amount of risk is embedded in investment bank profits, even among the best run. It’s also why investment banks cannot countenance being smaller. Lex says all this illuminates a truth at the heart of Obama’s proposals, and also why bonuses have spurred politicians to act. Investment bankers typically feel entitled to at least half of net income -- which comes before the tax take of a levy. In other words, they capture the largest part of a profit stream in a way that takes little account of the risk required to generate it. We will all be losers if governments clamp down on markets too zealously, according to Deutsche Bank CEO Josef Ackermann. He discusses the issue with CNBC's Maria Bartiromo at the World Economic Forum: On Friday, President Barack Obama's top economic adviser told bankers to put their customers first and insisted the US government would push through new banking reforms despite pressure from lobbyists. "Our challenge now is to put in place a new system," said Lawrence Summers who added that the reforms wouldn't last forever but should be able to protect a generation from banking excesses. Summers stressed: "we are going to put in place a set of reforms that will make a real difference." He said banks should be aware of their obligations to their communities in making lending decisions and to contain risk, especially when they benefit from taxpayer support after getting into trouble. He also questioned the bank's "paying out bonuses in large quantities." Summers criticised the current situation in Washington where there are three banking lobbyists per member of Congress, saying it raises questions when some of them are even pushing for financial institutions to be able to jack up credit card rates without letting customers know. Banks must accept new constraints on their activities, he said.

11 "They need to think very carefully about their obligations to their customers," Summers said.

DAVOS/SWITZERLAND, 31JAN10 - Impression of the buffet at Schatzalp, for the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 31, 2010. © World Economic Forum swiss-image.ch/Photo by Monika Flueckiger

Jaime Caruana, general manager of the Basel-based Bank for International Settlements (BIS), on Saturday praised the progress in international attempts to put the sector on a safer footing, and said the new initiative of President Obama to re-regulate US banks won't necessarily derail global efforts to make the system more sound. The BIS hosts the Basel Committee, which coordinates global banking regulators' efforts on drawing up minimum international standards for capital and liquidity. Last year, it proposed that banks in future put aside extra capital in good times, over and above the capital reserves they must normally hold. It also suggested forcing banks to hold a greater proportion of liquid assets, to tide them over sudden seizures in short-term funding. In addition, the Financial Stability Board (FSB), has a broader mandate from the G-20 leading industrialised and emerging nations to review bank governance worldwide. Caruana told Dow Jones Newswires that the FSB's recent suggestions on capital had largely addressed the issue of how to reconcile remuneration and dividends with healthy balance sheets, and he urged banks not to be "fixated" on short-term issues. "Concentrate on where we want to be...in a world with a more resilient financial system with more quality capital, more liquidity and a good resolution system for banks that are too big to fail." Caruana said he expected the advanced economies' governments to have high borrowing needs "for a long time." The ratio of debt to gross domestic product among the members of the Organization for Economic Cooperation and Development (OECD) will rise by 30 percentage points between 2007 and 2017, even assuming some fiscal consolidation that hasn't even been implemented yet, he said. "Debt reduction is a very long-term process, and it has to be started as soon as possible," Caruana urged."Banks may want to take more long-term funding to deal with the extra long- term assets they are holding and the duration risk." http://www.finfacts.ie/irishfinancenews/International_4/article_1018936_printer.shtml

NEWS : INTERNATIONAL

China's manufacturing PMI hit a survey high in January; India's manufacturing sector expanded at fastest pace for nearly one-and-a-half years By Finfacts Team Feb 1, 2010 - 7:38:27 AM

Source: Markit Economics

China's manufacturing PMI (Purchasing Managers’ Index) hit a survey high at the start of 2010, pointing to sharp growth of the Chinese manufacturing sector while India's manufacturing sector expanded at fastest pace for nearly one-and-a-half years in January. China At 57.4, up from 56.1 in the previous month, the headline HSBC China Manufacturing PMI (Markit Purchasing Managers’ Index) – a headline index designed to measure the overall health of the manufacturing sector – rose to a record high at the start of 2010, signalling a marked improvement of operating conditions in the Chinese manufacturing sector. The index has now risen more than sixteen points since posting a record low in November 2008. Manufacturing production in China rose for the tenth successive month in January, increasing at a sharp rate that was the second-fastest in the survey history. Where an increase in output was signalled, firms often linked growth to greater inflows of new business from external and

13 domestic sources. Data signalled that new orders rose at the fastest rate since the first month of data collection in April 2004. New business growth was supported by firmer market demand, while there were also reports that improved economic conditions had led to higher client spending. Export sales also rose in January, increasing at a near-record rate. This was in sharp contrast to the severe reductions seen at the beginning of 2009. Staffing levels in the Chinese manufacturing sector continued to rise in January. Despite easing to the slowest in five months, the rate at which firms added to their workforce numbers was comfortably faster than the series average. Those respondents that reported a rise in employment generally attributed growth to continued gains in new business and a subsequent increase in production requirements. Prices charged by Chinese manufacturers rose again in January, extending the current period of inflation to seven months. The rate at which firms raised their charges was the most marked since July 2008, mainly reflecting rising input prices. Higher client demand also allowed manufacturers to raise their factory gate prices on the month. Data signalled that average cost burdens faced by Chinese manufacturing firms rose sharply in January, buoyed by increased prices for a number of raw materials. Prices paid for brass, copper, oil, steel and zinc were all reported to have risen from one month previously. Input price inflation, which was the strongest since July 2008, has now been signalled for seven months in succession. Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist for China at HSBC said: “Industrial activity continues to accelerate, implying stronger GDP growth in 1Q. But rising input and output prices also point to greater inflationary pressure, which will likely prompt more tightening measures in the coming months.” The HSBC China Report on Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 manufacturing companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group.

Source: Markit Economics

14 India The Indian manufacturing sector began 2010 on a firm footing, with both new orders and output expanding considerably and at accelerated rates. This was in stark contrast to the situation around the turn of 2009, when production and new business contracted at rapid rates. Although the recovery in employment has yet to really gain traction, the marginal pace of job creation in January was nevertheless the fastest since September 2008. Meanwhile, input and output prices rose at sharp and accelerated rates. Climbing to 57.6 in January, its highest level for seventeen months, the seasonally adjusted HSBC India Manufacturing PMI (Markit Purchasing Managers’ Index, signalled a considerable improvement in operating conditions faced by Indian manufacturers. The headline index has now signalled expansion of the sector since April 2009, and at increasing rates for the past two survey periods. Indian manufacturers sharply raised their output levels during the latest survey period, in line with the upward trend in new work. Production and new orders have both increased for ten straight months, with the latest gains above their pre-downturn averages. Data showed that domestic and foreign demand rose considerably since December. The improvement in external demand was noticeable, although total new business growth continued to increase at a rate above export orders. Reflecting greater workloads, respondents noted a build-up of unfinished business during January. However, the rate of accumulation was only weak, as many firms increased efforts to catch up on backlogs. Data pointed to slight growth of Indian manufacturing industry employment in January, which panellists linked to higher production requirements and capacity constraints. Although only weak, the increase was the strongest for almost a year-and-a-half. In order to accommodate rising production requirements, and to re-build depleted stocks, Indian manufacturers purchased more inputs in the first month of the new year. Buying activity grew at a substantial pace that was the fastest since May 2008. Additional demand for raw materials placed pressure on suppliers’ capacities. Consequently, lead times lengthened for the second month running, albeit only slightly. Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said: “Any lingering concern that India's manufacturing recovery was tailing off should be well and truly put to rest by this strong release. A second consecutive rise in the PMI has taken the series to a new cycle high, consistent with on-going double digit rises in industrial production. The most impressive part of the release was the more than 5 point jump in the new export orders index, which took it to its highest level since October 2007 and indicated that the recovery is by no means dependent on domestic demand alone. “At the same time, however, price pressures are clearly intensifying. The rate of increase in input prices was the largest since the PMI began nearly 5 years ago, while the survey suggests that companies are more willing to pass on these rises in the form of higher output prices - something which the RBI is unlikely to take too kindly to. Admittedly, the employment index only inched above 50 but it can't be long before job hiring picks up more aggressively.” The HSBC India Report on Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 manufacturing companies. http://www.finfacts.ie/irishfinancenews/article_1018940.shtml

Bankers try to fight off wave of controls By Patrick Jenkins and Gillian Tett Published: January 31 2010 17:07 | Last updated: January 31 2010 17:07 Protesters were handing out leaflets in the streets of Davos at the weekend. But their anger was not directed against world poverty, nuclear power or war; instead they were demanding that banks should put their derivatives business on to exchanges to make the financial system more transparent. It is a potent reminder of how issues about financial stability dominated the agenda at the World Economic Forum last week. For most of the past decade, banks have used the WEF in Davos as a lavish opportunity to entertain clients. Last week they were fighting to fend off a wave of controls on sectors ranging from bonuses to proprietary trading and derivatives. In depth: Davos - Jan-28 IMF chief warns of reliance on exports - Jan-30 Vice-premier defends Chinese policy - Jan-28 Study finds banks cool on green ideas - Jan-28 Leadership questions shape Davos talks - Jan-28 Trichet holds cards in finance debate - Jan-28 International supervisors, led by the Financial Stability Board and the Basel Committee on Banking Supervision, are pondering how and when they should change the levels of capital and liquidity that banks will have to hold in future. Moreover, in recent weeks, politicians – Barack Obama, the US president, Alistair Darling, the UK chancellor, and Nicolas Sarkozy, the French president – have weighed in with measures, short-circuiting the more consultative regulatory response. Whether the banks could claim victory for their lobbying at Davos remains unclear, partly because the financial industry is fighting on many fronts. One issue that dominated discussion at the WEF wasproprietary trading – and a putative move by the Obama administration to ban the activity at banks that take insured deposits. Most bankers vociferously opposed the idea. Frédéric Oudéa, chairman and chief executive of Société Générale, said: “There is a process already under way in Basel. We need it to remain an orderly process in which regulators take the lead role and organise the dialogue with the banking industry. Otherwise there will be confusion, uncertainty and additional pressure on the financial system.” There is widespread confusion about what any ban might mean. Barney Frank, chairman of the House of Representatives finance services committee in Washington, told the Financial Times last week that banning banks from proprietary trading could be covered by a bill his committee had prepared that would permit a systemic regulator to clamp down on it. Some Western regulators said a ban might be incorporated into moves being considered by the Financial Stability Board to tighten the treatment of banks’ trading books.

16 But policymakers in Davos warnedthat banks would be foolish to think they would be “let off the hook”, as one said. “There is real political pressure to do something,” one senior western regulator said. “The banks need to recognise that.” That, in turn, meant a subtle but important shift in attitude among the bankers developed last week. Until a few weeks ago, most bankers had expected to use the Davos meeting to swap views on the shortcomings of the Basel committee proposals, put forward by financial bureaucrats in a consultation document late last year. In the event, there was plenty of handwringing over how the new Basel rules on capital would make it unfairly expensive to control a stake in a subsidiary, rather than wholly own it; and how plans to limit the value of deferred tax assets could strangle economic recovery. But the most powerful consensus was that however awkward regulators were, unpredictable politicians were worse. Bob Diamond of Barclays Capital talked about the “very negative” impact US measures to constrain banks would have; Josef Ackermann of Deutsche Bank spoke of “the costs of cacophony” associated with unco-ordinated proposals; Sadeq Sayeed, chief executive of Nomura in Europe, the Middle East and Africa, said: “A lot of the policy and tax proposals that are coming out are half-baked.” While the international bureaucrats were keen to distance themselves from the bankers, they stressed that reform had to be co-ordinated rather than driven by domestic politics. “We cannot have reform of the system driven by what each country sees that it needs for itself,” Dominique Strauss-Kahn, head of the International Monetary Fund, told the Davos forum on Saturday. “We need to have co-ordination – we cannot afford to have different solutions in different parts of the world.” http://www.ft.com/cms/s/0/be5b72a4-0e85-11df-bd79-00144feabdc0.html

17 In Depth December 30, 2009, 5:00PM EST Mania on the Mainland Think the U.S. real estate bubble was bad? China's could be worse By Dexter Roberts (This story has been updated to include December data in the third paragraph.)

Beijing - Li Nan has real estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700-sq.-ft. apartment in west Beijing. Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. If he finds the right place— preferably a two-bedroom in the historic Dongcheng quarter, near the city center—he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot. "This year they'll be even higher," says Li. Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes: Others are taking out mortgages at record levels. Developers are snapping up land for luxury high-rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won't flag. And if families can swing it, they buy two apartments—one to live in, one to flip when prices jump further. And jump they have. In Shanghai, prices for high-end real estate were up 54% through September, to $500 per square foot. In December alone, housing prices in 70 major cities rose 7.8%, while housing starts nationwide rose 34%. The real estate rush is fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments. "Once the bubble pops, our economic growth will stop," warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences' Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that "property prices have risen too quickly." He pledged a crackdown on speculators.

18 UNAFFORDABLE PRICES Despite parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can't be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What's clear is that the bubble is inflating at the rich end, while little low-cost housing gets built for middle and low-income Chinese. In Beijing's Chaoyang district—which represents a third of all residential property deals in the capital—homes now sell for an average of nearly $300 per square foot. That means a typical 1,000-sq.-ft. apartment costs about 80 times the average annual income of the city's residents. Koyo Ozeki, an analyst at U.S. investment manager Pimco, estimates that only 10% of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes. How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing's half-trillion-dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land. Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business. "When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land," says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley's (MS) top Asia analyst. "No one talks about their factories making money these days." HOMES BUILT ON SAND Newly wealthy towns are playing the game with a vengeance. Ordos is a city of 1.3 million in China's Inner Mongolia region. It has gotten rich from the discovery of a big coal seam nearby. An emerging generation of tycoons, developers, and local officials will go to any length to invent a modern Ordos. So 16 miles from the old town, a new civic center is emerging from the desert that could easily pass for the capital of a midsize country. An enormous complex houses City Hall and the local Communist Party headquarters, each 11 stories tall with sweeping circular driveways. Nearby loom a fortress-like opera house and a slate-gray, modernist public library. Thousands of villas and apartment towers stretch into the distance, all built by local developers in the hope that Ordos' recently prosperous will buy the places to be near the new center of power. Workers get bused daily to the new city hall, but the housing is still largely unoccupied. "Why would anyone go there?" asks Zhao Hailin, a street artist in the old town. "It's a city of empty buildings." (Ordos officials would not comment for this story.) The central government now faces two dangers. One is the anger of ordinary Chinese. In a recent survey by the People's Bank of China, two-thirds of respondents said real estate prices were too high. A serial drama with the ironic name The Romance of Housing, featuring the travails of families unable to afford apartments, was one of the most popular shows on Beijing Television until broadcasting authorities pulled it off the airwaves in November. The official reason was that the show was too racy (one woman got an apartment by becoming the mistress of a corrupt local official), but online chat rooms speculated that the show was cut because it was upsetting to people unable to afford apartments.

19 The debate has become even more charged following injuries and deaths related to real estate. A woman from Chengdu committed suicide by torching herself when her former husband's three-story factory and attached living space were demolished to make way for a new road. A man in Beijing suffered severe burns in a similar protest over his home. In early December five professors at Peking University wrote to the National People's Congress calling for changes to a land seizure and demolition law and accusing developers of usurping the government's role when taking land for construction. The law is leading to "mass incidents" and "extreme events," the professors warned. The second danger is that Beijing will try, and fail, to let the air out of the bubble. Pulling off a soft landing means slowly calming the markets, stabilizing prices, and building more affordable housing. To discourage speculation, the State Council, China's cabinet, is extending, from two years to five, the period during which a tax is levied on the resale of apartments. Tighter rules on mortgages may follow. Beijing also plans to build apartments for 15 million poor families. KEY TO GROWTH The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate; in November, for example, retail sales of furniture and construction materials jumped more than 40%. At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth. The worst scenario is that the central authorities let the party go on too long, then suddenly ramp up interest rates to stop the inflationary spiral. Without cheap credit, developers won't be able to refinance their loans, consumers will no longer take out mortgages, local banks' property portfolios will sour, and industrial companies that relied on real estate for a chunk of profits will suffer. It's not encouraging that the Chinese have been ham-handed about stopping previous real estate frenzies. In the 1990s the government brutally ended a bubble in Shanghai and Beijing by cutting off credit to developers and hiking rates sharply. The measures worked, but property prices plunged and economic growth slowed. Analysts are divided over the probabilities of such a crash, but even real estate executives are getting nervous. Wang Shi, chairman of top developer Vanke, has warned repeatedly in recent weeks about the risk of a bubble. In his most recent comments he expressed fear that the bubble might spread far beyond Beijing, Shanghai, and Shenzhen. PROFIT VS. SOUL One difficulty in handicapping the likelihood of a nasty pullback is the opacity of the data. As long as property prices stay high, the balance sheets of the developers look strong. And no one knows for sure how much of the more than $1.3 trillion in last year's bank loans funded real estate ventures. Analysts figure a substantial portion of that sum went into property, much of it indirectly. Banks often lend to state-owned companies for industrial purposes. But the state companies can then divert the funds to their own real estate businesses—or relend the money to an outside developer. Meanwhile, the big banks may be cutting back on their real estate risk by selling loans to smaller local banks and credit co-ops. For now, the party continues. On Dec. 12, Beijing developer Soho China celebrated a record- breaking year with a gala at the China Central Place JW Marriott (MAR). Guests dined on crab and avocado timbale, white bean soup, and beef tenderloin with wild mushrooms (Soho would not comment for this story). After a dance performance, a panel debated "The Balance Between Profit and Soul." When a writer joked he could not afford an apartment—and was still waiting for Soho Chairman Pan Shiyi to give him one—the crowd of 600 well-heeled

20 developers, entrepreneurs, and consultants laughed appreciatively. If the bubble bursts, few will be laughing. A Recipe for Trouble Lax lending by Chinese banks has played a major role in the runup of property prices on some parts of the mainland. A December report by Fitch Ratings says tighter rules imposed by China's bank regulator contributed to a slowdown in new loans in the second half of 2009. The rating agency also noted an increase in off-balance sheet transactions, such as repackaging of loans into wealth management products and the sale of loans to other financial institutions—activities that represent "a growing pool of hidden credit risk." http://www.businessweek.com/magazine/content/10_02/b4162030091917.htm?campaign_id= mag_Jan28&link_position=link22

NEWS : INTERNATIONAL Irish manufacturing output fell in January as freezing weather conditions hit operations By Finfacts Team Feb 1, 2010 - 8:10:57 AM

Source: Markit Economics

Irish manufacturing output fell in January as freezing weather conditions hit operations. Output dipped at a sharper pace than in the month before, while new business contracted for the first time in three months. Unusually bad weather conditions made some roads impassable, impacting negatively on output, new orders and supplier performance. The seasonally adjusted NCB Purchasing Managers’ Index (PMI) - - an indicator designed to provide a single figure measure of the health of the manufacturing industry - - recorded 48.1 in January, lower than the reading of 48.8 in December, and signalling a further deterioration in operating conditions. Falling demand was exacerbated by the freezing weather conditions in January, leading to the sharpest reduction of production in five months. Except for a slight rise in November 2009, output has contracted in each month since March 2008. New business declined for the first time in three months during January, albeit at only a marginal pace. Clients were reluctant to commit to new projects given the fragility of the wider Irish economy. New export orders increased during the month, in contrast to the trend for overall new business. Moreover, the rate of expansion accelerated to its fastest since October 2007 as firms expanded into new export markets.

22 Backlogs of work decreased, as has been the case in each month since July 2006. Lower outstanding business reflected the decline in overall new orders as firms transferred spare capacity to complete work-in-hand. Employment also fell markedly in January, and at the same pace as in December. January data pointed to the first rise in input costs in fifteen months as commodity prices increased. In contrast, output prices continued to decrease due to intense competitive pressures. Charges fell at a slightly faster pace than in the previous month. For the second month running, suppliers’ lead times lengthened, with unusually bad weather conditions the main reason for delays to deliveries. Vendor performance deteriorated to the greatest extent since October 2007. The rate of decline in purchasing activity quickened to the fastest in four months. The fall was partly in response to lower workloads, as well as expectations of further declines in new orders over the coming months. Inventory depletion policies led to falls in both stocks of inputs and finished goods as firms attempted to maximise cash flow while future new business levels remained uncertain. Irish manufacturing output fell in January as freezing weather conditions hit operations Feb 1, 2010 http://www.finfacts.ie/irishfinancenews/article_1018941.shtml

01.02.2010 EU wants Greece to cut wages

The FT reports this morning that Greece will be told this week to cut public sector wages and improve tax collection to avoid destabilising the eurozone. The Commission will recommend on Wednesday that Greece’s should “cut average nominal wages, including in central government, local governments, state agencies and other public institutions”, according to a draft proposal. The Commission said that current measures are insufficient, and wants the government also to crack down on tax evasion, and possibly introduce a tax on luxury goods. Ecofin will make the formal recommendation later this month, and Greece will then have four months to comply, or else face sanctions. The Greek timetable Kathimerini has a useful timetable of further action expected this month. This week, the government will appoint new staff to oversee tax and insurance reforms. The Ecofin on Feb 14 will decide on Greek’s stability programme, and announce a new independent statistical office. On Feb 22, Greece will probably launch the next 10-year bond. Judging by the newspaper reporting, it is evidently crisis time in Greece – in a way that this was not obvious in December. Munchau on the future of the euro area In his FT column, Wolfgang Munchau said the question about whether the eurozone can survive is unanswerable, but he offers a number of conditions necessary for survival. The first is a crisis management regime, one that is formally approved by national parliament. The second is a policy to address imbalances that would focus on both the c/a deficit and surplus countries. The third is a renewed effort to construct a meaningful financial supervisory regime, after the present decaffeinated proposals are implemented. He also says that the EU needs to maintain the fine political balance in the ECB, and not allow a German power grab. France promises a new deficit cutting agenda Les Echos has the story that the French government’s stability programme foresees a return to a 3% deficit from 2013 onwards, after reaching 8.2% this year. The path is 6% in 2011, and 4.6% in 2012, but it is all dependent on the assumption of 2.5% growht, (which is a little optimistic). France pledges its structural deficit by an annual amount of 1%, while public sector spending will be limited to between 0.5% and 1%.

24 Spain’s Austerity Programme Le Monde has a good summary of Spain’s stability programme, consisting of an estimate that the 2009 deficit was 11.4%, 2pp higher than previously envisaged. One of the measures taken to reduce the deficit is an increase in the pensionable age from 65 to 67 from 2013 onwards. The paper says the speculative attacks on Greece seem to have focused minds in Madrid. Euro area to be hit hard by bank lending squeeze The FT reports that the euro area is likely to be significantly worse affected than the US economy by the drying-up of bank lending, according to an ECB working paper. The paper looks at the links between bank lending and growth. The latest data showed that bank lending to euro area business contracting are at an ever faster pace.

Bank economists disagree on future interest rates In its regular poll among bank economists FT Deutschland finds a surprisingly large degree of difference of opinion, with one group predicting interest rates to stay at 1% for the rest of the year, while others predict increases to 2 or even 2.25%. There is also disagreement about the outlook of future liquidity policies, with one group predicting an ending to the unlimited tenders in Q2, and another that the ECB would wait much longer until it returns to normal. http://www.eurointelligence.com/article.581+M5d6f92e1afe.0.html#

EU call for Greece to cut public sector pay By Tony Barber in Brussels and Kerin Hope in Athens Published: January 31 2010 16:43 | Last updated: February 1 2010 07:31 Greece will be told this week to cut public sector wages and improve tax collection under a European Union initiative to prevent its financial troubles from destabilising the eurozone. The European Commission will recommend on Wednesday that Greece’s socialist government should “cut average nominal wages, including in central government, local governments, state agencies and other public institutions”, according to a draft proposal. In depth: Greek debt crisis - Dec-21 Paris pledges cuts to reduce deficit - Jan-31 Wolfgang Munchau: What the eurozone must do if it is to survive - Jan-31 Europe set to be worse hit by loan drought - Jan-31 Portugal’s PM questions Athens comparison - Jan-31 Greece faces long march back to growth - Jan-29 It comes as François Fillon, the French premier, outlined plans in an interview in Le Figaro newspaper over the weekend to tackle his country’s budget deficit, and concerns about Portugal, which disturbed financial markets last week by disclosing that its 2009 deficit was higher than expected at 9.3 per cent of gross domestic product. Greece is battling to regain the confidence of markets after being condemned by the Commission for falsifying public finances data and concealing its deficit size. Its finance ministry insisted over the weekend that there was “no possibility of the [stability] plan being rejected” by the European Commission. The Greek parliament approved a 2010 budget in December that George Papandreou, prime minister, described as the most stringent since the return to democracy in 1974. Athens has also submitted a three-year plan to Brussels that foresees a reduction of the deficit to less than 3 per cent of GDP by the end of 2012 from an estimated 12.7 per cent last year. EU policymakers have welcomed the broad thrust of the Greek measures, but the Commission and other eurozone governments are not convinced they will be enough. The Commission is expected to recommend that Greece should crack down on tax evasion and possibly introduce a tax on luxury goods. The Commission’s recommendations will be passed to eurozone and EU finance ministers for approval on February 15-16, and Greece will have four months to show it is putting the measures into practice. If it is judged not to have done so, the other 15 eurozone governments could under EU law impose financial sanctions. No country has been subjected to such punishment since the euro’s birth in 1999. The Commission also wants to give Eurostat, the EU’s statistical agency, the power to audit the accounts of member states – specifically, those of Greece – but a formal legislative proposal is not expected as early as this week.

26 Other EU governments are adamant in public that they will not provide financial aid to Greece, but it is tacitly acknowledged in Brussels that assistance would be provided if Greece’s debt crisis overwhelmed the government. The Greek government is bracing for a surge in public unrest over its austerity measures, with trade unions planning two days of strikes and protests on February 10-11. Greek farmers on Sunday resumed their tractor blockade of a northern border crossing with Bulgaria, an EU neighbour. As a result some 200 trucks were lined up on the Bulgarian side of the Promachonas crossing, a main route for Bulgarian exports to the EU that has been blocked on and off for two weeks. The Bulgarian government has complained to the Commission that the farmers’ protest – demanding extra crop subsidies and tax breaks on fuel – is hindering free movement of goods within the EU. Additional reporting by Peggy Hollinger in Paris http://www.ft.com/cms/s/0/b257fe8c-0e85-11df-bd79-00144feabdc0.html

Paris pledges cuts to reduce deficit By Peggy Hollinger in Paris Published: January 31 2010 18:43 | Last updated: January 31 2010 18:43 France will this week deliver to Brussels its battle plan to tackle the country’s crippling budget deficit, including a pledge to cut the growth in total public spending to less than 1 per cent a year from 2011. “No government has ever done as much,” said François Fillon, prime minister, who unveiled elements of the plan in Le Figaro newspaper on Saturday. “In concrete terms this means ministerial budgets will be frozen, with a similar effort from local authorities.” Mr Fillon’s comments come as the government attempts to drum up public support for spending cuts ahead of testing regional elections in March. Nicolas Sarkozy, president, last week launched a national consultation on public finances in a bid to drive home the urgency of the situation, with a warning that tough decisions would have to be taken in April. In the meantime, the government is required by European Union rules to send a draft stability programme to Brussels this week setting out targets for public spending and economic growth. Mr Fillon said the target of less than 1 per cent growth in total government spending – both at state and local authority level – would be enough to bring the deficit from this year’s 8.2 per cent of gross domestic product to 3 per cent by 2013.

27 However France’s target is based on a growth rate of 2.5 per cent, which analysts on Sunday suggested could be challenging. “That is a higher rate of growth than we had before the crisis,” said Laurence Boone, chief economist for France at Barclays Capital. Nonetheless, Ms Boone welcomed Mr Fillon’s comments as a “step in the right direction”. For the first time the government was showing a determination to include spending at local authority level in its global targets, an area long clouded by a lack of transparency, she said. Mr Fillon said it was “not normal” that local authority spending had increased by 6 per cent a year since 2003. The main test of France’s commitment to rein in public spending will be its success in reforming its pension regime – a task Mr Sarkozy has set his government for this year. Mr Fillon said the system would be running an annual deficit of €100bn ($139bn, £87bn) a year if nothing was done. The prime minister also suggested that the government could take the axe to tax breaks, some of which no longer served any “strategic” purpose. More than 460 tax breaks or fiscal credits exist, which cut public revenues by some €70bn last year. Finally, Mr Fillon ruled out a constitutional amendment such as that introduced in Germany, requiring the government to set balanced budgets. However, he suggested that the ideal would be to agree a “golden rule” to aim for budgetary balance by 2020. http://www.ft.com/cms/s/0/f9e9bc6c-0e90-11df-bd79-00144feabdc0.html

COLUMNISTS What the eurozone must do if it is to survive By Wolfgang Münchau Published: January 31 2010 19:57 | Last updated: January 31 2010 19:57 First Greece, then Portugal, and then what? The project of European monetary union is entering the most dangerous phase in its 11-year history. Last week, eurozone governments started preparations, for the first time, to bail out one of their fellow members. Greece will probably require a bridging loan at some point. Portugal might too. But they are small countries. No matter what happens, it will not break the euro. The clear and present danger to the eurozone is Spain. Daniel Gros of the Centre for European Policy Studies argued on these pages last week that Spain is in a better position than Greece because of its higher rate of gross national savings. But I believe that Spain is likely to squander that advantage. Spain, like Greece, has suffered from an extreme loss of competitiveness during a period in which it relied on a housing bubble to generate prosperity. While the Greek government is at least beginning to recognise the need for reform, perhaps too late, Spain’s political establishment remains in denial.

28 So what if Spain gets into trouble? Will the eurozone falter, as Nouriel Roubini, professor of economics at New York University, predicted in an interview last week? The question is unanswerable. I find it more constructive to ask what the eurozone will need to do to survive the strains ahead. Three measures are, in my view, essential for survival; a further three almost so. The first of the essential conditions is a robust and transparent system of crisis management. Maybe the Greek bail-out will provide a blueprint for such a system. But in any case, it would need to be worked out formally and approved by national parliaments to achieve a maximum degree of legitimacy. This should not be imposed by diktat. A good crisis-resolution system must also minimise moral hazard. Countries that benefit from help will have to accept a partial loss of sovereignty, and for this reason it is important that any such regime has wide political backing in all the member states. While eurozone members lack the political will for unconditional bail-outs, they accept that they need to help each other during a crisis. But this help is attached to the condition that the recipient takes corrective action. The second essential prerequisite for survival is a reduction in internal imbalances, which lie at the core of the current crisis. This is an issue that requires action both in countries with large current account deficits, such as Greece and Spain, and in those with large surpluses such as Germany. While Spain, for example, would need to reform its labour market to bring about adjustments in real wages, Germany should implement policies to stimulate consumption, including a long-overdue income tax reform. The build-up of these imbalances is the underlying reason why the Greek problem got out of hand. The place to handle this co-ordination is the eurogroup of the finance ministers of the eurozone, which now constitutes an official European Union institution under the Lisbon treaty. Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the eurogroup, should make imbalances the defining issue of his agenda and propose binding policies. Third, the EU should at some point revisit the now almost totally decaffeinated proposals for financial supervision. What started off as a deeply unimpressive set of recommendations by the De Larosière committee ended up further diluted as it proceeded through the EU’s legislative mills. The financial system remains the single biggest threat to the long-term stability of the eurozone economy. Fragmented financial regulation makes no sense in a monetary union and is potentially lethal. Over and above those essential steps, there are a number of policy actions the eurozone can, and should, undertake to strengthen its political and economic cohesion. The single most important of those is to maintain the fine political balance in the European Central Bank, which enjoys trust and respect in countries as diverse as Greece and the Netherlands. If Angela Merkel, the German chancellor, gets her way to install Axel Weber, the president of the Bundesbank, as the next ECB president, I fear that this balance might be upset. I am not talking about the geographic diversity among the ECB’s top officials in numerical terms, which can easily be maintained. My concern is about what will invariably be perceived as a power grab by Germany during an extremely sensitive period. Second, the eurozone should sort out its external representation. The presence of German and French national officials in organisations such as the International Monetary Fund, each defending their national position, is pathetic. The eurozone in particular needs to strengthen its voice in the macroeconomic debates in which it has a vital stake, the most important being the future of the global monetary system.

29 Finally, the EU – not the eurozone – needs to rebuild the internal market, which was damaged during the crisis. This offers by far the biggest opportunity for the EU to generate the productivity gains needed to maintain prosperity. The reason I have become more sceptical about the eurozone’s long-term prospects is not the inherent economics of monetary union. It is that I doubt the political will exists to do what is necessary. Wolfgang Münchau What the eurozone must do if it is to survive January 31 2010 19:57 http://www.ft.com/cms/s/0/d5d38ef4-0e98-11df-bd79-00144feabdc0.html

Europe set to be worse hit by loan drought By Ralph Atkins in Frankfurt Published: January 31 2010 21:14 | Last updated: January 31 2010 21:14 The eurozone is likely to be significantly worse affected than the US economy by the drying- up of bank lending, according to research published by the European Central Bank just days before its next interest-setting meeting. The results of a study into the links between bank lending and eurozone growth could strengthen the hands of those on the ECB’s 22-strong governing council urging caution as it unwinds emergency measures taken to shore up the financial system. Manufacturing interventions seen futile - Jan-25 Weak states threaten euro stability, says Rehn - Jan-12 EU inventories low amid recovery doubt - Jan-10 Union chief warns over early stimulus exit - Dec-07 EU states given stark warning on debt levels - Nov-08 Bullish industry lifts eurozone confidence - Oct-29 ECB data on Friday showed bank lending to eurozone business contracting at an ever faster pace, while banks continued to tighten credit standards. Lending to non-financial corporations contracted at an annual rate of 2.3 per cent in December, against 1.9 per cent in November. According to the ECB “working paper”, which does not necessarily reflect official policy, economists have found little evidence of a causal relationship between credit supply and real output in the US. But the link appeared significant in the eurozone – almost certainly because of the larger role played by bank loans in the 16-country region, especially for small and medium-sized companies that cannot raise funds from capital markets. “It should not be surprising that the impact on real economic activity from shocks to banks’ supply of credit are more pronounced in the euro area than in the US,” the report concludes. That suggested the impact of the global banking crisis on growth would be more severe in the eurozone. To help revive credit markets, the ECB has slashed its main interest rate to just 1 per cent and provided unlimited liquidity to eurozone banks for periods of up to a year, which has driven

30 market interest rates even lower. But it started its “exit strategy” in December by ending the provision of such 12-month liquidity. At Thursday’s governing council, the main interest rate is expected to be left unchanged. With inflation and growth remaining moderate, financial markets do not expect a rise until late this year – or later. But at March’s meeting, decisions are expected on the terms of the last planned offer of six-month liquidity and on the terms on which three-month liquidity will be offered. The eurozone emerged from recession in the third quarter of 2009, when gross domestic produce expanded by 0.4 per cent. The ECB fears the first half of 2010 might not see that pace of expansion maintained as effects of emergency government stimulus measures will start to wear off. http://www.ft.com/cms/s/0/75b27fd4-0e99-11df-bd79-00144feabdc0.html

NEWS : INTERNATIONAL IMF chief says many of world’s leading economies fooling themselves on foreign export demand driving their recoveries By Michael Hennigan, Founder and Editor of Finfacts Jan 31, 2010 - 2:27:46 PM

Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times; Global Agenda Council on Systemic Financial Risk, Yoshito Sengoku, Minister for National Policy, Cabinet Office of Japan, Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India, Zhu Min, Deputy Governor of the People's Bank of China, People's Republic of China; Global Agenda Council on the International Monetary System, Dominique Strauss-Kahn, Managing Director, International Monetary Fund (IMF), Washington DC, Christine Lagarde, Minister of Economy, Industry and Employment of France; Member of the Foundation Board of the World Economic Forum, Lawrence H. Summers, Director, National Economic Council (NEC), Executive Office of the President, USA and Josef Ackermann, Chairman of the Management Board and the Group Executive Committee, Deutsche Bank, Germany; Member of the Foundation Board of the World Economic Forum; Chair of the Governors Meeting for Financial Services 2010; Co-Chair of the World Economic Forum Annual Meeting 2010 are captured during the session 'Global Economic Outlook' at the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 30, 2010. © World Economic Forum swiss-image.ch/Photo by Sebastian Derungs

Dominique Strauss-Kahn, IMF (International Monetary Fund) Managing Director, said at the World Economic Forum, in Davos, Switzerland, this week-end that too many of the world’s

32 leading economies are fooling themselves in believing foreign export demand will drive their recoveries from the global recession. In an interview with the Financial Times, Strauss-Kahn warned that national and global growth would be slower than many countries hoped because too many were relying on exports to underpin expansion. At the G-20* summit in Pittsburgh last September, the leaders of the world's biggest economies, tasked the IMF with the job of collecting national economic forecasts and checking they were consistent with each other. The forecasts for mostly three to five years ahead, have been received by the IMF and Strauss-Kahn said it was clear when the data will be reviewed by the G-20 in April, it “will not add up.” “What we will show them is the hypotheses they are working on are not the same,” he said.“Exports from one region to another region have to equal imports and it won’t be the case.” On Saturday, Dominique Strauss-Kahn, warned the world’s economic leaders to remain cautious as they examine exit strategies from the various stimulus packages they have implemented in response to the global economic crisis. “If we exit too late, public debt will be higher,” he said at a panel on the Global Economic Outlook. “But if we exit too early, there is the risk of a double-dip recession. In that case, I don’t know what we can do because we have used all of the tools. The probability is low, but the risk is high.” He also noted that “Growth is better than expected, but still fragile. In large part, it is still supported by public funding.” Martin Wolf, the Chief Economics Commentator of the FT said: "Moisés Naim of Foreign Policy, said that the fancy acronym for this recovery which he was giving me, which I mentioned in a blog, is LUV, L-U-V. L is for the shape of the recovery of the European Union, U is for the shape of the recovery of the United States, and V is for the shape of the recovery of Asia and emerging countries. And I rather like this acronym. It seems to me get it very well."

France's Finance Minister Christine Lagarde, officially titled Minister of Economy, Industry and Employment, walks into the main hall at the Congress Centre for the 'Opening Plenary of the World Economic Forum Annual Meeting 2010' of the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 27, 2010. © World Economic Forum swiss-image.ch/Photo by Michael Wuertenberg/b>

33 Strauss-Kahn said: "I like your LUV acronym and it shows clearly that the Asian part of the world is now close to the total recovery, goes fast. It’s not exactly the same thing in other parts of the world, including Europe, and so the question of dealing with this different speed in the recovery, especially in the relationship between US and China, is something at which we have to look with great attention. We are not in a system where the recovery looks as if it was everywhere the same thing. It’s bound to be sluggish at least in Europe, maybe in the United States and that’s one of the big problems for the looking forward." Christine Lagarde, Minister of Economy, Industry and Employment of France, agreed that the timing of the exit “is absolutely critical.” She added that leaders will also have to carefully manage the frustration of their citizens during this process. “What we see in the United States and some other economies,” said Lawrence Summers, Director of the US National Economic Council and President Obama's chief economic adviser, “is a statistical recovery and a human recession. The policies to contain the economic collapse have been successful. In my judgement, we will continue to grow at a moderate rate for the next several quarters. But what is disturbing is the high unemployment – which is cyclical, but also structural.” In the US currently, one man in five between the ages of 25 and 54 is unemployed. Even after the recovery, according to projections, one in seven or one in eight will remain jobless. Josef Ackermann, CEO of Deutsche Bank, said: "Well, I agree with Christine that probably the L is somewhat too pessimistic for Europe, but I also think that the U and the V is somewhat too optimistic for the other regions. If you look on macro numbers, I think that’s somewhat misleading, because as many of you know in the industrial sector, if you look at different segments, where the correction has been 30%, 40%, or 50%, even growth rates of 5% or 7% means that you will have years to wait before you reach the pre-crisis level. That’s why I think the situation is still pretty fragile. If you look at the financial markets, they have become pretty nervous again. There are a lot of threats on the horizon." Near the end of the session, Strauss-Kahn briefly sketched out the IMF’s plans for a US$ 100 billion Green Fund to promote low-carbon economic growth. “The new growth model will be low carbon,” he said. Efforts to address climate change cannot remain stalled “because we cannot meet the financing needs.” *The G-20 represents about 90% of global gross national product, 80 percent of world trade (including trade within the European Union) as well as two-thirds of the world's population, according to the IMF. Measured by purchasing power, Asia accounts for more than 35% of world GDP, compared with the US and the EU at 20% each. The G-20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the US, plus the European Union, represented by the rotating Council presidency and the European Central Bank. The Managing Director of the International Monetary Fund and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate at G-20 meetings. Exports are also seen as key to Ireland's recovery. However, as almost 90% of Irish exports are made by foreign firms; decisions on the destination of exports are not generally made in Ireland and the majority of trade is intra-company, we depend on the demand for the products of mainly American firms.

34 In the 1980s, it was often suggested that teaching of German should have been given prominence; now it tends to be Mandarin - - making the latter proposal is easy from behind a desk but glossing over the huge challenges of exporting to Asia, when the big potential of the Eurozone market is largely unexploited, shows the urgency of a reality check in Ireland. Ministers don't even know why Belgium is on of our main export destinations! Exports to China are insignificant; exports to India are derisory and in regard to another BRIC economy, Brazil, we haven't helped our position by lobbying in Brussels for a total ban on EU imports of Brazilian beef. http://www.finfacts.ie/irishfinancenews/article_1018935.shtml

Henry Paulson's book offers a glimpse inside the economic crisis By Zachary A. Goldfarb Washington Post Staff Writer Sunday, January 31, 2010; A03 The Washington memoir, typically published after a calamitous event or the end of a political campaign, often brings a nugget or two of news. But that's a tall order for Henry M. Paulson Jr.'s "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System," as many authors have already published thick tomes examining the financial crisis of fall 2008. As Treasury secretary, Paulson helped oversee the government's intervention, and his memoir is the first lengthy account of the crisis from a key decision-maker. The book offers a look at Paulson's thinking during those scary days, as well as his sometimes unvarnished opinions of other Washington characters, many of whom had central roles in managing the government's response. Paulson writes that then-Sen. Barack Obama, at the time the Democratic presidential nominee, called him routinely, starting with the September weekend when the government seized mortgage finance giants Fannie Mae and Freddie Mac. Paulson was impressed with Obama as well as his vice presidential candidate, Sen. Joseph R. Biden Jr., but less so by their Republican counterparts. After talking to Obama, Paulson called Sen. John McCain, in an effort to appear politically balanced, but the Republican candidate "had little more to say as I described the actions we had taken and why." McCain put Sarah Palin on the line, but from the start, she and Paulson did not mesh well. "Right away she started calling me Hank. Now, everyone calls me Hank. My assistant calls me Hank. Everyone on my staff, from top to bottom, calls me Hank. It's what I like. But for some reason, the way she said it over the phone like that, even though we'd never met, rubbed me the wrong way," Paulson writes. "I'm not sure she grasped the full dimensions of the situation I had sketched out." Not surprisingly, Paulson is effusive in his praise of Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy F. Geithner, who were his partners in most of the major decisions in formulating the government response. But the former Treasury secretary has more modulated views on other key lawmakers and government officials, with whom he worked to gain new powers and take steps to bail out financial firms. Paulson had a strong relationship with Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, whom he called "a showman with a quick, impromptu wit. But he's also a pragmatic, disciplined, completely honorable politician." But Frank's counterpart in the Senate, banking committee Chairman Christopher J. Dodd (D- Conn.), received less adulatory words from Paulson. "He had been distracted by his unsuccessful campaign for the Democratic presidential nomination and seemed exhausted afterward," Paulson wrote. "Though personable and knowledgeable, he was not as consistent or predictable as Barney."

36 Paulson, who hailed from Wall Street, never meshed well with Republicans on Capitol Hill, and this was particularly true of the top-ranking Republican on the Senate banking committee, Richard C. Shelby (Ala.). "He was a true conservative. I don't think he ever really trusted me, because I came from Wall Street and he hated the Bear Stearns rescue," he wrote. Paulson had his share of tensions with other regulators. Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., exasperated him at times. Her job was to protect the FDIC's deposit insurance fund, and she raised concerns about Paulson's plans to bail out Citigroup. "Sometimes she said things that made my jaw drop," Paulson wrote. "That morning she had said she wasn't sure that Citi's failure would constitute a systemic risk." Paulson said he thought Bair "was simply posturing." Paulson also had an unusual relationship with James B. Lockhart III, who as the regulator of Fannie Mae and Freddie Mac made the official decision to seize the companies in early September 2008. Paulson depicted Lockhart as a nervous regulator, saying he had to invoke the president's name to convince Lockhart that action needed to be taken against Fannie and Freddie. Not long before, Lockhart had said they met robust financial requirements. Lockhart and President George W. Bush had attended the same high school, college and business school. "I invoked the president's name repeatedly," Paulson wrote. " 'Jim,' I'd say, 'you don't want to trigger a meltdown and ruin your friend's presidency, do you?' " As for the president himself, Paulson writes that Bush approved measures to rescue the financial system reluctantly, but he ultimately gave Paulson his full support. "He had a deep disdain for entities like Fannie and Freddie, which he saw as part of a permanent Washington elite, detached from the heartland, with former government officials and lobbyists cycling through their ranks endlessly while the companies minted money, thanks, in effect, to a federal entitlement," he wrote. Paulson also discusses his relationship with his wife, Wendy, and how he shared his fears that the financial system could collapse. In the tense moments as Lehman Brothers slid toward bankruptcy, he stepped out of his office and called her. She had just been to church. "Everybody is looking to me and I don't have the answer," he told her. "You needn't be afraid," she replied. "Your job is to reflect God, Infinite Mind, and you can rely on Him." http://www.washingtonpost.com/wp- dyn/content/article/2010/01/30/AR2010013001478_pf.html

NEWS : INTERNATIONAL Eurozone annual inflation is expected to be 1.0% in January; ECB says bank lending will remain tight in Q1 2010; M3 was negative again in December By Finfacts Team Jan 29, 2010 - 10:39:08 AM

Jean-Claude Trichet, President, European Central Bank, speaks during the session 'Rethinking the Eurozone' at the Congress Centre at the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 28, 2010. © World Economic Forum swiss-image.ch/Photo by Monika Flueckiger

Eurozone annual inflation is expected to be 1.0% in January 2010 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Separately, reports from the European Central Bank (ECB) showed that bank lending will remain tight in Q1 2010 and M3 money supply growth remained negative in December. Eurozone annual inflation was 0.9% in December 2009. The inflation target of the ECB is "below but close to 2%." Computation of flash estimates: Eurozone inflation is measured by the Monetary Union Index of Consumer Prices (MUICP). To compute the MUICP flash estimates, Eurostat uses early

38 price information relating to the reference month from Member States for which data are availableas well as early information about energy prices. The flash estimation procedure for the MUICP combines historical information with partial information on price developments in the most recent months to give a total index for the Eurozone. No detailed breakdown is available. Experience has shown the procedure to be reliable (18 times exactly anticipating the inflation rate and 6 times differing by 0.1 over the last two years). Bank Lending Survey The ECB said today in its quarterly Bank Lending Survey that Eurozone banks expect to continue tightening their credit rules for firms and households in the first part of 2010. A net 4% of banks said they saw themselves tightening credit standards to firms in the first quarter compared with the net 3% that toughened lending requirement in Q4 of 2009. "The net tightening of credit standards on loans to non-financial corporations declined to 3 percent in the last quarter of 2009... which was somewhat above the expectation, at the time of the previous survey round," the ECB said . "Looking forward, euro area banks expect some further tightening of credit standards on loans to NFCs in the first quarter of 2010, with net tightening potentially worsening slightly, to 4%,"it added Credit/Money Supply The annual rate of change of M3 -- a broad measure of money and credit in the Eurozone economy -- stood at -0.2% in December 2009, compared with -0.3% in November 2009. The three-month average of the annual rates of change of M3 over the period October 2009 - December 2009 decreased to -0.1%, from 0.6% in the period September 2009 - November 2009. The ECB's reference rate for M3 growth is +4.5%, signalling that inflation pressures are currently subdued. The annual rate of change of loans to non-financial corporations decreased to -2.3% in December, from -1.9% in November. The annual growth rate of loans to households increased to 1.3% in December, from 0.5% in the previous month. The annual rate of growth of lending for house purchase increased to 1.5% in December, from 0.3% in the previous month. The annual rate of change of consumer credit increased to -0.1% in December, from -1.0% in November, while the annual growth rate of other lending to households decreased to 1.7% in December, from 2.5% in the previous month. Finally, the annual rate of growth of loans to non-monetary financial intermediaries (except insurance corporations and pension funds) increased to 5.5% in December, from 0.3% in the previous month. The member countries of the Eurozone are Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland. http://www.finfacts.ie/irishfinancenews/International_4/article_1018930_printer.shtml

39 BRUSSELS Eurozone economic sentiment still buoyant By Stanley Pignal in Brussels Published: January 28 2010 12:57 | Last updated: January 28 2010 12:57 Economic sentiment in the eurozone is continuing to improve at a sustained rate, according to a closely watched monthly survey released on Thursday, but worrying divergences are emerging between the bloc’s healthiest and weakest economies. The European Commission’s “economic sentiment indicator” rose for a tenth consecutive month, up 1.6 points to 95.7, edging towards the long-run average of 100. Eurozone ministers step up efforts to align policy - Jan-18 EU seeks audit power over national accounts - Jan-27 Greek woes raise fears over eurozone - Jan-25 A breakdown of the survey shows that increased bullishness in the industrial sector remained the main contributor to the overall improvement. Capacity utilisation rates are edging up and production expectations are both up from last quarter, driven by decreased levels of inventory. The cheer is not yet shared by consumers, whose sentiment is unchanged from the end of 2009. High-street spending remains muted by continuing fears of unemployment, which is expected to continue to rise in the coming months across the 16-country bloc. Construction confidence remains near historic lows. The majority of member states contributed to the uplift, though the trend over several months has been for a chasm to form between the bloc’s economies. A handful of countries, including non-eurozone Sweden and Denmark, are now above the 100 mark, as well as Italy, boosted by the optimism of its shopkeepers. The “core” European countries such as France, Germany and the Netherlands are clustered around the eurozone average. By contrast, Greece, whose fiscal affairs are under close scrutiny from the Commission, is lagging well behind, at 80 points, in spite of a small rise this month. Spain, Cyprus and to a lesser extent Portugal also remain mired in gloom, as does Luxembourg, weighed down by its reliance on financial services. Outside the eurozone, the survey outlines a similar trend. “Core” Britain is well on its way to economic optimism, along with its Nordic neighbours. The “peripheral” Baltics and central European states are well behind, though held back by differing factors. Economists greeted the report with cautious optimism. The figures are “somewhat reassuring after the weaker tone of some of the other surveys lately”, said Jennifer McKeown at Capital Economics, before warning: “We would need to see a sharper rise in sentiment in the coming months to be convinced that the recovery is gaining momentum.” http://www.ft.com/cms/s/0/979818ec-0bfc-11df-96b9-00144feabdc0,dwp_uuid=bd2f85d2- 8e90-11db-a7b2-0000779e2340.html

Investment Outlook Bill Gross | February 2010

The Ring of Fire

Investment management is a privileged profession – not just for being paid by X-times what you’re really worth to society, but from the standpoint of longevity. If you’re good, and you at least give the impression that you still have most of your faculties, you can literally hang around forever. James Carville, the well-meaning but evil-lookin’ guy from the Clinton Administration once remarked that in his next life he’d like to come back as a bond manager. He had part of it right – the influence, the wealth, and even fame – but there was no need to imagine himself as some cryogenically preserved Wall Street version of Ted Williams – he was young enough at the time to make the leap and still have a 20-year career ahead of him. Other professions do not afford such opportunities – the gold watch at 65 is not only symbolic, but a statement in most professions that says you are more or less washed up. Athletes have at most 20 years and musicians seem to have that brief window of creation as well. The Beatles, for instance, were done after a decade’s time. Paul is still writing songs, but the magic clearly disappeared in the 70s and now his concerts are “garden parties” of remembrances as opposed to creation. What I think is close to unique about investment management is that it’s really about the stewardship of capital markets, and that time weeds out the impostors, leaving the aging survivors to appear as wise and capable of guiding clients through the next crisis – whatever and whenever it might appear. That assumption has some logic behind it, but critically depends on the investor truly enjoying the game and – of course – holding on to at least a few billion brain cells that keeps him from being obviously senile or at least being accused of having “lost it.” An investment manager at 65 fears both. I remember having met John Templeton on the set of Wall Street Week nearly 20 years ago. I was a young buck and he was – well – on the downside of his career. About the only thing he could tell Rukeyser, it seemed to me, was to cite the rule of 72 and proclaim that stocks and the Dow would be at 100,000 by 2030 or something like that. Now, approaching that same age, I’m a little more understanding and a little less young-buckish. If that was his only lesson, then it was a pretty good one I suppose – Dow 5,000 and the New Normal notwithstanding. And despite the strikingly premature departure of Peter Lynch and the transition of George Soros to philanthropic pursuits, there are some great examples of longevity in this business. Warren Buffett, of course, comes immediately to mind, as does Dan Fuss of Loomis Sayles, who may wind up as the Bear Bryant or Adolph Rupp of the bond business. Peter Bernstein, who passed away but a few months ago, was a brilliant writer and commentator on the investment scene well into his 80s. So there’s hope for you still, James Carville, and, I suppose, for me as well. It’s quite a privilege to be a “steward of the capital markets,” to have done it well for so long and to still be able to walk up to the plate and face a 95-mile- an-hour fastball. Or, is it a curve? Time will tell. There have been numerous changeups and curveballs in the financial markets over the past 15 months or so. Liquidation, reliquification, and the substituting of the government wallet

41 for the invisible hand of the private sector describe the events from 30,000 feet. Now that a semblance of stability has been imparted to the economy and its markets, the attempted detoxification and deleveraging of the private sector is underway. Having survived due to a steady two-trillion-dollar-plus dose of government “Red Bull,” Adderall, or simply strong black coffee, the global private sector is now expected by some to detox and resume a normal cyclical schedule where animal spirits and the willingness to take risk move front and center. But there is a problem. While corporations may be heading in that direction due to steep yield curves and government check writing that have partially repaired their balance sheets, their consumer customers remain fully levered and undercapitalized with little hope of escaping rehab as long as unemployment and underemployment remain at 10-20% levels worldwide. “Build it and they will come” is an old saw more applicable to Kevin Costner’s Field of Dreams than to today’s economy. “Say’s Law” proclaiming that supply creates its own demand is hardly applicable to a modern day credit-oriented society where credit cards are maxed out, 25% of homeowners are underwater, and job and income creation are nearly invisible. In this New Normal environment it is instructive to observe that the operative word is “new” and that the use of historical models and econometric forecasting based on the experience of the past several decades may not only be useless, but counterproductive. When leveraging and deregulating not only slow down, but move into reverse gear encompassing deleveraging and reregulating, then it pays to look at historical examples where those conditions have prevailed. Two excellent studies provide assistance in that regard – the first, a study of eight centuries of financial crisis by Carmen Reinhart and Kenneth Rogoff titled This Time is Different, and the second, a study by the McKinsey Global Institute speaking to “Debt and deleveraging: The global credit bubble and its economic consequences.” The Reinhart/Rogoff book speaks primarily to public debt that balloons in response to financial crises. It is a voluminous, somewhat academic production but it has numerous critical conclusions gleaned from an analysis of centuries of creditor/sovereign debt cycles. It states: 1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis. 2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years. 3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%. Their conclusions are eerily parallel to events of the past 12 months and suggest that PIMCO’s New Normal may as well be described as the “time-tested historical reliable.” These examples tend to confirm that banking crises are followed by a deleveraging of the private sector accompanied by a substitution and escalation of government debt, which in turn slows economic growth and (PIMCO’s thesis) lowers returns on investment and financial assets. The most vulnerable countries in 2010 are shown in PIMCO’s chart “The Ring of Fire.” These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth.

A different study by the McKinsey Group analyzes current leverage in the total economy (household, corporate and government debt) and looks to history, finding 32 examples of sustained deleveraging in the aftermath of a financial crisis. It concludes: 1. Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to seven years. 2. In about 50% of the cases the deleveraging results in a prolonged period of belt- tightening exerting a significant drag on GDP growth. In the remainder, deleveraging results in a base case of outright corporate and sovereign defaults or accelerating inflation, all of which are anathema to an investor. 3. Initial conditions are important. Currently the gross level of public and private debt is shown in Chart 2.

43 Initial conditions are important because the ability of a country to respond to a financial crisis is related to the size of its existing debt burden and because it points to future financing potential. Is it any wonder that in this New Normal, China, India, Brazil and other developing economies have fared far better than G-7 stalwarts? PIMCO’s New Normal distinguishes between emerging and developed economic growth, forecasting a much better future for the former as opposed to the latter. Chart 3 displays a startling recent historical and IMF future forecast for government debt levels of developed and developing countries. “Escalating” might be a conservative future description for advanced countries. “Stable” might now be more applicable to many emerging sovereigns.

What then is an investor to do? If, instead of econometric models founded on the past 30–40 years, an analysis must depend on centuries-old examples of deleveraging economies in the aftermath of a financial crisis, how does one select and then time an investment theme that can be expected to generate outperformance, or what professionals label “alpha?” Carefully and cautiously with regard to timing, I suppose, but rather aggressively in the selection process under the assumption that it’s never “different this time” and that history repeats as well as rhymes. Reinhart and Rogoff’s book, if anything, points to the inescapable conclusion that human nature is the one defining constant in history and that the cycles of greed, fear and their economic consequences paint an indelible landscape for investors to observe. If so, then investors should focus on the following 30,000-foot observations in the selection of global assets: 1. Risk/growth-oriented assets (as well as currencies) should be directed towards Asian/developing countries less levered and less easily prone to bubbling and therefore the negative deleveraging aspects of bubble popping. When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come. Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy. 2. Invest less risky, fixed income assets in many of these same countries if possible. Because of their reduced liquidity and less developed financial markets, however,

44 most bond money must still look to the “old” as opposed to the new world for returns. It is true as well, that the “old” offer a more favorable environment from the standpoint of property rights and “willingness” to make interest payments under duress. Therefore, see #3 below. 3. Interest rate trends in developed markets may not follow the same historical conditions observed during the recent Great Moderation. The downward path of yields for many G-7 economies was remarkably similar over the past several decades with exception for the West German/East German amalgamation and the Japanese experience which still places their yields in relative isolation. Should an investor expect a similarly correlated upward wave in future years? Not as much. Not only have credit default expectations begun to widen sovereign spreads, but initial condition debt levels as mentioned in the McKinsey study will be important as they influence inflation and real interest rates in respective countries in future years. Each of several distinct developed economy bond markets presents interesting aspects that bear watching: 1) Japan with its aging demographics and need for external financing, 2) the U.S. with its large deficits and exploding entitlements, 3) Euroland with its disparate members – Germany the extreme saver and productive producer, Spain and Greece with their excessive reliance on debt and 4) the U.K., with the highest debt levels and a finance-oriented economy – exposed like London to the cold dark winter nights of deleveraging. Of all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country, 2) Germany is the safest, most liquid sovereign alternative, although its leadership and the EU’s potential stance toward bailouts of Greece and Ireland must be watched. Think AIG and GMAC and you have a similar comparative predicament, and 3) the U.K. is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower. The last decade – the “aughts” – were remarkable in a number of areas: jobless recoveries in major economies, negative equity returns in U.S. and other developed markets, and of course the financial crisis and its aftermath. If an investment manager and an investment management firm proved to be good stewards of capital markets during the turbulent but vapid “aughts,” they may be granted a license to navigate the rapids of the “teens,” a decade likely to be fed by the melting snows of debt deleveraging, offering life for unlevered emerging and developed economies, but risk and uncertainty for those overfed on a diet of financed-based consumption. Beware the ring of fire! William H. Gross Managing Director http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/February+2010+Gr oss+Ring+of+Fire.htm

January 30, 2010 Beef Bowl Economics By HIROKO TABUCHI TOKYO — The broiled meat is tender and the rice is silky-smooth. But as Japan’s economic recovery falters, beef bowls have come to symbolize one of its most pressing woes: deflation.

Ko Sasaki for The New York Times A beef bowl at Yoshinoya Japan’s big three beef bowl restaurant chains, the country’s answer to hamburger giants like McDonald’s, are in a price war. It is a sign, many people say, of the dire state of Japan’s economy that even dirt-cheap beef bowl restaurants must slash their already low prices to keep customers. The battle has also come to epitomize a destructive pattern repeated across Japan’s economy. By cutting prices hastily and aggressively to attract consumers, critics say, restaurants decimate profits, squeeze workers’ pay and drive the weak out of business — a deflationary cycle that threatens the nation’s economy. “These cutthroat price wars could usher in another recessionary hell,” the influential economist Noriko Hama wrote in a magazine article that has won much attention. “If we all got used to spending just 250 yen for every meal, then meals priced respectably will soon become too expensive,” she said. “When you buy something cheap, you lower the value of your own life.” Deflation — defined as a decline in the prices of goods and services — is back in Japan as it struggles to shake off the effects of its worst recession since World War II. While prices have fallen elsewhere during the global economic crisis, deflation has been the most persistent here: consumer prices among industrialized economies rose by a robust 1.3 percent in the year to November, but fell 1.9 percent in Japan. In the decline, companies that undercut rivals too aggressively are being chastised as reckless at best, or as traitors undermining the country’s recovery at worst. Every markdown of beef bowl prices by the big three restaurants — Sukiya, Yoshinoya and Matsuya — has been promptly broadcast by the national news media here.

46 Japan has reason to be worried. Deflation hampered Japan from the mid-1990s, after the collapse of its bubble economy, to at least 2005. Households held back spending on big- ticket goods, knowing they would only get cheaper. Companies were unsure of how much to invest. At the time, the three beef bowl chains were in a similar price war. Still, government officials back then emphasized the supposed benefits of deflation; falling prices were good for households, they said. Others said deflation would help restructure the economy by weeding out weak companies. But the drawn-out deflationary cycle weighed heavily on Japan’s recovery. Apart from putting a damper on consumption and investment, asset deflation ravaged the country’s banks and shut out new businesses from credit. Now that deflation is back, Japan is wary. Unemployment remains near record highs, and wages are falling. Mounting public debt is also a problem, causing Standard & Poor’s on Tuesday to cut its outlook for Japan’s sovereign rating for the first time since 2002. Japan must do more to lift its economy out of deflation and bolster long-term growth, S.& P. said. Moreover, the population is shrinking, making demand inherently weak. Economists say Japan’s economy is saddled with a 35 trillion yen, or $388 billion, “demand gap,” or almost 7 percent of the country’s economic output. “With supply continuing to exceed demand by a massive margin, deflationary expectations are proving very difficult to shake,” said Ryutaro Kono, an economist at BNP Paribas in Tokyo. “Households have been tightening their purse strings as the income outlook looks increasingly bleak, and we believe firms will continue to respond by lowering prices.” Matsuya, the smallest of the three chains, set off the price war by cutting the price of its standard beef bowl to 320 yen, or $3.55, from 380 yen in early December. The market leader, Sukiya, followed suit that month, lowering its price to 280 yen, from 330 yen. This month, the No. 2 beef bowl chain, Yoshinoya, lowered the price of its beef bowl to 300 yen, from 380 yen, though it says the cut is temporary. A smaller chain, Nakau, has also lowered prices. The restaurant chains insist they have not downsized their portions, and will make up for cheaper prices by raising efficiency. “We don’t consider this a price cut. We’ve simply set a new price,” said Naoki Fujita at Zensho, which runs the Sukiya chain. “With incomes falling, we needed to figure out what would be a reasonable price,” he said. “We hope customers who came every week will now come twice a week.” In a sense, the beef bowl has always been about low prices. Yoshinoya, the beef bowl pioneer with about 1,560 stores in Japan and overseas, helped bring beef to the Japanese working class with its first restaurant in the Nihonbashi district of Tokyo in 1899. Though beef was a delicacy at the time, Eikichi Matsuda, the Yoshinoya founder, kept prices cheap by buying in bulk, and serving as many customers as possible from his tiny stall. Speed and efficiency reigned, with workers trained to start preparing a bowl even before a customer sat down. The same principles still apply at Yoshinoya. At a branch in central Tokyo, servers rarely take more than a minute to fill an order. The average customer spends just 7.5 minutes on a meal, and a small restaurant can serve more than 3,000 customers a day.

47 But forced to sell at ever-lower prices — and hurt by lower-priced competitors — making a profit has been increasingly difficult. The company suffered a 2.3 billion yen net loss in the nine months to November, and the next month, before Yoshinoya slashed prices, its sales slumped 22.2 percent. In contrast, sales at Sukiya, which serves up the cheapest beef bowl, surged 15.9 percent that month from the previous year. Yoshinoya is not considering further price cuts. Squeezing out more savings is “like wringing a dry towel,” said a spokesman, Haruhiko Kizu. Meanwhile, labor disputes at Sukiya show how falling prices and revenue can quickly hurt workers. A string of former workers have sued the chain over withholding overtime pay. Sukiya denies the accusations. Other companies have been harshly criticized for slashing prices. Fast Retailing, the company behind the fast-growing Uniqlo brand, has garnered as much disapproval as awe for selling jeans as low as 990 yen. McDonald’s, on the other hand, has won kudos for resisting bargain basement prices by introducing a series of big “American-style” burgers for more than 400 yen, considered expensive in today’s Japan. “Some Japanese companies are waging such reckless price wars, they’re wringing their own necks,” said Masamitsu Sakurai, who heads the influential business lobby Keizai Doyukai. “Companies need to be more creative. They should come up with products that add value.” Economists say it is absurd to blame individual companies for Japan’s deflation. “For prices to fall during an economic downturn is natural. That stimulates demand and facilitates an eventual recovery,” said Takuji Aida, chief economist for UBS in Tokyo. “But this mechanism doesn’t work when there is such a big demand shortfall.” “When prices fall because of an increase in productivity at a company, it’s good for the economy,” said Sean Yokota, an economist for UBS based in Tokyo. “It’s the demand gap that’s damaging.” The government has vowed to lift household incomes through a series of subsidies, including new cash payments to families with small children. But the scale of government payments — 2.3 trillion yen in the case of the child subsidies — is hardly enough to fill the nation’s huge demand shortfall. With interest rates close to zero, Japan also has few options left in monetary policy. In the meantime, cutthroat price battles are already driving laggards out of business. Wendy’s, the American burger chain, left Japan on Dec. 31. It is not surprising, considering the competition. A mere stone’s throw from Tokyo’s celebrated Ginza district is Shokuan, the kind of restaurant that is undercutting everyone. Shokuan, which has no chairs nor table service, is a cluster of beer vending machines huddled under the train tracks. A man behind a tiny counter sells dirt-cheap morsels: fish sausages for 50 yen, prawn crackers for 60 yen, canned yakitori for 160 yen. Many days of the week, Shokuan is spilling over with customers. “I don’t think there’s anything around here cheaper than this. That’s why I started to come,” said Yasunori Miura, a manufacturing company employee and a recent regular. “This here,” he said, pointing to his fish sausage, “is deflation.” Makiko Inoue contributed reporting. http://www.nytimes.com/2010/01/30/business/global/30deflation.html?th=&emc=th&pagewa nted=print

Global Central Bank Focus Paul McCulley and Tomoya Masanao | January 2010

Where Exit Should Be an Oxymoron: The Bank of

Japan

Global Central Bank Focus Paul McCulley and Tomoya Masanao | January 2010

With global growth accelerating in the second half of 2009, policymakers and investors alike naturally turned to discussion and debate regarding central bank exit strategies from the extraordinary, conventional (near-zero policy rates) and unconventional (Quantitative/Credit Easing) accommodation needed to prevent the Great Recession from turning into Depression 2.0. Two key questions dominate: the how of exits and the when of exits. The Federal Reserve has been exceedingly careful to distinguish between these two questions, providing detailed public discussion of the mechanics of exit, while stressing that economic fundamentals, notably below-target inflation in the context of huge resource slack, particularly labor markets, imply there is no urgent need to implement any exit for an extended period. Other central banks have provided similar guidance, with one major exception, the Bank of Japan (BoJ). And the reason is simple: Japan remains stuck in a deflationary liquidity trap, implying that not only would it be fundamentally wrong for the Bank of Japan to pull back from extraordinary accommodation, but that it should be even more extraordinary. Thus, we were pleasantly surprised in December that the Bank of Japan publically acknowledged that it would “not tolerate a year-on-year rate of change in the CPI equal to or below 0 percent.” The BoJ’s path to anti-deflation redemption must start somewhere, and simply stating that its comfort zone for inflation does not include zero is a start. The fact of the matter is that the BoJ is trapped in a deflationary lacuna of its own making and can escape if it is willing to do the opposite of what central banks in other developed countries will eventually do in the matter of exit strategies. Simply put, the Bank of Japan needs to credibly commit to not exiting reflationary policies, even as other central banks proceed along that course. Japan’s Liquidity Trap An economy enters a liquidity trap when the monetary policy rate is pinned against zero, yet aggregate demand consistently falls short of aggregate supply potential. Such a state of affairs generates enduring economic slack, which in turn generates enduring deflation. That was a very real global risk a year ago, but was met head-on by BoJ’s sister central banks, in particular the Federal Reserve, whose mantra was “whatever it takes.” And while a relapse toward the fat tail risk of global deflationary pressures certainly still exists, that tail has been dramatically flattened by innovative, courageous, and explicitly reflationary policies.

49 Not so for Japan, unfortunately: The country has been in a liquidity trap for almost two decades, with nominal GDP hovering near the levels of the early 1990s. And with a current output gap of 7–8% of its GDP, Japan faces perpetual deflation, unless and until the BoJ walks the reflationary walk.

To be sure, there are many, particularly in high-level policy positions in Japan, who argue that there is nothing more reflationary the BoJ can do, because the country’s liquidity trap is not a temporary one but rather a permanent one. The irony of the argument is that if it is followed, it is guaranteed to be “right,” or at least appear that way, as deflationary expectations remain entrenched and self-feeding. Yes, we recognize that Japan faces unique structural problems, most notably declining demographic growth. But neither in theory nor in practice does such a problem pre-ordain a permanent liquidity trap. It can be broken, if the BoJ were to become willing, in the famous words of Professor Krugman, to act responsibly irresponsible relative to monetary policy orthodoxy. Conventional wisdom holds that the most effective way to break a liquidity trap is with fiscal policy, levering up and risking up the sovereign’s balance sheet to support aggregate demand, when the private sector is delevering and de-risking. In general, we have no quarrel with that. But what holds in general does not necessarily hold in specific countries. And Japan is indeed an exception, because the central bank uniquely has the ability to foster rising inflationary expectations, lower real long-term interest rates, and a lower real exchange value for the yen, all keys to breaking out of her liquidity trap. Yes, fiscal authorities in Japan can lever the sovereign’s balance sheet in a fashion that would make Keynes blush, but unless the monetary authority rejects orthodoxy, explicitly promising not to exit from reflationary policy, fiscal authorities’ stimulative efforts will be muted. Krugman/Bernanke’s Prescriptions1 Bank of Japan officials suggest that there is not much monetary policy can do, as evidenced by these comments in the minutes of its policy meeting on November 19–202 (our emphasis): “A few members were of the opinion that the Bank should explain clearly to the public that the underlying cause of the continued decline in prices was the slack in the economy – in other words, the weakness in demand. These members added that to improve the situation it was essential to create an environment whereby final demand – specifically, business fixed investment and private consumption – could

50 achieve self-sustaining growth, and for this purpose it was most important to alleviate households’ concerns about the future and underpin firms’ expectations of future economic growth.” To be sure, there are indeed structural solutions besides resolutely reflationary monetary policy that would be helpful. For example, supply-side measures including increased immigration and child care facilities would be very helpful to mitigate Japan’s demographic trend. Likewise, a more flexible labor system would allow corporations to more quickly adjust employment to the levels sustainable in the New Normal, and allow them to invest for new opportunities emerging in Asia. Concurrently, accelerating Economic Partnership Agreements (EPA) would allow Japan Inc. to further benefit from Asia’s economic growth and to remain competitive. And the list goes on and on. So the BoJ does have a point: There needs to be many hands on the policy tiller. But none of the non-monetary actions offers scope for what matters most: Breaking the private sector’s self-feeding deflationary expectations, while generating aggregate demand above the economy’s supply-side potential, lowering the output gap. Indeed, some desirable supply-side structural reforms would, on a cyclical horizon, actually increase the output gap. The unavoidable conclusion must be that reflationary monetary policy must be the workhorse to pull Japan out of its liquidity trap. For such an approach to be effective, it explicitly must not have an exit strategy, but the opposite: a promise to keep on keeping on, resisting all entreaties to pull back until inflation itself, not just inflationary expectations, is unleashed on the upside. To its credit, the BoJ did adopt a commitment approach when it adopted Quantitative Easing (QE) in 2001, explicitly committing to a continuation of that regime until year-on- year change in the core CPI became positive in a “stable” manner. But when for a few months it appeared that “success” had been achieved in 2006, the BoJ exited QE. Whether or not it was a matter of a genuine policy mistake, made with the best intentions, or a policy mistake borne of a lack of will to be enduringly unorthodox is an open question. But the fact of the matter is that Japan slipped back into deflation soon thereafter. The missing ingredient was a commitment to not only resist pulling back from QE and avoiding rate hikes until inflation turned positive but to continue that policy even after inflation started moving up. And in terms of credibility, the cost has been high: Unless and until the BoJ commits credibly, backed by money-printing actions, to behaving “irresponsibly relative to orthodox, conventional thinking,” Japan will remain stuck in a liquidity trap. If the BoJ needs academic footing to do what needs to be done, it could well follow then- Fed Governor Bernanke’s 2003 suggestion: Rather than targeting the inflation rate, the BoJ could target restoring the pre-deflation price level, meaning that deflationary sins are not forgiven. This way, Mr. Bernanke argued, the public would view reflationary increases in the BoJ’s balance sheet and the money stock as permanent, rather than something to be “taken back” at the earliest orthodox opportunity. The BoJ: Time to Act Aggressively Japan’s problem is deflation, not inflation as far as an eye can see. An “all-in” reflationary policy is what is needed. Three concepts the BoJ could consider: 1. Explicitly promise there will be no exit from QE and no rate hikes until inflation is not just positive, but meaningfully positive. One way to do this would be to adopt a price level target rather than an inflation target, embracing the idea that past

51 deflationary sins will not only not be forgiven but require even more aggressive reflationary atonement. 2. Buy unlimited amounts of the long-dated Japanese Government Bonds (JGBs) to pull down nominal yields, with an accord with the fiscal authority to absorb any future losses on JGBs, once reflationary policy has borne its fruits, generating a bear market in JGBs. 3. Working with the Ministry of Finance, sell unlimited amounts of Yen against other developed countries’ currencies, printing the necessary Yen. Our read is that the BoJ has not concluded that such bold steps are required. But as Mr. Bernanke intoned,3 no country with a fiat currency, which borrows in its own currency in the context of a current account deficit, should ever willingly embrace deflation. It is to be fervently hoped that the Bank of Japan’s rhetorical reflationary thaw of December, declaring it will not “tolerate” zero or below inflation, will give way to active reflationary green shoots by spring. Meanwhile, markets don’t wait. And if it becomes clear that the BoJ really does “get it,” the currency markets will be way out in front of the BoJ.

Paul McCulley Managing Director [email protected]

Tomoya Masanao Executive Vice President [email protected]

January 4, 2010 http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2010/GCBF+January+2010.htm

Investment Outlook

Bill Gross | January 2010

Let’s Get Fisical

Quixotic journeys often make for great literature, but by definition are rarely productive. I am, after all, referring to windmills here – not their 21st century creation, but their 17th century chasing. Futility, not productivity, was the ultimate fate of Cervantes’ man from La Mancha. So it is with hesitation, although quixotic obsession, that I plunge headlong into a discussion of American politics, healthcare legislation, resultant budget deficits and – finally – their potential effect on financial markets. There will be windmills aplenty in the next few pages and not much good can come of these opinions or my tilting in their direction. Still, I mount my steed, lance in hand, and ride forward. Question: What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority. You don’t have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents: A recent NBC News/Wall Street Journal poll reported that over 65% of Americans trust their government to do the right thing “only some of the time” and a stunning 19% said “never.” What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups. If, by chance, they’re ever voted out of office, they have a home just down the street – at K Street – with six-figure incomes as a starting wage. What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O’Reilly or Olbermann? It doesn’t matter. You’re just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A “ballot box” pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That’s the new democracy. When special interests, even singular citizens write a check, it represents a

53 perversion of democracy not the exercise of the First Amendment. Any chance that any of this will happen? Not one ghost of a chance. Forward Don Quixote, the windmills are in sight. Distressed as I am about the state of American democracy, a rational money manager cannot afford to get mad or “just get even” when it comes to investing clients’ money. Still, like pilots politely advertise at the end of most flights, “We know you have a choice of airlines and we thank you for flying ‘United’.” Global investment managers likewise have a choice of sovereign credits and risk assets where stable inflation and fiscal conservatism are available. If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.

Explaining the current state of global fiscal affairs is often confusing – it’s much like Robert Palmer’s 1980s classic song where he laments that “She’s so fine, there’s no telling where the money went!” Where government spending has gone is not always clear, but one thing is certain: public debt is soaring and most of it has come from G7 countries intent on stimulating their respective economies. Over the past two years their sovereign debt has climbed by roughly 20% of respective GDPs, yet that is not the full story. Some of governments’ mystery money showed up in sovereign budgets funded by debt sold to investors, but more of it showed up on central bank balance sheets as a result of check writing that required no money at all. The latter was 2009’s global innovation known as “quantitative easing,” where central banks and fiscal agents bought Treasuries, Gilts, and Euroland corporate “covered” bonds approaching two trillion dollars. It was the least understood, most surreptitious government bailout of all, far exceeding the U.S. TARP in magnitude.

54 In the process, as shown in Chart 1, the Fed and the Bank of England (BOE) alone expanded their balance sheets (bought and guaranteed bonds) up to depressionary 1930s levels of nearly 20% of GDP. Theoretically, this could go on for some time, but the check writing is ultimately inflationary and central bankers don’t like to get saddled with collateral such as 30-year mortgages that reduce their maneuverability and represent potential maturity mismatches if interest rates go up. So if something can’t keep going, it stops – to paraphrase Herbert Stein – and 2010 will likely witness an attempted exit by the Fed at the end of March, and perhaps even the BOE later in the year.

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds. The conclusion of this fairytale is that the government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much of it to private investors, and lived happily ever – ever – well, not ever after, but certainly in 2009. Now, however, the Fed tells us that they’re “fed up,” or that they think the economy is strong enough for them to gracefully “exit,” or that they’re confident that private investors are capable of absorbing the balance.

Not likely. Various studies by the IMF, the Fed itself, and one in particular by Thomas Laubach, a former Fed economist, suggest that increases in budget deficits ultimately have interest rate consequences and that those countries with the highest current and projected

55 deficits as a percentage of GDP will suffer the highest increases – perhaps as much as 25 basis points per 1% increase in projected deficits five years forward. If that calculation is anywhere close to reality, investors can guesstimate the potential consequences by using impartial IMF projections for major G7 country deficits as shown in Chart 3. Using 2007 as a starting point and 2014 as a near-term destination, the IMF numbers show that the U.S., Japan, and U.K. will experience “structural” deficit increases of 4-5% of GDP over that period of time, whereas Germany will move in the other direction. Germany, in fact, has just passed a constitutional amendment mandating budget balance by 2016. If these trends persist, the simple conclusion is that interest rates will rise on a relative basis in the U.S., U.K., and Japan compared to Germany over the next several years and that the increase could approximate 100 basis points or more. Some of those increases may already have started to show up – the last few months alone have witnessed 50 basis points of differential between German Bunds and U.S. Treasuries/U.K. Gilts, but there is likely more to come. The fact is that investors, much like national citizens, need to be vigilant and there has been a decided lack of vigilance in recent years from both camps in the U.S. While we may not have much of a vote between political parties, in the investment world we do have a choice of airlines and some of those national planes may have elevated their bond and other asset markets on the wings of central bank check writing over the past 12 months. Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of “check-free” elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond. Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this “juice” was being squeezed into financial markets. If so, then most “carry” trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their “sugar daddy.” There’s no tellin’ where the money went? Not exactly, but it’s left a suspicious trail. Market returns may not be “so fine” in 2010. William Gross Managing Director http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Let’s+Get+Fisical+January +2010.htm

España cotiza a la baja en Davos El reformismo de Zapatero no logra convencer al foro - Los mercados temen el contagio del déficit fiscal que arrastra Grecia CLAUDI PÉREZ - Davos - 31/01/2010 Si hace dos años pagó 300.000 euros por esa casa que sabía que iba a doblar su precio, si ha sido uno de los dos millones y medio de españoles que han perdido su empleo en esta crisis, entonces tal vez crea las tesis apocalípticas de Nouriel Roubini sobre la economía española: amenaza derribo, según el gurú. Si hace dos años pagó 300.000 euros por esa casa que sabía que iba a doblar su precio, si ha sido uno de los dos millones y medio de españoles que han perdido su empleo en esta crisis, entonces tal vez crea las tesis apocalípticas de Nouriel Roubini sobre la economía española: amenaza derribo, según el gurú. Y probablemente no encaje las del presidente Zapatero, que ya en abril del año pasado vaticinaba que lo peor había pasado. Roubini y Zapatero presentaron en Davos dos visiones opuestas de España: pavorosa, casi sádica la del economista; suave e indulgente la del jefe del Ejecutivo. La economía española se encuentra en algún punto entre esos dos extremos, un punto que Davos escruta con atención. El Foro Económico es una suerte de Bolsa donde cotizan personas, empresas e incluso países. El veredicto: "España cotiza a la baja; en parte, de forma injusta", explica el economista Daniel Gros. "Los matices no existen para los mercados en tiempos de desasosiego y, menos aún, para Davos", dice mientras apura un humeante café. Dinero, peculio, pasta, guita, plata, parné. Ésa es la quintaesencia de Davos. Ésa y una buena dosis de poder, un olfato increíble para detectar tendencias, para adivinar quiénes serán los próximos triunfadores y hacer sangre con quienes pierden el tren. Davos es darwinista. Implacable. El foro dedica su tiempo a las potencias y a los que vienen pegando fuerte: China, India, Brasil. Y se ceba con los perdedores de la crisis. Grecia, Islandia, Portugal, Irlanda, España: cuando alguien busca un país con problemas, ésas suelen ser las víctimas propiciatorias. Los contraejemplos. En fin: Davos está más cerca de Roubini que de Zapatero, aunque España no haya sido el epicentro -ni muchos menos- de los debates. "El paro rozando el 20%, el déficit público galopante y la constatación de que saldremos del túnel más tarde no ayudan. El nerviosismo de los mercados por el miedo al contagio de la crisis griega, tampoco. Al menos este año ha aparecido el Gobierno para defender que España tiene multinacionales punteras, una banca que resiste y una deuda relativamente baja", asegura Ángel Cabrera, presidente de la escuela de negocios Thunderbird. Davos se decanta por un optimismo contenido, pero plagado de amenazas. La principal es que la colosal factura de la crisis -los estímulos públicos para esquivar una depresión- derive en una burbuja de deuda y empiecen las quiebras. Se trata de una vieja historia: Argentina, Venezuela, Corea, los países asiáticos saben mucho de eso. La novedad es que ésta es una crisis rubia y de ojos azules. Los países con problemas son los anglosajones y los europeos. Los ricos. Aunque las mayores dificultades están en la periferia de los ricos: "Grecia, sobre todo, y un puñado de países con menos problemas pero afectados por la desconfianza del mercado", explica Carmen Reinhart, de la Universidad de Maryland. "España está muy mal. Mucho peor que otros países. Nos costará mucho salir de la crisis. Perderemos puestos en el escaparate internacional", profetiza Francisco Rubiralta, presidente de Celsa, en los pasillos del Congreso. Lluís Cantarell, ejecutivo de Nestlé, define el cuadro

57 macroeconómico como "desastroso", afirma que las constantes vitales de España son "las de una economía postburbuja", pero no ve riesgos de suspensión de pagos. Y da una de las claves de la deriva negativa que ha tomado la marca España: "Los negocios españoles de los empresarios de Davos no van bien. La opinión de los medios anglosajones va calando. Y a la vez seguimos sin tener suficiente presencia internacional, a pesar de la visita de Zapatero". El presidente del Gobierno rompió el jueves una trayectoria de años de ausencia en Davos. Al día siguiente anunció un fuerte impulso reformista (plan de austeridad, pensiones y mercado laboral) para marcar distancias con la crisis griega. El problema es que Davos desconfía. "España tiene un serio problema de credibilidad: Zapatero lo tiene. El Gobierno ha hecho una declaración de intenciones, pero las estadísticas confirman lo que ven los ojos: la gente que está en Davos conoce al dedillo las pésimas cifras de España, ha visto los efectos devastadores de la recesión in situ, y tiene una opinión clara sobre la gestión de la crisis. La credibilidad no se gana en un día con un golpe de mano", apunta Moisés Naim. Y sin embargo todo eso no debería bastar para especular con un posible impago de la deuda, que está castigando el riesgo país (los intereses que el Estado paga por los bonos). "La deuda está 20 puntos por debajo de la media de la eurozona", argumentó Zapatero. "España tiene un historial de país serio", remachó un día antes de poner en marcha el plan para apuntalar la credibilidad fiscal española y las reformas tantas veces reclamadas por neoliberales, liberales e instituciones internacionales. Y, sin embargo, "España es una amenaza para la zona euro", replica Roubini, que ve serios riesgos de una fractura en la Unión: la posibilidad de que algún país abandone el euro. En fin, nubes y claros. Reinhart asegura que España está "relativamente mejor que Irlanda, y mucho mejor que Grecia", y aplaude el nuevo paquete de reformas, aunque matiza que lo que suceda "dependerá de cuánto dure la flojera económica". "No va a haber impagos en la eurozona", afirma a este diario el comisario europeo Joaquín Almunia. El problema es otro: "Es muy improbable que haya impagos, pero sí va a haber defaults escondidos: países que empezarán a colocar nueva deuda a tipos de interés altísimos, como ha hecho Grecia. A la larga eso provoca una bola de nieve y los países se quedan clavados, estancados durante mucho tiempo", avisa Reinhart. Gros añade que la capacidad de ahorro de España y la buena situación de partida de las cuentas públicas inducen al optimismo. "No va a haber ningún impago: es absurda esa sobreactuación de los mercados basada en simples rumores. Otra cosa es la salida de la crisis: 10 años de estancamiento si el Gobierno sigue en las nubes". "A largo plazo todos muertos. Keynes tenía razón: está muerto", ironiza el profesor de Columbia Xavier Sala-i-Martín. "Se ha olvidado que después de Keynes aprendimos otras cosas, los Estados se han puesto a rescatar la banca, la industria automovilística, de todo. Se han creado una burbuja pensando que ya pagaremos más adelante. Pero el largo plazo ha llegado y esa burbuja amenaza con estallar", asegura desdeñando a quienes afirman que así se ha evitado una Gran Depresión. "En España se negó la crisis. Luego se dijo que sería algo pasajero. Ahora se afirma que la banca está bien cuando no sabemos qué diablos hay en los balances. Se anuncia un paquete de reformas: uno más. Sobra marketing, faltan hechos, sería mejor decir de una vez que España no tiene un dolor de cabeza, sino un cáncer. La única forma de intentar curarse es dar con el diagnóstico", añade con un pesimismo feroz. Zapatero cargó en Davos contra la prensa anglosajona y contra "ciertos países" armados con vaticinios "chocantes" sobre la economía española y sus bancos. No hace falta irse tan lejos para encontrar casandras. Pero atención: circula un chascarrillo entre expertos, según el cual Davos ha predicho con éxito nueve de las cinco últimas recesiones. Puede que vaya por el mismo camino con las crisis de deuda pública.

58 El oráculo 'infalible'

Davos como barómetro de la economía, Davos como Bolsa de poder, Davos como moderno, interesante y carísimo Oráculo de Delfos. Davos es una delicia para quien quiera saber por dónde van a ir los tiros (y últimamente hay tiros) en lo relativo a las grandes tendencias económicas. Aunque a menudo confirma la sospecha de que la economía es una ciencia forense: "Porque nos explica de qué ha muerto el tipo, pero pocas veces acierta a salvarlo", se mofa Antonio Baños en el libro La economía no existe. En la historia reciente de Davos hay innumerables perlas que invitan a tomarse el foro con cierto humor, o al menos a desdramatizar. En 2001, Ken Lay declaró solemnemente en Davos que Enron sería "la empresa del siglo XXI". Lay era presidente del grupo energético estadounidense que quebró en diciembre de ese mismo año. En 2004, Bill Gates vaticinó que en apenas dos años el spam (correo basura) estaría resuelto. Y en 2008, John Snow, secretario de Estado norteamericano con George W. Bush -autor de la bella frase "he abandonado los principios del libre mercado para salvar el sistema del libre mercado"- predijo una crisis "corta y suave". Y en esas estamos: dos años después el mundo se encuentra "ante una recuperación estadística, pero también ante una recesión humana", dijo ayer el sucesor de Snow en el cargo, Larry Summers. http://www.elpais.com/articulo/economia/Espana/cotiza/baja/Davos/elpepieco/20100131elpep ieco_5/Tes?print=1

ANÁLISIS: Las consecuencias de la crisis - La respuesta del Ejecutivo Pensiones: la hora de la reforma es ahora LUIS GARICANO Y CÉSAR MOLINAS 30/01/2010 La esperanza de vida al nacer de los españoles ha aumentado desde 1991 al ritmo galopante de cuatro horas cada día. Y la natalidad se ha desplomado. Si añadimos a esta realidad demográfica el excesivo número de jubilaciones anticipadas, tenemos una situación insostenible. De acuerdo con la Comisión Europea, si no se modifican los actuales tipos de cotización, los ingresos del sistema se mantendrán en las próximas décadas alrededor del 10% del PIB, mientras que los gastos se irán elevando paulatinamente hasta más allá del 15% el PIB en 2040. La deuda se tornará explosiva. La propuesta del Gobierno de aumentar en dos años la edad de jubilación ante esta situación es un ejercicio de realismo y es necesaria para asegurar la sostenibilidad del sistema de pensiones. Oposición y sindicatos pueden quejarse de que la propuesta se ha hecho unilateralmente. Pero, más allá de las formas, es necesario sacar este debate del cuerpo a cuerpo político y tratarlo como una cuestión de Estado, de manera que desemboque en una reforma apoyada por un amplio consenso social. ¿Por qué ahora, cuando la Seguridad Social tiene superávit? La urgencia es extrema. Grecia está al borde de una situación crítica: el tipo de interés de los bonos del Tesoro griego a 10 años ha subido, sólo en esta semana, 0,60 puntos hasta el 6,86%. Los mercados se preguntan si, dada la baja tasa de crecimiento que se augura para España en los próximos años, los graves problemas financieros e inmobiliarios y el alto déficit estructural, el futuro de España

59 no será como el presente de Grecia. La incapacidad que están mostrando los actores políticos y sindicales para el compromiso también añade incertidumbre. El resultado es un aumento de la prima de riesgo de nuestra deuda que supone miles de millones de euros. Reducir el déficit estructural es la única forma de incrementar la sostenibilidad presupuestaria (y reducir los tipos de interés sobre la deuda) sin contraer más la economía. ¿Resuelve la subida en dos años de la edad de jubilación el problema? No del todo. Otras reformas pueden ayudar: la limitación de las jubilaciones anticipadas, el estímulo de las pensiones complementarias, y el aumento del período de cotización mínimo. En cualquier caso, éste es un buen comienzo, y es hora de ponerse a trabajar extendiendo el debate sobre las pensiones al conjunto de la sociedad, más allá de los consensos que habrá que trabajar en el Pacto de Toledo. http://www.elpais.com/articulo/economia/Pensiones/hora/reforma/ahora/elpepieco/20100130e lpepieco_2/Tes?print=1

Los primeros europeos en jubilarse a los 67 La reforma de las pensiones amplía la base de cálculo de la cotización EL PAÍS - Madrid - 31/01/2010 España es uno de los 10 países de la OCDE que quiere retrasar la edad legal de jubilación, de los 65 a los 67 años, en la que se ha convertido en la principal y más polémica medida de una reforma de pensiones que ha levantado ampollas en los sindicatos y la oposición al Gobierno. - Trabajar hasta los 67. Si el plan de Zapatero sale adelante tal y como lo ha concebido, los españoles serán los primeros europeos, juntos a los holandeses, en jubilarse a los 67 años. El Gobierno ha calculado que los 8,6 millones de pensiones que hay que pagar este año se convertirán en 15,3 millones en 2040. Para contrarrestar el envejecimiento de la población, el Gobierno ha decidido aplazar la edad de jubilación hasta los 67 años de forma paulatina a partir de 2013, añadiendo dos meses de trabajo por año, con lo que la reforma culminaría en 2025. Es decir, que se jubilarán a los 67 todos los nacidos a partir de 1959. Reino Unido ha optado por fijar la edad de jubilación a los 68, pero lo empezará a aplicar más tarde, en 2024, y lo culminará en 2046. Alemania, por ejemplo, también ha apostado por los 67, pero su reforma no acabará hasta 2029. Los españoles y los holandeses estrenarán en 2025 la jubilación a los 67. - Prejubilaciones sólo a partir de los 58. Para evitar la contradicción de que en un país donde la edad legal de jubilación está en los 67 años haya prejubilados a partir de los 52 (en estos casos la empresa cotiza por el empleo hasta su edad oficial de jubilación), el Ejecutivo limita el retiro anticipado a los que tengan al menos 58 años; y evitar también un "uso indebido del despido" como vía para la jubilación anticipada, en la que el trabajador cobra la prestación de paro hasta la jubilación. - Viudos y huérfanos. En el caso de convivencias cortas y sin hijos, el Gobierno plantea que las pensiones de viudedad dejen de ser vitalicias y puedan sustituirse por una asignación temporal o indemnización puntual. Para los huérfanos, proyecta un pago fijo independientemente de la situación familiar, que ahora sí puede variar la cuantía, como por ejemplo el número de beneficiarios o la relación familiar entre los progenitores.

60 - Cálculo de la pensión. Las pensiones se calculan hoy basándose en los últimos 15 años cotizados, que, normalmente, son aquellos en los que trabajador recibe mejor sueldo y por tanto logra una mejor pensión. La reforma plantea ampliar este periodo -según el Gobierno, para no penalizar a aquellos despedidos al final de su vida laboral- y no contempla la "cotización a la carta" propuesta por los sindicatos: que el trabajador escoja los años de cotización. También estudiar cambiar el mínimo exigible para cobrar una pensión, que ahora son 15 años (35 para percibir el máximo). - Autónomos. El Gobierno quiere limitar la libertad que tienen los autónomos de seleccionar la base sobre la que pagan la Seguridad Social, ya que de esa forma eligen las cantidades más elevadas al final de su vida laboral para obtener mejores prestaciones. En este capítulo, no concreta la fórmula para restringir esta práctica. http://www.elpais.com/articulo/economia/primeros/europeos/jubilarse/67/elpepieco/20100131 elpepieco_4/Tes?print=1

¿Podemos permitirnos no reformar el mercado laboral? JAVIER ANDRÉS Y RAFAEL DOMÉNECH 31/01/2010 Nuestro marco de relaciones laborales es poco eficiente y poco equitativo, a pesar de lo cual dos argumentos han sido utilizados de forma reiterada para frenar la adopción de las medidas necesarias para corregir estas deficiencias. El primero es que nuestro mercado de trabajo no ha sido el causante de la crisis, por lo que un cambio en el modelo productivo excluyendo una reforma laboral sería suficiente para reducir rápidamente el desempleo. El segundo es que cualquier reforma laboral requiere un recorte de los derechos de los trabajadores. La realidad ha terminado por imponerse y una tasa de desempleo en rápido crecimiento ha ido eliminando muchas de las resistencias a las reformas. Ahora es crucial acertar con los cambios adecuados para alcanzar tres objetivos simultáneamente: reducir el desempleo rápidamente, crear empleo más estable, para que expansiones y recesiones no generen tanta volatilidad en la tasa de paro, y que los nuevos empleos sean de más calidad, con una remuneración adecuada del capital humano que favorezca el crecimiento económico. España ha disfrutado de unas condiciones muy favorables entre 1994 y 2007, pero tardó demasiados años en alcanzar tasas de desempleo similares al promedio europeo. Esas condiciones excepcionales que impulsaron el crecimiento en el pasado tardarán en repetirse, por lo que el cambio del modelo productivo hacia actividades que generen un mayor valor añadido es no sólo deseable, sino ineludible. Si tenemos éxito en esta tarea, lograremos un empleo más estable y de mayor calidad, pero ese cambio no garantiza que el empleo crezca a un ritmo superior al del pasado, más bien al contrario. En un trabajo reciente con los profesores José E. Boscá y Javier Ferri mostramos que la recuperación del empleo en una economía más productiva puede ser bastante más lenta de lo que lo ha sido en la década pasada. La razón es, básicamente, que en esa economía aumentaría la tasa de crecimiento del PIB necesaria para generar empleo. Por ello es preciso introducir medidas que permitan crear más puestos de trabajo para absorber a la gran cantidad de trabajadores, en especial los de baja cualificación, desempleados a consecuencia de la crisis. En estudio vemos que con la

61 aplicación de una reforma laboral integral adecuada, el tiempo que tardaría la tasa de paro en alcanzar nuevamente el promedio europeo se reduciría prácticamente a la mitad. Por tanto, la disyuntiva que el debate político nos presenta entre "cambio de modelo productivo o reforma laboral" es artificial. Un cambio en el patrón de crecimiento hace la reforma laboral mucho más necesaria y urgente. Un conjunto de reformas que impulsarían la creación de empleo en el marco de un mercado de trabajo más justo es el propuesto, entre otros, por el denominado Grupo de los 100. Además de la reorientación de las políticas de formación, dos elementos destacan en esta propuesta. En primer lugar, la creación de un nuevo contrato único e indefinido que tuviera una indemnización por despido inicial mayor que la de los contratos temporales actuales y que fuera creciente con la antigüedad en la empresa, hasta alcanzar un nivel máximo inferior al de los actuales contratos indefinidos. Puesto que el nuevo contrato no se aplicaría a los contratos indefinidos vigentes, no daría lugar a recortes de derechos adquiridos, evitando así el riesgo de incrementar el número de despidos. Sin embargo, el nuevo contrato permitiría mejorar la protección efectiva de millones de trabajadores cuya probabilidad de acceder a un contrato indefinido es baja e incentivaría el esfuerzo en formación de trabajadores y empresas. En segundo lugar, se propone un cambio en la negociación colectiva para aprovechar las ventajas de un sistema multinivel que potencie la negociación de las condiciones salariales al nivel de la empresa. Se conseguiría que la evolución de los salarios fuera más acorde con la de la productividad. Esta medida aumentaría la demanda de trabajo, reduciría incertidumbres para las empresas y generaría incentivos que darían lugar a aumentos en el esfuerzo y la adquisición de capital humano. Aunque estas medidas no benefician a todos los trabajadores por igual, se complementan. Con un único contrato indefinido y políticas activas de empleo se aumenta la protección de los trabajadores más vulnerables. Con los cambios en la negociación colectiva se incentiva la acumulación de capital humano y las mejoras de productividad y salarios de los más cualificados. Durante los dos últimos años se ha perdido un tiempo valioso en falsas disyuntivas. Ahora que el paro se sitúa en el umbral del 19%, todo el mundo acepta la reforma como ineludible. Pero una reforma inadecuada o insuficiente no ayudaría a reducir rápidamente la tasa de desempleo y sólo generaría frustración social. Por el contrario, cambios en la dirección correcta permitirían una rápida creación de empleo más productivo y estable. Además, la reforma laboral facilitará la solución de otros retos a los que tenemos que hacer frente a corto plazo, como la consolidación fiscal, ya que puede constituir una gran oportunidad para que España gane ante el resto del mundo la credibilidad necesaria con la que afrontar la recuperación de la manera más eficaz y equitativa posible. http://www.elpais.com/articulo/primer/plano/Podemos/permitirnos/reformar/mercado/laboral/ elpepueconeg/20100131elpneglse_3/Tes?print=1

62 Aún quedan caladeros de empleo Las actividades que más puestos de trabajo ofrecen son educación y servicios CARMEN SÁNCHEZ-SILVA 31/01/2010 Se puede ver el vaso medio lleno o medio vacío. Usted elige. Después de un año como 2009, en el que los niveles de desempleo han escalado a cifras históricas en España, es difícil que el presente ejercicio resulte tan negativo para los trabajadores. Igual de difícil que prever un descenso del paro, cuando más del 40% de las empresas españolas encuestadas por PricewaterhouseCoopers reconocen que tienen planes de despedir a parte de su plantilla en los próximos seis meses, aunque la mitad lo haya hecho ya durante el semestre anterior. Son muchas, demasiadas, pero menos que el pasado año. Lo mismo que las que tienen en mente contratar a personal. Pero las hay. Si busca empleo, ha de tener en cuenta varias cosas para no desesperar en el intento, como les está sucediendo a muchos parados. Para empezar, el número de candidatos que se presentan por cada vacante ha crecido desproporcionadamente, se ha multiplicado por tres mientras las ofertas se han reducido a la mitad, según el portal de empleo Infojobs. Para continuar, ante este aluvión de interesados, las empresas se han vuelto mucho más exquisitas y exigen unos requisitos que jamás hubieran pedido para hacer la primera criba de su proceso de selección y que normalmente exceden las características del puesto de trabajo de que se trate. Y lo peor de todo, y acorde también con la falta de ajuste entre la oferta y la demanda, los sueldos que se ofrecen son un 25% inferiores a los que se estilaban hace año y medio por los mismos puestos, según César Castel, directivo de la empresa de trabajo temporal Adecco. Sepa también que la mayoría de las ofertas de trabajo que circulan por el mercado son para los profesionales más baratos. La mayor parte de las empresas se están decantando por cubrir sus vacantes con gente joven y recién titulada que puede absorber mucho trabajo a bajo precio. Y también con personal muy especializado, y, por tanto, escaso, al que ahora se paga menos que antes, aunque haya que buscarlo debajo de las piedras. Son tantos los cambios que ha sufrido el mercado de trabajo durante esta crisis, que el Catálogo de ocupaciones de difícil cobertura que elabora el Ministerio de Trabajo e Inmigración va empequeñeciendo a marchas forzadas. Del último trimestre de 2009 al primero de 2010 han desaparecido 47 trabajos y sólo quedan 86. Y estas ocupaciones para las que cuesta encontrar candidatos se refieren casi exclusivamente a personal sanitario (médicos, enfermeros, terapeutas y farmacéuticos), técnicos de salud ambiental, mantenimiento e ingenieros. Las ocupaciones de difícil cobertura que no requieren formación específica, como dependientes, camareros o pastores, han desaparecido del catálogo. Y es que, como señala la Asociación de Grandes Empresas de Trabajo Temporal (AGETT), cerca del 60% de los parados españoles cuenta con estudios secundarios o una cualificación inferior. Según Randstad, actualmente los yacimientos de empleo están en el sector sanitario, en el que existe un claro déficit de profesionales; en la educación, entre otras cosas porque la formación será la única vía a través de la cual los desempleados conseguirán abandonar el paro, señala la compañía de trabajo temporal, y en otros servicios sociales, como la atención a personas. De hecho, educación, con 89.000 empleos, y servicios sociales, con casi 18.000, son las dos áreas en las que más trabajo se ha creado en el último trimestre de 2009, señala AGETT. También

63 en la Administración Pública, que en épocas de recesión trata de compensar la escasez de ofertas de trabajo de la iniciativa privada. Siguiendo con los caladeros de empleo, Randstad añade los pocos negocios que se benefician de la crisis: comida rápida, belleza y salud, marcas blancas y, sobre todo, la actividad financiera que tiene que ver con el cobro de deudas o el control del gasto a que se están enfrentando la mayor parte de las organizaciones. También los sectores que saldrán antes de la crisis, entre los que cita energía, automoción y turismo. Los eco-empleos, aquellos que generan la economía sostenible y el respeto al medio ambiente, figuran igualmente en esta lista, como las actividades informáticas. Si tuviéramos que elegir las titulaciones más demandadas serían, según Alfonso Jiménez, socio de la empresa de recursos humanos PeopleMatters, medicina y las ingenierías, fundamentalmente para las empresas energéticas y de telecomunicaciones que tienen proyectos en el exterior y necesitan personal para desarrollarlos, que son las que más están contratando. José Medina, presidente de la firma de cazatalentos Odgers Berndtson Iberia, señala que la demanda de directivos procede de las compañías de telecomunicaciones y nuevas tecnologías, las de energías renovables y la banca de inversión y de empresa. Ahora queda buscar. La lista de candidatos

¿Sabe cuáles son los perfiles más solicitados para cubrir las ofertas laborales? Adecco ha seleccionado a los "10 más buscados de 2010", y son los que siguen: ingeniero de energías renovables (con experiencia de tres a cinco años y sueldo medio de unos 45.000 euros anuales); ingeniero aeronáutico (en este caso, recién salido de la facultad, con dominio del inglés y un salario a partir de 26.000 euros); controller para reducir los gastos de las compañías (suelen ser titulados en Administración de Empresas, con idiomas, cinco años de experiencia, a los que se pagan entre 30.000 y 40.000 euros, más variable, si bien su retribución ha descendido); analista de fusiones y adquisiciones (con características similares al anterior, pero con mayor salario); programador de Java (con formación profesional y experiencia de dos años. Su sueldo, como el del controller, es más bajo que hace dos años, de unos 22.000 euros). Siguen: consultor SAP (ingeniero técnico con tres años de experiencia y un salario en descenso, desde 36.000 euros); médico de familia (licenciado con experiencia de tres años, normalmente durante el MIR, y un sueldo de 50.000 euros brutos); director de desarrollo de negocio (licenciado, preferiblemente en Ciencias de la Salud, con experiencia mínima de dos años y un salario medio de 50.000 a 70.000 euros, sin contar el variable); gestor de clientes (no se pide licenciatura o diplomatura concreta, sí idiomas y de 3 a 5 años de experiencia. Su sueldo ha caído y oscila entre 30.000 y 40.000 euros) y director de grandes cuentas (con Administración de Empresas, inglés y más de cinco años de experiencia, su salario va de 65.000 a 85.000 euros más variable). Se suman a esta lista, entre los perfiles menos cualificados, gestores de cobros (ganan entre 13.000 y 15.000 euros), operadores de telemarketing (entre 12.000 y 14.000 euros) y mozos y peones de almacén (de 12.000 a 16.000 euros anuales). La empresa de trabajo temporal señala que los salarios de estos trabajadores con cualificación inferior no han notado disminuciones respecto a años anteriores, pues suelen ser los mínimos recogidos en los convenios colectivos. - http://www.elpais.com/articulo/primer/plano/quedan/caladeros/empleo/elpepueconeg/201001 31elpneglse_7/Tes?print=1

64 TRIBUNA: ¿Qué reforma laboral? Valeriano Gómez / Ignacio P. Infante / Santos M. Ruesga / Fernando Valdés 31/01/2010 Desde que se abordara en España la primera reforma laboral de la democracia, hace ahora 30 años, el debate sobre el coste y la regulación del despido ha representado un asunto crucial. Ello ha sido así hasta tal punto que hoy suele constituir un lugar común calificar de trivial, blando o ligero cualquier proceso de reforma que no contenga cambios en la regulación del despido -siempre, eso sí, para reducir su coste o para hacer más liviana o flexible, ésta es la palabra, la facilidad para despedir-. No deja de ser paradójico que esto ocurra en una economía que antes de que estallara la crisis, con el empleo creciendo a un ritmo extraordinario, realizó casi 700.000 despidos de trabajadores con contrato indefinido y que terminará el año 2009 con alrededor de 1,5 millones de despidos. Pero lo relevante del asunto es que pese a este volumen, verdaderamente enorme, nuestras empresas no parecen destinar tan grandes cantidades a indemnizar a los trabajadores despedidos. Los datos indican que el gasto de las empresas en indemnizaciones por despido apenas alcanzó el 1,15% del total del coste laboral en 2008 (alrededor de cinco veces menos que lo destinado a pagar cotizaciones por desempleo). Nuestras estadísticas permiten inferir adicionalmente algunas cosas. Sabemos, por ejemplo, que el número de despidos comenzó a crecer intensamente desde que el Gobierno del PP aprobará la Ley 45/2002, que facilitó el despido sin causa y abarató de forma muy considerable el coste efectivo del despido en España. El problema es que, en paralelo, también crecieron los beneficiarios de prestaciones por desempleo, y el aumento del gasto en protección de los desempleados que originó fue mucho mayor para el conjunto de la economía que el ahorro que pudo producir en aligerar el coste de los ajustes de plantilla inducidos. Conviene, pues, no perder de vista la relación entre los diversos instrumentos de protección del empleo porque al analizarlos globalmente saltan algunas sorpresas. Dinamarca, por ejemplo, paradigma de la flexiseguridad, sin apenas indemnizaciones por despido, gastaba antes de que estallara la crisis casi el doble que España en proteger a sus desempleados y más del triple (en términos de PIB) en políticas activas de empleo. En conjunto, y en términos relativos, mucho más que el gasto español en proteger a los desempleados y en indemnizar a los despedidos. Sabemos, además, que, en términos comparados, España no carece de flexibilidad externa (aquella que se logra facilitando la contratación o el despido de los trabajadores). Según los datos del último informe El empleo en Europa de la Comisión Europea, España ocupa uno de los lugares más altos de la UE en cuanto a volumen de despidos en proporción del total del empleo (los datos, conviene subrayarlo, son anteriores a la crisis). Todos los indicadores de flexibilidad externa muestran a España en las primeras posiciones: el flujo de contratación alcanza en tiempos normales los niveles más elevados de la UE, las tasas de despido son las terceras más elevadas y la rotación del empleo es tan alta que ocupa el primer lugar a prácticamente al mismo nivel que Dinamarca. De ahí que sea más sensato concluir que la enfermedad que padecemos es, más bien la de exceso de flexibilidad externa, precisamente la que menos necesitamos, la mala flexibilidad; la que agudiza los ciclos, especialmente en las recesiones, hundiendo más la actividad, el empleo y las finanzas públicas. Con todo esto no pretendemos defender una suerte de inmutable continuidad en el modelo español de regulación laboral. Bien al contrario, creemos que pueden y deben abordarse reformas en su configuración que afronten algunos de sus principales problemas. Lo que

65 ocurre es que, en nuestra opinión, la forma de abordarlo no debe consistir en situar el coste del despido en el eje central de las reformas. En España se despide demasiado, con mucha facilidad y sin necesidad de que exista causa alguna para la rescisión de la relación laboral. Simplemente no es verdad que los trabajadores con contrato indefinido disfruten de mucha estabilidad que pagan los trabajadores con contrato temporal. Lo que tenemos es un nivel desproporcionado de inestabilidad y de rotación en los dos segmentos de nuestro mercado de trabajo: un nivel de inseguridad mayor en el trabajo temporal que en el indefinido, pero absolutamente excesivo en ambos. En estas circunstancias no debería resultar difícil perfilar la orientación de las reformas. El objetivo consistiría en reducir el grado de flexibilidad externa aumentando la flexibilidad interna. Dicho de otra forma, se trataría de ampliar el nivel de estabilidad y de seguridad de los trabajadores, mejorando su capacidad de adaptación y la de las condiciones en que se desempeña el trabajo (en la jornada laboral, la movilidad y la polivalencia interna, los salarios, la formación y la cualificación profesional). El resultado debe ser una economía más flexible, porque tiene mayor posibilidad de ajuste interno, en lugar de una economía que se acomoda a las exigencias cíclicas o productivas despidiendo mano de obra rápida e intensamente. En nuestra opinión, esto podría lograrse a través de distintas combinaciones de medidas en el ámbito de la contratación laboral, en el papel de la negociación colectiva y la regulación de la forma en que se fijan y modifican las condiciones de trabajo, en la intermediación laboral y en la política activa de empleo. Pero, sobre todo, la reforma debe ser global y equilibrada, huyendo de cualquier tipo de fórmula magistral, porque hace tiempo que sabemos que no existen recetas simples para problemas complejos. Para ello podría estimularse la contratación estable a través de una mayor posibilidad de uso del contrato de fomento de la contratación indefinida (con indemnización por despido de 33 días de salario por año de servicio) combinando esta medida con el establecimiento de límites al uso del contrato de obra o servicio, cuya configuración práctica se aleja por completo de su diseño original. Alternativamente podría plantearse la posibilidad de unificar el contrato de obra o servicio y el eventual por circunstancias de producción con una duración máxima del nuevo contrato de 24 o 30 meses adaptando, a su vez, los límites al encadenamiento de contratos temporales. Podría, además, realizarse un significativo abaratamiento relativo de la contratación indefinida, reduciendo el tipo de cotización empresarial por desempleo de este tipo de contratación, junto al aumento del tipo de cotización por desempleo a cargo de las empresas en la contratación temporal. Para que esto tenga algún efecto significativo sobre el nivel de temporalidad, la distancia entre ambos no puede ser cuasi simbólica como ocurre actualmente (lo que produce una enorme subvención al coste de uso de la contratación temporal). Con el tiempo, el modelo de cotización al desempleo debería introducir elementos de penalización (bonus-malus) para las empresas en función del uso que hicieran sus antiguos trabajadores del sistema de protección al desempleo. No es una obviedad decir que la reforma laboral que necesitamos debe basarse en el acuerdo social. Durante el periodo 2004-2008, antes de la crisis, el Gobierno y los interlocutores sociales han protagonizado un intenso y fructífero proceso de diálogo. Sin embargo, nuestra historia económica y social más reciente muestra las grandes dificultades que han caracterizado los procesos de concertación social en etapas de crisis. De ahí la importancia de que el Gobierno y los interlocutores sociales sean capaces de romper esa inercia histórica alcanzando espacios de consenso para combatir las consecuencias de la crisis más intensa que nuestra economía haya vivido en décadas y aprender a no repetir los errores cometidos. Aun

66 así, si el acuerdo no fuera posible, el Gobierno debe actuar. Pero para ello no se necesita perder la razón ni el equilibrio. Eso ya ocurrió en 2002 y todavía estamos pagando las consecuencias http://www.elpais.com/articulo/primer/plano/reforma/laboral/elpepueconeg/20100131elpnegls e_4/Tes?print=1

Las pensiones revolucionan el diálogo social El Gobierno plantea una reforma laboral tímida frente a la rotunda propuesta de retrasar la jubilación. Los sindicatos ya no se fían de que los cambios en el mercado de trabajo sean tibios LUCÍA ABELLÁN 31/01/2010 El pensionazo del Gobierno, como se ha apresurado a bautizarlo el dirigente de Izquierda Unida Gaspar Llamazares, ha irrumpido en el diálogo social de forma prematura. La revolución que supone elevar de 65 a 67 años la edad legal de jubilación ha desconcertado a los agentes sociales -especialmente a los sindicatos-, que no veían venir la jugada. Con ese mar de fondo, el Ejecutivo se propone arrancar oficialmente la ronda de diálogo social, tras la presentación el próximo viernes de sus recetas laborales en el Consejo de Ministros. Conscientemente o no, el Ejecutivo ha actuado de forma contraria a la que se le reclamaba: donde se pedían reformas profundas -en el mercado de trabajo, especialmente por parte de la patronal y la mayoría de los expertos- prepara propuestas tibias que hará públicas la próxima semana. Y en el debate más verde -no había demandas de cambios profundos en las pensiones, más allá del Banco de España y de que el calendario obligaba a renovar el Pacto de Toledo- opta por la línea dura, la que suelen adoptar los países cuando sus sistemas de pensiones están quebrados: elevar por ley la edad de jubilación. Esta iniciativa del Gobierno corrige la querencia que hasta ahora se le ha atribuido hacia las propuestas sindicales, en detrimento de las empresariales. Con el alargamiento de la vida laboral, José Luis Rodríguez Zapatero hace suya una propuesta bendecida por la CEOE y denostada públicamente por los sindicatos. Tras conocerse las propuestas del Consejo de Ministros, la CEOE emitió un comunicado que consideraba "muy positiva la medida". Justo lo contrario que los sindicatos, que anunciaron su "rechazo frontal". Tras el movimiento del viernes, UGT y Comisiones Obreras ya no se fían de que las propuestas laborales vayan a ser moderadas, como se ha trasladado hasta ahora. "Tampoco parecía que fueran a introducir estos cambios en el sistema de pensiones", ironiza Toni Ferrer, número dos de UGT. También Carlos Bravo, secretario de Seguridad Social de CC OO, cree posible un enfoque "más duro" de los cambios laborales esbozados en las últimas semanas. La patronal ha rehusado pronunciarse sobre el diálogo social con el argumento de que aún no se conocen con detalle las propuestas del Gobierno. Aunque se negocie en mesas diferentes, es probable que el Ejecutivo emplee esa baza de la compensación para garantizarse el apoyo de ambas partes -CEOE por un lado y UGT y CC OO por otro- a su bloque laboral. En ese supuesto, la patronal aceptaría una reforma que cumple pocas de sus aspiraciones pero satisface a los sindicatos al dejar intacto el coste del despido y las cotizaciones a la Seguridad Social. A cambio, endurece el sistema de pensiones,

67 pero de forma gradual y con alguna medida que los sindicatos no ven con malos ojos (como modificar algunos aspectos de la pensión de viudedad). Para que prospere ese doble juego, las centrales tendrán que olvidarse del mazazo de las pensiones. Aunque Carlos Bravo duda de que salga adelante, al menos con la rotundidad expresada hasta ahora. "A ver si esto aguanta el paso por la comisión parlamentaria [del Pacto de Toledo, que debe acordar los cambios en el sistema de pensiones]. Saben que no cuentan con consenso", advierte. El giro del Gobierno obedece a la urgencia por transmitir a los mercados una imagen de país solvente, empeñado en adoptar medidas, aunque resulten traumáticas, para reconducir el déficit desbocado (11,4% del PIB en 2009). "Está imperando una línea cortoplacista y economicista", ataca el líder de acción sindical de UGT. Esa línea más centrada en la corrección de los desequilibrios se encarna en la vicepresidenta y ministra de Economía y Hacienda, Elena Salgado. A ella se atribuye el espíritu de las medidas más duras. Frente al papel de Salgado, que compareció tras el Consejo de Ministros del viernes para explicar a un tiempo el plan de austeridad y la reforma de las pensiones, Celestino Corbacho, responsable directo de las prestaciones públicas como ministro de Trabajo, asistía en Barcelona a una reunión de ministros europeos del ramo, enmarcada en la presidencia española de la Unión Europea. La coincidencia no puede considerarse casual -o al menos no era inevitable-, pues la cita comunitaria figuraba en el calendario desde hacía tiempo y, sin embargo, el Gobierno optó por mantener el orden del día del Consejo de Ministros pese a la ausencia de Corbacho. Lo aprobado por el Gobierno contradice el mensaje mantenido por Trabajo en general -y por Corbacho en particular- sobre la prolongación de la vida activa. "Ahora no debe ser obligatorio", consideró recientemente en una entrevista radiofónica. De hecho, la propuesta de elevar de 65 a 67 años la edad legal de jubilación no figuraba en el primer documento sobre pensiones que Trabajo remitió a Hacienda y a Presidencia para que incorporaran retoques. Al final, el retoque se ha convertido en la piedra angular de la reforma. Con esos precedentes, nadie se atreve a afirmar con contundencia que no habrá más sorpresas. En los últimos días ha circulado entre empresarios y sindicatos el rumor de que Economía quería introducir la idea de un contrato único con despido más barato -como defiende la patronal y apoyó, antes de ser nombrado, el secretario de Estado de Economía, José Manuel Campa- en la reforma laboral. Y ello a pesar de que el presidente del Gobierno se ha comprometido públicamente a no recortar derechos, entre ellos el de la indemnización por despido. Pero lo ocurrido con las pensiones trastoca todos los planteamientos iniciales. Si no hay añadidos de última hora, la reforma laboral se centrará en reordenar las bonificaciones a la contratación, de forma que beneficien a muy pocos colectivos. El más beneficiado será el de los jóvenes, pues el paro azota a este colectivo con casi el 40%. Previsiblemente nadie se opondrá a la medida, aunque la CEOE puede recoger con desagrado que disminuyan las bonificaciones para algunos colectivos que ahora las disfrutan (por ejemplo, las mujeres en general). En el lado contrario, soliviantará a los sindicatos la retirada de trabas a las empresas de trabajo temporal. El Gobierno se ha comprometido a aplicar, antes de mayo, una directiva europea que impide las restricciones a ese sector. Por ello, es previsible que se les permita operar en la construcción y en el sector público (hasta ahora vedados) y que colaboraren con los servicios de empleo en la colocación de trabajadores. La puesta en práctica del modelo alemán de reducción de jornada y los cambios en el trabajo a tiempo parcial, con medidas para evitar el absentismo laboral, completarán el ideario gubernamental.

68 Al mismo tiempo, sindicatos y patronal ultiman un pacto salarial y de empleo que debe servir de guía para los convenios firmados este año. El acuerdo servirá para medir la capacidad negociadora de los agentes sociales y lo que cabe esperar de ellos en la negociación a tres bandas que arrancará en pocos días. Siempre que no haya nuevos imprevistos. http://www.elpais.com/articulo/primer/plano/pensiones/revolucionan/dialogo/social/elpe pueconeg/20100131elpneglse_5/Tes?print=1

TRIBUNA: ¿Qué explica la resistencia a la reforma laboral? Proponemos un contrato único con indemnizaciones por despido crecientes con la antigüedad J. J. Dolado, F. Felgueroso y M. Jansen 31/01/2010 Existe un amplio consenso acerca de que los graves problemas en el ritmo de recuperación de la economía española están estrechamente relacionados con el pésimo comportamiento del mercado laboral durante la crisis, sin parangón en los países de nuestro entorno. Por ello, parece imprescindible acometer una reforma laboral integral que acelere la salida de la recesión y establezca las bases de un nuevo modelo productivo. Un requisito esencial de la misma debería pasar por la eliminación de la dualidad entre trabajadores con contratos indefinidos y temporales. Sin embargo, no se vislumbran reformas de calado en esta dirección ni por parte del Gobierno ni de los agentes sociales. Por ello, cabe preguntarse: ¿A qué se debe tanta resistencia a la reforma laboral? ¿Resulta insalvable dicha resistencia? Para responder estas cuestiones, un primer paso es conocer la opinión de los propios trabajadores sobre si el actual sistema de protección al empleo funciona adecuadamente. Las encuestas disponibles antes de la crisis sobre la percepción subjetiva de los trabajadores acerca de la seguridad en el empleo (International Social Survey Programme) documentan un hecho interesante: mientras que los trabajadores jóvenes en España (menores de 35 años) son los que se sienten menos protegidos en el grupo de países de la UE-15, los de edad avanzada se encuentran entre los que perciben mayor nivel de protección. Así pues, esta evidencia apunta directamente a la existencia de un conflicto de intereses frente a la posible reforma laboral. A favor estarían los trabajadores escasamente protegidos (temporales y parados), y en contra, los trabajadores excesivamente protegidos (indefinidos). La resistencia de este último colectivo a cambiar el statu quo se explica por la elevada brecha existente entre sus indemnizaciones por despido y las de los trabajadores temporales, que les proporciona mayor capacidad de presión salarial cuanto mayor es su poder de negociación en los convenios colectivos. Estamos, pues, ante un caso paradigmático de conflicto entre insiders y outsiders, fenómeno agudizado por las características del sistema de representación sindical en España. En efecto, los restrictivos requisitos legales sobre el censo de votantes en las elecciones sindicales y la eficacia general de los convenios desincentivan la afiliación de los parados, trabajadores en pymes y la mayoría de los trabajadores temporales. De esta forma, el perfil típico del trabajador afiliado a los sindicatos es de un asalariado con contrato indefinido, de un nivel educativo medio-bajo, de avanzada edad, con mayor antigüedad y que trabaja en empresas de gran tamaño. Es decir, el votante mayoritario, al que protegen los sindicatos para asegurarse su reelección, es aquel que obtiene mayores ventajas de la dualidad en nuestro mercado de trabajo.

69 Por otra parte, la patronal tampoco está exenta de responsabilidad en el bloqueo de la reforma laboral, ya que con su cerrazón en la reducción de los costes laborales ha marginado aquellos aspectos de la reforma laboral necesarios para el cambio productivo. Ante esta situación, el Gobierno debería reflexionar sobre si supeditar la reforma al acuerdo de los agentes sociales es la decisión correcta, incluso desde el punto de vista de su propia supervivencia política. En efecto, según el Eurobarómetro de junio de 2009, el 61% de la población española opinaba que una mayor flexibilidad contractual sería beneficiosa para la creación de empleo, siendo esta opinión mayoritaria entre los colectivos más afectados por la crisis. En el mismo sentido, los resultados más recientes del Barómetro del CIS indican que el partido en el Gobierno podría perder las próximas elecciones generales por la pérdida de votos de aquellos colectivos que demandan mayor flexibilidad contractual (estudiantes, autónomos, parados y trabajadores temporales) y que no parecen estar suficientemente representados por los agentes sociales. El Gobierno tiene, pues, un doble reto: ¿cómo diseñar una reforma laboral eficaz y que pueda ser políticamente viable? La eficacia exige la definitiva supresión de la dualidad entre indefinidos y temporales. La viabilidad política requiere maximizar el número de ganadores y compensar a los posibles perdedores de la reforma garantizándoles niveles de protección adecuados. En nuestra opinión (véase el libro electrónico www.crisis09.es/propuesta/), una receta apropiada para suprimir la dualidad es la creación de un contrato único con indemnizaciones por despido crecientes con la antigüedad, sin efectos retroactivos. Este tipo de contrato se puede diseñar para mejorar el nivel de protección de la mayoría de la población activa, sin que varíen sustancialmente las indemnizaciones reales medias. Dicha medida debería integrarse en un paquete de reformas más amplio -un nuevo diseño del sistema de protección por desempleo, la modernización de la negociación colectiva y la mejora en la eficacia de las políticas activas- que puede garantizar el mantenimiento del nivel de protección social de aquellos trabajadores que puedan verse perjudicados por el cambio en la regulación contractual. En definitiva, una reforma laboral eficaz no es inviable, pero para alcanzarla el Gobierno debería abrir la puerta a la posibilidad de que no fuera consensuada y fijar unos mínimos ambiciosos que traten de beneficiar a los más perjudicados por la crisis y ayudar a cambiar de modelo productivo. Las medidas avanzadas hasta el momento, tales como el Kurzarbeit, van más encaminadas a lograr un acuerdo social rápido que a cumplir estos objetivos. - http://www.elpais.com/articulo/primer/plano/explica/resistencia/reforma/laboral/elpepuecone g/20100131elpneglse_6/Tes?print=1

70 TRIBUNA: Los contratos indefinidos y sus costes C. GARCÍA SERRANO / M. Á. MALO 31/01/2010 Si realizásemos una encuesta sobre qué es lo más característico del personaje de Sherlock Holmes, no nos sorprendería que el resultado fuese su conocida expresión "Elemental, querido Watson". Lo que sí resultaría sorprendente (al menos para quienes hubiesen contestado en ese sentido) es saber que tan extendida opinión entra en conflicto con la realidad de los relatos originales de dicho personaje: él nunca utilizó esa expresión. De igual forma, existen algunas ideas sobre el funcionamiento del mercado de trabajo español que creemos que no se corresponden con la realidad. Precisamente, el objetivo de este artículo es ofrecer algunos datos que permitan aportar luz sobre ciertas cuestiones (relacionadas con los contratos indefinidos, los despidos y sus costes) que se encuentran en el centro del debate actual sobre una posible reforma laboral. La idea (extendida) es que las empresas son reacias a contratar a trabajadores de forma permanente porque, en caso de tener que extinguir la relación laboral, resulta muy caro y difícil realizar un despido. Este argumento tiene varias partes: 1) las empresas tienen miedo a contratar indefinidamente, 2) debido a que los costes de despido son muy elevados, 3) porque les va a resultar muy costoso desprenderse de los trabajadores en caso de necesitarlo en el futuro. Veamos cada una de ellas por separado. La primera tiene que ver con la contratación: como las empresas anticipan los costes esperados de una eventual extinción y como dichos costes son elevados, las empresas deciden utilizar otro tipo de contratos (temporales) para emplear a los trabajadores. Si esto fuera así, lo que nos encontraríamos es que casi todos los contratos que se realizan son de naturaleza temporal. ¿Qué nos dicen los datos? La información proporcionada por el Servicio Público de Empleo Estatal (SPEE) sobre contratos firmados en España nos muestra, por ejemplo, que como media en el periodo expansivo 2003-2007, aproximadamente, un 90% de los contratos fueron temporales, y un 10%, indefinidos. ¿Pero cuántos fueron estos últimos? En términos absolutos, el número de contratos indefinidos firmados pasaron de casi 1,3 millones (cerca del 9% del total) en 2003 a algo más de 2,2 millones (el 12% del total) en 2007. Incluso en 2008, cuando el empeoramiento de la situación económica ya se dejó sentir, sobre todo en la segunda mitad del año, los contratos indefinidos firmados llegaron a 1,9 millones. Y los datos del año 2009 indican que, a pesar de la recesión, se han firmado más de 1,3 millones. En total, entre 2003 y 2008 se firmaron en España 10,5 millones de contratos indefinidos, cifra similar al volumen de trabajadores con contrato indefinido existente en promedio en ese periodo (según los datos de la EPA). Esto significa que a las empresas no parece asustarles realizar contratos indefinidos, a juzgar por el número que vienen firmando en los últimos años. Lo curioso es que muchos de los contratos indefinidos firmados corresponden a la variedad de mayores costes de despido: estos contratos indefinidos ordinarios, que ya suponían uno de cada tres indefinidos firmados en 2003, pasaron a ser casi uno de cada dos en 2007 y 2008, cuando se firmaron casi un millón de este tipo cada año. Pero es que esa proporción se ha mantenido en 2009, con un total de 603.000 contratos indefinidos ordinarios firmados. De los datos anteriores se deduce que las empresas sí se aventuran a contratar a trabajadores de forma permanente. Pero ¿por qué utilizan estos contratos si sus costes de despido son tan elevados? Pues debe de ser porque no lo son tanto. Recordemos que existen dos tipos de contratos indefinidos: el ordinario (con una indemnización de 45 días por año trabajado, con un máximo de 42 mensualidades, en caso de despido improcedente) y el de fomento del empleo (con unos costes de despido improcedente más reducidos: 33 días con un máximo de 24 mensualidades), creado

71 con la reforma de 1997. Esta fórmula supone cantidades cuantiosas pensando en trabajadores con, por ejemplo, 20 años de antigüedad y altos salarios, pero invitamos a los lectores a que echen las cuentas de cuánto supone despedir a un mileurista con contrato indefinido que lleve tres años en la empresa. Además, existen colectivos cuya contratación de forma indefinida permite a las empresas obtener bonificaciones en las cuotas a la Seguridad Social (por un periodo de dos años antes de 2006 y de cuatro años desde entonces, aunque hay excepciones), lo que hace aún más atractiva su contratación. Las bonificaciones actúan como un subsidio que reduce los costes laborales. Si además se trata de un contrato de fomento del empleo indefinido, los costes asociados a la rescisión son menores, por lo que las empresas se ahorrarían una parte de los costes de despido ordinarios. De hecho, los incentivos económicos para este tipo de contratos tienen una cuantía tal, que han podido ser utilizados por las empresas como si fueran temporales, porque los incentivos podían superar los costes de despido en un horizonte de unos dos años desde la firma del contrato. En el caso de los contratos ordinarios (aunque también se aplica a los de fomento del empleo) hay un aspecto relevante que hay que mencionar. A partir de la Ley 45/2002, que reformó la regulación de los salarios de tramitación con el fin de facilitar el acceso a las prestaciones por desempleo, se produjo de facto una disminución de los costes de despido por dos vías: por un lado, se eliminaron los salarios de tramitación, y por otro lado, se eliminaron en su práctica totalidad los costes de transacción asociados al despido, al convertirlo en un proceso en esencia automático. Lo único que tiene que hacer la empresa desde entonces para despedir a un indefinido es poner en el juzgado a disposición del trabajador la indemnización correspondiente en 48 horas, lo que supone asumir de hecho la improcedencia del despido. Si, como se dice desde muchas instancias, despedir en España es muy difícil y caro, los datos deberían decirnos que es así en efecto. Veámoslo. De acuerdo con la información sobre altas en las prestaciones por desempleo del SPEE, en 2008 y en 2009 (datos hasta noviembre), el número de despidos de indefinidos se situó en torno a un millón: de todos ellos, unas tres cuartas partes se produjeron a través del recurso a la Ley 45/2002. Pero si nos fijamos en los años de expansión económica nos encontramos con unas cifras que van de los 455.000 en 2004 a los 639.000 en 2007. Estas cifras implican que en el periodo 2004-2007 los despidos afectaron a un 5,5% de la población asalariada del sector privado con contrato indefinido, lo que es una cifra bastante respetable. Por tanto, los contratos indefinidos tienen una duración muy variable y no constituyen para los trabajadores que acceden a ellos una barrera de protección contra la salida del empleo. También los datos nos muestran que no es precisamente difícil despedir en España (ni tampoco tan caro, en el caso de trabajadores con antigüedades no muy elevadas). No obstante, el mecanismo jurídico para ese despido rápido tiene un precio para la empresa y para el trabajador. La empresa debe pagar la indemnización de improcedencia, que llega hasta más que doblar la indemnización de procedencia (20 días de salario por año trabajado con un máximo de 12 mensualidades). Y el trabajador debe pagar con una importante indefensión jurídica, pues este sistema de despido rápido, en la práctica, hace que la causa del despido se vuelva de hecho irrelevante. Cualquier planteamiento de reforma laboral del mercado de trabajo español debería tener en cuenta estos datos. Dando otra vez la voz (esta vez cierta) a Sherlock Holmes: "Es un error fatal diseñar teorías antes de tener datos. Sin darse cuenta, uno empieza a torcer los hechos para acomodar las teorías, en vez de acomodar las teorías a los hechos". http://www.elpais.com/articulo/primer/plano/contratos/indefinidos/costes/elpepueconeg/20100131elpn eglse_8/Tes?print=1

72 TRIBUNA: La marcha de los pavos reales PAUL KRUGMAN 31/01/2010 La semana pasada, el Centro para el Progreso de Estados Unidos, un comité de expertos estrechamente vinculado a la Administración de Obama, publicaba un cáustico ensayo sobre la diferencia entre los auténticos halcones del déficit y los vistosos "pavos reales del déficit". Se decía a los lectores que pueden reconocer a los pavos reales del déficit por el modo en que fingen que nuestros problemas presupuestarios pueden resolverse con trucos como una congelación temporal del gasto discrecional no de Defensa. Una semana después, en su discurso sobre el Estado de la Unión, el presidente Obama proponía una congelación temporal del gasto discrecional no de Defensa. Pero esperen, la cosa se pone peor. Para justificar la congelación, Obama empleó un lenguaje que era casi idéntico a las observaciones que hizo a principios del año pasado John Boehner, el líder de la minoría en la Cámara de Representantes, y que muchos ridiculizaron. Boehner dijo entonces: "Las familias estadounidenses se están apretando el cinturón, pero no ven que el Gobierno se apriete el suyo". Obama ha dicho ahora: "Las familias de todo el país se están apretando el cinturón y están tomando decisiones difíciles. El Gobierno federal debería hacer lo mismo". ¿Qué está pasando aquí? La respuesta, se supone, es que los asesores de Obama creían que podría apuntarse unos cuantos tantos políticos haciendo el baile del pavo real del déficit. Pienso que se equivocaban, que se ha hecho a sí mismo más daño que bien. Sea como sea, sin embargo, el hecho de que cualquiera pensase que una idea política tan tonta era políticamente inteligente es mala señal, porque indica hasta qué punto estamos renegando de nuestros problemas económicos y fiscales. La naturaleza de los problemas de Estados Unidos es fácil de explicar. Estamos sufriendo las secuelas de una grave crisis financiera que ha provocado una destrucción de empleo masiva. Lo único que impide que nos precipitemos hacia una segunda Gran Depresión es el gasto deficitario. Y ahora mismo necesitamos más gasto deficitario porque las vidas de millones de estadounidenses se están arruinando por el elevadísimo desempleo, y el Gobierno debería estar haciendo todo lo posible por reducir el paro. A la larga, sin embargo, hasta el Gobierno de EE UU tiene que pagar su parte. Y las perspectivas del presupuesto a largo plazo eran nefastas incluso antes del reciente repunte del déficit, principalmente por culpa de la inexorable subida de los costes de la asistencia sanitaria. Con vistas al futuro, vamos a tener que encontrar la manera de que los déficit sean más pequeños, no más grandes. ¿Cómo se puede resolver este aparente conflicto entre las necesidades a corto plazo y las responsabilidades a largo plazo? Desde el punto de vista intelectual, no resulta nada difícil. Debemos combinar medidas que creen empleo ahora con otras que reduzcan el déficit más adelante. Y los responsables de la economía en la Administración de Obama comprenden esa lógica: durante el año pasado, han dejado muy claro que su visión conlleva combinar los incentivos fiscales para estimular la economía ahora con una reforma de la asistencia sanitaria para ayudar al presupuesto más tarde. Sin embargo, la triste verdad es que nuestro sistema político no parece capaz de hacer lo que es necesario. En lo que respecta al empleo, ahora está claro que el estímulo de Obama no fue lo bastante grande ni de lejos. Ahora no es necesario responder a la pregunta de si la Administración debería o podría haber solicitado un paquete de medidas mayor a principios del año pasado. En cualquier caso, la cuestión es que el impulso debido al estímulo empezará a desaparecer dentro de unos seis meses, aunque todavía nos enfrentamos a años de paro

73 masivo. Según los últimos pronósticos de la Oficina Presupuestaria del Congreso, el año que viene la tasa media de paro sólo estará ligeramente por debajo del actual y desastroso 10%. Con eso y todo, el Congreso no muestra mucho entusiasmo por lanzar ningún plan importante de creación de empleo. Mientras tanto, la reforma de la asistencia sanitaria se enfrenta a unas perspectivas complicadas. Puede que los demócratas del congreso se las apañen para aprobar un proyecto de ley; el no hacerlo sería un suicidio político. Pero no cabe duda de que los republicanos han tenido mucho éxito a la hora de desacreditar el plan. Y, lo que es más crucial, lo que han desacreditado más eficazmente han sido las iniciativas para controlar el gasto: unas medidas modestas y absolutamente razonables para garantizar que los dólares de Medicare se gasten sabiamente se han convertido en "paneles de la muerte". De modo que si la reforma sanitaria fracasa podemos olvidarnos de cualquier intento serio de controlar el aumento de los costes de Medicare. E incluso si tiene éxito, muchos políticos habrán aprendido una dura lección: uno no se lleva ningún laurel por hacer lo que es fiscalmente responsable. Por el bien de la carrera de uno, es mejor limitarse a fingir que uno es fiscalmente responsable, o sea, ser un pavo real del déficit. Por eso estamos paralizados ante el paro masivo y el gasto sanitario descontrolado. No culpen a Obama. Un hombre sólo puede hacer lo que está en su mano, aunque viva en la Casa Blanca. Culpen más bien a nuestra cultura política, una cultura que recompensa la hipocresía y la irresponsabilidad en vez de los esfuerzos serios por solucionar los problemas de Estados Unidos. Y culpen a las maniobras obstruccionistas, por las cuales 41 senadores pueden hacer que el país sea ingobernable si así lo deciden. Y así lo han decidido. Siento decir esto, pero el Estado de la Unión (no el discurso, sino la cosa en sí) no pinta muy bien. - http://www.elpais.com/articulo/economia/global/marcha/pavos/reales/elpepueconeg/2010013 1elpnegeco_2/Tes

74 TRIBUNA: coyuntura nacional ÁNGEL LABORDA Parece que el Gobierno se pone las pilas ÁNGEL LABORDA 31/01/2010

La última semana de enero ha sido intensa en cuanto a la información económica y a medidas de política económica conocidas. El Gobierno hizo público el déficit del conjunto de las administraciones públicas en 2009, que alcanzó una cifra equivalente al 11,4% del PIB (unos 120.000 millones de euros), lo que supone dos puntos porcentuales más de lo estimado en los Presupuestos Generales del Estado para 2010. Tal como están los mercados financieros, dicha noticia no es nada buena y hubiera provocado una fuerte pérdida adicional de confianza y credibilidad internacional en la economía española, con la consiguiente ampliación del diferencial de tipos de interés de la deuda soberana española y, por extensión, de todas las emisiones públicas y privadas.

Así que, a la fuerza ahorcan, en el mismo momento de la publicación del déficit, el Gobierno anunciaba sorpresivamente una medida de calado en el sistema de pensiones públicas, la extensión progresiva de la edad de jubilación obligatoria hasta los 67 años, y la intención de recortar en 50.000 millones el gasto público de aquí hasta 2013, todo ello para reafirmar el compromiso de que en dicho año el déficit público estará por debajo del 3% del PIB, como exige el Pacto de Estabilidad. La extensión de la edad de jubilación es una medicina amarga, pero totalmente necesaria, que la sociedad española seguramente va a digerir de mala manera, por eso hay que felicitar al Gobierno por atreverse con ella. Respecto al recorte del gasto público, sólo hay que decir que se cumpla. Pero la estadística estrella de la semana fue la EPA del cuarto trimestre. El aumento del paro en 203.200 personas fue superior al de 160.000 previsto en esta página hace una semana, aunque esta desviación no ha obedecido a que se destruyera más empleo (224.200 frente a 260.000 previstos), sino a que la población activa disminuyó menos de lo previsto. Por tanto, los datos no son especialmente malos, pues el indicador más importante del mercado laboral es el empleo. Por otro lado, el aumento del paro hay que valorarlo teniendo en cuenta la desfavorable estacionalidad de estas fechas, de tal forma que, corregido de este efecto, se reduce a unas 50.000 personas. No es mucho si lo comparamos con las casi 700.000 en que aumentó en el primer trimestre del año o las 300.000 en el segundo. En todo caso, con el aumento del cuarto trimestre, el número de parados asciende a 4,3 millones de personas, el 18,8% de la población activa (18,7% en términos desestacionalizados). Además de su magnitud, otra característica

75 del paro es que está muy desigualmente repartido [gráfico inferior derecho]. La tasa de paro alcanza el 39% entre los jóvenes de 16 a 24 años y casi el 30% entre los inmigrantes, frente al 14,6% de los españoles de 25 años y más. Esto es lo que hace "sostenible", o más llevadera, esta abultada tasa de paro respecto a lo que ocurriría en otros países, pues los jóvenes se refugian en casa de sus padres y los inmigrantes no tienen derechos políticos. Como se ha señalado, el dato de empleo fue mejor de lo previsto, reduciéndose en 66.700 ocupados respecto al trimestre anterior en términos desestacionalizados, -1,4% en tasa anualizada. El ritmo de caída intertrimestral se redujo sustancialmente en la industria y la construcción, mientras que la nota negativa la puso el sector de los servicios, que tras crear empleo en el tercer trimestre ha vuelto a destruirlo en el cuarto [gráfico superior derecho]. La moderada tasa de caída del empleo total nos está indicando que el crecimiento trimestral del PIB en el cuarto trimestre se habrá situado próximo a cero. Las previsiones para 2010 no cambian apenas. Durante el primer semestre, el empleo va a seguir cayendo, aunque a un ritmo moderado, y la tasa de paro desestacionalizado podría aumentar unas décimas, hasta el 19% en el segundo trimestre. Posteriormente iniciaría un ligero descenso al conjugarse la estabilización del empleo y la caída de la población activa [gráfico superior izquierdo]. En todo caso, la cifra de parados seguirá por encima de los cuatro millones todo el año, una cifra que no se reducirá sustancialmente hasta que no se haga una profunda reforma del mercado laboral. A ver si el Gobierno nos sorprende de nuevo en este tema. http://www.elpais.com/articulo/economia/global/Parece/Gobierno/pone/pilas/elpepueconeg/2 0100131elpnegeco_4/Tes

76 REPORTAJE: Primer plano 4.326.500 problemas sin resolver El paro marca récord histórico y seguirá subiendo, pero los expertos creen que el techo está cerca MANUEL V. GÓMEZ 31/01/2010 Faltan más de dos horas para que se cierre al público la oficina de empleo del barrio de Moratalaz, en Madrid. En la planta baja del edificio, donde se piden las prestaciones, se agolpan más de setenta personas. La máquina ya no da la vez. Faltan más de dos horas para que se cierre al público la oficina de empleo del barrio de Moratalaz, en Madrid. En la planta baja del edificio, donde se piden las prestaciones, se agolpan más de setenta personas. La máquina ya no da la vez. "Cubierto el cupo de números", se puede leer en el papel que emite. También la hora y la fecha: 11.50 del 26 de enero. Una señora espera su turno vigilando a su bebé, y una joven, apoyada en un pilar, mata el tiempo leyendo Amanecer, la cuarta entrega de la serie Crepúsculo. Media hora después sale de la oficina Ignacio Martín, de 28 años. Ha hecho los trámites para cobrar el paro. Le ha llevado más de dos horas. Martín perdió su empleo en un almacén de materiales de construcción el pasado 13 de enero. Hoy, miércoles, confiando en que el frío y la nieve hayan desanimado a la gente, ha acudido a la oficina de empleo. Ni así. "Hay veces que antes de abrir la cola da la vuelta al edificio", explica. Las salas de espera llenas en las oficinas del paro y las colas a las puertas de las oficinas son las dos fotografías silenciosas de una crisis muy cruel para el mercado laboral, que en dos años ha disparado el paro hasta los 4,3 millones de personas, equivalentes al 18,8% de la población activa. Serán las imágenes que ilustrarán la variante española de la recesión mundial más grande desde posguerra, como esas de enfrentamientos de obreros y policías que se ven de la reconversión industrial y la crisis de los ochenta. El año 2009 se inauguró con una pregunta: ¿superará España los más de cuatro millones de parados? La cuestión era pura retórica. Nadie, excepto el Gobierno, respondía con un no. Bastó un solo trimestre para darles la razón a quienes respondían que sí. Entre enero y marzo del año pasado la Encuesta de Población Activa, el mejor indicador del mercado laboral, contó 800.000 parados nuevos, que se sumaron a los 600.000 de final de 2008. La caída de los indicadores se trasladaba a la calle. La Gran Recesión había llegado al clímax y el paro daba la verdadera medida de una crisis que había arrancado en el verano de 2007 de la mano de unas hipotecas con el extraño nombre de subprime. De hecho, en términos comparables, la tasa de paro actual es homologable, la más alta que figura en los registros: un 24,5% en marzo de 1994, que sería un 18,2% de aplicarse la metodología actual. Los cuatro millones de desempleados se esperaban; la rapidez con que se alcanzaron, no. El paro crecía desde julio de 2007, pero en ese medio año creció un 65%. "Me sorprendió", explica Josep Oliver, catedrático de la Universidad Autónoma de Barcelona. "El ajuste en la construcción era esperable, pero la caída de Lehman Brothers trajo lo que los americanos han llamado el gran pánico, lo que sucedió de octubre a marzo". El crédito se secó. "Este hundimiento no hubiera sido tal sin Lehman. Trajo una caída de la demanda mundial de una magnitud muy superior a la esperada. El ajuste de la construcción inmobiliaria era incluso necesario, pero la crisis financiera la hizo superior", explica Sara de

77 la Rica, directora del Observatorio Laboral de la Fundación de Estudios de Economía Aplicada (Fedea). El intenso deterioro dio pie a otra pregunta, todavía más grandilocuente y amenazadora: ¿Veremos cinco millones de parados? El Gobierno la respondió, pronto con una negativa. De momento, los hechos le dan la razón. La caída del empleo ha seguido, pero a menor ritmo. En los últimos nueves meses de 2009 se han contado unos 300.000 parados más. Ahora, el freno del desplome no impide que al volver la vista atrás y repasar el saldo que hasta ahora deja la crisis las cifras agregadas, por sí mismas, produzcan escalofríos: hay 2,5 millones de desempleados más, la tasa de paro ha escalado casi 11 puntos porcentuales y se han destruido 1,8 millones de puestos de trabajo. Con estos número, el Gobierno ha vuelto a modificar sus previsiones a peor. El pasado viernes pronosticó que el empleo caerá un 2% este año y que el paro subirá hasta el 19%. Incluso, el secretario de Estado de Economía, José Manuel Campa, afirmó que no descarta alcanzar el 20% en una "situación puntual". Esto supone situar la amenaza de los cinco millones de parados a la vuelta de la esquina. Pero, al final, parece que se va a quedar en eso: en un espectro amenazante que no tomará forma corporal. "En algún momento pasaremos de cuatro millones y medio de parados, pero no creo que lleguemos a cinco", pronostica José Antonio Herce, director de Economía de Analistas Financieros Internacionales (AFI). "En el peor de los casos nos iremos a una tasa de paro del 20%", vaticina. Este cálculo, sobre una población activa de unos 23 millones de personas, sitúa el número de desempleados en 4,6 millones. Las cifras que maneja el Centro de Predicción Económica (Ceprede) de la Universidad Autónoma de Madrid son muy parecidas. El paro seguirá creciendo este año y también el que viene. También el servicio de estudios del BBVA descarta alcanzar la fatídica cifra. "No veo los cinco millones", contesta con contundencia el economista jefe de Intermoney, José Carlos Díez. "Sólo se pueden ver si hay una recaída de la crisis financiera. Y ése es un escenario de riesgo al que yo sólo doy un 10% de posibilidades". Ésta es una cautela que de una u otra forma expresan la mayor parte de los conocedores del mercado laboral. "No lo veremos salvo que suceda algo inesperado y vuelva a cerrarse el grifo, que no creo", dice Miguel Ángel Malo, de la Universidad de Salamanca. Sara de la Rica, tras ver los datos de la última encuesta de población activa el pasado viernes, se muestra más cauta. Cree que si el primer trimestre del año muestra una evolución similar "nos acercaremos muchísimo", enfatiza, " a esos cinco millones". Pero la prudencia no ha sido un obstáculo para que en los últimos meses, al rebufo de la recuperación económica internacional, las previsiones se hayan revisado o se vayan a revisar a mejor. Incluso hay quien se declara sorprendido por el cambio de tendencia. "Si me hubieran preguntado a comienzos de año si llegamos a cinco millones de parados, hubiera respondido que sí. Ahora creo que nos quedaremos por debajo. La tasa de paro me ha sorprendido incluso a mejor. Estamos esperando a que se conozca el dato del cuarto trimestre del año [comentaba el pasado miércoles], pero espero mejorar la previsión", explica Manuel Balmaceda, director del servicio de estudios de Cemex, uno de los gabinetes que tiene una de las tasas de paro más pesimistas de la quincena que componen el panel de coyuntura de Funcas para 2010: el 21%.

78 No obstante, ni la ligera mejora de las previsiones esconde que España ha vuelto a destacar en el seno de los países desarrollados por su sempiterna y estructural alta tasa de paro. En el tercer trimestre, la tasa española de desempleo duplicaba la europea y la de la mayoría de las grandes economías mundiales. Para el secretario de Estado de la Seguridad Social, Octavio Granado, esta vieja persistencia, incluso en épocas de crecimiento, se debe a la existencia de más de 850.000 trabajadores en el sector agrario o un millón que trabajan estacionalmente en la hostelería. Granado también lo achaca a los fijos discontinuos, que cuando dejan de trabajar engrosan las estadísticas del paro, y al poco peso de las ayudas sociales en España. La comparación es todavía más dramática cuando se observan los puntos de partida previos a la crisis. En junio de 2007, España había alcanzado unos porcentajes de paro casi homologables al del resto de países desarrollados: un 8,3 de media anual frente al 5,7 de la OCDE. La década larga de intenso crecimiento acabó con uno de los lastres seculares de la economía española: sus dificultades para crear empleo. Algo que a lo largo de la historia se había solucionado con la emigración. Pero la llegada del pinchazo inmobiliario más la crisis financiera han convertido a España en la máquina de destrucción de empleo más siniestra de la Unión Europea y una de las más eficaces del club de los países ricos, la OCDE: hasta septiembre del año pasado había engullido 1,6 millones de puestos de trabajo por 2,8 millones del conjunto de la UE, y suponía el 15% del aumento total de paro de la OCDE. Y lo más paradójico de todo es que la caída de la actividad económica en España ha sido menor que otros países. Ahí está el ejemplo de Alemania, tan mentado estos últimos meses. Allí el PIB en 2009 se ha contraído un 5%. La tasa de paro apenas se ha movido. ¿Por qué? Luis Garrido, catedrático de Estructura Social de la UNED y uno de los mejores conocedores del mercado laboral, da la vuelta a la tradicional explicación sobre la alta temporalidad: "En España, incluso en épocas de poco crecimiento, hay una gran contratación. Con la contracción, lo que ha pasado es que no se ha contratado". Es un razonamiento que avalan los datos del Ministerio de Trabajo. El año pasado se registraron poco más de 14 millones de contratos, un 15% menos. Por su parte, Oliver, de la UAB, lo achaca al gran peso que tiene sobre el empleo la construcción: "En Alemania este sector emplea una media histórica del 6%; aquí, el 9%, y llegó a casi el 14% en 2007". Así pues, los mimbres para el desplome estaban puestos para cuando llegara el enfriamiento de la economía. Además, como subraya la OCDE, éste es un sector cuya mano de obra nota mucho más que otros los vaivenes de los ciclos económicos. La crisis ha devuelto el ladrillo a su peso habitual en el mercado laboral. Y eso da pie a los analistas a interpretar que la sangría en la ocupación se detendrá pronto. "Creo que lo que falta de destrucción de empleo está muy concentrada en la construcción, donde quedan unos 200.000 o 300.000 empleos", cuantifica Díez, de Intermoney. En su opinión, la caída se detendrá en primavera. Más pesimistas se muestran en BBVA. "Aunque existe una elevada incertidumbre, los indicadores más recientes indican que el PIB podría haber dejado de contraerse en el cuarto trimestre de 2009 y que estaría creciendo ya en el primer trimestre de 2010. No obstante, para que se inicie una senda de recuperación sostenida del empleo será necesaria una mejora significativa de la actividad, lo que podría ocurrir a finales de 2010 y de forma más clara a lo largo de 2011".

79 En el mismo tono se expresa Balmaseda, de Cemex: "No sé si la destrucción se detendrá en 2010, pero sí que se amortiguará". Por su parte, Miguel Ángel Malo, de la Universidad de Salamanca, no sólo recurre a los números para explicar el fenómeno; también echa mano del sentido común. "Poco a poco todo se suaviza. Nos ha sucedido algo terrible y es mucho menos probable que nos vuelva a pasar", razona. Ahora bien, una cosa es que cese la destrucción del empleo y otra que baje el paro. Y ahí el consenso entre analistas, organismos internacionales y políticos es casi total: España tendrá que acostumbrarse a vivir con altas tasas de paro los próximos años. "Tenemos problemas añadidos a los del resto de Europa. Existe la posibilidad de que la demanda externa tire más, pero nuestra crisis va a durar más porque tenemos que pagar la deuda acumulada por el ladrillo", razona Carlos Martín, especialista en mercado laboral del servicio de estudios de CCOO. Aunque no se atreve a detallar fechas, Martín sí que augura un largo tiempo por encima del 10% de paro. Más concreto es Herce, de AFI. "Nos quedan seis o siete años por encima de los dos dígitos en el paro", explica. Y eso que, en su opinión, el horizonte demográfico, tan pujante en los últimos años va a cambiar, lo que lógicamente acabará por afectar a la población activa, que ya en los últimos trimestres ha caído. El mismo horizonte temporal baraja Juan José Méndez, director de Estudios de Ceprede. Incluso el más optimista de los analistas, Oliver, vaticina un "horizonte complejo" en los próximos años: "Hasta 2016 o 2017 no se va a recuperar el nivel de empleo de 2007". "Casi el 65% de los desempleados tienen un bajo nivel de formación, y eso va a costar reabsorberlo. Pueden convertirse en parados estructurales", concluye. Eso se traducirá en un lastre para la recuperación económica, mucho más anémica que la de otros países, como ha recordado esta misma semana el FMI. Así lo resume Balmaseda: "Es un círculo vicioso. En la medida en que no haya expectativas de recuperación del consumo, las empresas no invierten y el empleo no se recupera. Y si no hay trabajo, no crece el consumo".

2009, una trituradora de empleo

Costará ver un año tan fatídico como 2009 para el mercado laboral. Un rápido repaso de los datos globales asusta. Justifica que para los españoles el paro se haya convertido en su

80 principal preocupación encuesta tras encuesta. La tasa de desempleo ha subido al 18,8%. Hay 4,3 millones de parados. Pero aún peor es la cantidad de empleo que ha engullido 2009. Por esa vía ha llegado todo el aumento del paro. De hecho, el año pasado se contaron 1,1 millones de desempleados más, en cambio se destruyeron 1,2 millones de puestos de trabajo. La diferencia hay que buscarla en la caída de la población activa, según la encuesta de población activa. Se invierte así la tendencia que había mantenido el paro en la primera parte de la crisis, cuando su crecimiento se debió más al aumento de población activa que a la destrucción de empleo. La década larga de crecimiento disparó el aumento de personas en edad y disposición de trabajar (definición académica de población activa). Se pasó de 16 millones a 23 millones y la tasa de actividad superó el 60%. La incorporación de mujeres e inmigrantes resultó clave. "Fue un salto de escala estructural", explica Josep Oliver, de la Universidad Autónoma de Barcelona. En los mismos términos se expresa José Carlos Díez, sobre todo en lo que respecta al sexo femenino. Pero la recesión y la destrucción de empleo ya han comenzado a hacer mella. La población activa lleva cayendo desde marzo. Es la primera vez que encadena nueve trimestres bajando en los registros estadísticos del INE. En todo caso, las propias características de la crisis y las inercias han provocado un comportamiento muy diferente según se trate de hombres o de mujeres. La recesión no ha detenido la incorporación de mujeres al mercado de trabajo. "Esto no lo detiene nada", afirma contundente Luis Garrido, de la UNED, cuando se le pregunta si la crisis puede frenar esta tendencia. Y los datos le dan la razón. En junio de 2007 había 9,3 millones mujeres trabajando o dispuestas a hacerlo; al acabar 2009 son 10,1 millones. Para explicar esta evolución se recurre a dos análisis. Por un lado está la propia inercia acumulada durante años y el hecho de que la tasa de actividad entre las mujeres que se retiran es mucho menor que las de las que se incorporan al mercado laboral. Pero también hay entre los expertos quien recurre al efecto trabajador añadido. Dicho en román paladino, la entrada en el mercado laboral de miembros inactivos de un hogar cuando el cabeza de familia pierde el empleo. En cambio, el desánimo ha cundido entre los hombres y su población activa lleva más de un año cayendo. Mucho tiene que ver en ello el desplome de la construcción y el de la industria, dos sectores donde la presencia masculina es mayoritaria. Lo que ha acabado por invertir una tendencia: que haya más mujeres en paro que hombres. De hecho, en el último trimestre del año pasado hubo 1,9 millones de desempleadas por 2,4 de parados. Desde que comenzó a escalar el paro, en el tercer trimestre de 2007, la construcción ha destruido casi un millón de puestos de trabajo, y la industria, más de medio millón. Entre ambos sectores cargan con el 80% de los puestos de trabajo destruidos. "Son empleos temporales ligados a actividades poco competitivas de sectores que han sufrido", explica José Antonio Herce, de AFI. Para Herce, esto explica en buena medida el perfil de quienes han perdido su trabajo durante esta crisis: jóvenes e inmigrantes. Basta ver las tasas de paro que se han alcanzado en estos colectivos para darse cuenta de que sus conclusiones están en la línea acertada. Entre los menores de 25 años hay un desempleo del 39,1%; entre los extranjeros, un 29,7%. Luis Garrido, de la UNED, complementa esta visión. "Ésta es una crisis de los que no están educados", explica. El número de puestos de trabajo perdidos es decreciente conforme se

81 asciende en la pirámide educativa. En los niveles más bajos -quienes tienen educación primaria y la primera etapa de secundaria- se han destruido 1,4 millones de empleos. Garrido resume así la evolución del mercado laboral durante la recesión: "Cuanto más varón, más crisis; cuanto más joven, más crisis; cuanto más inmigrante, más crisis". Y este lienzo es un problema serio para Carlos Martín, de CC OO, por sus propias características: "Veo muy difícil encontrar para estas personas un lugar en el nuevo modelo productivo hacia el que vamos". http://www.elpais.com/articulo/primer/plano/4326500/problemas/resolver/elpepueconeg/2010 0131elpneglse_2/Tes?print=1

REPORTAJE: Dinero & inversiones Cortejo nupcial entre gestoras La crisis abre la puerta a la concentración en la industria de la inversión colectiva DAVID FERNÁNDEZ 31/01/2010 La industria de la inversión colectiva afronta un periodo que se prevé trufado de matrimonios. Las bodas, aunque se consumarán en la intimidad de un despacho, afectarán a más de 5,6 millones de invitados: los ahorradores españoles con participaciones en fondos de inversión. La mayoría de los enlaces no serán por amor, sino por conveniencia, por pura necesidad. La crisis económica fuerza a juntar dotes como única vía para sobrevivir. El tamaño se presume vital en un contexto donde en los últimos tres años las gestoras han visto cómo más de tres millones de clientes cerraban sus cuentas y el patrimonio que gestionaban caía un 36% al pasar de 254.322 millones de euros a sólo 162.566 millones. Los primeros pasos en la concentración del sector ya han comenzado. A comienzos de 2010, Gestifonsa, la gestora de fondos del Banco Caminos, anunció la adquisición de un 35% del capital de su rival Gesconsult. En cuatro años, según el acuerdo, la participación irá en aumento hasta llegar al cien por cien. Esta operación se suma a otras similares realizadas en 2009, como la entrada del banco suizo Mirabaud en el capital de Venture Finanzas o la compra del 50% de la gestora de Nmas 1 por parte del grupo Syz. "En un periodo de crisis como el actual se necesita tener un determinado tamaño para sobrevivir. Los márgenes se reducen porque la competencia es alta y resulta muy difícil captar inversores", explica Paula Mercado, directora de análisis de la empresa de servicios financieros VDOS Stochastics. "Las fusiones generan sinergias, ajustes de costes y mayor eficiencia", añade. Mientras que la demanda de fondos de inversión ha sufrido un claro retroceso en los últimos tres años (retroceso acelerado por las propias entidades financieras, que se han volcado en vender depósitos para reforzar sus balances), la oferta no se ha contraído, ni mucho menos, a la misma velocidad. En España hay registradas 120 gestoras de inversión colectiva y la oferta de fondos supera los 2.800 productos. "En todo el mundo hay un claro proceso de concentración. El negocio de esta industria está en la distribución y no en la gestión. Para minimizar los costes sólo cabe administrar un gran patrimonio", indica Marcelo Casadejús, director de marketing de Ahorro Corporación. "En España, la mayoría de las gestoras tienen un patrimonio por debajo de los 90 millones de

82 euros y así es muy difícil alcanzar la rentabilidad". Casadejús fija en 3.000 millones de patrimonio bajo gestión el umbral a partir del cual una gestora puede ser rentable "de verdad". El mercado de fondos de inversión en España sigue dominado por los grandes grupos financieros. Entre las gestoras de los dos grandes bancos (BBVA y Banco Santander) y las de las dos principales cajas (La Caixa y Caja Madrid) gestionan el 50% del patrimonio total de la industria. Sin embargo, los ahorradores parece que empiezan a confiar cada vez más en las gestoras de tamaño medio y pequeño, que poco a poco les van robando cuota de mercado a las grandes. De hecho, entre las sociedades que más aumentaron el patrimonio bajo gestión en 2009, la mayoría son firmas de independientes. Entre las entidades de mayor tamaño las que mejor lo hicieron fueron La Caixa e Ibercaja. "En mi opinión, no sobran los pequeños jugadores de la industria, sino gestoras que no aporten valor a sus clientes. En este negocio hay muchos actores grandes con fondos referenciados a índices, pero cuyas comisiones no son precisamente de gestión pasiva", comenta Víctor Alvargonzález, consejero delegado de Profim, firma especializada en la selección de fondos. "Los grandes grupos van a seguir porque cuentan con una gran red de oficinas. Sin embargo, ya nada será como antes. Hay nuevos formatos para comercializar los fondos y se premiará a aquellos que aporten especialización y valor añadido al partícipe", añade Alvargonzález. La política de compras emprendida por el Banco Santander en los últimos años llevó a la entidad a plantearse en 2008 la venta de algunas áreas de negocio que no consideraba estratégicas, entre las que se encontraba su gestora. La idea del banco era desprenderse de la fábrica de productos (donde se diseñan y gestionan) y quedarse con la red de distribución (oficinas y clientes). La operación, sin embargo, no llegó a concretarse, aunque fuentes del mercado no descartan que el Santander vuelva a desempolvar el proyecto en el futuro. Gestiohna ha publicado un informe donde trata de identificar cuáles son las tendencias globales en la industria. En opinión de los expertos, los bancos minoristas irán abandonando la gestión de activos, ya que, en muchos casos, no lo consideran un negocio estratégico a largo plazo, dando como resultado una mayor separación entre la distribución (red comercial) y la creación de productos (gestora de fondos). Esta agencia de valores apuesta por que el futuro pasará por un predominio del modelo multiboutique: muchos especialistas y una única plataforma de distribución. "Serán aquellas entidades robustas, es decir, las que hayan tenido un mayor músculo financiero o que hayan sabido preservarlo mejor durante la crisis, las que dominarán el mercado. Además, si se trata de entidades con marcas internacionales consolidadas, superarán más fácilmente la desconfianza de los inversores", explican desde Gestiohna. De forma paralela a este proceso, en el caso del mercado español hay un factor añadido que puede acelerar los movimientos de concentración en el negocio de la gestión de activos: el proceso de restructuración del mapa de cajas de ahorro. La inmensa mayoría de las cajas tienen gestora propia y habrá que ver qué hacen con ella las entidades que se vean involucradas en movimientos de fusión. "Lo lógico es que aquellas cajas que no tengan un tamaño adecuado junten sus áreas de gestión de activos", reconoce Casadejús. Los expertos consultados coinciden en señalar que los cambios que se avecinan para la industria deberían ser positivos para el cliente. "La concentración de productos persigue lograr sinergias y reducir los costes, lo que se tiene que trasladar al cliente en forma de

83 menores comisiones y una gestión más profesional", argumenta Paula Mercado. Además de la unión de actores dentro del mercado, otro de los cambios que se auguran para el sector es un mayor desarrollo del modelo de arquitectura abierta, algo que en teoría también es bueno para el cliente. "Esta estructura permite cubrir un amplio conjunto de activos de mercado y distintos perfiles de rentabilidad-riesgo, y crea un entorno en el que cada gestora puede dar lo mejor de sí misma", señalan desde Gestiohna.

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84 ENTREVISTA: THOMAS MIROW Presidente del BERD "Hay riesgo de repetir errores por el dinero barato" ALICIA GONZÁLEZ 31/01/2010 El Banco Europeo de Reconstrucción y Desarrollo (BERD) es un gran desconocido para muchos pero no para las empresas españolas que operan en los países del antiguo bloque del Este. De hecho, el BERD acaba de comprar este mismo mes un 25% de las filiales de Iberdrola Renovables en Polonia y Hungría. Al frente del banco está Thomas Mirow, francés de nacimiento (París, 1953) y alemán de formación y trayectoria. Mirow para poco en su despacho de Londres y la conversación transcurre vía telefónica, en la que defiende el doble mandato que tiene el banco: ayudar tanto a los países de la Europa del Este como a los Estados donantes de la entidad. Curioso para un banco de desarrollo. Pregunta. Europa del Este ha sido de las regiones más golpeadas por la crisis. ¿Cómo afronta el futuro? Respuesta. Las perspectivas son algo mejores. Hemos elevado nuestra previsión de crecimiento en 2010 hasta el 3,3% desde el 2,5% de octubre. Esa revisión se debe, fundamentalmente, a un comportamiento mejor de lo previsto en cuatro grandes economías (Polonia, Turquía, Rusia y Kazajistán), mientras que las más pequeñas, que no tienen materias primas que exportar, van a mantener un crecimiento lento o en algunos casos, como los países del Báltico y Hungría, incluso negativo. P. ¿Cree que se han aprendido las lecciones de la crisis? R. Me atrevería a decir que muchos se han dado cuenta de los riesgos del modelo de crecimiento que tenían hasta que estalló la crisis pero, por supuesto, es mucho más difícil traducir eso en un nuevo modelo productivo. Eso significa depender menos de las materias primas, añadir más valor a la cadena de producción y supeditar menos su financiación al capital extranjero. Esas son las claves. P. Así que corremos el riesgo de que los errores se repitan... R. No diría tanto. Quizá hay riesgo de repetir errores por lo que se refiere a una excesiva dependencia del dinero barato y la liquidez fácil. Pero hace falta tiempo para asumir las consecuencias de la crisis no sólo en teoría sino para implementar los cambios necesarios y afrontar la nueva realidad. P. La entrada en el euro, ¿sería positivo para los países que lo han solicitado o sería mejor esperar? R. Mi tesis ha sido siempre que los países deberían hacer un esfuerzo adicional para unirse a la eurozona, sobre la base de cumplir los criterios de Maastricht. Pero debe ser una situación económica y políticamente sostenible ya sea en 2013, 2014 o en 2015. El mensaje fundamental es que el ingreso en el euro puede contribuir mucho a la estabilidad en la región, pero tiene que producirse sobre bases sólidas para no introducir nuevas debilidades en la zona euro y que acabe afectando a las economías de los nuevos países. P. ¿Y qué riesgos afrontan? R. El primero, sin duda, es una nueva desaceleración de los precios de las materias primas, de las que países como Rusia y Kazajistán son muy dependientes especialmente de los precios

85 del petróleo, el gas y de los metales. Y eso, a su vez, está muy supeditado a la evolución de la economía mundial. En segundo lugar, creemos que la cartera de créditos de los bancos es ya muy elevada y eso mermará su capacidad para proporcionar la financiación que los países necesitan para salir de la crisis. Además, todavía esperamos que afloren más créditos impagados y por supuesto mayor desempleo. Todos estos factores pueden darse a la vez y reducir nuestras expectativas actuales. Eso sin olvidar que siempre puede haber episodios externos de algún país de la eurozona que tenga efectos contagio sobre la región. Lo hemos visto con Grecia. P. ¿Cómo les están afectando esos problemas? R. Los bancos griegos juegan un importante papel en algunos países, especialmente en el sureste europeo. Por el momento, no ha tenido mucho impacto porque las dificultades de los bancos se restringen al ámbito doméstico. Pero los mercados de capitales están siguiendo los problemas de Grecia con mucha precaución y el contagio puede venir más por ahí, por el mercado de bonos y un aumento del riesgo soberano. P. ¿Cuál es la situación general de la banca en la región? R. Pues hay varios bancos europeos importantes, desde el punto de vista sistémico, que están reestructurando créditos, ajustando sus cálculos de riesgo, y todo eso está provocando un frenazo en la oferta crediticia. Su actividad se dedica más a refinanciar exposiciones ya existentes que a sufragar nuevos proyectos o a nuevos clientes. P. ¿Puede eso derivar en una segunda oleada de inestabilidad bancaria en la región? R. No, no lo vemos. Lo que sí vemos claramente es una mayor estrechez del crédito a familias y empresas, pero no inestabilidad. P. ¿Creen que los diferenciales de riesgo de la región reflejan la realidad de las economías? R. Hay muchas diferencias entre unos países y otros. Luego están, no olvidemos, los episodios externos de los que hemos hablado y que tienen un impacto en los spreads. Pero es verdad que hay países a los que los mercados miran con especial atención, como Ucrania, donde se está a la espera de la segunda vuelta de las elecciones y otros que también celebrarán elecciones en breve. Dicho todo esto, la verdad es que los países no están teniendo dificultades para emitir bonos y obtener la financiación que necesitan. P. Pero los países desarrollados están realizando al mismo tiempo emisiones de deuda ingentes, tanto a nivel soberano como corporativo. R. No hemos percibido por ahora que los países tengan grandes dificultades en los mercados. Los riesgos de ese efecto crowding out [expulsión] que menciona no se han materializado a nivel soberano. Sí se percibe más ese impacto a nivel del sector privado. Ellos sí lo sufren. P. ¿Cuál es ahí el papel del BERD? R. En este último mes hemos proporcionado liquidez a muchos bancos. Ahora probablemente se trate menos de dar liquidez y más de asegurar la necesaria recapitalización de la banca. También ayudamos a que se recupere el crédito con apoyo, especialmente a las pequeñas y medianas empresas. Pero queremos abrir el debate sobre cómo alcanzar el equilibrio entre la necesidad de préstamos en divisa extranjera y prevenir al mismo tiempo que se tomen posiciones demasiado arriesgadas, ayudando a construir mercados de capitales locales en esos países. P. ¿Ha logrado un acuerdo para aumentar el capital del BERD?

86 R. La decisión tiene que tomarse definitivamente en la asamblea anual del banco que se celebrará en mayo en Zagreb. Todavía estamos en pleno proceso de negociación, pero creo que las conversaciones van bien. P. ¿También con el Gobierno español? R. He podido hablar con la vicepresidenta Salgado la semana pasada en Madrid y creo que estaba dispuesta a apoyar nuestros esfuerzos. Aunque debe ser ella la que aclare su posición, creo que tuvimos una reunión muy satisfactoria. http://www.elpais.com/articulo/economia/global/Hay/riesgo/repetir/errores/dinero/barato/elpe pueconeg/20100131elpnegeco_7/Tes?print=1

87 TRIBUNA: HAROLD JAMES Regreso al futuro en las finanzas HAROLD JAMES 31/01/2010 El ex presidente de la Reserva Federal Paul Volcker constituyó la principal fuente de inspiración para la propuesta del presidente Barack Obama para reformar la banca. Volcker, que sin duda ha sido el gobernador de un banco central con más éxito del siglo XX, fue desde el principio una voz de advertencia tenaz sobre los problemas de lo que él llamaba "el flamante nuevo sistema financiero". Pero Volcker también ha sido un destacado detractor de los peligros de la volatilidad monetaria. ¿Qué vínculo hay entre la nostalgia por un sector bancario simplificado y menos arriesgado y el deseo de reintroducir un sistema monetario que también parece una reliquia del pasado? Ya se hablaba mucho sobre la posibilidad de revivir la regulación bancaria de los años treinta antes del drástico y combativo anuncio que hizo Obama el 21 de enero. Las propuestas para lo que ahora se conoce como la regla Volcker -que prohibiría las operaciones bursátiles con capital propio e impediría a los bancos "poseer, invertir en o financiar" fondos de cobertura o fondos de capital riesgo- son una versión actualizada de la Ley Glass-Steagall, aprobada en Estados Unidos en 1933 para separar la banca de inversión de la banca comercial. La campaña de los años treinta para restringir las actividades bancarias tuvo lugar en muchos países. En Bélgica, donde se crearon los primeros bancos universales a principios del siglo XIX, también se separó la banca de inversión de la comercial. A los bancos italianos se les prohibió poseer valores de sociedades industriales. El argumento de los años treinta no se concibió tanto en función de unos bancos que eran "demasiado grandes para quebrar", sino como una respuesta al mal asesoramiento que los bancos habían ofrecido a sus clientes. Los bancos de inversión habían vendido participaciones y bonos (sobre todo de sociedades y Gobiernos extranjeros) a sus pequeños clientes, se habían liberado de su propio riesgo y habían creado para sí mismos un gran flujo de ingresos por comisiones. Entonces, como ahora, mucha gente exigía un castigo para los bancos y los banqueros. Pero la gente también quería que los bancos dedicaran más recursos a financiar las inversiones y la industria nacional. En general, las reformas bancarias castigaron a los banqueros, pero no consiguieron fomentar nuevos préstamos bancarios. La discusión actual se centra menos en el peligro que representan los bancos para sus clientes que en los riesgos que generan para los contribuyentes. Las operaciones bursátiles con capital propio se justificaban no porque generasen grandes beneficios para los bancos (que lo hacían), sino porque se suponía que creaban mercados y proporcionaban liquidez para instrumentos que rara vez cotizaban. Los bancos crearon lo que a todos los efectos eran mercados de sustitución, que les permitían a sus clientes y a ellos mismos poner precio a instrumentos que de otro modo habría sido imposible valorar. Se suponía que los enormes beneficios eran la recompensa por la prestación de un servicio público. Esos grandes bancos son necesarios porque los pequeños actores por sí mismos no pueden constituir un mercado. Los bancos grandes también son agentes de peso en los mercados

88 monetarios internacionales y acumulan posiciones importantes en el cambio de divisas tanto entre sus filiales como sobre una base consolidada. Si los bancos modernos son demasiado grandes y demasiado peligrosos porque son demasiado vulnerables, la forma más evidente de hacer que sean más seguros es exigirles mayores requisitos de capital. Tradicionalmente, ésa era la opción que se defendía en la mayoría de los debates internacionales. Pero, por desgracia, la forma más evidente que tienen los bancos de aumentar su ratio de capital es reducir sus préstamos. En una crisis económica, eso es lo último que las empresas necesitan. La nueva respuesta al dilema es establecer por ley qué tipos de actividades deben suprimirse. La esperanza es que, al reenfocar así las actividades financieras, se estimulen otros tipos de préstamos. En los años treinta, el control de los bancos iba unido al control de los movimientos de capital y, en última instancia, a la fijación de los tipos de cambio. Unos cuantos economistas, en particular el austriaco Gottfried Haberler, propusieron la alternativa de los movimientos de capital continuos, facilitados por las principales instituciones financieras, y los tipos de cambio flexibles, pero la propuesta no llegó a tener resonancia política. Al celebrar la conclusión del acuerdo de Bretton Woods de 1944, que sentó las bases de la arquitectura financiera del mundo de la posguerra, el secretario del Tesoro estadounidense Henry Morgenthau aprovechó su discurso de clausura de la conferencia para hacer un llamamiento a favor de un sistema bancario más eficaz que proporcione más dinero con condiciones más baratas: "La consecuencia sería expulsar sólo a los prestamistas usureros del templo de las finanzas internacionales". Tras el fracaso del régimen del tipo de cambio de Bretton Woods a principios de los años setenta, todo el mundo suponía que un sistema monetario flexible traería más estabilidad. Pero, aunque hasta hace poco no hemos aprendido que los gigantes financieros crean inseguridad financiera, los mercados cambiarios se han caracterizado durante mucho tiempo por la inestabilidad y la incertidumbre. Estos mercados necesitaban que los grandes bancos actuasen como estabilizadores y asumiesen el otro lado de las apuestas. Cuando los grandes bancos no son capaces de desempeñar esta función y se ven obligados a reducir costes, aumenta la probabilidad de que los mercados se desestabilicen. Es probable que la siguiente fase de la crisis actual provoque más crisis de tipo de cambio, ya que la categoría crediticia de los Gobiernos y la posición de sus bancos van de la mano. En 1992, durante la crisis que hizo tambalearse el sistema monetario europeo, el ministro de Economía de Francia, Michel Sapin, habló en el Parlamento sobre cómo la Revolución Francesa había usado la guillotina con los especuladores. ¿Podríamos regresar a 1944, cuando se aplicó a escala internacional lo aprendido en los años treinta, y fijar una vez más los tipos de cambio? Eso iría en contra de casi todos los argumentos de la economía moderna, pero en un momento en que miramos al pasado en busca de soluciones financieras ya no es algo impensable. http://www.elpais.com/articulo/empresas/sectores/Regreso/futuro/finanzas/elpepueconeg/201 00131elpnegemp_8/Tes?print=1

89 ENTREVISTA: KENNETH ROGOFF Ex economista jefe del FMI "La resaca va a ser dura, pero España no es Grecia" C. P. - Davos - 31/01/2010 Kenneth Rogoff (Rochester, Nueva York, 1953) fue niño prodigio del ajedrez y gran maestro con apenas 25 años, poco antes de dejar esa prometedora carrera por una seudociencia social en horas bajas llamada economía. "Simplemente me cansé. Lo compaginaba con los estudios en Yale y decidí escoger ese camino", apunta en una cafetería de Davos. Ex economista jefe del FMI, profesor de Harvard y tremendamente influyente en círculos académicos y políticos, acaba de publicar junto con Carmen Reinhart un libro estupendo, Esta vez es diferente, que demuestra que la crisis actual no es una plaga bíblica, sino un latigazo con un parecido asombroso a anteriores episodios. Rogoff jugó varios torneos en su juventud en España. Y sigue de cerca su economía. "La resaca va a ser dura. Pero no estoy de acuerdo con quienes dicen que España puede suspender el pago de su deuda. Ha mostrado signos de debilidad y los mercados han olido sangre. Pero España no es Grecia. Irlanda y Portugal están peor, y hasta el Reino Unido, Japón y EE UU afrontan una situación complicada", resume al final de la charla. Pregunta. Una crisis económica combinada con una crisis bancaria suele desembocar en una crisis de deuda. ¿La burbuja ya está aquí? Respuesta. Para solucionar las crisis financieras lo normal es que se eleve con gran rapidez la deuda pública. No todas esas crisis acaban en impagos, pero la actual ha sido impresionante y ya empiezan a verse potenciales víctimas. Si un país pierde la confianza de los mercados lo acabará pasando mal. Seguro. Eso le está ocurriendo a Grecia. Y hay otros países que deberían empezar a preocuparse. Puede decirse que la burbuja ya está ahí, pero los programas del FMI y la fuerte rebaja de los tipos de interés pueden evitar muchos problemas. P. Los mercados han decidido que España puede ser una de las víctimas, pero su deuda está muy por debajo de otras. ¿Se ensaña el mercado con España? R. España tiene problemas, pero otros países están en peor situación. Grecia está mucho peor. Irlanda y Portugal están peor. P. ¿La tormenta sobre Grecia puede obligar a algún país a abandonar la eurozona? R. Varios ministros e instituciones europeas se han encargado de reiterar que eso es imposible, aunque es contraproducente negar algo tantas veces. Grecia se enfrenta a una posible suspensión de pagos, y el mercado ha marcado una línea difusa para otros países. Pero ahí pueden salir al rescate la UE y el FMI, y por otro lado tanto Grecia como Irlanda o España ya han iniciado fuertes ajustes para mejorar su credibilidad. En realidad, esto es sólo el principio. Cuando la deuda supera niveles del 80% del PIB el crecimiento se resiente. Y muchos países van a sufrir por eso. P. ¿Dónde ve otras amenazas? R. En China. China es uno de esos países que cree que esta vez es diferente. Está hinchando una burbuja enorme en el sector inmobiliario, y en los mercados, que trata de reducir ahora con una contracción del crédito. El peligro es evidente.

90 P. Advertir del riesgo de estallido de la burbuja de deuda es como invitar a retirar ya los estímulos públicos. ¿No puede provocar eso una recaída? R. No es una elección fácil, pero algunos países se han puesto en peligro y deben retirar ya los estímulos fiscales, una medida que va a ser dolorosa. Venimos de unos años de grandes excesos, y los excesos tarde o temprano se pagan. En algunos lugares no queda más remedio que poner en marcha planes de austeridad. P. España recortará gastos y subirá los impuestos indirectos. ¿Son medidas acertadas? R. Es inteligente. España tenía que ganarse la credibilidad del mercado. Es un país desarrollado y su regulación bancaria ha sido excelente, por lo que le será relativamente más fácil el ajuste. Por otra parte, el derrumbe inmobiliario dificulta las cosas: la deuda ha crecido rápido y los tipos están subiendo. Los españoles no tienen más remedio que enfrentarse a unos impuestos más altos. Eso puede ser desagradable, pero el Gobierno ha dado una señal clara, indispensable en estos momentos de desconfianza. P. Paul Krugman dice que los salarios españoles deben bajar un 10%. ¿Qué opina? R. Esto va a sonar duro: es necesario, aunque sería muy doloroso. Pero no creo que suceda. P. ¿Está a favor del plan de Obama sobre la banca? R. Me gusta la dirección. Aunque hay mucho que discutir: no basta con combatir el "demasiado grandes para caer" recortando el tamaño. Si divides un banco grande en 100 pequeños muy interconectados, tienes el mismo problema.

http://www.elpais.com/articulo/economia/resaca/va/ser/dura/Espana/Grecia/elpepieco/201 00131elpepieco_6/Tes?print=1

91 vox Research-based policy analysis and commentary from leading economists Financial system reform from first principles

Alberto Giovannini 30 January 2010

The debate over reform of the financial system has intensified even as the crisis has started to recede. This Policy Insight argues that too much investment activity has been able to operate without detection by regulators. To prevent a repeat crisis, regulators must have an informational advantage over market participants to assess the weaknesses in the financial system as they develop.

An intermediated financial system – where one of the tasks of intermediaries is liquidity transformation – is prone to financial crises. Financial crises are, essentially, the breakdown of financial intermediation, a sudden stop to financial transactions as market participants fear for the value of their investments and consequently demand immediate liquidation (Lagos, Rocheteau, Weill 2009). Financial crises are costly not only because of frictions such as bankruptcy costs, but also because liquidity transformation is socially productive, since it allows higher-yielding investments. The possibility of market failures therefore justifies a role for regulators. The tools to prevent financial crises are supervision, capital requirements and the management of the discount window. But the recent financial crisis, and in particular the events of 2008, have shown that these tools are seriously deficient; they did not prevent the build-up of systemic risk and the crisis itself. In CEPR Policy Insight No. 45, I discuss potential causes of the regulatory breakdown, and suggest a strategy for reform of regulations, with the sole objective, in this paper, of tackling the systemic risk problem. This paper builds on two earlier articles (Giovannini 2008a, b). In the last few decades the financial system has experienced fast growth and fast transformation, due to the adoption of a capitalist-based economic system by most large economies in the world and to the development of computation and communication technologies. Securities and derivatives issuance and trading has mushroomed, with two major effects; counterparty risk has increased exponentially and has even spread beyond banks, and liquidity risk now pervades securities markets. In addition, there has been a progressive divergence between functions and institutions in the financial system. As a result, institutional constraints to various financial businesses have become obsolete and inappropriate. An important example of this imbalance has been the growth of risky investment businesses within banking organisations, whose regulatory constraints on leverage and accounting were designed for client-service businesses, and not for investment businesses. This may have led to excessive risk taking in the run-up to recent financial crises, as the gigantic losses suffered

92 by banks strongly suggest. Having defined the market failures that characterised financial crises, and having identified the fundamental changes in the financial system that have occurred in the recent decades the paper discusses the pillars of a financial reform strategy. I start from the observation that, despite the phenomenal increase in number and complexity of financial transactions, it is possible and necessary to endow systemic risk managers with the informational advantage over financial market participants that they need to assess the weaknesses in the financial system as they develop. This will require a wide-ranging reform, in which all market actors who are – or maybe – involved in liquidity transformation disclose to supervisors the full extent of their activities. Another pillar of the reform strategy is a redesign to regulations pertaining to banks (client servicers) and investment managers (capital managers). It is generally agreed that these two functions are characterised by very different risks: hence a clearer institutional identification and separation of them is needed, as well as a uniform treatment of the different organisations within each function. Acknowledgements: The author thanks Vitor Gaspar, Garry Schinasi and Luigi Spaventa for comments and suggestions. References Giovanni, Alberto (2010). "Financial system reform proposals from first principles." CEPR Policy Insight No. 45, 29 December. Lagos, Ricardo, Guillaume Rocheteau, Pierre-Olivier Weill (2009). “Liquidity in the financial crisis: New insights on the lender of last resort.” VoxEU.org, 16 December. http://www.voxeu.org/index.php?q=node/4540

93 vox Research-based policy analysis and commentary from leading economists Too interconnected to fail = too big to fail: What is in a leverage ratio? Daniel Gros 26 January 2010

Did allowing financial institutions to become “too big” play a role in the financial crisis? This column argues that being “too interconnected” is also a factor, and that US accounting standards should recognise gross derivatives exposure on the balance sheet to make this interconnectedness, and the resulting exposure, clear. By now there is general agreement that a financial institution can not only be “too big”, but also “too interconnected” to fail. But how do we measure what it is to be too interconnected? This is where accounting enters the picture, for it turns out that some accounting systems show important interconnections, whereas others do not. Moreover, when interconnections are revealed on balance sheets, they have an important impact on one measure of risk, the leverage ratio, which is supposed to supplement the traditional risk-weighted capital- adequacy measures under the Basel rules. Are we primed for another crisis? Properly measured, leverage is still at the same level as at the peak of the bubble in late 2007. The conditions for a new systemic crisis are thus still in place. Why has the leverage ratio, defined as total assets divided by total capital, become popular? Because it directly shows the maximum percentage loss a bank can sustain on its assets before it loses all of its capital. For example, if the leverage ratio is 50, capital disappears if the bank loses on average 2% on its assets. This is why some observers have proposed adding this crudely calculated leverage ratio to the standard risk-weighted capital ratios under the Basel regime. In practice this idea will immediately encounter a fundamental conceptual problem in the context of making transatlantic comparisons, given that the EU uses different accounting principles (International Financial Reporting Standards or IFRS) than the US, which follows the Generally Accepted Accounting Principles or GAAP. These two accounting systems generally yield similar results, but they present a completely different picture in the case of derivatives because exposure to this particular financial instrument is reported gross under IFRS, but net under GAAP. This makes a huge difference, as illustrated by the following two examples. Accounting for derivatives: IFRS vs GAAP Deutsche Bank is among the few banks that report their balance sheets under both GAAP and IFRS. Under IFRS, its balance sheet shows assets of around €2 trillion for 2008. In order to show how much its leverage has fallen, Deutsche Bank has published its own evaluation of how large its balance would be under GAAP, arriving at only €1 trillion – but

94 roughly the same level of equity. This implies that its leverage would be halved if judged under the US accounting system (see Figure 1). Figure 1. Deutsche Bank results: IFRS vs GAAP

Source: Ackermann (2009) The key difference between IFRS and GAAP is the treatment of the item called (under IFRS) “positive market values from derivatives”, which equals €1.224 billion on Deutsche Bank’s IFRS balance sheet. Under GAAP, however, this item would shrink to about one- tenth of that figure, with only €128 billion appearing under “derivatives post netting”. A similar observation applies to the liability side of the balance sheet. With IFRS, Deutsche Bank also shows over €1.2 billion in liabilities under “market values of derivatives”, which presumably would also be reduced by a factor of about 10 under GAAP. For other categories (loans, repos, etc.) the difference in the results between IFRS and GAAP are minor. This important difference in reporting on derivatives, however, renders as meaningless any transatlantic comparisons in leverage for investment banks (or the investment banking arms of EU universal banks) – which is exactly where the crisis arose in 2008. Unfortunately, none of the leading US investment banks have published its accounts under IFRS. Despite this, the notes to the balance sheets of some of them show that the impact of showing the ‘gross’ amount of derivates exposure would be major. For example, the institution epitomising investment banking, Goldman Sachs, reported at the end of 2008 a balance sheet (total assets) of about $900 billion (equivalent to about €600 billion, which would not put GS among the top five in Europe) with the item “market value of derivatives” amounting to $120 billion. But the notes to its financial statement reveal that the gross derivatives exposure was over $3,700 billion or 30 times more. This suggests that measured under IFRS, the balance sheet might be 5 times larger (3,700 + 900 = 4,600) than under GAAP. Goldman Sachs reported shareholders’ equity of $64 billion for end 2008. This would translate into a leverage ratio of slightly below 15 under GAAP (900/64), but under IFRS the leverage ratio would be five time higher, almost 72 (4,600/64)! This is higher than the IFRS leverage for Deutsche Bank mentioned above and almost three times the average of the 15 largest European banks (see below).

95 Explaining the difference between IFRS and GAAP What is the reason for this huge difference in the way derivatives show up in the balance sheet? The key difference is the netting allowed under GAAP, but not IFRS. In the wake of the market’s reaction to the insolvency of Lehman Brothers, too interconnected has been advocated as another principle for not letting a bank fail. Under IFRS this might not be a separate principle from the usual too big to fail, since most interconnections show up in the balance sheet, but not under GAAP. This difference between IFRS and GAAP could resolve to some extent the mystery of why the US authorities were surprised by the extent of the market reaction to the failure of Lehman. Lehman’s balance sheet (total assets around $600 billion, not far from Goldman Sachs) reflected GAAP and thus did not show the extent of the exposure of other market participants. The example from Goldman Sachs suggests that the balance sheet of Lehman under IFRS would have been several times larger, thus giving a better picture of the importance of Lehman. A balance sheet under IFRS would thus give a better picture of the exposure of the bank itself to counterparty risk. Assume a bank has a large amount of derivatives contracts outstanding, but without any significant net exposure. It could still make very large losses in case important counterparties fail and netting arrangements do not work or the pricing of the contracts is distorted, as happens typically in a systemic crisis. This is why the highly leveraged European banks came under such intensive pressure during the acute phase of the crisis. High leverage should be a warning Unfortunately, there has been no reduction in leverage since the “Mother of all bailouts” of the autumn of 2008 (see Gros and Micossi 2008). As Table 1 below shows the average leverage ratio of the 15 largest EU banks is exactly at the same level (28.7) as in late 2007, before the crisis. Measured leverage increased temporarily to 35 during the crisis because the increase in volatility increased the value of most derivates. The fact that leverage is still at the same level as at the peak of the credit bubble should be seen as a warning. Should disorderly market conditions return, European policymakers could be faced with similar problems. It is likely that in the US leverage has also not declined if one takes into account “off balance” derivative exposure, but this is not possible to document at this stage. Table 1. Leverage ratio (total assets/equity), average 15 biggest EU banks

June 30 2009 Yearend 2008 Yearend 2007

28.7 35.5 28.7 Source: own computations based on data from FT.com. In favour of full disclosure Regulators have also recently expressed their support for fully recording derivate exposure on balance sheets in a recent consultative document of the Basel Committee. “213. Certain differences in accounting treatments across jurisdictions can have a significant impact on the measurement of a leverage ratio at an international level. The main difference in accounting between IFRS and GAAP arises from the netting of derivatives and repos.

96 215. Consistent with taking a non-risk based approach and international comparability the proposed measure of exposure does not permit netting.” This crisis has shown that a full (gross) accounting for all potential exposure, including derivatives, is essential for two reasons: • Showing gross derivatives exposure on the balance sheet gives an immediate picture of the interconnectedness of a bank, making it unnecessary to introduce “too interconnected to fail” as an additional criterion. • An overall leverage ratio based on derivates measured on a gross basis shows the overall exposure of a bank, especially in a systemic crisis. By contrast, the GAAP (and the usual Basel ratios) just show risk under normal market conditions. References Ackermann, Josef (2009), “Financial Transparency”, presentation, Montreal and Toronto, 19-20 February. Gros, Daniel and Stefano Micossi (2008), “The beginning of the end game”, VoxEU.org, 20 September. http://www.voxeu.org/index.php?q=node/4524

97 vox Research-based policy analysis and commentary from leading economists Who fell in 2009: Those with current account deficits or with extra froth?

Ashoka Mody 21 January 2010

Virtually no country was untouched by the crisis. But which countries saw the sharpest declines in GDP – and why? This column shows that those with higher growth rates before the crisis fell harder while relatively closed economies were somewhat insulated. In contrast, the relationship between current account deficits and the decline in growth rates is fuzzier.

The full force of the global crisis was felt in 2009. Relative to 2008, generally regarded as the first full year of the crisis, the fall in 2009 growth rates was breathtaking (Table 1). Table 1. Change in the 2009 GDP growth rate relative to 2008 Number Standard 25th 75th of Mean deviation percentile percentile countries

Advanced 33 -4.8 2.1 -5.9 -3.7 Upper-Middle Income 34 -6.9 4.3 -8.7 -3.7 Lower-Middle Income 36 -4.1 4.2 -6.1 -1.1 Low Income 34 -2.5 2.8 -4.1 -0.6 Average -4.6 3.1 -6.1 -2.1

Note: Growth forecasts for 2009 are from the IMF’s October World Economic Outlook. The sample does not include countries with current account surpluses greater than 25% or less than -25% of GDP, or small island economies. “Upper Middle-Income countries are those with per capita incomes greater than $4000. The “Lower Middle-Income” countries are those with per capita incomes between $900 and $4000. “Low-Income” countries have per capita incomes below $900. These definitions correspond to the World Bank classifications.

On average, a country’s GDP was about 4.5 percentage points lower in 2009 than in 2008. The devastation was widespread. Virtually no country was untouched by the panic in financial markets and the collapse in world trade. But the crisis also had diverse effects. The 25th percentile in the change of growth rates was - 6 percentage points and the 75th percentile was -2 percentage points. The diversity is also evident across country groups; the fall was large among advanced economies (4.8 percentage points) and, especially upper-middle-income economies (6.9 percentage points) and more

98 moderate among lower-middle-income (4.1 percentage points) and low income countries (2.5 percentage points). Within these groups, the experience varied considerably, particularly among the middle-income countries. A widely held view is that countries with large current account deficits were living beyond their means and suffered disproportionately during the crisis (see DeLong 2008). Latvia’s large deficit and its growth collapse symbolise this view, although it is common to generalise to all of Central and Eastern Europe. How empirically well-founded is this relationship? Figure 1 reports bivariate relationships reflecting country access to foreign capital and institutional credibility in managing the flows (see the appendix table for details).

Figure 1. Change in growth in 2009 relative to 2008 vs (a) growth in 2007 (b) current account in 2007 GDP growth, 2007 Current A/C, 2007 GDP growth, 2007 Current A/C, 2007

GDP growth, 2007 Current A/C, 2007 GDP growth, 2007 Current A/C, 2007

Froth The consistent evidence is that the greater the pace of growth in 2007 – at the peak of the upswing—the sharper was the fall in 2009. It is as if the strong growth rates in 2007 reflected a global boom that was unsustainable. The fact that this relationship holds in a cross-country regression implies that there was a global component of unsustainable growth. Thus, even countries that did not have bubbles in the obvious sense of overheated property sectors or rapid credit growth shared in the global froth. In addition, among middle- and low-income economies, if growth did not moderate sufficiently in 2008, the penalty was paid in 2009.

99 Current account deficits There is much weaker support for the idea that higher current account deficits contributed to a sharper fall in 2009. The bivariate relationships are relatively fuzzy, reflected in the lack of precision on the current account variable in the regressions. With the conventional positive sign on the current account balance, a larger surplus in 2007 is associated with a greater growth deceleration in 2009 among the advanced countries. Though the coefficient is not significant, it does reflect the differing forces operating. The decline in US growth was, for example, less than that of Germany and Japan, as these surplus countries were particularly hit by the contraction of world trade. This, in turn, reflects the difference in the composition of growth in the surplus and deficit economies. Countries running surpluses relied heavily on world trade, which took a major hit in late 2008 and the early part of 2009, sharply curtailing growth rates in 2009. The deficit countries relied more on domestic consumption, which also fell but less than did world trade. Among non-advanced countries, deficits did hurt, but the coefficient is significant only for the lower-middle income group, that at a 10% level. Once again, this reflects the fact that both net exporters and net importers were hurt. Even among low-income countries, commodity exporters with sound current account positions suffered as commodity prices fell. There is some evidence that lower-middle-income and low-income countries that consolidated in 2008 were less vulnerable in 2009. Regional diversity The regional diversity among the non-advanced economies suggests that regions that were relatively closed to international trade and financial flows remained somewhat insulated from the global crisis. On the whole, African and Middle Eastern countries, excluding Iraq and those with current account surpluses greater than 25%, performed better than Asian economies, the benchmark for the analysis. In contrast, countries belonging to the former Commonwealth of Independent States did markedly worse. The lower-middle-income Latin American countries fell behind. Among the Central and Eastern European economies, there was considerable variation. Those hurt were lower-middle-income economies such as Albania, Bosnia and Herzegovina, and Macedonia, and the Baltic nations. The rest did only marginally worse than the Asian economies. The Latvian example is inappropriately extended beyond its borders. Even by the standards of Central and Eastern Europe, Latvia was going beyond the speed limits (Fabrizio, Leigh, and Mody, 2008). But the results do caution that generalising from Latvia is not warranted. The more general finding is that economies of various stripes were overheated to varying degrees, and the crisis was, in part, a correction of that overheating. Some policy speculations The evidence suggests that within relatively homogenous country groupings, the decline in GDP growth in 2009 relative to 2008 was greater the higher the growth rate in 2007. While there are many reasons to celebrate that expansion, including bringing into the fold many low income countries, it also accumulated an unsustainable element. Understanding the reasons for the global coordination of country bubbles is key to thinking about future systemic vulnerabilities. Clearly, running a large current account deficit is a source of vulnerability. But the evidence cautions that pointing the finger in that direction may distract from the more potent underlying reasons for the “Great Recession” of 2009. Disclaimer: The views expressed here are those of the author and not necessarily those of the IMF, its management, or its Executive Board.

100 References DeLong, J. Bradford (2008), “The wrong financial crisis”, VoxEU.org, 10 October. Fabrizio, Stefania, Daniel Leigh, and Ashoka Mody (2008), “The Second Transition: Eastern Europe in Perspective,” Paper prepared for the Workshop: “Five years of an enlarged EU—a positive-sum game” Brussels, 13-14 November, forthcoming in a European Commission edited collection. Appendix Appendix table: Explaining the drop in the 2009 GDP growth rate relative to 2008 Dependent Variable: Change in GDP growth rate between 2008 and 2009 VARIABLES Advanced Upper- Lower- Low- Upper- Lower- Low- Middle- Middle- Income Middle- Middle- Income Income Income Income Income

Change in growth rate -0.29 -0.18 -0.60*** -0.7*** -0.71*** -0.33** -0.6*** between 2007 and (-1.27) (-0.66) (-2.79) (-5.98) (-5.51) (-2.41) (-9.49) 2008 Change in the current -0.11 -0.22 0.28** 0.21*** 0.03 0.01 0.23*** account between 2007 (-0.70) (-1.13) (2.60) (3.51) (0.39) (0.18) (7.25) and 2008 Current account deficit -0.02 0.08 0.09* 0.03 -0.05 0.06 0.11*** in 2007 (-0.35) (1.08) (1.88) (0.80) (-1.46) (1.61) (5.32) Growth rate in 2007 -0.78*** -0.57* -0.39* -0.5*** -0.70*** - -0.5*** 0.51*** (-3.44) (-2.01) (-2.00) (-5.51) (-5.52) (-4.06) (-9.70) Per capita Income in 0.00 -1.01 -2.62*** -0.22 -1.71** -1.26** 0.57* 2007 (0.00) (-0.64) (-3.40) (-0.38) (-2.20) (-2.14) (1.84) Africa 3.02** 0.39 0.66* (2.36) (0.51) (1.89) Middle East 8.28*** 0.52 (4.94) (0.59) Western 1.84 - 3.02*** Hemisphere (1.62) (-3.79) CIS -0.82 - -2.9*** 13.6*** (-0.61) (-12.47) (-5.84) Baltics -12.2*** (-8.48) Other Central-Eastern -2.17 - Europe 3.61*** (-1.62) (-2.92) Constant -2.37 5.87 19.02*** 2.73 11.14 10.10** -1.92 (-0.23) (0.40) (3.35) (0.76) (1.57) (2.35) (-0.96)

Observations 32 34 36 34 34 36 34 R-squared 0.41 0.24 0.52 0.69 0.94 0.93 0.9 1. t-statistics in parentheses, *** p<0.01, ** p<0.05, * p<0.1 2. Estimation uses the robust regression procedure to minimise the influence of outliers. A regression using robust standard errors gives virtually identical results. 3. The sample does not include countries that current account greater than 25% or less than -25 percent.

101 4. “Upper Middle-Income countries are those with per capita incomes greater than $4000. The “Lower Middle- Income” countries are those with per capita incomes between $900 and $4000. “Low-Income” countries have per capita incomes below $900. These definitions correspond to the World Bank classifications. 5. The omitted region is Asia. http://www.voxeu.org/index.php?q=node/4507

102 vox Research-based policy analysis and commentary from leading economists The recession will be over sooner than you think Nicholas Bloom Max Floetotto, 12 January 2009

A key source of the today’s economic weakness is uncertainty that led firms to postpone investment and hiring decisions. This column, by the authors whose model forecast the recession as far back as June 2008, report that the key measures of uncertainty have dropped so rapidly that they believe growth will resume by mid-2009. This means any additional economic stimulus has to be enacted quickly. Delaying to the summer may mean the economic medicine is administered just as the patient is leave the hospital. Many pundits (e.g. Krugman) are warning that a dire recession is in the offing. We would have agreed with them three months ago; indeed, we wrote a VoxEU column predicting a severe recession in 2009; based on the analysis of 16 previous economic shocks, we forecasted a 3% drop in GDP and a 3 million increase in unemployment in each of Europe and the US with these predictions made from VAR forecasts (see Bloom 2008 for details). We also worried about a far worse outcome – Europe and the US slipping into another Great Depression due to damaging policy responses. Luckily, using the latest data on uncertainty measures, our model predicts that the worst has been avoided. Good news: Great Depression II avoided and growth resumes mid-2009 Much like today, the Great Depression began with a stock-market crash and a melt-down of the financial system. Banks withdrew credit lines and the inter bank lending market froze-up. What turned this from a financial crisis into an economic disaster, however, was the compounding effect of terrible policy. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by desperate US policymakers as a way of blocking imports to protect domestic jobs. Instead of helping workers, this worsened the situation by freezing world trade. At the same time policymakers were encouraging firms to collude to keep prices up and encouraging workers to unionize to protect wages, exacerbating the situation by strangling free markets. In fact economic uncertainty is now dropping so rapidly that we believe growth will resume by mid-2009. Uncertainty is now falling It now appears that the global policy response to the credit crunch has avoided repeating those mistakes. Instead, it has focused on delivering a massive dose of tax and interest rate cuts, and spending increases. Policies restricting free-markets have largely been avoided. This has calmed stock markets as the fears of an economic Armageddon have subsided. At the same time political uncertainty has dropped as world leaders have clarified their stimulus plans. Figure 1 shows one measure of uncertainty – the implied volatility on the S&P 100 – commonly known as the financial “fear factor”. This jumped over three fold after the dramatic collapse of Lehman’s in September 2008. But it has fallen back by 50% over the last three weeks as both economic and political uncertainty has receded. Other measures of uncertainty have also fallen; this is even true for the frequency of the word “uncertain” in the press! As uncertainty falls the economy will rebound The heightened uncertainty after the credit crunch led firms to postpone investment and hiring decisions. Mistakes can be costly, so if conditions are unpredictable the best course of action

103 is often to wait. Of course, if every firm in the economy waits, economic activity slows down.1

But now that uncertainty is falling back growth should start to rebound. Firms will start to invest and hire again to make up for lost time. Figure 2 shows our predicted impact of the spike in uncertainty following the credit crunch. This is based on our detailed analysis of 16 previous financial, economic and politically driven uncertainty shocks. After falling by 3% between October 2008 and June 2009, we forecast GDP will rapidly rebound from July 2009 onwards. So it’s now or never for expansionary policy Many economists make the case for a stronger policy response. That might be right, but policy makers need to act fast. Any additional economic stimulus – be it a spending package, quantitative easing or a couple of rounds of liquidity injections – has to be enacted quickly. Dithering over different courses of policy will actually make things worse by adding uncertainty (see Caballero 2008). This is exactly what happened after 9/11 when the Federal Reserve Board criticized Congress for creating unnecessary uncertainty with its lengthy debates on investment tax credits. Delaying the stimulus package until the summer may mean that it is too late. The economic medicine will be administered just as the patient is trying to leave the hospital! References Caballero, Ricardo (2008). “Normalcy is Just a Few Bold Policy Steps Away,” December 17, 2008.

104 Bloom, Nick, Max Floetotto and Nir Jaimovich (2008). “Really Uncertain Business Cycles.” Bloom, Nick (2008). “The Impact of Uncertainty Shocks,” Stanford mimeo, forthcoming Econometrica. Krugman, Paul (2009). “Ideas for Obama,” New York Times column, 11 January 2009.

Footnotes 1 See “Really Uncertain Business Cycles” by Bloom, Floetotto and Jaimovich for a more detailed discussion ; here is the abstract from that paper: “This paper proposes uncertainty shocks as a new impulse driving business cycles. We first demonstrate that uncertainty, measured by a number of proxies, appears to be strongly countercyclical. When uncertainty is included in a standard vector-auto-regression, uncertainty shocks lead to a large drop and rebound in economic activity. Guided by this we build a stochastic dynamic general equilibrium model that extends the benchmark neoclassical growth model along two dimensions. It allows for heterogeneous firms with non-convex adjustment costs for both capital and labor, and time varying uncertainty defined as fluctuations in the variance of technology shocks. Increases in uncertainty lead to large drops in employment and investment. This occurs because uncertainty makes firms cautious, leading them to pausing hiring and investment. This freeze in activity also reduces the reallocation of capital and labor across firms, leading to a large fall in productivity growth. Taken together, the freeze in the hiring and investment, and the drop in relocation, lead to a business cycle sized drop and rebound in output, investment and productivity growth after a rise in uncertainty.” http://www.voxeu.org/index.php?q=node/2785

105

Obama Needs to Teach the Public how to Get Out of the Mess We're in, But He's Not Robert Reich Jan 29, 2010 6:13PM The President wants businesses that hire new employees this year to get $5,000 per hire, in the form of a tax credit. That will come to about $33 billion. It’s good step. He’s also supporting a cut in the capital gains tax for small businesses. That makes sense; after all, small businesses generate most jobs.

But here’s the problem. Both of these measures, and many of the other tax cuts he’s proposing, give ammunition to supply-siders who think the way out of this awful economy is simply to cut taxes on businesses. If a new jobs tax credit is a good idea, why not a cut corporate in income taxes? If it’s useful to reduce capital gains taxes for small businesses, why isn’t it useful to reduce them for all businesses? The answer, of course, is that across-the-board supply-side tax cuts for businesses don’t increase the demand for the things businesses produce. They’re useful only to the extent businesses are confident consumers are out there, able and willing to buy. Carefully targeted — as are the cuts the President is proposing — they can give businesses an extra nudge to hire. But without adequate demand, they’re useless. So what’s the President’s new proposal for boosting overall demand? Hmmm. Turns out, he’s not really proposing anything new on that score. (Some who watched his State of the Union the other night thought they heard him call for a second stimulus. Actually, he didn’t, and as far as I can tell he doesn’t plan to.) His political advisors are telling him to emphasize deficit reduction instead. And that’s what he did Wednesday night when he talked about a “freeze” on discretionary spending, and a “commission” to look for ways to cut the deficit. I can understand why Obama’s political advisors are pushing him in this direction. Many Americans borrowed too much during the boom years before the Great Depression, and now they’re paying the price. So they naturally analogize their own plight to that of the federal government and the economy as a whole. The government is too deep in debt, they reason. Logically, that means the only way out of the nation’s economic doldrums is for the government to mend its ways. The government has to reduce its budget deficit just like American families have to reduce theirs. This analogy is faulty, of course. If John Maynard Keyenes taught us anything, it’s that a federal budget is not at all like a family budget. In fact, it’s precisely because families have to pull in their belts that the federal government has to let its belt out. When consumers and businesses aren’t buying much of anything, the government has to fill the gap. That’s the only way to get jobs and get the economy moving again. Once the economy is percolating, the government can pull back. By then, tax revenues will soar, and the long-term deficit will shrink. (And yes, entitlement reform is probably necessary in the long term. But here again, it’s vitally important to separate the long term from the now.) But if the public learns the wrong set of lessons — that tax cuts for businesses are good, and deficit reduction starting now is good — there’s no hope for getting wise policies out of Congress. The debate is framed all wrong.

106 The President — any president — is the nation’s educator in chief. Everything he proposes contains an implicit lesson. The economic lesson President Obama ought to be teaching is that targeted tax cuts, mostly for small business, are good to the extent they give businesses a nudge toward creating more jobs. But businesses won’t begin to create lots of jobs until they have lots of customers. And that won’t happen until lots more Americans have work. The only way to get them work when businesses aren’t hiring is for government to prime the pump. One final lesson I wish he’d teach: The best and fastest way for government to prime the pump is to help states and locales, which are now doing the opposite. They’re laying off teachers, police officers, social workers, health-care workers, and many more who provide vital public services. And they’re increasing taxes and fees. They have no choice. State constititions require them to balance their budgets. But the result is to negate much of what the federal government has tried to do with its stimulus to date. We need a second stimulus directed at states and locales. I wish our educator-in-chief would say that loud and clear, explain why, and then do it.

Originally published at Robert Reich's Blog and reproduced here with the author's permission. http://robertreich.org/post/358773967/obama-needs-to-teach-the-public-how-to-get-out- of-the

107

Obama Wants to Limit Government Spending Despite High Unemployment and a Fragile Economy Mark Thoma Jan 26, 2010 11:44AM Here's the administration's latest bright idea: Obama Seeks Freeze on Many Domestic Programs, by Jackie Calmes, NY Times: President Obama will call for a three-year freeze in spending on many domestic programs... The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address... Brad DeLong reacts (see here too): Barack Herbert Hoover Obama?, by Brad DeLong: For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one... What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year, the employment numbers are more like 3.3 and 3.7 million in 2011 and 2012, respectively.) ... As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of the fundamental unseriousness of Barack Obama and his administration: rather than make proposals that will actually tackle the long- term deficit in a serious way--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--he comes up with a proposal that does short-term harm to the economy as an alternative to tackling the deficit in any serious and significant way. As another points out, it is hard to imagine a less competent legislative operation: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It's quite another to negotiate against yourself by attacking employment in the short term. ... I can't disagree at all. This is pretty disappointing. The long-term budget problem is due to primarily one thing, rising health care costs. Everything else is dwarfed by that problem. If we solve the health care cost problem, the rest is easy. If we don't solve it the rest won't matter.

108 This was an opportunity for Obama to explain the importance of health care reform and how it relates to the long-term debt problem. Why not emphasize this?: Sam Stein: Orszag Calls Senate Health Care Bill Biggest Cost-Container Ever Considered: The health care bill before the Senate would cut costs and reform health-care delivery more than any piece of legislation in American history, White House budget director Peter Orszag declared on Wednesday. "The bottom line is the bill that is currently on the Senate floor contains more cost containment and delivery system reforms in its current form than any bill that has ever been considered on the Senate floor period," the Office of Management and Budget director told reporters... Instead we get cheap political tricks that are likely to backfire. How will this look, for example, if there's a double dip recession, or if unemployment follows the dismal path that the administration itself has forecast? This seems to be a case of the former Clinton people in the administration (or wannabees) trying to relive their glory days instead of realizing that those days are gone, the world is different now and it calls for different solutions. I wasn't in favor of having so many Clinton administration people in this administration, and nothing so far has caused me to change that assessment. They're nothing but trouble.

Originally published at Economist's View and reproduced here with the author's permission. http://economistsview.typepad.com/economistsview/2010/01/obama-wants-to-limit- government-spending-despite-high-unemployment-and-a-fragile-economy.html

109 The People’s Bank of China and the Road Not Taken By Adam Wolfe and Rachel Ziemba 1/25/2010 | Last Updated The following content is offered for the exclusive use of RGE’s clients. No forwarding, reprinting, republication or any other redistribution of this content is permissible without expressed consent of Roubini Global Economics, LLC. All rights reserved. If you have received access to this content in error, RGE reserves the right to enforce its copyright and pursue other redress. RGE is not a certified investment advisory service and aims to create an intellectual framework for informed financial decisions by its clients. EXECUTIVE SUMMARY The steps China has taken so far to rein in excess liquidity have been moderate, and real tightening has not started yet; We maintain our forecast for inflation to average 3.5% in 2010 and expect rising inflation and improving exports to trigger an interest rate hike in Q2; If China waits to raise interest rates and slow stimulus-related investment until H2, a boom-bust cycle could easily result. When the People’s Bank of China (PBoC) raised the required reserves ratio (RRR) by 50 basis points earlier this month, it surprised the markets and caused analysts to pull forward their [...]

Eurozone: Monetary Policy

How and When Will the ECB Exit From Monetary Easing? ECB Statements: What Is the ECB Thinking? Credit Crunch in the Eurozone Intensifies: Loans to Non-Financial Corporations Decrease Further What Is the Impact of ECB Refinancing Operations? How Has the ECB Balance Sheet Changed? What Is the ECB Style of Quantitative Easing? Eschewing Government Bonds? Is the ECB Less Accommodating Than the Fed?

Overview: The European Central Bank is the independent central bank that governs monetary policy in the Eurozone. Though it is not formally an inflation-targeter, it aims primarily to maintain the euro's purchasing power in the euro area. Towards this end, the ECB formulated a monetary

110 strategy based on the 'twin pillars' of price stability (annual inflation below but close to 2% over the medium term) and a compatible money supply growth rate (around 4.5% annual M3 growth). The ECB uses a variety of tools to achieve its goals, such as interest rates on loans to banks and open market operations. The global credit crisis starting late 2007 behooved the ECB to modify its lending and deposit facilities and expand its policy toolbox to include outright asset purchases and FX swaps.

Germany: Labor Market

German Unemployment Rises in January: What Is the Labor Market Outlook? Will Germany's Short-Work Scheme Help Avert Massive Lay-Offs?

Overview: The German labor market had long been characterized by its lack of flexibility, a low participation ratio as well as one of the highest unemployment rates in Europe. The rigid labor market saw some groundbreaking reforms in 2003 with the launch of the so-called “Agenda 2010” which severely limited the duration and amount of unemployment benefits and relaxed hiring and firing regulations. Between 2005 and November 2008, unemployment fell from 12.7% to 7.1%. Despite the depth of the current economic recession in Germany, the labor market has been relatively unaffected as a result of short-work measures in which employers cut working hours and the government compensates workers for the loss in salary.

United Kingdom: Banking Sector, Risk Management and Financial Regulation

What are the Risks to the UK’s Banking Sector? UK Credit Conditions: Crunch Time? RGE Strategy Flash: Elections and Banker Compensation in the UK The UK Financial Sector: Towards a Separation of Utility-Banking and Trading Activities? Lord Turner Tobin-Tax Proposal: Brown Backtracks following G20 Meeting High-Street Banks in Flux while RBS and Lloyds Seal Funding FSA Calls for Increased Capital Requirements UK Plans to Sell £16bn of Assets UK Banking Crisis: Can Public Finances Cope?

Overview: The subprime crisis and the ensuing global recession continued to take a toll on the British economy, as legacy debt remained on the books of the UK's financial institutions, despite the

111 government's bank bailouts. British Prime Minister Gordon Brown joined his counterparts at the G20 summit in Pittsburgh, PA, in late-September 2009 to complete what he called "the unfinished business" of cleaning up banks, with bank reform--capital adequacy, accounting for assets and liabilities, stimulus exit strategies and executive renumeration--high on the global economy-focused agenda. Germany: Economic Profile

Germany: What Will Economic Growth Look Like in 2010? Germany's Ifo Survey Reaches 18-Month High: Is January the Peak? German Investor Confidence Declines in January - Is the Recovery Slowing Down? German GDP Contracts 5% in 2009: Is the Recovery Losing Steam? Germany: Industrial Production Declines in October - Is the Economic Recovery Losing Momentum? Germany: What Is the Outlook for Investment? What will be the Shape of the German Recovery? Will East Germany's Economy Ever Catch-Up with its Western Counterpart?

Overview: Germany is the fifth largest economy in the world and the largest in the European Union. Germany relies on the economic model of a social market economy which combines elements of market capitalism with a generous welfare state and strong labor protection. While Germany has an impressive economic track record, the German economy is also suffering from structural problems such as high unemployment, low GDP growth, a rigid labor market and an unsustainable welfare state. In addition, the economies of those states which used to represent East Germany are still underperforming. As a result of painful reforms implemented by former Chancellor Gerhard Schroeder, Germany was able to fully take advantage of a booming global economy after 2003. Germany’s strength lies in manufacturing and the economy depends excessively on exports as a result of which it is one of the most volatile in the world. Small and medium sized firms which specialize in niche products, rely on bank financing and are often privately owned make up the backbone of the German economy. These firms, which are highly dynamic and competitive, employ roughly two-thirds of the German workforce. Looking forward, Germany is facing strong economic headwinds. The economy which entered into a severe recession in the second quarter of 2008, is set to register one of the sharpest GDP declines in 2009 among industrialized countries despite a large fiscal stimulus package. While the German economy is in a good position to take advantage of a rebound in global growth it has been facing severe criticism for its export-dependent growth model and calls to rebalance the economy by relying more on domestic demand are growing louder. Furthermore, the recession will leave Germany with a much larger budget deficit which is already under pressure from ballooning social security spending, largely the result of an ageing society.

112 The Greece Dilemma: Sovereign Debts Imperiling the Euro and Challenging EU Ties By Arnab Das, Elisa Parisi-Capone and Natalia Gurushina 1/19/2010 12:00:00 AM | Last Updated The following content is offered for the exclusive use of RGE’s clients. No forwarding, reprinting, republication or any other redistribution of this content is permissible without expressed consent of Roubini Global Economics, LLC. All rights reserved. If you have received access to this content in error, RGE reserves the right to enforce its copyright and pursue other redress. RGE is not a certified investment advisory service and aims to create an intellectual framework for informed financial decisions by its clients. Executive Summary Greece’s sovereign debt crisis puts the credibility of the euro and European institutional arrangements on the line. Nothing less than the stability of the euro, the integrity of European Monetary Union, even the EU and European integration itself are at stake. At their January 18, 2009 meeting, eurozone finance ministers kept up the pressure on Greece to fulfill its commitment to cut its budget deficit, estimated to be close to 13% of gross domestic product in 2009, to less than 3% of GDP in 2012. The European Commission, the EU's executive arm, will take a closer look at [...]

Comparing 2010 Growth Forecasts for Major Economies By Rachel Ziemba, Elisa Parisi-Capone, Christian Menegatti, Arpitha Bykere, Bertrand Delgado and Mikka Pineda 1/21/2010 | Last Updated

EXECUTIVE SUMMARY

Aggressive policy stimulus led the global economy first to stabilization and then to growth in H2 2009, but the shape and robustness of the recovery remains uncertain. RGE continues to believe that a U-shaped, subpar economic recovery in the advanced world is most likely. Emerging markets, particularly those with strong balance sheets in Asia and Latin America, will display a stronger recovery and outperform advanced ones, further increasing their share of global output. High unemployment rates, particularly in advanced economies, will restrain consumption and the cost of rebuilding corporate, household and government balance sheets will be a [...] http://www.roubini.com/

113

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS MONITOR < Go to Peterson Institute for International Economics Monitor Main Page Monetary Policy and Asset Bubbles in 2010 Joseph E. Gagnon Jan 13, 2010 7:47PM In his speech at the American Economic Association on Sunday, Ben Bernanke, chairman of the Fed, said that monetary policy played at most a small role in the US housing bubble and that financial regulatory policy is the appropriate tool for preventing harmful asset price bubbles in the future. I agree with these conclusions, but I suspect that many do not, even within the world of central banking. Brad DeLong recently described the dilemma about bubbles that some central bankers may believe they face. On his weblog, DeLong presents a simple model of a bubble caused by a central bank that holds the short-term interest rate below its long-run equilibrium in order to offset a shortfall in aggregate demand, i.e., to fight a recession. This bubble is caused by the “carry trade.” Speculators borrow at the low short-term interest rate to purchase a long-term asset at a price above its long-run expected value. They know that the asset price will fall when the central bank raises the interest rate at some future date, but in the meantime they can earn income above their cost of borrowing (this excess income is known as the “carry”). If speculators correctly evaluate these costs and benefits, their expected carry will equal the expected fall in the asset price and there is in fact no bubble. Another way of saying the same thing from the point of view of an unleveraged investor is that the expected returns to holding either the high-priced long-term asset or a short-term deposit or T-bill are the same. Indeed, by lowering the short-term interest rate, the central bank intentionally raises the fundamental value of the long-term asset in order to stimulate private spending. However, if speculators incorrectly assume that they are smart enough to sell before the price of the long-term asset falls, or if they believe that the government may bail them out when the asset price falls, then there will be a bubble—the asset price will rise too high. DeLong assumes that the bursting bubble causes a decline in social welfare equal to any bailout plus an amount proportional to the squared losses of the speculators. DeLong’s model cleverly captures many key features of an asset bubble and yet remains simple enough to draw clear conclusions. He shows that overconfidence about being able to get out before the bubble bursts and expectations of a bailout make bubbles costly. The cost of bursting bubbles discourages the central bank from lowering the interest rate as much as it needs to stabilize the economy. These results reflect the dilemma that many observers currently see in monetary policy—how to walk the fine line between easing too little to fight unemployment and easing too much to cause a new and harmful bubble. The main drawback of DeLong’s model is that it overstates the welfare costs of bursting bubbles in two ways. First, it assumes that all declines in long-term asset prices are costly even if they are not associated with bubble-like behavior. Second, it ignores the role of unleveraged or partially leveraged investors. Modifying his model to correct these shortcomings leads to a very different conclusion for economic policy. Bursting bubbles are economically harmful only to the extent that they bankrupt investors or raise fears that investors will go bankrupt. Bankruptcy imposes deadweight losses on society, resulting from the resolution process and the delays and uncertainty associated with it. Fear

114 of a counterparty’s bankruptcy causes financial markets to freeze, disrupting overall economic activity. Lenders also appear to alternately underestimate and overestimate potential default losses and these swings undoubtedly are costly. In DeLong’s model, the welfare cost of a bursting bubble is related to the square of the decline in the asset price. This welfare cost, however, implicitly assumes that investors are fully leveraged and thus are forced to default on their short-term loans whenever long-term asset prices fall, even when there is no bubble. This feature of the model is clearly unrealistic. The way to reduce the cost of a bursting bubble is to reduce leverage. In a world of unleveraged (or lightly leveraged) investors, falling asset prices would not bankrupt anyone and thus would not raise fears of bankruptcy. In such a world, there are no welfare costs of a bursting bubble, at least as long as the central bank acts nimbly to keep the economy on track. It is true that investors suffer a decline in wealth, but only from a level that was not fundamentally correct to begin with. For example, the technology bubble of 2000 burst with no apparent ill effects because it was not leveraged to any significant extent and there were no government bailouts. The recession of 2001 was very mild and probably was unavoidable given that GDP was above potential in 2000 and inflation was rising. As I have argued elsewhere, monetary policy actions to support and even increase the prices of long-term assets are warranted now to speed economic recovery and avoid deflation. Excessive increases in the prices of houses and equities are not likely given the recent experience of investors with losses in both of these markets. The old adage—once bitten, twice shy—is probably in effect for some years to come. Moreover, real estate lenders are demanding much higher down payments with stricter standards for appraisals than in the past, greatly reducing opportunities for leverage in the property markets. Some observers, including James Hamilton (here and here), are concerned that low interest rates are pushing up commodity prices, possibly creating a new bubble. It is important to recognize that the susceptibility of commodities to bubbles is directly related to their storability. That is why it is easy to have a bubble in gold and impossible to have a bubble in lettuce. Storage capacity for the most important commodity—petroleum—is a relatively small fraction of global consumption, which limits the size and duration of any bubble in its price. (Indeed, the rise and fall of oil prices in 2008 appears to have reflected a bubble, but one that lasted only a few months.) Commodity prices also are sensitive to the state of global economic activity, making it difficult to determine whether or not rising commodity prices at a time of global economic recovery are excessive. In any case, the key is to prevent leveraged investing in commodities. The global financial crisis demonstrates the need for reforms to greatly reduce the leverage of financial institutions and to make that leverage respond to the credit cycle in a stabilizing manner. See, for example, the Geneva Report on “The Fundamental Principles of Financial Regulation” and the Pew Task Force statement [pdf] of “Principles on Financial Reform.” Focusing on the housing market, my colleague Adam Posen also has proposed [pdf] linking property-related taxes to property prices in order to damp their swings. The bottom line is that regulators need to be vigilant in maintaining the process of deleveraging and preventing any new buildup of leveraged asset purchases, including for commodities. In the long run, we need to greatly reduce the degree of leverage in our financial system, and it may be a good idea to make leverage respond inversely to asset prices and to put stabilizing mechanisms in the tax system. http://www.roubini.com/piie-monitor/258269/monetary_policy_and_asset_bubbles_in_2010

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29.01.2010 Bailout time

The main story in European newspapers this morning is that the EU has began to organise a bailout for Greece. Le Monde and FT Deutschland have extensive and detailed coverage of the story. There are currently talks among government on how to assemble a credit to Greece, but FTD says Angela Merkel is still reluctant to commit, unless there is much clearer evidence than so far that Greece is genuinely consolidating. The issue will come up at the February 11 economic summit in Brussels. Le Monde says the talks are still in a preparatory stage, and nothing has been decided yet. Berlin is in particular looking towards a massive increase in government savings in Greece, beyond what prime minister Papandreou has already promised. But the paper also quotes sources as saying that a bailout is now very likely. One big difficulty is to resolve the problem how to circumvent the No Bailout clause in the Maastricht Treaty. Barroso and Zapatero also came out yesterday saying that the euro area implies joint responsibility among their members and that no one would be left alone. There is still official denials, but talks seem to focus on several options: bilateral credits, which would mean that Germany as the large euro area membes pay the largest share; another option would be an early release of funds to Greece under the cohesion fund or through the involvement of the European Investment Bank; there seems to be agreement among member states that whatever happens, the IMF should not take the lead in a rescue. During yesterday, the financial situation of Greece deteriorated further. Greek credit default swaps yesterday breached 400 basis points, as the country’s is now headed towards junk bond status. The markets also began to turn on Portugal, a country that is consolidating even less than Greece, a situation that reaffirms’ the fiscal conservatives’ view that once you open the floodgates of a bailout to Greece, Portugal and others will be next in line. The FT has a report that Portugal finance minister attacked the credit rating agencies. The euro meanwhile fell below $1.40, its lowest level against the dollar for six months. Daniel Gros on PIGS Writing in the FT, Daniel Gros argues that Greece and Portugal are in a much worse position than Spain because of their lack of domestic savings, 7.2% for Greece, and 10.2% for

116 Portugal, while the average of the euro area is 20%, with Ireland and Spain close to that average. “This implies that Spain and Ireland will be able to finance government deficits from their national savings now that housing investment has crashed and no longer absorbs such a large chunk of savings. Greece and Portugal are unique in their reliance on foreign capital to such a large extent.” He also makes the point that the stability pact only focus on government saving, not on the private sector, which has to be taken into account as well. Sarkozy installs working group on balanced budget rules Yesterday Nicolas Sarkozy held his Conference on public finances. As it was to be expected no concrete decisions have been taken but several working groups were set up, to study how to install a balanced budget rule, how to control local expenditures, how to improve health insurance finance and what to do with the social security debt . Sarkozy said that the objective is to allow France to reach a zero structural deficit by 2020. Les Echos argues that wWhile there has been similar attempts like this before with little results, such an exercise is still useful to remind the French that consolidation measures will come, no matter what, and to signal financial markets that consolidation is taken seriously. Economic sentiment in the eurozone on the rise Economic sentiment in the eurozone continues to improve, the European Commission’s “economic sentiment indicator” raised for a tenth consecutive month by 1.6 points to 95.7, close to the long term average of 100. The FT reports that a breakdown shows that the industrial sector is the main contributor to the overall improvement, while sentiment for consumers remains unchanged. Bernanke confirmed as Fed Chief Ben Bernanke was confirmed by the US Senate for another four tear term as chairman of the Fed, reports the FT. Thirty senators, both Democratic and Republican, voted against Bernanke and 70 voted for him. This is not as knife edge as expected after the biggest show of dissent in the Senate ever since voting on this position began 30 years ago. Meanwhile, the Obama administration enjoyed another victory in the Senate, with a vote in favour of increasing the federal debt limit by $1,900bn to $14,300bn. Austria’s finance minister for financial transaction tax Austrian Finance minister Josef Proll called for an EU wide financial transaction tax, in an interview with Kurier (hat tip Der Standard). The tax, however, should not be passed over to customers. Banks should pay their contribution to the consolidation of public finance. Sarkozy calls for a new Bretton Woods Gillian Tett in the FT picked out of Nicolas Sarkozy’s keynote speech in Davos his call for a new Bretton Woods system, saying that while there is a lot of French rhetoric, one should not dismiss his remarks. Sarkozy will hold the G20 presidency next year with a French government determined to advance the Bretton Woods debate as currency volatility will become the next big subject on the political agenda. http://www.eurointelligence.com/article.581+M5095c861114.0.html

117 COMMENT Greek burdens ensure some Pigs won’t fly By Daniel Gros Published: January 28 2010 20:08 | Last updated: January 28 2010 20:08 Financial markets have coined a new term to sum up troubled eurozone states: the “Pigs”. Portugal, Ireland, Greece and Spain have found their bonds moving together, with Greece and its troubles a bellwether for the entire group. These countries all had a long boom based on cheap credit, which ended in a bust in which their public finances deteriorated spectacularly – raising concerns as to whether they will be able to service their debt. However, this acronym is misleading, as is the exclusive concentration on fiscal policy. In determining the sustainability of public debt one should not look only, perhaps not even mainly, at today’s fiscal accounts but at the resource balance for the entire country. On this account, clear differences emerge. The Pigs consist of two quite different groups, with Greece and Portugal in the weakest position because of their lack of domestic savings. The gross national savings rates of these two countries – private and state combined – are at record lows: Greece a mere 7.2 per cent of gross domestic product, Portugal 10.2 per cent. By contrast, the average for the euro area is about 20 per cent. Ireland and Spain, at 17 and 19 per cent, are much closer to the euro area average than to Greece and Portugal. This implies that Spain and Ireland will be able to finance government deficits from their national savings now that housing investment has crashed and no longer absorbs such a large chunk of savings. Greece and Portugal are unique in their reliance on foreign capital to such a large extent. Gross savings show the domestic resources (cash flows) available to finance domestic investment and consumption (wear and tear) of capital. With such low gross savings it is not surprising to find that neither Greece nor Portugal have been able to finance even a minimum level of net investment from domestic sources. Greece is unique in the eurozone in that its net national savings – after adjusting for capital consumption – have been negative for almost a decade, reaching minus 5.1 per cent of GDP in 2008 (only Portugal did worse). By contrast, the euro area average is (plus) 6 per cent of GDP. Even the Baltic states, which relied on foreign capital to finance a construction binge, are in a better position with net savings safely in positive territory. Such low levels of domestic savings have two implications: a fiscal adjustment alone does not solve the problem, and a bail-out would be costly. A fiscal adjustment that is not reflected in an increase in the national savings rate would simply transfer the problem from the government to the private sector. A cut in the fiscal deficit would simply result in more private debt. Banks would see non-performing loans accumulate, and in the end they would have to be bailed out by the government. Adjustment requires belt-tightening by the entire economy. To set Greece and Portugal on a sustainable economic path requires an increase in savings; put simply, it needs a cut in consumption of about 10 per cent of GDP.

118 The lack of domestic savings combined with a high net external debt is also the reason why a bail-out could be rather costly. Comparing a country to a company, the gross national savings rate represents the cash flow generated by all sectors of the economy and the net savings rates shows the evolution of shareholders’ equity. It is one thing to provide financing to a country or a company that is generating strong internal cash flows and got into trouble only because of excessive investment (the case of Ireland and Spain). It is quite different to prop up one whose equity is being eroded because internal cash flow is not even sufficient to maintain the capital stock (Greece and Portugal). When taking over a company in distress, one does not consider only the views of management. Similarly, a bail-out of a country makes sense only if all stakeholders contribute. Saving a country that is consuming too much makes sense only if the entire body politic accepts that more than a fiscal adjustment is required. Deep cuts in private sector wages and consumption are needed before any outsider should even consider stepping forward. Europe’s stability pact is flawed because it concentrates only on one sector (government) rather than the entire country’s resource balance, which is what counts in the long run. Preventing a repeat of the problems of the weakest of the Pigs requires concentrating surveillance on this aspect. The writer is director of the Centre for European Policy Studies in Brussels Daniel Gros Greek burdens ensure some Pigs won’t fly January 28 2010 20:08 http://www.ft.com/cms/s/0/1a568f14-0c40-11df-8b81-00144feabdc0.html

119 Chinese vice-premier raises profile at forum

China’s leadership succession process will step up a gear when Li Keqiang, the man tipped to be the country’s next premier, addresses the World Economic Forum - Jan-27 Vice-premier defends Chinese policy By David Pilling in Davos Published: January 28 2010 18:27 | Last updated: January 28 2010 18:27

Li Keqiang (right), with World Economic Forum founder Klaus Schwab, greets delegates before his address on Thursday

Li Keqiang, the man poised to become China’s next premier in 2012, stepped on to the Davos stage with what looked like a royal wave. In depth: Davos - Jan-28 Trichet holds cards in finance debate - Jan-28 Study finds banks cool on green ideas - Jan-28 Leadership questions shape Davos talks - Jan-28 Video: Emerging market breakfast - Jan-28 Gillian Tett: New Bretton Woods is not so mad - Jan-28

120 In easily his most high-profile speech abroad since his elevation to vice-premier two years ago, he resolutely defended China’s record in pursuing balanced growth, implicitly rejecting criticism that Beijing had not done enough to mend its export-led model. “China’s contribution to the world’s economic recovery is obvious,” he said, adding that its 8.7 per cent growth in output last year came in spite of falling exports that shaved nearly 4 per cent off the headline rate. Growing domestic demand, both through government-led investment and consumption, contributed more than 12.5 per cent to the growth in gross domestic product, he said. “While promoting growth, we spared no effort in rebalancing the structure of the economy.” The vice-premier, who analysts say is being groomed to succeed Wen Jiabao as premier, stayed clear of contentious topics. He avoided even oblique reference to exchange rate policy – a point of friction with the US – let alone topics such as Iran, Google or domestic political reform. The closest he brushed with controversy was to criticise countries that preached free trade but adopted protectionist practices, a swipe at recent US measures against Chinese products such as tyres. Orville Schell, director of the Asia Society, said: “An ascending leader has very little margin to propose interesting ideas or breakthrough concepts. It was very safe ... a good effort to depict China as a responsible global citizen in a time of economic turmoil.” Elizabeth Economy, an expert on China at the US Council on Foreign Relations, said the speech “addressed implicit criticism that China doesn’t do enough”. The succession process to determine who will lead what may already be the world’s second- biggest economy is opaque. “It is extraordinary how little we know about what goes on behind the screen,” said Mr Schell. “It goes on behind the walls of the Forbidden City and is revealed.” China experts say Xi Jinping, who two years ago was made a member of the nine-man politburo standing committee along with Mr Li, is likely to succeed Hu Jintao as president. Mr Li, who has a doctorate in economics, peppered his speech with data aimed at proving that China was shifting to more balanced and sustainable growth. Sales of consumer goods had risen 15.5 per cent last year, while income grew in tandem with GDP, increasing disposable income, he said. Acknowledging that China remained “excessively dependent on exports”, he added: “I am confident consumption will play a bigger and better role to drive China’s economic development.” Some delegates criticised China’s fixed exchange rate policy, citing it as evidence that Beijing intended to return to its export-led model. George Soros, the billionaire investor, said lifting the renminbi-dollar peg would boost domestic consumption and help fight inflation. “It cries out for action today,” he said. Chinese delegates said Beijing would not respond to US pressure to alter the exchange rate but hinted at “gradual change”. http://www.ft.com/cms/s/0/00b0cd7e-0c39-11df-8b81-00144feabdc0.html

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Leadership questions shape Davos talks By Gideon Rachman Published: January 28 2010 18:12 | Last updated: January 28 2010 18:12 The big political debates at the World Economic Forum are being shaped by two events that are taking place well away from the ski-slopes of Davos: Barack Obama’s efforts to re-launch his presidency in Washington and the conference on Afghanistan that is under way in London. Both events raise the same fundamental questions. Is the US now too weakened and introverted to exercise effective global leadership? And if the US cannot lead, what other combination of powers can sort out the most difficult global problems? In depth: Davos - Jan-28 Trichet holds cards in finance debate - Jan-28 Study finds banks cool on green ideas - Jan-28 Video: Emerging market breakfast - Jan-28 Vice-premier defends Chinese policy - Jan-28 Gillian Tett: New Bretton Woods is not so mad - Jan-28 A year ago at Davos the election of Mr Obama was widely hailed as the one big ray of hope in a dark period in international affairs. Twelve months on, things look different. The world has avoided a new Great Depression and the mood among delegates from some of the big emerging economies – in particular China, India and Brazil – is confident, even ebullient. But Mr Obama is a much-diminished figure. While he still gets high marks from the Davos crowd for intelligence and charisma, the president has struggled to make progress on any of the international issues that he identified as priorities – Iran, the Middle East, Afghanistan, the climate talks at Copenhagen or economic relations with China. The loss of the Democrats’ super-majority in the Senate and the fact that the president’s healthcare package is in deep trouble have further damaged Mr Obama’s image as an effective leader. Meanwhile, the fact that the president has responded to his political difficulties by proposing radical-sounding new banking reforms has put the question of banking regulation right at the centre of the WEF debates. The sense that the US is too preoccupied by its domestic travails to dominate the world stage has been compounded in Davos by the absence of senior administration officials. Some top US officials are expected to make an appearance later in the week. But, in their absence, the political figures who excited most interest in the opening days of the forum were Nicolas Sarkozy, the president of France, who gave the opening keynote address and Li Keqiang, vice-premier of China, who is tipped to be his country’s next prime minister, or even president. However, the Chinese delegates have stuck carefully to a familiar script in Davos. China is still a developing nation, they insist. It has made a big contribution to pulling the world out of

122 recession. Currency disputes with the US can only be dealt with gradually and in a spirit of co-operation. Discussions in Davos have also made it evident that the rise of China and other big emerging economies are redefining the idea of “security”. While the Afghan war is a traditional issue of hard security – involving bombs, bullets and bloodshed – new types of challenge are increasingly preoccupying experts on national security. Cyber-security is being discussed with rising urgency, particularly after Google’s clash with the Chinese government over internet censorship and computer hacking. Davos delegates have been told that new types of weapon are being developed that do not kill people – but can completely disable the internet and wipe computer memories, so disrupting the functioning of a modern society. The problems of food security and energy security are also being widely aired. However, advocates of tougher action on global warming are worried that the failure of the Copenhagen talks is leading to inertia rather than a renewed effort to achieve agreement. Barbara Stocking, the chief executive of Oxfam, a UK-based charity, is dismayed by the lack of urgency on climate change. “Everybody is just tired. It feels like last year’s issue,” she says. Financial and banking reform are still very much at the top of the political agenda. Mr Sarkozy’s bravura speech to the forum concentrated on these areas. The economic ideas outlined by the French leader would have been dismissed as hopelessly crude and naive before the financial crisis but, in the current climate, they received a respectful, if hardly ecstatic, welcome. Mr Sarkozy seized his opportunity to launch a full-frontal attack on financial capitalism, arguing that the proper role of banks is to lend to entrepreneurs and not to speculate on the markets. The huge profits made by investment banks in previous years were, he said, often unrelated to the creation of jobs for ordinary people – or even to hard work. The French president also emphasised the crucial role of the state in reviving the global economy and mocked multinational companies and global banks for suddenly rediscovering their nationalities in their hours of need. In the heyday of the investment banks, Davos delegates would have choked on this kind of talk. But this year they swallowed it with relatively few complaints. http://www.ft.com/cms/s/0/b4bdd9a4-0c31-11df-8b81- 00144feabdc0.html?catid=6&SID=google

123 c Forum Trichet holds cards in finance debate By Chris Giles in Davos Published: January 28 2010 23:15 | Last updated: January 28 2010 23:15 The setting: the main hall of the World Economic Forum in Davos. The event: a debate on repairing Europe’s damaged public finances. The participants: three European prime ministers and one official. There was no doubt the official was in charge. The three elected heads of state, from Greece, Spain and Latvia, had the air of schoolboys pleading that though they had done wrong, their motives were sound, others were to blame and they would do better. In depth: Davos - Jan-28 Study finds banks cool on green ideas - Jan-28 Leadership questions shape Davos talks - Jan-28 Video: Emerging market breakfast - Jan-28 Vice-premier defends Chinese policy - Jan-28 Gillian Tett: New Bretton Woods is not so mad - Jan-28 To their left sat Jean-Claude Trichet, president of the European Central Bank, playing the role of headmaster and speaking for the citizens of the eurozone. Given the severe economic problems of Europe’s periphery and the calibre of the panel, this debate ought to have been a sell out. But the hall was less than a third full. Was the world so confident Europe could sail through the storm that delegates did not feel the need to turn up? Or did it not care about Europe any more when there were so many exciting emerging economies to discuss? That could not be answered, but the body language and comments of George Papandreou, José Luis Rodríguez Zapatero and Valdis Zatlers, the prime ministers of Greece and Spain and the president of Latvia respectively, suggested none of them thought their economies were out of the woods. Mr Trichet tried to put the problems in a eurozone context. The single currency area, he said, was not to be judged by one of its members. “You have to be fully aware that Greece is not Finland and Spain is not Germany,” he said. His main message was that the eurozone responded to the economic crisis at least as well as the US and the UK and its aggregate public finances were better. This message of overall European health did not help the others present their case when their economies were faring much worse. Mr Papandreou conceded that Greece’s problems with debt financing were its own credibility problem, but became flustered and started to blame speculators with “ulterior motives”. His performance deteriorated. Mr Trichet remained impassive.

124 Mr Zapatero pledged an austerity drive with social protection for the Spanish people, already hit by nearly 20 per cent unemployment. Mr Zatlers pledged to get Latvia in a position to join the euro by 2012. Mr Trichet’s thoughts were impossible to gauge. Mr Trichet is too much of a professional to let on. But there was no doubt who held the cards in Europe. http://www.ft.com/cms/s/0/fbb294c8-0c48-11df-8b81-00144feabdc0.html

125 France

Calls for a new Bretton Woods not so mad

Banking bonuses or credit markets may no longer dominate the debate; instead, the next big bogeyman may be exchange rates, writes Gillian Tett - Jan-28 Sarkozy calls for action on currencies By Gillian Tett in Davos and Ben Hall in Paris Published: January 27 2010 20:08 | Last updated: January 27 2010 20:08 President Nicolas Sarkozy on Wednesday stepped up his calls for a new Bretton Woods system to stabilise global exchange rates, promising proposals for reform of the international monetary system when France takes over the presidency of the G8 and G20 next year. “The prosperity of the postwar era owned much to Bretton Woods … we need a new Bretton Woods,” he told the World Economic Forum in Davos. “We cannot preach free trade and tolerate monetary dumping. France, which will chair G20 in 2011, will place reform of the monetary system on the agenda.” In depth: Davos - Jan-26 Video: Barney Frank - Jan-27 Diamond lashes out - Jan-27 Davos blog - Jan-27 John Gapper: Volcker has the measure of the banks - Jan-27 Opinion: An early warning system for asset bubbles - Jan-27 France has consistently called for action on currencies before international meetings, but its calls have either fallen on deaf ears, or it has failed to raise the issue at the meeting itself. French officials say Paris is determined to come up with concrete proposals next year. But the US and UK would almost certainly reject a new global pact to peg currencies, and most European countries, including France, would reject any suggestion that China could peg its exchange rate at anything like the current rate. Mr Sarkozy, the first French president to address Davos, delivered a fiery half-hour speech full of rhetorical blasts against the excesses of financial capitalism that prompted many Davos delegates to stand in applause. He said he supported the view of Barack Obama, US president, that “banks must be dissuaded from speculating for themselves of investing in hedge funds”. But he stopped short of saying France would follow suit with a ban on proprietary trading or any move to break up its biggest banks.

126 Mr Sarkozy was warmer about Britain’s support for a tax on financial transactions. “We are not going to escape some kind of taxation on speculation – I really support what Gordon Brown has been doing in Britain and calling for in Britain,” the French president said. “Taxing the exorbitant profits of finance to combat poverty: who cannot see how such a decision – even if I am well aware of the complexity of implementing it – would contribute to putting us on the path of a moralisation of financial capitalism?” Mr Sarkozy insisted that regulatory co-ordination was crucial and lashed out against the uneven manner with which G20 countries are implementing accounting and bank capital rules – including differences between the treatments of European and American bank balance sheets. “How can we conceive that in a competitive world, we can insist that European banks have three times more capital to cover the risks of their market activities, without demanding the same of American or Asian banks?” He also stepped up his criticism of the International Accounting Standards Board, saying that unless it followed the instructions of world leaders to address the cyclical nature of norms – and reduce the scope of “fair value” – the credibility of the G20 would be threatened. The opening keynote speech has often been used before by non-American countries to stake out political territory and flex their intellectual muscles in the global debate. At last year’s event, Vladimir Putin, Russian premier, delivered a scathing criticism of the excesses of western banks, and senior Chinese leaders also used the platform to point out the shortcoming of American finance. Mr Sarkozy used his speech to hammer home his appeal for capitalism to find a greater moral purpose and to put the interests of people first. He insisted that it was wrong to view the French government as being anti-capitalist or anti- market. On the contrary, he insisted that “this is not a crisis of capitalism, but a crisis as a result of the skewing of capitalism”. “There is no alternative system to a market economy ... there can be no prosperity without an efficient financial system and free circulation of goods, services and persons and competition,” Mr Sarkozy said. However, added that “we can only save capitalism and a market economy by re-engineering it, by giving a conscience to it”. “Without state intervention everything would have imploded. This is not a matter of liberalism or socialism, or being from the right or left – it is a fact. We need deep profound change, and were we not to change we would be showing tremendous irresponsibility.” Mr Sarkozy said the economic recovery required governments to be more audacious in drawing up common global standards and regulations. “If we decide to stand still our system will be swept away ... We will have protectionism, isolationism. I am for free trade but will public opinion accept some countries shrugging off rules?” he argued. http://www.ft.com/cms/s/0/1d4c4bb6-0b71-11df-8232-00144feabdc0.html

127 ft.com/gapperblog Martin Wolf in Davos: The French world order January 28, 2010 6:30pm by Martin Wolf Another weird day has passed. But all days at Davos are weird. One never knows what is going on, except for the fact that, wherever one is, one would be far better off somewhere else. The highlight of yesterday evening was the opening address of President Nicolas Sarkozy of France. The speech is so classically French as to be a caricature of itself: bombastic, high- flown and verbose, it addresses a vast range of contemporary challenges, around the grand theme of moralising and containing capitalism. Yet, I have to admit, there is much in it with which I find myself in agreement. “Purely financial capitalism is a distortion, and we have seen the risks it involves for the world economy. But anti-capitalism is a dead end that is even worse.” Again, “In just one year, we have a genuine revolution in mentalities. For the first time in history, the heads of state and government of the world’s 20 largest economic powers decided together on the measure that must be taken to combat a world crisis. They committed themselves, together, to adopting common rules that will radically change the way the world economy operates … Now, however, they must be implemented”. Mr Sarkozy made really good assault on everybody’s favourite target - the bankers: “That those who create jobs and wealth may earn a lot of money is not shocking. But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible.” When the French and the US governments agree on something like this, we know we are in a new world. Fortunately, Mr Sarkozy also said plenty of things I can still happily disagree with. He believes, for example, that it is easy to distinguish between lending to entrepreneurs and speculating on markets. But a loan is itself a speculation and a speculation may indirectly finance an entrepreneur. Life is not that simple. Again, as I have heard repeatedly over the past 39 years, France is calling for a new Bretton Woods - a world of fixed exchange rates: “We cannot put finance and the economy back in order if we allow the disorder of currencies to exist. Exchange rate instability and the under- valuation of certain currencies militate against fair trade and honest competition.” Ironically, the French president is complaining about what some economists have dubbed “Bretton Woods II”. Indeed, the principal source of disorder has been the Chinese fixed exchange rate, not the floating rates. France wants it both ways - fixed rates, but also ones that may be adjusted in line with “employment and purchasing power”. Well, if that is what France wants, I know where it needs to start - inside the eurozone where real misalignments are now massive. There can be no more powerful example of the conflict between the French desire for fixity of currency values, now total inside the eurozone, and the French desire for control over real exchange rates, now impossible inside the zone. But

128 nothing can be done about it. It is about time the Europeans really started worrying about internal imbalances and distortions of internal competitiveness. Even so, he is right on the really big issue. The disorder created by China’s decision to peg its exchange rate to the dollar is considerable. The Chinese simply refuse to recognise the problem or their responsibilities. When pushed, they argue that they are still a developing country with a gross domestic product per head that is about the hundredth, if countries are ranked by real incomes per head. But they also constantly remind us that China is a very big country. A very big country full of people with modest incomes has an enormous impact on the world. China must recognise and respond to this reality - and soon. If not, the open world economy may not survive. January 28, 2010 6:30pm in Davos | 3 comments http://blogs.ft.com/gapperblog/2010/01/martin-wolf-in-davos-the-french-world-order/ From GLOBAL IMBALANCES AND INSTITUTIONS January 28, 2010

Chris Giles in Davos: Global imbalances and institutions By Chris Giles, the FT’s economics editor I am at a so-so lunch discussing the prospects for long-term economic growth and have just heard the best comment on global imbalances and the worst suggestion for international organisations. Both came from Angel Gurria, secretary general of the OECD. The words of truth: “I don’t think anything of substance has been done during the crisis to correct global imbalances. It was the crisis itself that reduced imbalances”. Depressing but true. The scary proposal: what is needed for the future is a new talking shop between OECD, IMF, ILO, UN, FSB, World Bank etc to ensure coherent policy. Its working name: “the Observatory for Policy Coherence”. Isn’t that what the G20 is supposed do? Office for pointless chatter more like. http://blogs.ft.com/gapperblog/

129 COLUMNISTS Calls for a new Bretton Woods not so mad By Gillian Tett in Davos Published: January 28 2010 13:42 | Last updated: January 28 2010 13:42 Are the French going mad? That is a question that some investors might ask, as the global elite wander – or trudge – through the snow in the Davos ski resort this week. On Wednesday night, Nicolas Sarkozy, French president, strutted into the Davos limelight by becoming the first French leader to deliver the opening keynote at the event. Sarkozy calls for action on currencies - Jan-27 Editorial Comment: Still lost in the old Bretton Woods - Dec-27 Insight: Getting the show on the road - Aug-18 More columns by Gillian Tett - May-28 And, as one might expect, the speech was an odd blend of lofty, arresting rhetoric, unexpectedly geeky comments about global accounting standards and capital treatment of securitised products (which Mr Sarkozy apparently thinks leaves French banks at a disadvantage). But perhaps the most arresting “soundbite” was a call for a resurrection of the Bretton Woods global currency accord. “The prosperity of the postwar era owed much to Bretton Woods ... we need a new Bretton Woods,” Mr Sarkozy declared, in a speech that prompted a large part of the Davos audience to rise to their feet with wild applause. “We cannot preach free trade and also tolerate monetary dumping.” Now, cynics with long memories might point out that the French have often muttered this kind of thing before (and Mr Sarkozy himself has used the “Bretton Woods” tag on several occasions in recent months). And the fact that he unveiled this in Davos says as much about France’s determination to shape the global intellectual debate, at a time when America is looking increasingly confused, as any plans to start a clear policy initiative. However, there are two reasons why it might be foolish to completely ignore what Mr Sarkozy has said. First, the French will assume the presidency of the Group of 20 next year, and officials in Paris seem pretty determined to use this as a platform to advance this “Bretton Woods” debate. Indeed, some tangible proposals are apparently already being furtively discussed. Second, in recent months all manner of ideas that seemed old-fashioned in the mid noughties – if not barking mad – have staged a comeback, as politicians flounder to stem the rising tide of voter anger. Just think of the Tobin tax, Keynesian economics or Glass-Steagall reforms. Or take note of how Paul Volcker was resurrected last week as a policy force. Back to the future, in other words, is now all the rage, after a year in which cyber-finance has become wildly unpopular. And the point about using the “Bretton Woods” tag is that it taps into a current groundswell of geopolitical angst, in much the same way that all those “old-fashioned” banking ideas do. For the issue of exchange rates has repeatedly cropped up in the debates at Davos this week,

130 suggesting that it is now one of the key “worry points” for many Davos delegates, as they assess future financial risks. This does not really reflect what has happened during the past year. After all, by many measures the foreign exchange markets have actually been surprisingly quiet in recent months, given the sheer magnitude of the financial crisis. Instead, the key issue now is the next year. After all, there are mounting pressures besetting the eurozone – just look at the fiscal headaches in Greece, while the global imbalances that plague the China-US relationship also remain firmly in place, even after the financial crisis. Most important of all, when central banks start implementing exit strategies, there is the potential to deliver a whole new range of currency upheaval, particularly in relation to the crucial, but oft-ignored, issue of the dollar carry trade. “To me, the big risk this year is the dollar carry trade,” confesses Zhu Min, deputy governor of the People’s Bank of China. “It is a massive issue – estimates are that it is $1,500bn – which is much bigger than Japan’s carry trade.” He added that in the past year numerous investors are thought to have used the ultra-cheap dollar funding on offer to pour money into emerging markets. Thus, when the US starts tightening, there could be huge “volatility”, with some unpredictable consequences. Now, that does not necessarily mean that a call for Bretton Woods is a good idea, or that the French really have much chance of ever implementing it. After all, the G20 has found it extraordinarily hard to produce much in the way of co-ordinated action over the last year. And the Chinese themselves remain implacable, opposed to anything which could force a stronger renminbi, even under the guise of a Bretton Woods. But the key point that investors should note is that Mr Sarkozy has probably smelt the wind: the issue of currency volatility is now hovering around the political agenda. Or, to put it another way, by the time that Davos delegates meet in 2011, I rather suspect that it will probably no longer be banking bonuses or credit markets that are dominating the debate; instead, the next big bogeyman may be exchange rates. http://www.ft.com/cms/s/0/56dbb854-0c0b-11df-96b9-00144feabdc0.html

131 COLUMNISTS Volcker has the measure of the banks By John Gapper Published: January 27 2010 21:11 | Last updated: January 27 2010 21:11

Since Paul Volcker stood by Barack Obama a week ago as the US president unveiled banking reforms devised by “this tall guy”, the “Volcker rule” has provoked angst on Wall Street and in Washington. Critics complain that it is a populist measure designed to distract attention from the Democrats’ political woes; that it is impractical; that it would put US banks at a disadvantage to European ones; that its target is wrong; and that it would let investment banks escape. Some of these objections, particularly the last, have weight, yet the Volcker rule – that deposit-taking banks would not be able to engage in proprietary trading, or to own hedge funds or private equity firms – is the first time any government has proposed a sensible structural remedy for the problems created by bailing out banks in 2008. For that reason, I welcome the conversion of the US president to splitting up banks rather than letting them remain too big to fail and relying on tough regulation, higher capital charges and mechanisms for winding them down if they get into trouble. For the first time, a government is directly attacking the size and complexity of over-mighty institutions. My colleague Martin Wolf raised a number of difficulties with the Volcker plan this week, and it does indeed, as he put it, need “more work”. But it would be a great shame if – as Wall Street hopes – it runs into the sand on Capitol Hill in the same way as healthcare reform. There is clearly a populist element to the change in regulatory approach, which Tim Geithner, the Treasury secretary, resisted before the Democrats lost the pivotal senate election in Massachusetts.

132 But a law intended to elicit votes and popular support is only problematic if it is a bad law. A plan drawn up by a former chairman of the Federal Reserve and first suggested in a report from the G30 group of international banks is not a piece of political chicanery. Nor do I see why it is impractical. Hedge funds and private equity funds are easy enough to split off from banks that have federal deposit insurance and official backing such as access to the Fed discount window. There is a case, which I discussed in an earlier column, for going further and taking asset management out altogether. The definition of proprietary trading is trickier, given that any bank with market-making activities (which includes all the biggest ones) or Treasury operations (all of them) is positioning its balance sheet in order to make money, or at least not to lose it. But the reality is that most banks know what a proprietary trading desk is and the ones that do not find themselves suffering huge losses from rogue trading. It would be easy enough for executives and regulators to eliminate pure casino-style risk-taking. Next is the objection that the Volcker rule is – like the Glass-Steagall Act before it – a US idea that does not fit the push for global co-ordination of regulation. France and Germany – despite their oft-expressed hostility to hedge funds and financial gambling – are never going to do anything to undermine their own universal banks. Yet it is much better for the US to do the right thing than to wait for the European Godot. That need not be a problem for the US financial system – the Volcker rule would not curb innovation or stop hedge funds or private equity groups from making money. Curbs on large financial institutions are compatible with – indeed, can stimulate – a thriving financial sector. A further objection to the Volcker rule is that it aims at the wrong target – that hedge funds and proprietary trading desks did not cause the crisis. This point is overstated: in fact, the crisis at Bear Stearns started with its own hedge funds, and many banks were in effect trading by holding triple-A mortgage-related derivatives. It is also more generally misplaced. As Viral Acharya, a professor at New York University’s Stern School, argues, the crisis was caused by a “general underpricing of risk” that led many banks into taking on more trading and investment risk to boost their returns. There is, however, one substantial objection to the Volcker rule as it has been structured by the administration. It focuses on deposit-taking banks rather than, as Mr Volcker’s G30 report last year phrased it, “systemically important financial institutions”. This means that it would apply to, for example, JPMorgan and Bank of America, but probably not to Goldman Sachs and Morgan Stanley. These investment banks have the option of giving up their bank holding company status, shedding deposit-taking, and being able to continue combining proprietary and customer businesses. Leaving aside the strange consequence that an attempt to curb banks could end up helping Goldman by reducing the competition, this is wrong in principle. Even if Goldman and Morgan Stanley surrendered access to the discount window and their bank status, do we really believe this deals with the problem? Of course not, for we cannot (much as everyone would like to) erase the memory of the last time trouble struck. The Treasury was forced to bail out Goldman and intervene to prop up American International Group, the full details of which are now embarrassing Mr Geithner. The Volcker rule is not perfect but is the best attempt yet to confront head on the legacy of that time. If it were extended to Wall Street as a whole, it would be better still. http://www.ft.com/cms/s/0/f00aa3dc-0b7a-11df-8232-00144feabdc0.html

133 COMMENT An early warning system for asset bubbles By Charles Roxburgh and Susan Lund Published: January 27 2010 16:48 | Last updated: January 27 2010 16:48 As policymakers and business leaders gather in Davos this week, much of their conversation will no doubt focus on how to drive a global economic recovery. Yet they should spend just as much time and energy discussing how to prevent the next devastating financial crisis – specifically, how to spot and prick asset bubbles as they are inflating. For many years, some of the world’s most prominent central bankers said this was impossible. However, new research from the McKinsey Global Institute shows that rising leverage is a good proxy for an asset bubble – and that the right tools could have identified the recent global credit bubble years before the crisis broke. We urge policymakers to develop these tools and use them to ensure a more stable financial system, thereby avoiding more of the widespread pain and suffering caused by the current crisis. Our new MGI report, Debt and deleveraging: The global credit bubble and its economic consequences, details how debt rose rapidly after 2000 to very high levels in mature economies around the world. But to spot a bubble, we need to know how much debt is too much. Some households, businesses and governments can carry large amounts very easily, while others struggle with lesser amounts. The answer lies not in the level of debt alone, but in the sustainability of debt. If borrowers cannot service their debt, they will go through a process of debt reduction, or deleveraging. We see today, for example, that many debt-burdened households are deleveraging – voluntarily and involuntarily – by saving more and paying down debt, or by defaulting. To assess the sustainability of current debt levels, we looked at borrowing within individual sectors and subsectors of individual economies and at more granular factors such as the recent growth rate of leverage, the borrowers’ ability to service the debt under normal conditions, and the borrowers’ vulnerability to a disruption in income or a spike in interest rates. Our analysis is far from perfect. The data we would ideally want are not wholly available. Still, the results show that borrowers in 10 sectors in five mature economies have potentially unsustainable levels of debt, and therefore have a high likelihood of deleveraging. Half of the 10 are the household sectors of Spain, the UK and the US, and to a lesser extent South Korea and Canada – reflecting the boom in mortgage lending during recent housing bubbles. Three are the commercial real estate sectors of Spain, the UK and the US – reflecting loans made during commercial property bubbles. The remaining two are portions of Spain’s corporate and financial sectors, both of which thrived during that country’s real estate bubble, which is now deflating. These findings confirm that the credit bubble was global in nature and fuelled primarily by borrowing related to real estate. More importantly, we see that this type of analysis could have identified the emerging bubble years ago, when its existence was still being debated. We performed the same exercise with data from 2006 and found that the household sectors of several countries (Spain, the UK, the US and South Korea) were then already flashing red, as

134 were the financial sectors in the US, UK and Switzerland, and part of Spain’s corporate sector. If these tools had existed and been used in 2006, they would have signalled the growth of credit bubbles in the red sectors – almost two years before Lehman Brothers went bankrupt, credit markets seized up and the global economy started contracting for the first time since the Great Depression. And by pinpointing the sectors and countries, the data would have helped regulators identify the specific sources of the growing problem and address them in a targeted way. For example, they could have required tighter lending standards or bigger margin requirements in specific credit markets that appeared to be overheating. Starting now, policymakers should develop a more robust international system to track the growth and sustainability of leverage in different sectors of the economy, beyond borders and over time. A key first step will be collecting better, more granular data. Today, the available figures are limited and not always comparable across countries. If the data existed, we would distinguish between secured and unsecured household debt and between the debt of banks and non-bank financial institutions. Just as the Great Depression prompted the US government to revamp its outdated methods of measuring consumer prices, so should the current crisis motivate governments to develop more sophisticated ways to monitor leverage. An international body – such as the Financial Stability Board or the International Monetary Fund – should work with national governments to collect and maintain the data. Central bankers and other policymakers entrusted with ensuring the overall safety and soundness of the financial system should use the data to identify systemic risks. They should then consider whether to use monetary policy or regulatory tools – either nationally or multinationally – to curb the build-up of dangerous pockets of leverage. Such data would be valuable as well to business leaders. Bank executives, for example, could use them to guide lending strategies and refine risk models. And corporate executives should consider leverage trends when re-evaluating marketing strategies and revenue projections. The bursting of the great credit bubble is not over yet. But governments around the world need to work together to prevent the next one, putting an end to the recent boom and bust cycle. With the right tools, policymakers can create a healthier financial system and lay the foundation for a stronger global economic recovery. Charles Roxburgh is a London-based director of the McKinsey Global Institute and Susan Lund is its director of research, based in Washington, DC http://www.ft.com/cms/s/0/d9438ca2-0b45-11df-9109-00144feabdc0.html

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The McKinsey Quarterly The looming deleveraging challenge Several major economies are likely to face imminent deleveraging. If history is any guide, it will be a lengthy and painful process. January 2010 • Susan Lund, Charles Roxburgh, and Tony Wimmer Source: McKinsey Global Institute The specter of deleveraging has been haunting the global economy since the credit crunch reached crisis proportions in 2008. The fear: an unwinding of unsustainable debt burdens will drag down growth rates for years to come. So far, reality has been more benign, with economic growth recovering sooner than expected in some countries, even though the financial sector is still cleaning up its balance sheets and consumer demand remains weak. New research from the McKinsey Global Institute (MGI), though, suggests that the deleveraging process may just be getting under way and is likely to exert a significant drag on GDP growth.1 Our study of debt and leverage2 in ten mature and four emerging economies3 indicates that some sectors of the economies of five countries—Canada, South Korea, Spain, the United Kingdom, and the United States—will very probably experience deleveraging. What’s more, our analysis of deleveraging episodes since 1930 shows that virtually every major financial crisis after World War II was followed by a prolonged period in which the ratio of total debt to GDP declined significantly. The one exception was Japan, whose bursting asset bubbles in the early 1990s touched off a financial crisis followed by many years when rising government debt offset deleveraging by the private sector. The “lost decade” of sluggish GDP growth that followed is a cautionary tale for policy makers hoping to somehow avoid the painful process of deleveraging. Business executives too will face challenges: they may have to adapt to an environment in which credit is tighter and costlier and consumer spending could be slower than trend over the medium term in countries where household debt has built up. Our findings underscore the likelihood that growth will be stronger in emerging markets, which are far less leveraged, than in mature ones. To cope, companies should build the potential impact of “pockets” of deleveraging into their market outlooks. Where deleveraging is likely today Debt grew rapidly after 2000 in most mature economies. Although the United States is often assumed to be the most profligate borrower, by 2008 several countries—including France, South Korea, Spain, and the United Kingdom—had higher levels of debt as a percentage of GDP (Exhibit 1). Of course, such aggregate measures of leverage are not by themselves a reliable guide to the sustainability of debt. Swiss households, for example, have sustainably managed very high levels of leverage for a long time because they possess high levels of financial assets that can be drawn on to repay debt and because Swiss banks have conservative lending requirements.

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So to gauge the likelihood of a deleveraging, we took a more granular view, studying how debt and leverage have grown over time in individual sectors of 14 major economies. We assessed the sustainability of debt by considering factors such as the level and recent growth of leverage and the borrowers’ debt service capacity and vulnerability to income and interest rate shocks. Our analysis suggests that ten sectors have a high likelihood of deleveraging (Exhibit 2). In eight of the ten, very high levels of debt are linked to real-estate booms: the household sectors of Spain, the United States, and, to a lesser extent, of Canada and South Korea, as well as the commercial-real-estate sectors of Spain, the United Kingdom, and the United States. The remaining two are parts of Spain’s financial and non-real-estate corporate sectors.4

Overall, the corporate sectors in most countries entered the crisis with lower levels of leverage than they had at the start of the decade, with the exceptions of the commercial-real- estate subsector and companies acquired through leveraged buyouts. Both of those pockets of

137 leverage have over $1 trillion of debt, which will need to be refinanced in coming years, suggesting difficulties ahead. What history teaches about deleveraging To understand what deleveraging might look like going forward, we analyzed 45 significant, historical deleveraging episodes: those in which the ratio of total debt to GDP declined for at least three consecutive years and fell by 10 percent or more. The deleveraging episodes ranged from the US Great Depression (1929–43) to Argentina’s current troubles (2000– present). In 32 of the episodes, the deleveraging process commenced after a financial crisis and followed one of four paths. Three typically occur under economic conditions that are not currently present, so they are unlikely now: high inflation, which causes deleveraging by increasing nominal GDP growth; massive default, which typically follows currency crises; and rapid economic expansion fueled by war or oil booms. The fourth—a prolonged period of austerity, or “belt tightening”—is not only the most common path, fitting 16 of the 32 deleveraging episodes that took place after a financial crisis, but also the one that seems most relevant today. Deleveraging through belt tightening—exemplified by the US economy during the Depression years from 1934 to 1938 and by South Korea and Malaysia after the Asian financial crisis in 1997—is usually a long and difficult process that reduces the ratio of debt to GDP by about 25 percent. Credit growth in most cases slowed dramatically: in the mature economies in our sample, it averaged 17 percent annually in the ten years prior to the crisis but fell to just 4 percent during deleveraging. Real GDP typically declined in the first two to three years of deleveraging but then rebounded and grew strongly for the next four to five years while deleveraging continued (Exhibit 3).

This time could be different While the historical record is helpful, several elements of today’s environment suggest that deleveraging may start later and take longer. First, aging populations in much of the world are causing labor force participation rates to fall, which will make it more difficult than usual to jump-start and sustain GDP growth. Another complication is that the financial crisis of 2008 was global in scale, affecting the world’s biggest economies—not just one or a few, as in most previous crises. Therefore, it would be very difficult for all of today’s affected countries

138 to boost net exports simultaneously, as many did in the past to support GDP expansion when credit growth was slowing and households were saving more. Add to that problem the prospect of sharply increasing government debt relative to GDP in several major economies. According to Global Insight, US government debt will grow to 105 percent of GDP by 2012, from 60 percent in 2008; UK government debt to 91 percent, from 52 percent; and Spanish government debt to 74 percent, from 47 percent. This development could more than offset any deleveraging by the private sector. One implication is that Spain, the United Kingdom, and the United States might postpone deleveraging until after the crisis passes and growth in government debt has been reined in. It’s also likely that debt-to-GDP ratios will decline more slowly and over a longer period than the historical average, creating severe headwinds on economic growth, though we do not forecast GDP. How policy makers and business leaders can respond Policy makers today face an acute challenge going forward. On the one hand, public policies that stimulate GDP growth will be invaluable for countries experiencing deleveraging, because such policies help an economy “grow into” its current level of debt rather than pay it off. Households and businesses can therefore save more without reducing consumption and investment as sharply as they would otherwise have to do. On the other hand, faced with rising public debt, policy makers must also carefully consider when to reduce government support of aggregate demand. Japan’s experience in 1997 highlights the danger of winding down stimulus programs prematurely, potentially stifling a recovery. But it also illustrates the dangers of letting public debt grow unchecked. Getting the timing right will be critical. Regulators are now discussing ways to improve the stability of the financial system. Our analysis strongly suggests the need for monitoring leverage at a very granular level in the real economy, since overleveraged borrowers in a few sectors were at the heart of the crisis. The data, which could then inform the banks’ risk models and regulatory policies on bank capital, should be compiled at an international level, given the growth in cross-border lending and the insights that can be gleaned from cross-country comparisons. Our analysis also provides support, in principle, for a more active approach to monitoring systemic risk in the financial system.5 We suggest caution about moves to raise bank capital ratios too quickly and too high, however, given the risk of exacerbating the pressures facing major economies as they deleverage. Corporate executives, meanwhile, must learn to manage under continuing uncertainty. Business models that rely on low-cost debt will not be economically feasible, but companies with capital will find ample opportunities to expand market share or make new acquisitions. Consumer-facing businesses have already seen a shift in spending toward value-oriented goods, and this new pattern may persist until households repair their balance sheets. Scenario planning will be of the essence. We encourage business leaders to develop a range of scenarios that reflect different degrees and speeds of deleveraging rather than predicate strategies on a single view of what might unfold. As of this writing, the deleveraging process has barely begun. Each week brings news of another country or company straining under the burden of too much debt. Deleveraging is likely to be a significant component of the post-crisis recovery, and this will dampen growth. Nevertheless, by learning lessons from past experiences of deleveraging, today’s policy makers and business leaders may be better placed to steer a course through these challenging waters. https://www.mckinseyquarterly.com/Economic_Studies/Country_Reports/The_looming_dele veraging_challenge_2510?gp=1

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28.01.2010 How not to select the ECB President

By: Francesco Giavazzi Once again the procedure the Eurogroup is following in designating new members of the Governing Council of the European Central Bank is unlikely to select the candidates best suited for the job. This time, however, the damage could be more serious: on February 15 the Eurogroup—because of the way it decides--will de facto select two candidates, the vice- president and the President. Both will serve eight-year mandates: the first starting in July of this year, when the term of Lucas Papademos, the current vice-president expires; the second starting next year when the term of Jean Claude Trichet will also come to an end. Deciding on the new President so long ahead of time (the formal decision will only be taken by the European Heads of State in the Spring of 2011) is clearly against the Treaty. This, however, is what will happen if the Eurogroup accepts to follow the Brussels practice of assigning jobs based a the size and geography of countries: one from a big one, the other from a small one, one from the North, one from the South. The only difference this time is that gender will not be a parameter in the decision—it has in the past. This is why, on February 15, the vote on the new vice-President might become a proxy vote for the new President. If the vice President will come from a southern European small country the President – some will contend - should come from a large country in the North—guess which. If instead he will be a national of, say, the Benelux, the President should come from a large country in the South. Let us remind ourselves what the European Treaties say (Protocol 18 on the Statute of the European System of Central Banks and of the ECB, article 11.2): “The President and the vice President, and the other members of the Executive Board, shall be appointed from among persons of recognized standing and professional experience in monetary and banking matters.” No mention is made of nationality. What the Eurogroup is about to do is thus blatantly against the Treaty. By indicating so early the successor of Jean Claude Trichet, it also risks turning the President into a lame duck—and this could hurt the credibility of the ECB. The ECB is the most independent central bank in the world. Not only because its independence is so strongly enshrined by the European treaties: it is so independent because, contrary to any other central bank in the world, it faces not a single government, by 16 different ones, not a strong national assembly, but a rather weak European Parliament, and this mitigates the pressure that politicians can exert on the bank. Just compare the anxiety that transpires from Ben Bernanke’s expression when he testifies on Capitol Hill, with the celestial calm with which Jean Claude Trichet lectures the members of the Economic and Financial Committee of the European Parliament. Independence is the biggest asset of the

140 ECB and the main reason why the Euro has defied the critics and established such a high reputation in such a short period of time. But the more independent is the bank, the more careful the selection of its board members must be. This would not happen if the Eurogroup allowed geography to constrain its choices. We often read European Finance ministers and Heads of State complaining when Jürgen Stark, a member of the Executive Board, airs his tough views. Such complaints are unacceptable. When they agreed to the German proposal and filled the job Otmar Issing was leaving with Jürgen Stark, they knew exactly what his views were. If they had any doubt, why didn’t they ask that the Treaty be obeyed and the discussion be opened to alternative candidates? The argument that the Executive Board must reflect the Euro area does not hold. The decision-making body of the bank, the Governing Council, already includes the national central bank governors. Although governors are there to represent their own views, and not the views of their own countries, they are the vehicle through which the variety of economic and financial conditions throughout the Euro area get represented around the table where monetary policy decisions are taken. What is more important than a geographical balance of the six members of the Executive Board is that they should simply be the best. Whoever they will chose as the new vice-President, Eurogroup ministers should say very clearly that their choice in no way will constrain the selection of the new President a year from now. Before evaluating alternative candidates for the presidency the Eurogroup should ask itself which are the profiles and the experiences most needed on the central bank’s board. Sometime it will be an expert in monetary policy, another someone with more direct experience of financial markets. Rather than working around a geographical map of the Euro area these the four questions that should inform its decision: 1) modern monetary policy is about effective communication. Communicating is particularly difficult in the Euro area, as it requires a President able to reach out to over 300 million citizens, recognizing their diverse cultures and without moving markets. Who could best match the talent of Jean Claude Trichet at doing this? 2) the crisis has put a premium on financial experience, both direct experience in financial markets and institutional experience in designing financial regulation. Which candidate comes on top on financial market experience? 3) one of the President’s most important tasks is steering the Governing Council, a group that by now is very large and risks becoming ineffective. Who could match the talent of Jean Claude Trichet? 4) if the Eurogroup was worried about the candidates independence, not only from domestic political pressure but also from the pressure that some national ailing banking systems may put to unduly prolonge central banking support, which personality has proved more independent? With an important, and still very weak, fraction of the German banking industry controlled by local politicians, would it be wise to select a President who is a German national? Avoiding that these considerations drop off the table of the Eurogroup is one of the roles of public opinion. There are still three weeks before a decision is taken. Let’s open a discussion. The author is Professor of Economics, Bocconi University, Milan http://www.eurointelligence.com/article.581+M547ec4d8f23.0.html#

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28.01.2010 It’s crunch for the euro area. The markets are turning on Greece and Portugal

Investors freaked out yesterday demanding highest premiums for Greek bonds and also turned against Spain and Portugal. The Greek 10y bonds reached a record high of 6.92%, 3.56pp over German bunds. The yield on Portuguese bonds increase 10bp to 4.21%. The reaction came after comments that China was not interested in increasing its exposure to sovereign Greek debt, reports the FT. Marco Annunziata of Unicredit was quoted that Chinese purchases of Greek bonds would be no less disturbing. For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme”. Earlier Nouriel Roubini said that Spain is a real threat for the eurozone. Kathimerini warns of a domino effect within the EU. FTD quotes the ever complacent Jean-Claude Juncker with a Crisis, What Crisis comment. John Authers on Greece John Authers conclude that Greece is now considered as a riskier credit than the average emerging market. The trading spread of 3.6pp over US treasuries is higher than the average emerging market sovereign bond spread of 2.97pp over treasuries. Is it justified? While Greece economic problems are less severe than those of Spain, the markets mistrust Greek data. The deficit is deep seated and pre-dates the crisis. Only true austerity measures can counter it, which may curtail economic growth or stir up social discontent. Portugal’s 2010 budget disappointing Portuguese prime minister Jose Socrates defended his 2010 budget, saying that Portugal was not different from the EU average and that public accounts are in order, reports El Pais. On Tuesday the Portuguese government had to report a higher-than-expected deficit of 9.3% for

142 2009 but pledged to lower it to 8.3% in 2010. Socrates insisted that public debt was with 77.4% well below EU average of 78% but markets reacted with disappointment. Barack Obama alas Nicolas Sarkozy Barack Obama strikes a populist tone in his State of the Union address when he declared job creation number one target this year, writes the FT. Sounding ever more like Nicholas Sarkozy did a couple of years ago, Obama proposes to invest $30bn through community banks to help small businesses, tax credits to those who hire new workers or raise wages and to eliminate all capital gains taxes on small businesses. Europe and its “too big to fail” banks A study by Goldman Sachs argues that the limit of the size of banks, as envisaged by the Obama administration, is much harder to implement in Europe, reports Der Standard. European Banks are large relative to the GDP of their headquarter country, because the GDP of some of the European countries is small. Nine European banks have balance sheets that are larger than the GDP of their country. The study argues that while the limit of bank size will be difficult in Europe, there is more support for limits on proprietary trading. Reinhart and Rogoff on why growth will be low, and debt high Not a very optimistic outlook by Carmen Reinhart and Ken Rogoff: “Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday’s financial crisis could easily morph into tomorrow’s government debt crisis.” They also write that markets are only just realising what lies ahead. They will soon wake up to the fiscal tsunami. http://www.eurointelligence.com/article.581+M5ed2785d983.0.html#

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Chinese whispers drive up Greek yields By Tony Barber in Brussels, David Oakley in London and Kerin Hope in Athens Published: January 26 2010 22:59 | Last updated: January 28 2010 10:27

China’s foreign exchange reserves grew $130bn in the last quarter of 2009 alone

Greece’s debt crisis returned to financial markets with a vengeance as agitated investors demanded the highest premiums to buy its government bonds since the launch of European monetary union over a decade ago. Athens’ arduous road back to growth - Jan-27 Bond spreads surge after ministry triggers fresh fears of default - Jan-28 In depth: Greece debt crisis - Jan-27 Concerns at ‘overmarketed’ bonds - Jan-27 Short View: Greek bonds - Jan-27 Lex: Greece - Jan-28 The yield spread between 10-year Greek bonds and benchmark German Bunds widened dramatically on Wednesday, by almost 0.7 percentage points at one point, in what one trader called a “capitulation” to sellers worried about Greece’s ability to refinance its debt. The mayhem unfolded after Greece denied it had given a mandate to Goldman Sachs, the US investment bank, to sell government debt to China. Greek 10-year bond yields closed at 6.70 per cent, 0.48 percentage points up on the day. The Financial Times reported on Wednesday that Athens was wooing Beijing to buy up to €25bn of government bonds in a deal promoted by Goldman. China had not yet agreed to such a purchase, the FT said. The government’s comments unsettled markets because of their implication that China, with $2,400bn in foreign exchange reserves, was not interested in increasing its exposure to sovereign Greek debt.

144 Experts, though, said that heavier Chinese purchases of Greek debt would be no less disturbing. For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme,” said Marco Annunziata, chief economist at Unicredit. The Greek finance ministry said Athens wanted to diversify its sources of funds, and meetings with institutional investors would continue in Athens as well as the US and Asia. Shares in Greek banks tumbled after Greece’s denial that it had mandated Goldman. The yield spread on Portuguese and Italian government bonds widened as traders fretted about other peripheral eurozone countries with high public debt and rising budget deficits. George Papandreou, Greece’s premier, met the national central bank governor before flying to the World Economic Forum at Davos, where he planned to defend his government’s last- ditch efforts to rescue its public finances from collapse. George Provopoulos, the bank governor, said: “I’m feeling more optimistic than before because the prime minister gave a message that he is determined to take immediate action on the stability plan.” At the heart of Greece’s problems is a lack of confidence in its trustworthiness, a point the European Commission intends to address in coming weeks by proposing that Eurostat, the European Union’s statistical service, should be granted powers to audit national governments’ accounts. Additional reporting by Justin Baer and Francesco Guerrera in New York and Jamil Anderlini in Beijing http://www.ft.com/cms/s/0/65ac74fc-0aaf-11df-b35f- 00144feabdc0.html?referrer_id=yahoofinance&ft_ref=yahoo1&segid=03058 Short View: Greek bonds By John Authers, Investment editor Published: January 27 2010 19:13 | Last updated: January 27 2010 19:13 Why exactly would a Greek default be so tragic? Wednesday saw the biggest wave of fearful sentiment towards Greek sovereign bonds yet, sending their yields soaring upwards. Greek 10-year yields reached an intra-day high 6.92 per cent, briefly hitting a record spread of 3.56 percentage points over German bunds. By the end of the European day, the 10-year Greek note was trading at a spread of 3.6 percentage points over US treasuries. For comparison, JPMorgan’s EMBI Plus indices show that the average emerging-market sovereign bond is trading at a spread of 2.97 points over treasuries – implying that Greece, part of the eurozone, is now a riskier credit than the average emerging market. This is all the more shocking because on Monday Athens appeared to have kept markets onside when its first bond auction of the year was oversubscribed some four times over. After Greece on Wednesday said it had no “plan B”, the latest move suggests deep doubts about the current “plan A”. The ripple effects of this concern are now being felt in currency, commodity and stock markets across the world. Is such concern justified? At one level, Greece’s economic problems do not look as severe as those of, for example, Spain – where unemployment is nearly 20 per cent. Greece’s unemployment rate, of 9.8 per cent, is almost the same as that of the US. Its budget deficit, at close to 13 per cent of GDP, is unsightly but not unconscionable.

145 But the market mistrusts Greek data; and it can see the logic of the situation. Its deficit is deep-seated and pre-dates the crisis. Only truly austere economic measures (“plan A”) can counter it, and these may curtail economic growth or stoke social discontent. That worry cannot be quickly extinguished, and it weighs on relatively risky assets across the world – and on the euro. But at least some of the weird advantages of the crisis world are back – the stronger dollar is pushing down on oil prices. http://www.ft.com/cms/s/0/864d085a-0b74-11df-8232-00144feabdc0.html Road back to growth is long and arduous By Ralph Atkins in Frankfurt Published: January 28 2010 02:00 | Last updated: January 28 2010 02:00 As with labyrinths in its ancient mythology, Greece is finding there is no easy way out of its fiscal crisis. News that Athens was wooing China as a possible buyer of its bonds might have had the appearance of a quick-fix for a country that has angered policymakers across continental Europe by repeatedly understating the size of its yawning public sector deficit. But the move had the immediate effect of wiping out some of the optimism created earlier this week. On Monday, investors placed €20bn of orders - four times the expected level - for the Greek government's first bond issue of the year. Turning to Beijing for future funding suggested Athens was not hopeful of sustaining that appetite. Subsequent denials that there was any deal with China only made matters worse, increasing financial market nervousness about the longer-term funding of public finances in Greece and other so-called peripheral eurozone countries. To the consternation of their governments, Greece's crisis has heightened once again fears about the risk of default in Ireland, Portugal and Spain, which have also seen public sector deficits spiralling, and Italy, where the deficit has been kept under better control but debt as a share of gross domestic product is near Greek levels. All of which has hardly helped burnish the image of Europe's 11-year-old monetary union. Turning to China sent "an even worse signal" than would an International Monetary Fund programme, remarked Marco Annunziata, chief economist at Unicredit. Policymakers will have rolled their eyes in exasperation yesterday at comments by Nouriel Roubini, the New York university professor, who told Bloomberg radio in Davos that he had never been more pessimistic about the eurozone's future. Yet the official view - from a eurozone point of view - is that Greece's problem is containable for two main reasons. First, the European Union is having some success in imposing fiscal discipline on Athens through the close surveillance of its budget plans - and by being deliberately vague about what would happen if it ever did default. Second, Greece accounts for only 2-3 per cent of eurozone GDP, so its problems should be kept in perspective. But for Greece itself - which as part of a 16-country monetary union does not have the option of currency devaluation - no escape is seen from a painful adjustment process. Its problems go beyond an immediate need to reduce the public sector deficit, which reached almost 13 per cent of its GDP last year. The massive revisions late last year in official statistics, which triggered the crisis, highlighted deep institutional weaknesses.

146 More damaging, Greece has suffered a huge loss of competitiveness over the past decade, which raises questions about when it will ever return to sustainable economic growth and could require steep cuts in wage costs to recover. A big worry for EU authorities will be that measures to shore-up Athens' public finances - whether through a deal with China or otherwise - might buy the country time but simply exacerbate its difficulties. This would make it still harder for Athens to find an exit. Comment, Page 15 Lex, Page 18 http://www.ft.com/cms/s/0/57e31ee2-0baa-11df-9f03-00144feabdc0.html Concerns at ‘overmarketed’ bonds By Anousha Sakoui and David Oakley Published: January 27 2010 18:57 | Last updated: January 27 2010 18:57 The collapse of Greek bond prices just 24 hours after the country successfully sold €8bn ($11.3bn) in new bonds has raised concerns about whether new issues are being too aggressively marketed at a time when borrowers are rushing to tap their funds. Lead managers on the €8bn bond sale drew more than €25bn in orders for the five-year, fixed-rate bond, five times more than the government had reckoned on. Chinese whispers drive up Greek yields - Jan-27 In depth: Greece debt crisis - Jan-27 Short View: Greek bonds - Jan-27 Athens’ arduous road back to growth - Jan-27 Lex: Greece - Jan-28 EU seeks audit power over national accounts - Jan-27 But. despite the large order book, which would suggest strong demand for the deal, the yield on the bonds rose on Wednesday from 6.10 per cent to 6.35 per cent in secondary trading. Greek 10-year bonds yields rose 69 basis points at one point, the biggest daily rise since the country joined the euro. Ten-year bond yields finally closed at 6.70 per cent, 48bp higher on the day. Some investors said the bonds came under pressure after the Greek government said there was no agreement over a separate sale of bonds to China and no mandate to an investment bank to negotiate such a sale. Others questioned whether the demand suggested by the large order book was genuine. The concerns come as the price of other bonds has fallen on increasing supply and weaker equity markets.

147 “There is a huge tendency to overmarket these issues, to create hype, to make investors feel like an idiot if they are not in the deal,” said one London-based fixed-income fund manager. The investor believed some bond deals were being sold on the basis that they would trade up in the secondary market rather than on the credit quality of the borrower. “The suggestion is that you should buy the deal because it is 10 times oversubscribed ... it is a herd mentality. It shows how immature the market is that we get these calls and that they work ... it is an insult to my side of the street.” Gary Jenkins, head of fixed income at Evolution, said: “The calculators syndicate bankers use always seems to add a nought on to the real book size.” Morgan Stanley, one of the banks that arranged the €8bn Greek sale, denied order books were overinflated. One banker close to the deal said: “We saw significant demand because investors believe the current trading levels of Greece do not reflect the economic fundamentals – while the volatility may continue, it does seem overdone.” Last week a body representing investors in covered bonds highlighted their concerns about the process of “shadow bookbuilding.” It believed this was restricting the time investors had to evaluate information. Martin Egan, global head of primary markets at BNP Paribas, said investors had expressed concerns over the management of bond order books and how banks marketed deals. This arose last year when order books for deals were very big and investor allocations poor. “There is a move to make the process of issuing and investing in debt more efficient and transparent. Debt capital markets is a fast moving, innovative space and what we need to find is common ground where we match issuer and investor in primary and secondary markets.” http://www.ft.com/cms/s/0/9e6b3de6-0b72-11df-8232-00144feabdc0.html

148 Joining the queue for China cash By FT Reporters Published: January 26 2010 22:59 | Last updated: January 26 2010 22:59 The decision of Greece, and its bankers, to ask Beijing for cash to fund its yawning fiscal deficit should come as no surprise. The Chinese capital is the first port of call for countries and companies that need money. China has a huge stock of surplus cash, with $2,400bn (€1,702bn, £1,486bn) in foreign exchange reserves, amassed by a decade of largely fixed-exchanges rates, swelling trade surpluses and capital inflows. Athens invites Beijing to buy bonds - Jan-26 Help mooted months ago - Jan-26 In depth: Greece debt crisis - Jul-10 Investors flock to Greek bond issue - Jan-25 China has both the need to diversify the way it invests those funds, reducing their reliance on US Treasuries, and also an interest in leveraging the influence the money brings to its own rising diplomatic ambitions. It is not just the foreign exchange reserves, which are managed by a body under the central bank, that have been enlisted to fund China’s offshore ambitions. On top of a standalone sovereign investment fund, state banks, in various guises, have funded overseas ventures. The implosion of the western financial system over two years from 2007, along with an evaporation of confidence in the US, Europe and Japan, almost overnight pushed China’s global standing several notches higher. In a few months in early 2009, unconstrained by any serious public debate at home, the Chinese state committed $50bn in extra funding for the International Monetary fund and $38bn with Hong Kong for an Asian monetary fund. About the same time, state interests extended a $25bn loan to cash- strapped Russian oil companies, set aside $30bn for Australian resource companies and offered tens of billions more to various countries or companies in South America, central and south-east Asia to lock up commodities and lay down its marker for future purchases. Last September, with western governments and companies still on the backfoot, China readied lines of credit of up to $60bn-$70bn for resource and infrastructure deals in Africa – in Nigeria, Guinea, Ghana and Kenya. Not all the money set aside was spent, either because it was not welcome or terms could not be agreed. But Beijing’s ability to muster such funds speaks volumes for China’s growing financial power.

149 “China is obviously using its financial muscle to expand its sphere of influence,” said a Beijing-based lawyer who advises Chinese companies. Such sums might give the impression that China has been throwing its money around with abandon. But after some early loss-making forays, mainly through investments in US and European financial companies, China has become more cautious about where it places its money. The Chinese system, although far from transparent and democratic, has its own checks and balances, largely in the form of increasingly rigorous internal assessment of investment plans. Rival state agencies are notoriously jealous and are more than happy to highlight any deals of competitors that have gone bad, internally and through encouraging criticism on the internet. In the case of Greece, money is not a problem. Buying up to €25bn in Greek bonds is equal to about two weeks’ worth of accumulation of foreign exchange reserves in China. Chinese thinking is that Brussels could not let Greece fail, because the implications for the euro’s credibility are too dire. If that line of argument prevails in Beijing, then China may well be a buyer of Greek bonds. In the process, the Chinese may well be buying invaluable political capital in Brussels as well. http://www.ft.com/cms/s/0/8676f812-0aad-11df-b35f-00144feabdc0.html

150 Obama pledges renewed focus on jobs By Anna Fifield in Washington Published: January 27 2010 23:03 | Last updated: January 28 2010 05:10 President Barack Obama declared that creating jobs would be his “number one focus” this year, delivering a rousing inaugural State of the Union address on Wednesday night in which he pledged to right the economy and continue pushing for healthcare and financial sector reform. The president admitted he and his administration had made mistakes in its first year in office, but vowed that he would not be discouraged by the slow and often bumpy road towards achieving his aims, telling the joint houses of Congress that “I don't quit”. “From the day I took office, I have been told that addressing our larger challenges is too ambitious – that such efforts would be too contentious, that our political system is too gridlocked, and that we should just put things on hold for awhile,” Mr Obama said in a marathon 75-minute address. “For those who make these claims, I have one simple question: How long should we wait? How long should America put its future on hold?” Video: Jobs focus right but why so late? - Jan-28 Video: Obama speech emphasises jobs - Jan-28 Speech: State of the Union - Jan-28 In depth: The Obama presidency - Jan-22 Analysis: No game changer - Jan-28 Overture to business - Jan-28 With his speech, Mr Obama was seeking to restore faith in his administration after a rocky few months marred by bitter debates within the Democratic party over healthcare reform, sagging ratings and the shock loss last week in the Massachusetts election to fill the Senate seat vacated by Ted Kennedy. Business the "true engine of job creation" He focused on repairing the economy as the solution to many of the US's problems, saying that “the true engine of job creation in this country will always be America’s businesses”. “So tonight, I’m proposing that we take $30bn of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat,” Mr Obama said, adding that he would extend a new tax credit for small businesses that hired new workers or raised wages. “While we’re at it, let’s also eliminate all capital gains taxes on small business investment; and provide a tax incentive for all businesses, large and small, to invest in new plants and equipment,” he said. Mr Obama singled out infrastructure projects – such as the national high-speed rail project he will announce on Thursday – and clean energy technology as areas where large numbers of jobs could be created. His suggestion that the US build new nuclear power plants had members from both parties on their feet applauding. “The House has passed a jobs bill that includes some of these steps. As the first order of business this year, I urge the Senate to do the same. People are out of work. They are hurting.

151 They need our help. And I want a jobs bill on my desk without delay,” the president said. However, he admitted that this would not replace the 7m jobs lost over the last two years and said more innovation would be needed. Obama appeals to the ordinary American Obama and Wall Street

Obama calls for the most far-reaching overhaul of Wall Street since the 1930s After being criticised for focusing too much on healthcare and not enough on creating jobs during his first year, Mr Obama's speech had a notable down-to-earth, sometimes folksy, feel to it, as the president sought to show ordinary Americans he understood their concerns. He tapped into popular anger at Wall Street, saying he “hated” the bank bailout, which he call “about as popular as a root canal,” to laughter from the chamber. The president made good on his pledge earlier in the week to help middle class families pay for child care, tertiary education and supporting their aging parents. He also reiterated his intention to continue trying to pass legislation reforming the financial and healthcare sectors, an uphill battle even before the Massachusetts defeat, which cost the Democrats their 60 seat super-majority in the upper chamber. “I am not interested in punishing banks, I’m interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs,” he said, urging the Senate to continue working on its version of a House bill that includes many of these changes. Continued push for healthcare reform Obama and healthcare

Bitter disputes threaten Obama’s attempts to reform US healthcare On healthcare, Mr Obama told Congress: “Do not walk away from reform. Not now. Not when we are so close. Let us find a way to come together and finish the job for the American people.” Nancy Pelosi, speaker of the House, earlier on Wednesday suggested that Democrats could embark on a two-phase process to deal with healthcare, passing incremental change now and broader reform later when the political climate is more favourable. Mr Obama acknowledged that he could have done a better job in communicating why he considered healthcare reform so urgent, noting that the longer it has been debated, the more sceptical people have become. “I take my share of the blame for not explaining it more clearly to the American people. And I know that with all the lobbying and horse-trading, this process left most Americans wondering what’s in it for them,” the president said. He also alluded to the defeat in Massachusetts, saying that some of his administration's “setbacks” were deserved.

152 But a year after he was elected as the “change” president, Mr Obama refused to concede that he had disappointed his supporters, saying he did not set out to do what was popular but what was necessary. “I campaigned on the promise of change – change we can believe in, the slogan went. And right now, I know there are many Americans who aren’t sure if they still believe we can change – or at least, that I can deliver it,” he said. “But remember this – I never suggested that change would be easy, or that I can do it alone. Democracy in a nation of three hundred million people can be noisy and messy and complicated. And when you try to do big things and make big changes, it stirs passions and controversy. That’s just how it is.” Responding to the speech, Robert McDonnell, the new Republican governor of Virginia who wrested the state from Democrats last November, said that the Obama's administration's $787bn stimulus package had failed to fix the economy. “In the past year, over 3m Americans have lost their jobs, yet the Democratic Congress continues deficit spending, adding to the bureaucracy and increasing the national debt on our children and grandchildren,” Mr McDonnell said. “The circumstances of our time demand that we reconsider and restore the proper, limited role of government at every level.” http://www.ft.com/cms/s/0/d2d709ae-0b8e-11df-8232-00144feabdc0.html

153 COMMENT Why we should expect low growth amid debt By Carmen Reinhart and Kenneth Rogoff Published: January 27 2010 20:17 | Last updated: January 27 2010 20:17 As government debt levels explode in the aftermath of the financial crisis, there is growing uncertainty about how quickly to exit from today’s extraordinary fiscal stimulus. Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday’s financial crisis could easily morph into tomorrow’s government debt crisis. In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route. We do not anticipate outright defaults in the largest crisis-hit countries, certainly nothing like the dramatic de facto defaults of the 1930s when the US and Britain abandoned the gold standard. Monetary institutions are more stable (assuming the US Congress leaves them that way). Fundamentally, the size of the shock is less. But debt burdens are racing to thresholds of (roughly) 90 per cent of gross domestic product and above. That level has historically been associated with notably lower growth. While the exact mechanism is not certain, we presume that at some point, interest rate premia react to unchecked deficits, forcing governments to tighten fiscal policy. Higher taxes have an especially deleterious effect on growth. We suspect that growth also slows as governments turn to financial repression to place debts at sub-market interest rates. Fortunately, many emerging markets are in better fiscal shape than advanced countries, particularly with regard to external debt. While many advanced countries took on massive increases in external debt during the run-up to the crisis, many emerging markets were busy deleveraging. Unfortunately, this is not the case in emerging Europe, where external debt burdens average over 100 per cent of GDP; external (again including public plus private) debt levels in troubled Greece and Ireland are even higher. Will the typical wave of post-financial crisis defaults follow in the next few years? That depends on many factors. One factor that is different is the huge expansion of the International Monetary Fund initiated last April. IMF programmes can mitigate outright panics and will help those countries that genuinely make an effort to adjust. For some countries, however, debt burdens will prove politically intractable even after IMF loans. They will eventually require restructuring. Indeed, the IMF must ensure that it does not simply enable countries to dig deeper holes that lead to more destructive defaults, as occurred in Argentina in 2001. Having imposed very lax conditions in response to the financial crisis, the IMF now faces its own difficult exit strategy.

154 How this unfolds will affect the timing of defaults, though debt downgrades and interest rate spikes have already started to unfold. Another big unknown is the future path of world real interest rates, which have been trending downwards for many years. The lower these rates are, the higher the debt levels countries can sustain without facing market discipline. One common mistake is for governments to “play the yield curve” – as debts soar, shifting to cheaper short-term debt to economise on interest costs. Unfortunately, a government with massive short-term debts to roll over is ill-positioned to adjust if rates spike or market confidence fades. Given these risks of higher government debt, how quickly should governments exit from fiscal stimulus? This is not an easy task, especially given weak employment, which is again quite characteristic of the post-second world war financial crises suffered by the Nordic countries, Japan, Spain and many emerging markets. Given the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. Yet, the sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it. Markets are already adjusting to the financial regulation that must follow in the wake of unprecedented taxpayer largesse. Soon they will also wake up to the fiscal tsunami that is following. Governments who have convinced themselves that they have done things so much better than their predecessors had better wake up first. This time is not different. Ms Reinhart is professor of economics, University of Maryland, and Mr Rogoff is professor of economics, Harvard University. They are co-authors of ‘This Time is Different: Eight Centuries of Financial Folly’ (Princeton) http://www.ft.com/cms/s/0/f4630910-0b7a-11df-8232-00144feabdc0.html

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Global Business

January 27, 2010 British Central Banker Favors Splitting Big Banks By LANDON THOMAS Jr. LONDON — Mervyn A. King, the governor of the Bank of England, is an owlish, self- effacing man who, in contrast to his more outspoken peers in Frankfurt and Washington, strikes a public posture that borders on the demure. But as outrage over lush banking profits gathers steam on both sides of the Atlantic, Mr. King finds himself at the vanguard of a growing movement that argues that big banks must separate their higher-risk trading and investment banking businesses from their core deposit- taking functions. Last week, such a proposal pushed by the former Federal Reserve chairman Paul A. Volcker made headway. President Obama shocked Wall Street by proposing that large banks that collect customer deposits be banned from engaging in proprietary trading activities. At a hearing before a parliamentary treasury committee on Tuesday, Mr. King used some of his strongest language yet to support such a separation. In the process, he hailed Mr. Obama for having moved so quickly. “The U.S. has been more open in moving to a safer banking system than we are,” he said. “After you ring-fence retail deposits, the statement that no one else gets bailed out becomes credible.” To illustrate his point that increased regulation and higher capital requirements alone would not be sufficient to forestall another banking crisis, he pointed to Citigroup — which once was seen as a model for combining all banking functions under one roof. “You had regulators in the building and four of the most respected people in the world running the bank,” he said, citing its architect, Sanford I. Weill; the former Treasury secretary Robert E. Rubin; the former International Monetary Fund official Stanley Fischer; and a veteran international banker, William Rhodes. “They did not set out to destroy Citibank, but when you have a large complicated institution, things happen,” he said. “That is the argument for trying to create firewalls.” Under post-Depression laws, bank holding companies in the United States were not allowed to own investment banks before 1999. But in Europe, no such division ever existed. In fact, until last week such a notion had been roundly criticized, more a provocative debating point in an academic seminar than a practicable piece of legislation. Others speculated that the idea would surely be swatted away by muscular banking lobbies if it ever came close to becoming law. Indeed, some see the idea, far-fetched and steeped in principle as it may be, as more an emblem of Mr. King’s own unyielding sense of what is right and what is wrong for the markets — albeit one that in this case is in tune with the public mood.

156 “I think Mervyn is a little more fixated on moral hazard than others,” said DeAnne Julius, a prominent economist here, referring to the view that rescuing banks via bailouts or sharp cuts in interest rates just encourages more of the risky conduct that got them in trouble in the first place. Ms. Julius, a former member of the central bank’s policy-making committee, disagrees with Mr. King’s bank proposal. But she acknowledged that “he believes strongly in the rigors of market discipline, and he has a tendency to stay with a theory and get the world to conform to it.” Prime Minister Gordon Brown, who earlier fired his own cannonball at bankers with his proposal for 50 percent tax on bonuses, said on Tuesday that British banks were not in need of such a change. Last month Robert Diamond Jr., the president of Barclays, which with its substantial trading business would be one of the banks most affected, gave a series of speeches defending the universal model. “Banks are bound to fight,” Mr. King said in his testimony. Mr. King’s arguments were delivered with a severity that reached beyond his view that banks that had become larger and more profitable since the crisis must be shrunk. A former finance professor at the London School of Economics, Mr. King, 61, is known as a ferocious worker. And in 2007, as central banks in the United States and Europe aggressively cut interest rates, Mr. King stubbornly kept British rates fixed, arguing that any such loosening would unfairly reward bad banking behavior. After the failure of Northern Rock and the collapse of Lehman Brothers, Mr. King shifted course. The Bank of England has become perhaps the most aggressive central bank in terms of adding liquidity to the economy by buying government bonds. But after this unprecedented action, Mr. King has become even more doctrinaire in his view that the large banks that have benefited be forced to pay a price, one that would ensure that they never again threaten the viability of the world financial system. In his testimony, Mr. King said he had been thinking about how to address the dangers of big banking since 2007, at the first signs of the crisis. But it was not until last June, during a speech before the financial industry, that he first suggested that only through such a breakup could bankers reclaim public trust. “ ‘My word is my bond’ are old words,” he said dryly as London’s banking elite tucked into their filet mignon dinners. “ ‘My word is my C.D.O.-squared’ will never catch on,” he added, using the abbreviation for collateralized debt obligation, one of the financial instruments that were blamed for precipitating the financial crisis. Since that speech, Mr. King has become a cult hero of sorts to many academics and others who advocate even harsher measures to keep banks on the straight and narrow. One who has had his ear is Laurence J. Kotlikoff, a professor at Boston University who wants all financial institutions — from hedge funds to private equity funds as well as investment and commercial banks — to reconstitute themselves as mutual funds, meaning they would not be allowed to borrow to increase the size of their investments. The goal would be to prevent the types of debt-fueled bets that had such dire consequences.

157 That Mr. King would just about endorse such a proposal for the entire financial industry — he referred to Mr. Kotlikoff twice in his testimony on Tuesday — suggests that he may be inclined to push further than Mr. Obama. “He is interested in this idea,” said Mr. Kotlikoff, who presented his idea to Bank of England officials last November and says he will do so again next month. “And he understands the depth of the problem.” LANDON THOMAS Jr.British Central Banker Favors Splitting Big Banks January 27, 2010 http://www.nytimes.com/2010/01/27/business/global/27england.html?th&emc=th

China Central Banker Zhu Says Stable Yuan ‘Important’ (Update1) By Rob Delaney and Simon Kennedy Jan. 27 (Bloomberg) -- People’s Bank of China Deputy Governor Zhu Min defended his country’s “stable” yuan policy and warned that dollar volatility is threatening a global economic recovery. “It’s absolutely important to have rmb stability. It’s good for China. It’s also good for the world” Zhu said in a panel discussion at the World Economic Forum in Davos, Switzerland. Rmb is an abbreviation for renminbi, the yuan’s formal name. “Everybody understands that because of the U.S. dollar carry trading, all this money was brought into the emerging market, and someday if U.S. monetary policy changes, this money will go back to the U.S. market,” Zhu said. China is fighting criticism from countries, including the U.S., that it’s keeping the yuan’s value artificially low, making it more difficult for exporting nations to compete. China has kept a lid on its currency since July 2008 after it strengthened 21 percent against the dollar over the previous three years. “I think they have been excessively self-interested. I think they’ve been very uncooperative,” Barney Frank, chairman of the U.S. House Financial Services Committee, said of China’s currency policy. Frank was on the same panel as Zhu and made his comments to reporters afterwards. Yuan Peg China’s economy rebounded stronger than anticipated in the fourth quarter, and the inflation rate accelerated to a 13-month high of 1.9 percent in December, igniting speculation the government will abandon the yuan peg to avoid the economy from overheating. The Chinese government may allow the yuan to have “a bigger one-off move than people talk about, at least 5 percent, maybe more,” Goldman Sachs Group Inc. Chief Economist Jim O’Neill said in a Jan. 23 interview. “They may also consider having a wide band to let it move more frequently on the daily basis to stop speculative players.” http://www.bloomberg.com/apps/news?pid=20601087&sid=a6fmVclHUHqM&pos=5#

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Housing recovery could take a decade, economists warn By Renae Merle Washington Post Staff Writer Wednesday, January 27, 2010; A12 Even as the housing market shows signs of improvement, including in new data released Tuesday, economists warn that it could take up to a decade for many homeowners to regain equity in their homes, while some people in the hardest-hit regions of the country may not see a recovery during their lifetime. Home prices have fallen 30 percent since reaching their peak in 2006, and many economists think they will take another tumble this year as more foreclosures pile on the market. The pace of recovery will vary throughout the country, with homes in the most battered markets taking the longest to regain value. Meanwhile, millions of homeowners who are "underwater" -- owing more on their mortgages than their homes are worth -- face years of negative equity that puts them at a higher risk of foreclosure. "What are we going to do down the road when people who should have been saving for retirement, or college funds, are spending that money instead staying current on their underwater home?" said Brent T. White, a University of Arizona law school professor who has studied underwater borrowers. Economists worry that the housing market could stumble later this year when government measures to boost sales, including ultra-low interest rates and a tax credit for home buyers, expire. "We're just not convinced that the housing market can stand on its own two feet without the fiscal support of the tax credit," said Paul Dales, an economist for Capital Economics, a research firm. Signs of strength There are some signs that the housing market is strengthening. Homes sales last year increased 5 percent from 2008 and the backlog of unsold homes on the market fell significantly. The Standard & Poor's/Case-Shiller home-price index released Tuesday showed that in 20 major cities home prices rose 0.2 percent on a seasonally adjusted basis between October and November, the sixth straight month-over-month increase. But that same report illustrated the precarious nature of the recovery. In some metropolitan areas, including New York and Chicago, prices fell in November compared with the previous month, according to the index. In the Washington region, prices fell slightly, 0.2 percent on a seasonally adjusted basis. And prices overall in the 20-city index were down 5.3 percent compared with the corresponding period in 2008. There "is no clear sign of a sustained, broad-based recovery," said David Blitzer, chairman of S&P's index committee. In fact, many economists are expecting more losses. Moody's Economy.com has forecast an additional 10 percent decline in home prices this year, while Barclays expects prices to fall 8

159 percent by early 2011. Wells Fargo is more optimistic -- it expects home values to drop just 3 percent more this year. Even after the housing market stabilizes, it will take years for some owners to see the value of their homes appreciate. About 25 percent of homeowners owe more than their home is worth, according to data from First American CoreLogic, a research firm. While it has historically taken five to 10 years for home prices to regain losses after a major downturn, analysts said, it is likely to take much longer this time, particularly in parts of the country that have seen the steepest declines. "In California, Florida, in the ground-zero zones, it could take 15 years to fully recover," said Lawrence Yun, chief economist for the National Association of Realtors. In regions marked by rampant speculative home purchases, such as Naples, Fla.; Las Vegas; and parts of Southern California, it could take even longer, said Mark Zandi, chief economist for Moody's Economy.com. "It's not that we will never get back there. But it will take generations because it will take that long to grow the income and wealth to support those types of housing values," he said. Historical comparisons are likely moot, given the unprecedented nature of this housing downturn, said Thomas Lawler, a housing consultant and economist. Most housing-market collapses have been regional, not national like this one, he said, and many have not included the steep price declines experienced this time around. "If the question is how long will it take for prices to recover to the peak, it will be longer than before simply because prices fell by more," Lawler said. And in some parts of the country, the answer may be never, he said. Speculative buying Speculative buying pushed development farther from urban centers during the housing bubble, Lawler said. In some cases, local markets faltered before amenities such as grocery stores could be completed, and now there is no reason to finish those projects, he said. "There are going to be parts of Florida where homes shouldn't have been built [and] . . . that should have stayed farm land," he said. To achieve a healthy recovery, the housing market would need to avoid the quick run-up in prices experienced during the housing boom, economists said. If home prices rise significantly faster than inflation, it could lead to another housing bubble, they said. During a normal market, home prices rise 3 to 5 percent a year, Yun said. But during the housing boom, the appreciation rate was twice that in many areas. In the Washington region, home prices rose by 10 percent or more a year between 2001 and 2005, he said. "In the Washington market, which was one of the more bullish markets, it's going to take many years for people who bought at the peak to see those" prices again, Yun said. Renae Merle Housing recovery could take a decade, economists warn January 27, 2010; http://www.washingtonpost.com/wp- dyn/content/article/2010/01/26/AR2010012604115_pf.html

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La salida de la crisis Reino Unido sale a duras penas de la recesión W. OPPENHEIMER - Londres - 27/01/2010 La economía británica ha salido ya, aunque a duras penas, de la recesión. Según los datos oficiales, pero todavía provisionales, publicados ayer por la Oficina Nacional de Estadística del Reino Unido, la economía creció un 0,1% en el último trimestre de 2009. Un dato muy por debajo del 0,4% pronosticado por la mayoría de los analistas. La debilidad de ese crecimiento refuerza el sentimiento de que la recuperación es aún muy frágil. El dato ha sorprendido por su pobreza, sobre todo por los indicadores positivos anteriores, como un sorprendente repunte de la inflación en diciembre que dejó el IPC en el 2,9% en el conjunto del año pasado y, sobre todo, una inesperada caída de las cifras de paro también en diciembre, la primera en 18 meses. Los datos publicados ayer son todavía provisionales y sólo recogen el 40% de la información de la que surgen las cifras definitivas y puede aún ser corregido al alza, aunque también a la baja. Algunos analistas aventuraban ayer la posibilidad de que la subida del IVA en 2,5 puntos, que entró en vigor el 1 de enero, y la ola de frío polar que ha sufrido este mes el país podrían hacer retornar las tasas de crecimiento negativo en el primer trimestre de 2010. En cualquier caso, el Reino Unido, la última de las cinco grandes economías occidentales en salir de la recesión después de que ya lo hicieran Alemania, Francia, Estados Unidos y Japón, ha caído un 4,8% a lo largo de 2009, la caída anual más pronunciada desde 1949, y un 6,1% desde que entró en crecimiento negativo en el segundo trimestre de 2008. La recesión ha durado seis trimestres consecutivos, el periodo más largo desde que en 1955 empezaron las estadísticas trimestrales sobre la evolución del PIB. El dato de ayer tiene consecuencias políticas contradictorias. Por un lado, supone sólo un alivio relativo para el Gobierno laborista con vistas a las cercanas elecciones generales, que se esperan para mayo. La fragilidad del dato impide al primer ministro Gordon Brown dar por enterrada la crisis. Pero cuestiona también la estrategia de la oposición conservadora, que defiende que empiece de inmediato el recorte del gasto público para empezar a reducir los déficit presupuestarios. "La economía británica es propensa a la doble caída en recesión y un temprano endurecimiento de la política fiscal o monetaria podría fácilmente hundir otra vez la economía del Reino Unido", advirtió ayer Azad Zangana, economista de Schroders, la compañía de gestión de activos globales. W. OPPENHEIMER Reino Unido sale a duras penas de la recesión 27/01/2010http://www.elpais.com/articulo/economia/Reino/Unido/sale/duras/penas/recesion/elp epueco/20100127elpepieco_4/Tes

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27.01.2010 Greece woes China to buy bonds

Greece is wooing China to buy up to €25bn of government bonds, reports the FT. Goldman Sachs has been promoting a Greek bond sale to Beijing and the State Administration of Foreign exchange (Safe), which manages China’s $2,400bn foreign reserves, and added $139bn of new reserves in the last quarter of 2009 alone. But people close to Safe said China already held a significant amount of Greek debt and was wary of adding to that. Another proposal for the Bank of China or the Chinese sovereign wealth fund to acquire a strategic stake in the National Bank of Greece, the country’s flagship commercial lender, seems to get nowhere. Kathimerini reports that the finance ministry is preparing a dollar issuance for March and eventually also a yen issuance. Juncker says euro area must co-ordinate more than budgets In an interview with Les Echos, Jean-Claude Juncker says the euro area has go beyond cooperation on budgetary poilcy. In the last year it has become dramatically clear that more policy co-ordination is needed, if Europe wanted to make its weight felt on the international stage. The euro area needs to address internal imbalances, and it needs procedures to deal with countries that pursue unilateral strategies. In particular, he calls on France and Germany to overcome their difference on the question of economic governance. Juncker says he and the eurogroup cannot be made responsible for this still unresolved problem. Munchau on what the euro area needs to do now In his column in FT Deutschland, Wolfgang Munchau says the long-term survival of the euro area can no longer be taken for granted if the current system of governance were to persist for ever. At the very least, the euro area needs a crisis resolution mechanism to deal with situation as in Greece, which could easily spill over to other European countries. Portugal, Ireland and even Spain are at threat. Ad hoc intervention mechanism will ultimately fail for political reasons, as they are not politically legitimate.

Stiglitz calls on Europe to show solidarity for Greece Joseph Stiglitz argues in a forceful column in the Guardian that European leaders acted irresponsibly when they condemned Greece for excessive deficits. Comments from the ECB and other officials have compounded Greece's problems by sending interest rates soaring , they also put at risk the recovery of the Greek economy. With Europe's economy still weak, an excessively rapid tightening of its budget deficit would risk throwing Greece into a deep

162 recession. Stiglitz calls on Europe to show solidarity with Greece and appreciate their efforts. He suggests that the EU should reframe the short run budget targets and use primary deficits rather than structural deficits. The European Investment Bank could even undertake countercyclical investments to offset deflationary impacts of the budget cuts. The EU should show support for Greece’s efforts in every possible way. Bini-Smaghi warns on bubbles The Wall Street Journal reports Lorenzo Bini-Smaghi as saying that excessively low interest rates for too long could fuel another asset price bubble. “If the aim is to lower long-term rates, it may also encourage market participants to take substantial long positions in the fixed income market,” he said, and risk suffering heavy losses when policymakers exit from their accommodative policies. The risk of such losses “may induce the central bank to further delay the exit to avoid penalizing banks,” Bini Smaghi said, which is what happened during 2002-2004. IMF raises 2010 growth forecast In its latest World Economic Outlook the IMF revised upwards its growth global forecast to 3.9% this year, though the the recovery is proceeding at different speeds. El Pais notes that Spain is the only large economy for which the IMF forecasts in 2010 is still negative. Spain is expected to contract (-0.6%) in 2010. The recovery will only be take up in 2011(0.9%), with the aftermath of the housing collapse and persistent high unemployment still compromising growth prospects. Zapatero’s complacency Le Monde picks up a Breakingviews.com commentary according to which Zapatero has not yet prepared the Spanish for austerity measures. There is no way out of this crisis other than through a fall in wage costs, which could restore Spain’s competitiveness, but this would require a fall in payroll taxes, lower income taxes, and a fall in a real earnings – none of which is on the political agenda in the country. Otherwise Spain risks being trapped in a spiral of decline. Roubini says Spain threat to the euro area Nouriel Roubini now gets really gloomy about the eurozone saying in an interview with Bloomberg that Spain poses a looming threat to the euro region holding together. For all the focus on Greece, Spain could become a bigger threat to the euro zone because it’s the region’s fourth-largest economy and has higher unemployment and weaker banks. Roubini suggests that down the line the euro zone could split up into a strong center and a weaker periphery with some countries to exit monetary union altogether. China starts tightening monetary policy Beijing enforced tighter monetary policy in an attempt to temper inflation expectations by ordering some banks to temporarily hold lending after the sector extended a total of €114bn in new loans in just the first two weeks of January, reports the FT. The rush to lend was partly driven by the expectation that the government will tighten monetary policy in the coming months, prompting officials to implement administrative measures ahead of schedule. This caused commodity prices for oil and other metals fell as uncertainty increased over the outlook for demand from China. http://www.eurointelligence.com/article.581+M512d66998da.0.html#

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Juncker ne veut pas "porter le chapeau du désaccord franco-allemand" [ 26/01/10 - 18H31 - actualisé à 19:34:00 ] Le chef de file des ministres des Finances exhorte les Etats membres à muscler la gouvernance économique de la zone euro. Vous venez d'être reconduit à la tête de l'Eurogroupe. Mais vous avez aussi été candidat à la présidence du Conseil et les Vingt-Sept vous ont préféré Van Rompuy. Pourquoi ? AFP/Georges Gobet

Une écrasante majorité d'Etats membres soutenait ma candidature. Mais un pays était réticent et, comme il n'y avait aucune opposition à l'égard de mon ami Van Rompuy, je me suis retiré. J'aurais pu exiger un vote à la majorité qualifiée, mais je n'ai pas voulu que l'attribution de ce nouveau poste fasse l'objet d'une controverse. J'en garde une déception qui s'efface peu à peu, mais aucune forme d'amertume. Herman Van Rompuy est un inconnu pour beaucoup d'Européens et Catherine Ashton, la haute représentante, n'a aucune expérience diplomatique. N'est-ce par un choix difficile à justifier ? Je ne me prononcerai pas sur Ashton, car je ne la connais pas. Mais je sais que Van Rompuy, que je connais depuis vingt ans, est un vrai européen, un homme très intelligent. Il connaît bien l'Union, ses mécanismes et les réactions des Etats membres. Il a une grande faculté d'écoute, mais ceux qui pensaient qu'il serait facile à mettre au pas vont être surpris par sa capacité de résistance et sa force de proposition. Il va être un président fort, on va le découvrir très rapidement. A la tête de l'Eurogroupe vous souhaitez, comme la présidence espagnole, renforcer la gouvernance économique de la zone euro. Pourquoi et comment ? J'aime ce terme de gouvernance qui est une façon plus musclée d'évoquer le renforcement de la coordination des politiques économiques. Je plaide pour ce renforcement depuis des années

164 sans avoir obtenu le soutien de tous les pays de la zone euro. Mais, depuis dix-huit mois, le monde a dramatiquement changé et, si nous voulons faire de la zone euro une entité monétaire, économique et politique qui compte, nous devons cesser de donner l'impression de nous consacrer exclusivement à la consolidation budgétaire. Le moment est venu de préparer des stratégies de sortie de crise coordonnées. Il faut, pour cela, examiner plus en détail et plus en profondeur la situation compétitive de chaque pays de la zone. Des divergences existent, elles ont augmenté avec la crise et, si nous n'y prenons pas garde, elles pourraient mettre à mal notre cohésion. Pratiquement, nous devons examiner l'évolution de nos situations compétitives et attirer l'attention d'un pays qui s'écarterait de la moyenne sur les conséquences possibles de cette promenade solitaire. Nous devrons notamment nous pencher sur les obstacles structurels limitant la croissance, en édictant des objectifs à moyen terme pour les éliminer. Et adopter des recommandations, par pays, pour atteindre ces objectifs et alimenter les débats nationaux. De son côté, la Commission devrait utiliser les nouveaux moyens prévus par l'article 121 du traité de Lisbonne pour adresser des avertissements aux Etats membres ne suivant pas l'esprit de nos recommandations. Mais l'Allemagne refuse de s'engager sur cette voie. Pourquoi ? Depuis que l'Eurogroupe existe et que je propose d'accroître cette coordination des politiques économiques, je constate deux choses. Les partisans de ce renforcement hésitent lorsqu'il s'agit d'examiner en détail la situation de leur pays et leurs objectifs. On n'aime pas évoquer à l'Eurogroupe des stratégies qui n'auraient pas été acceptées par les Parlements nationaux. Aussi nous découvrons souvent, a posteriori, les décisions de politique économique sans avoir pu évaluer leur compatibilité avec celles des autres pays de la zone. Et je constate également que l'Allemagne conteste l'idée même d'une coopération plus élaborée entre pays partageant la même monnaie, même si les décisions économiques des uns ont immédiatement un impact sur les économies des autres. La notion même de gouvernement économique est refusée en Allemagne, car elle ne correspond pas à la manière dont ce pays gère son économie et organise son dialogue social. Il n'y a pas d'accord entre la France et l'Allemagne sur ce sujet. Il y a plus qu'une nuance entre l'approche des deux pays et je regrette beaucoup qu'on me fasse parfois porter le chapeau, en m'imputant des responsabilités que je n'ai pas. La France et l'Allemagne doivent mener un dialogue que leurs dirigeants font parfois semblant d'avoir entamé, mais qu'ils n'ont pas vraiment approfondi. Tenir le président de l'Eurogroupe pour responsable de cette situation en l'accusant d'immobilisme est d'autant plus injuste que ce désaccord franco-allemand peut être surmonté. Vous souhaitez également renforcer le rôle international de l'Eurogroupe en reconnaissant que ce ne sera pas facile. Les esprits ne sont pas mûrs, car plusieurs pays refusent une représentation unique de la zone euro. Mais il est difficile de revendiquer une identité propre de l'eurozone si nous ne parvenons, un jour, à la faire représenter de manière plus ramassée dans les enceintes internationales. Qui va préparer les sommets européens comme celui de février : Van Rompuy, l'Espagne, le président de la Commission, vous-même ? Les dirigeants et les citoyens de l'Union vont-ils s'y retrouver ? On a, en effet, omis d'évoquer les difficultés de cohabitation créées par le traité de Lisbonne. Je crois que la préparation de ce conseil relève du droit d'initiative exclusif de la Commission et d'un travail de préparation du président du Conseil européen qui va effectuer un tour des

165 capitales de l'Union. Il faudra ensuite trouver une bonne chorégraphie, notamment avec la présidence espagnole. Un des grands problèmes auxquels sont confrontés les grands pays industrialisés reste la sous-évaluation de la monnaie chinoise. Que peut faire l'Europe ? En deux ans, je suis allé deux fois en Chine, avec le président de la BCE, Jean-Claude Trichet, et Joaquin Almunia, le commissaire responsable de l'Economie. Nous avons eu, notamment la dernière fois, des discussions ouvertes et franches avec nos interlocuteurs chinois, en insistant sur le fait que les déséquilibres globaux qui existent ne sont pas le fait de la zone euro, cette dernière étant devenue le seul facteur d'ajustement. Il faut que le monde et les Européens prennent conscience que les taux de change constituent l'un des éléments les plus importants des relations internationales. La Chine et les Etats-Unis l'ont parfaitement compris, mais l'Europe hésite à le faire. Il ne faut pas en faire un discours quotidien, mais il faut expliquer, de temps en temps, à nos partenaires que nous sommes mécontents des déséquilibres globaux et du taux de change de l'euro, qui est surévalué, alors que le yuan et le dollar sont sous-évalués. PROPOS RECUEILLIS PAR JACQUES DOCQUIERT, Les Echos AFP/Georges Gobet Juncker ne veut pas "porter le chapeau du désaccord franco-allemand"26/01/10 actualisé à 19:34:00 http://www.lesechos.fr/info/inter/300405953.htm?xtor=RSS-2059 Kolumne Wolfgang Münchau - Griechenland ist überall Bislang hat die Krise in Athen vor allem eins gezeigt: Die Europäische Währungsunion braucht feste Regeln für den Umgang mit quasi-insolventen Staaten. von Wolfgang Münchau 26.01.2010, 18:33 Alle Jahre wieder kommt diese Frage auf: Fliegt der Euro-Raum irgendwann einmal auseinander? Der große Unterschied zu früher ist, dass jetzt auch die EU-Kommission in ihrem jüngsten Bericht über den Euro-Raum diese Frage stellt. Denn von den vielen hypothetischen Szenarien, die die Euro-Skeptiker immer wieder aufwärmen, ist eines in der Tat ernst: das Szenario, dass ein Mitgliedsstaat in einen Strudel von Überschuldung und verlorener Wettbewerbsfähigkeit gerät und sich aus eigener Kraft nicht mehr befreien kann. Griechenland ist ein offensichtliches Beispiel, aber auch Portugal und Irland könnten dort landen. Auch Spanien tendiert trotz seiner im Moment noch akzeptablen Staatsfinanzen in diese Richtung. Daher ist die Frage gerechtfertigt, ob uns der Euro-Raum um die Ohren fliegen kann. Die wichtigsten Gründe, die dagegen sprechen, sind institutionelle, rechtliche und historische. Man wird natürlich alles versuchen, so etwas zu verhindern. Ökonomen tendieren dazu, die politischen Bande der EU zu unterschätzen. Trotzdem sollten die Euro-Optimisten die ökonomische Wucht des oben genannten Szenarios nicht geringreden. Wenn ein Land permanent an Wettbewerbsfähigkeit verliert, wenn das politische System nicht in der Lage ist, diese Probleme zu beheben, dann wächst das Risiko einer Krise, die aus den Fugen gerät. Stellen Sie sich vor, Deutschland hätte die Wiedervereinigung mit Lohnausgleich, aber ohne Milliardentransfers gewagt. Der Osten hätte keine wirtschaftliche Anpassungsmöglichkeit

166 gehabt. Er hätte weder abwerten noch die Reallöhne senken können. Man hätte auch kein Geld für Investitionen gehabt. Die Konsequenz: eine nicht endende Depression, die wahrscheinlich noch Jahrzehnte anhalten würde. Glauben Sie, so etwas hätte keine Konsequenzen für die Politik im wiedervereinigten Deutschland? Eine solche Entwicklung würde langfristig die nationale Einheit gefährden. Die Transfers, die wir für die deutsche Vereinigung politisch akzeptierten, wären in der Europäischen Währungsunion tatsächlich nicht möglich. Dazu fehlt es an politischem Willen. Wir müssen uns auf andere Mechanismen verlassen, um unsere Krisen zu meistern. Was bleibt aber ohne Transfers und ohne die Möglichkeit nominaler Abwertungen? Ökonomisch gibt es nur eine Antwort: reale Abwertungen, speziell die Verbesserung der Wettbewerbsfähigkeit durch reale und möglicherweise sogar nominale Lohnkürzungen. Da der griechische Staat nicht nur unter schwacher Wettbewerbsfähigkeit leidet, sondern auch unter Überschuldung, sind die politischen Spielräume begrenzt. Kurzfristig kann man das Problem durch weitere Verschuldung überdecken. Noch ist Griechenland solvent. In dieser Woche gelang es der Regierung, eine Anleihe mit einem Coupon von 6,2 Prozent auf den Markt zu werfen. Die akute Krise hat somit etwas an Schärfe verloren, aber kein Problem ist damit gelöst. Denn die haushaltspolitischen Spielräume werden jetzt noch geringer. http://www.ftd.de/politik/europa/:kolumne-wolfgang-muenchau-griechenland-ist- ueberall/50066100.html?mode=print Kolumne Wolfgang Münchau - Griechenland ist überall So far the crisis has pointed in Athens, first of all, one: the European monetary union needs firm rules for the contact with virtually insolvent governments. from Wolfgang Münchau All years again this question arises: does the euro-space fly apart sometime once? The big difference is too early that now also the EU commission puts this question in their youngest report on the euro-space. Since, indeed, from a lot of hypothetical scenarios which warm up the Eurosceptics again is serious: the scenario that a member state gets in a whirlpool of insolvency and lost competitive ability and cannot free itself from own force any more. Greece is an obvious example, but also Portugal and Ireland could land there. Also Spain tends in spite of his public finances akzeptablen still at the moment in this direction. Therefore, the question is justified whether the euro-space can fly to us around the ears. The most important reasons which speak on the contrary are institutional, legal and historic. One will try naturally everything to prevent such a thing. Economists tend to underestimate the political gang of the EU. Nevertheless the euro-optimists should not the economic force of the scenario named at the top geringreden. If a country loses permanently to competitive ability if the political system is not able to repair these problems, then grows the risk of a crisis which gets from the joints. Introduce yourselves, Germany would have ventured the reunification with wage balance, but without billion transfer. The east would have had no economic adaptation possibility. He would have neither can depreciate nor lower the real wages. One would also have had no money for investments. The consequence: a not ending depression which would still likely

167 stop decades. Do you believe, such a thing would have no consequences for policy in reunified Germany? Such a development would endanger in the long term the national unity. The transfer which we accepted for the German union politically would not be possible in the European monetary union actually. In addition there is not enough political will. We must rely on other mechanisms to master our crises. What remains, however, without transfer and without possibility of nominal devaluations? Economically there is only an answer: real devaluations, specially the improvement of the competitive ability by real and possibly even nominal wage cuts. Because the Greek government suffers not only from weak competitive ability, but also under insolvency, the political times are limited. At short notice one can cover the problem by other indebtedness. Greece is still solvent. This week the government succeeded in throwing on the market a loan with a remnant of 6.2 per cent. The acute crisis has lost therefore something to sharpness, but no problem is solved with it. Since the times concerning budgetary policy become lower even now. Esta página ha sido traducida por Reverso de Softissimo

A principled Europe would not leave Greece to bleed Unless it is one rule for the big and powerful and another for the small, the EU must stand behind Athens' new leadership

Joseph Stiglitz guardian.co.uk, Monday 25 January 2010 22.00 GMT Greece has been condemned by European officialdom for its huge deficits. "No government or state can expect from us any special treatment," comes the warning from Jean-Claude Trichet, president of the European Central Bank. But Trichet failed to note that there had long been a double standard – in effect two Maastricht treaties, one for the large and powerful countries, another for the smaller and less powerful. When France broke the EU edict not to let debt exceed 3% of GDP, there were strong words, but little else. Of course, Trichet may claim there is a difference between what Greece and the many other countries that have broken the limits have done. There is a difference of size. But there is also a difference in culpability and consequences. Greece's large deficit has implications for the future of the citizens of Greece, but not for the stability of the euro – unlike a similarly large deficit on the part of one of the larger countries. A large part of Greece's deficit is the result of the global recession, whose impact was felt acutely by many countries who were not responsible for causing it. However, the global crisis did reveal the deep-rooted structural problems of the Greek economy, which had deteriorated further during the last six years under the previous government. Unfortunately, European

168 leaders have compounded Greece's problems. Their statements have sent the interest rates it has to pay soaring, making it all the more difficult for Greece to tame its deficits. Instead, they should have welcomed the efforts of Greece's new government. At least it has come clean about the dishonest accounting of its predecessors. Like America's banks, it could have tried to keep up with a system of dishonest accounting, hoping that it would not be caught out. But Greece's new prime minister, George Papandreou, has always stood for honest and transparent government. Europe should be coming to the assistance of this kind of leader, not making his life more difficult. Greece is among the poorest of the European family. Part of the basis of the success of the European project is a sense of social solidarity, which entails coming to the assistance of those who are less fortunate. When the euro was created, many economists worried about the lack of stability-solidarity funds. If Europe had developed a better solidarity and stabilisation framework, then the deficits in the periphery of Europe might have been smaller and they would have been more able to manage them. Economic downturns often affect those in the periphery much worse – they are the victims of their neighbours' failures. It is common wisdom that when the US sneezes, Mexico catches a cold. But more recently, this aphorism has mutated: Mexico now catches pneumonia, as its fall in GDP last year showed. Part of the reason for the success of America's "single market" is that there is this sense of social cohesiveness, and a large federal budget to support it: when one part of the country has difficulties, federal spending can be diverted to help those parts that are in need. While Europe may not yet have an overall budgetary framework that can fully address weaknesses in one part or the other of the EU, it should at least adopt the principle of "do no harm". For the ECB to announce that it will not accept Greek bonds as collateral would be counterproductive. For the ECB to delegate judgments about the credit-worthiness of Greek bonds to the rating agencies would be more than just irresponsible; it would be reprehensible. Delegation of effective regulatory responsibility to the rating agencies is partly what got the world into the present mess; and the rating agencies' judgments have proven to be deeply flawed – underrating the risk of mortgage backed securities, but consistently overrating the risk of certain sovereign debts. With Europe's economy still weak, an excessively rapid tightening of its budget deficit would risk throwing Greece into a deep recession. Adjustments always take time, and are always painful. Europe should reframe the short-run budgetary targets it sets for Greece in terms of the structural deficit – what the deficit would have been had the country been able to achieve full employment. In recent years, even the IMF has reframed most countries' budgetary targets in terms of the primary deficit – net of interest payments, recognizing that volatile financial markets mean that interest payments are not really within a country's control. The EU could and should show support for the honesty and integrity of Greece's government and its efforts not only to bring the budget under control, but to increase transparency of the entire budgetary framework and to reduce corruption. The EU can go further: institutions like the European Investment Bank should undertake countercyclical investments in the country, to offset the deflationary impacts of the budget cuts. Europe should show that it will stand behind Greece, much as the IMF provides support funds for developing countries. The provision of such support might lower interest rates, and make it easier for the country to reach budgetary balance. The EU, the euro, and the premise of European solidarity is being tested again. The measure of Europe will not be in the harshness of its actions, but in the spirit of solidarity that it shows in assisting its neighbour.

169 America too has unprecedented deficits, as do many countries around the world. Like Obama, Papandreou inherited an economic situation that was not of his making. Both of their predecessors had made mistakes of colossal proportions. Both of their predecessors had engaged in dishonest bookkeeping – but Bush's pale in comparison to that of Papandreou's predecessor. Both were elected on a platform that promised change, and both brought new standards of honesty and transparency to government. Both had their original vision compromised by the exigencies of the economic situation they confronted. For the sake of European solidarity and democracy, Europe should support Papandreou's efforts in every way they can, not turn their back on the people of Greece who must be convinced that supporting the government's austerity measures is in everyone's best interest.

Joseph Stiglitz A principled Europe would not leave Greece to bleed, Monday 25 January 2010 http://www.guardian.co.uk/commentisfree/2010/jan/25/principled-europe-not-let-greece- bleed/print

Roubini Never More Pessimistic on Euro Area, Calls Spain a Risk By Simon Kennedy and Thomas R. Keene

Jan. 27 (Bloomberg) -- New York University Professor Nouriel Roubini said he’s never been more pessimistic about the future of European monetary union, saying Spain poses a looming threat to the euro region holding together. “Down the line, not this year or two years from now, we could have a breakup of the monetary union,” Roubini said in a Bloomberg Radio interview from the World Economic Forum’s annual meeting in Davos, Switzerland. “It’s a rising risk.” Roubini’s concern contrasts with the view of European Central Bank President Jean-Claude Trichet who said it’s “absurd” to imagine that the 16-nation euro area could splinter. Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent’s biggest budget deficit and countries from Spain to Ireland face rising debt burdens.

170 “The euro zone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union,” said Roubini, who predicted the recent financial crisis a year before it began. “This is the very first test” of the single currency bloc. Economies including Spain and Greece are threatened by fiscal imbalances and declining competitiveness, Roubini said. Membership in the euro means they can no longer devalue the currency to export their way out of recession, he said. Commission Deadline The Greek budget deficit ran more than four times the European Union limit of 3 percent of gross domestic product last year and Greece is one of 13 nations facing deadlines from the European Commission to cut its shortfall. The country’s debt is set to top 120 percent of GDP this year, the highest in the euro region and twice the limit for adopting the single currency. Trichet on Jan. 14 dismissed as an “absurd hypothesis” the argument that Greece could be forced to exit the euro area. The country should remain in the union where its problems “will be unequivocally easier to solve,” central bank governor George Provopoulos said in the Financial Times on Jan. 22. Roubini said for all the focus on Greece, Spain may eventually pose a bigger threat to the euro zone because it’s the region’s fourth-largest economy and has higher unemployment and weaker banks. Spain’s jobless rate is more than 19 percent, almost twice the EU average. “If Greece goes under that’s a problem for the euro zone,” he said. “If Spain goes under it’s a disaster.” Bond Vigilantes Roubini described rising sovereign risk as a “new phenomenon” for advanced economies that will complicate their recoveries from the worst global recession since World War II. So-called bond vigilantes, or investors who punish governments by dumping their debt, “have been asleep at the wheel,” outside of Europe, Roubini said. The risk premium investors demand to buy 10-year Greek debt over comparable German bonds rose to an 11-year high of 312 basis points on Jan. 22. “Eventually they could wake up” in Japan and the U.S. and sell off their bonds as they did with Greece. “We have a massive fiscal problems in most of the advanced economies, and we’re not really dealing with it,” he said. After Standard & Poor’s yesterday lowered its sovereign credit rating outlook on Japan, Roubini said he was “worried” about the world’s second-largest economy as its debt mounts, deflation returns and population ages. While it can currently finance itself thanks to domestic savers, at some point they may “flee the yen,” pushing up borrowing costs and crippling the economy, he said.

Simon Kennedy and Thomas R. Keene Roubini Never More Pessimistic on Euro Area, Calls Spain a Risk, 27 enero, 2020, en: http://www.bloomberg.com/apps/news?pid=20601085&sid=aVW11LBGT.08#

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Swaps Trading Surges as National Deficits Rise: Credit Markets By Shannon D. Harrington and Abigail Moses Jan. 27 (Bloomberg) -- Traders are buying protection against defaults on sovereign debt at more than five times the rate of company bonds as governments fund ballooning deficits. The net amount of credit-default swaps outstanding on 54 governments from Japan to Italy jumped 14.2 percent since Oct. 9, compared with 2.6 percent for all other contracts, according to Depository Trust & Clearing Corp. data. European countries led the jump, with the amount of protection on Portugal rising 23 percent, Spain 16 percent and Greece 5 percent. Rising use of derivatives to insure against defaults or speculate on government bond prices is spilling over into the corporate debt market, stemming a rally that drove yields to the lowest relative to sovereign benchmarks since December 2007, according to BNP Paribas. The global financial system remains “fragile,” with sovereign debt posing a risk to markets, the Washington-based International Monetary Fund said yesterday in its Global Financial Stability Report. The perception of rising risk “can puncture a country’s ability to access the capital markets,” said Scott MacDonald, head of credit and economics research at Stamford, Connecticut- based Aladdin Capital Management LLC, which oversees $11.9 billion. “Maybe it’s not an end-all be-all indicator. But when these countries get into a position where they need to raise capital, it becomes a confidence game.” Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of Treasuries held at 164 basis points, or 1.64 percentage points, yesterday, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14. Losing Streak Spreads on high-yield securities increased for the sixth day yesterday, the longest period since August. The gap on junk bonds widened to an average of 644 basis points from 642 basis points on Jan. 25 and the low this year of 599 basis points on Jan. 11, according to the Bank of America U.S. High Yield Master II index. The market for mortgage-backed and asset-backed securities showed signs of improving. Lloyds Banking Group Plc is selling the first dollar-denominated mortgage-backed debt in Europe since credit markets began to seize up in 2007. Ford Motor Co.’s finance unit plans to offer $1 billion of bonds backed by auto leases, according to a person familiar with the offering who declined to be identified because the terms aren’t set. Yesterday, Discover Financial Services sold $750 million of bonds backed by credit-card payments, boosting the sale from $500 million.

172 ‘Increase of Risk’ Unprecedented fiscal and monetary stimulus programs have “come at the cost of significant increase of risk to sovereign balance sheets and a consequent increase in sovereign debt burdens that raise risks for financial stability in the future,” the IMF said in the report. The cost to protect against a default by Greece has more than doubled to 325 basis points since Sept. 30 as the government struggles to reduce a budget deficit that’s 12.7 percent of gross domestic product, CMA DataVision prices show. Greece sold 8 billion euros ($11.3 billion) of bonds this week at a premium to yields on outstanding securities in the first issue since the debt was downgraded last month by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. The net notional amount of credit swaps on Greece has increased to $8.8 billion, according to DTCC data. Contracts on Portugal bonds have jumped to $9.6 billion since October 9, the data show, as the nation faces a budget shortfall that’s more than twice the European Union’s limit. The cost of protection on Portugal has more than doubled since September to 130 basis points, according to CMA. Italy, Spain Bets on Italy have jumped 13 percent to $25.4 billion, while the net amount of swaps on Spain climbed 16 percent to $15.2 billion. Traders “are not necessarily betting there’s a default,” said Brian Yelvington, head of fixed- income strategy at Greenwich, Connecticut-based broker-dealer Knight Libertas LLC. “But rather that the credit risk profiles differ enough that they certainly shouldn’t trade right on top of each other.” Credit swaps on Spain have jumped to 97 basis points more than Germany, from 31 basis points on Sept. 30, CMA data show. The surge in trading of sovereign debt swaps comes as the cost to protect against losses on government debt exceeds that of companies in some cases. Swaps on almost a third of the 125 companies in the benchmark Markit iTraxx Europe Index are trading for less than the governments of the countries where they’re based, BNP analyst Andrea Cicione in London said in a report last week. Lloyds MBS In the U.S., swaps on 8 companies in the Markit CDX North America Investment Grade Index were quoted for less than contracts on Treasuries, according to CMA data. Lloyds, the U.K.’s biggest provider of home loans, is offering the first dollar-denominated mortgage bonds backed by European assets since July 2007, Deutsche Bank AG data show. Britain’s mortgage-backed bond market shut in 2007 when securities linked to U.S. subprime loans slumped, causing investors to shun hard-to-value assets. The top-rated AAA rated notes with an average life of 2.95 years may yield about 115 basis points more than the London interbank offered rate, or Libor, said three people with knowledge of the deal who declined to be identified because the terms aren’t set. The bonds, backed by prime U.K. mortgages, will be issued by Lloyds’s Permanent Master Issuer Plc and include securities in euros and pounds. Rising Prices Lloyds, 43 percent-owned by U.K. taxpayers, is tapping dollar-based investors as prices on U.S. mortgage securities increase from record lows. The most-senior notes backed by U.S.

173 option adjustable-rate mortgages traded last week at about 54 cents on the dollar from 33 cents in March, Barclays Capital Inc. data show. Ford’s sale of asset-backed bonds comes three weeks after the Dearborn, Michigan-based automaker’s finance unit issued $1.25 billion of so-called floorplan bonds, which are linked to loans that finance cars on dealer lots. Nissan Motor Co. plans to offer $500 million of bonds backed by payments from dealers, according to a person familiar with the offering. The top-rated debt is eligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility, said the person. U.S. junk bonds have returned 1.41 percent on average this month, compared with 1.79 percent for investment-grade company debt, Bank of America indexes show. Junk bonds are rated below Baa3 by Moody’s and less than BBB- by S&P. Fed Meets Junk bonds weakened yesterday even as reports in the U.S. showed home prices and consumer confidence both climbed. The S&P/Case-Shiller home-price index increased 0.2 percent in November and the Conference Board’s confidence gauge rose this month to the highest level in more than a year. The U.S. Federal Open Market Committee is likely to keep its target interest rate for lending between banks unchanged in a statement at about 2:15 p.m. today, after completing its two- day policy meeting. The Fed probably won’t raise rates from its range of zero to 0.25 percent target until November, according to the median of 51 forecasts in a Bloomberg survey of economists. To contact the reporters on this story: Shannon D. Harrington in New York at [email protected]; Abigail Moses in London at [email protected] Shannon D. Harrington and Abigail Moses Swaps Trading Surges as National Deficits Rise: Credit Markets Jan. 27 http://www.bloomberg.com/apps/news?pid=20601085&sid=agMzklasMuzE

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Weber Says ECB May Take Further Exit Steps in First Half By Francine Lacqua and Simone Meier

Jan. 27 (Bloomberg) -- European Central Bank council member Axel Weber said the bank may take further steps in the first half of this year to withdraw liquidity from the banking system as the economy gathers strength. “As the economy improves, we’ll take some of the exceptional measures back,” Weber said in an interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland, today. “Not all measures are needed to the same degree, so I don’t rule out that we take some additional steps even before the second half.” One of the cornerstones of the ECB’s strategy to fight the financial crisis has been to lend banks as much money as they want at its benchmark interest rate of 1 percent, a record low. The central bank has already started to scale back its emergency longer-term lending as the economy shakes off its worst recession since World War II. Weber said the ECB will have to discuss a return to a normal auction procedure in its refinancing operations, though this would not be reintroduced to all tenders at once. The 16-nation euro region will have a “protracted” economic recovery, he said, adding it may take two to three years to return to pre-crisis conditions. The euro rose against the dollar after Weber spoke to $1.4059 from $1.4043.

Francine Lacqua and Simone Meier Weber Says ECB May Take Further Exit Steps in First Half Jan. 27 http://www.bloomberg.com/apps/news?pid=20601087&sid=aqKFYctgbYNc&pos=3#

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Banks Reviving Synthetic Bets as Volcker Blasts Default Swaps

By Shannon D. Harrington and Pierre Paulden

Jan. 26 (Bloomberg) -- Wall Street is marketing derivatives last seen before credit markets froze in 2007, as the record bond rally prompts investors to take more risks to boost returns. Bank of America Corp. and Morgan Stanley are encouraging clients to buy swaps that pay higher yields for speculating on the extent of losses in corporate defaults. Trading in credit- default swap indexes rose in the fourth quarter for the first time since 2008, according to Depository Trust & Clearing Corp. data. Federal Reserve data show leverage, or borrowed money, is rising in capital markets. Investors who retreated to the safety of government debt during the financial crisis are returning to the simplest forms of so-called synthetic collateralized debt obligations after last year’s record 57.5 percent rally in junk bonds left money managers with fewer options. While President Barack Obama’s adviser Paul Volcker has blamed credit swaps and CDOs for taking the financial system “to the brink of disaster,” bankers say the instruments help companies raise capital. “In a flight to quality you see investors fly away from anything exotic,” said Moorad Choudhry, author of “Structured Credit Products: Credit Derivatives and Synthetic Securitisation” and head of treasury in London at Europe Arab Bank Plc. “It’s now very slowly reversing, and if the recovery continues we will see it come back.” Betting on Indexes Bets using credit-default swap indexes that speculate on bonds without buying them have jumped 13 percent in the past three months to $1.2 trillion, DTCC data show. The amount includes index tranches, which may offer higher returns than indexes, according to Morgan Stanley and BlueMountain Capital Management LLC. Derivatives, contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather, may boost yields for managers as if they were borrowing to purchase debt securities. Bank of America strategists led by Suraj Tanna in London recommended that investors

176 “rethink” so-called first-to- default baskets that pay investors for the risk that any one of four to 10 companies default. The trades “can provide an attractive premium relative to the total default risk the investor is taking,” the analysts said last month. Morgan Stanley strategists suggested clients sell protection on a so-called mezzanine tranche of the Markit CDX North America Investment Grade Series 9 Index that would pay 3.8 percentage points annually for about five years. That’s more than triple the payments for a trade on the index, which is linked to 125 companies and used to speculate on corporate creditworthiness or to hedge against losses. ‘More Leverage’ In the mezzanine trade, holders start losing money after 7 percent of the investment’s value has been eliminated and lose everything after 10 percent. As yields over benchmarks tighten, “investors are using more leverage to achieve return expectations,” said Bryce Markus, a money manager at New York-based BlueMountain, whose founders helped pioneer credit swaps. “These are very thin slices and a very junior part of the capital structure. If there is a misstep, the whole tranche could be wiped out.” Speculative-grade bond yields have narrowed 15.4 percentage points relative to benchmarks since Dec. 15, 2008, when spreads were at a record 21.8 percentage points, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. The index has gained 1.45 percent this year, after the record rally in 2009. Debt rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s is considered high yield, or below investment grade. ‘Easier to Understand’ CreditSights Inc., a New York debt research firm, predicts investors will initially return to first-to-default baskets and other “simpler structures” including credit-linked notes, or floating-rate securities created by selling a credit-default swap on an individual company. Such trades are “significantly easier to understand compared to more complex, portfolio- based structures like bespoke tranches,” CreditSights strategist Atish Kakodkar wrote in a Dec. 9 note to clients. One obstacle to the return of riskier derivatives is the dearth of experts after financial institutions fired more than 340,000 employees, including mathematicians who created these instruments. “These are very complex and exotic products,” said Sasha Rozenberg, global head of credit products at SuperDerivatives Inc. in New York. “It’s going to take time to build up teams,” said Rozenberg, who joined the pricing provider in 2007 from Morgan Stanley, where he worked in the credit derivatives structuring group. Lehman, Washington Mutual UBS AG hired more than 200 people for its debt unit last year, including traders specializing in credit structures, to rebuild the fixed-income business after $57.5 billion in writedowns and losses at the Zurich-based bank, Switzerland’s largest. UBS spokesman Doug Morris in New York declined to comment. While banks are recommending these trades, investors aren’t seeking out the riskiest derivatives that led to losses of as much as 90 percent after Lehman Brothers Holdings Inc. failed, said Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York. The investments included customized synthetic CDOs that during 2006 and 2007 loaded their

177 holdings with credit swaps linked to the debt of financial companies such as Lehman, Washington Mutual Inc. and bond insurers MBIA Inc. and Ambac Financial Group Inc. $62 Trillion Insurance companies, hedge funds and money managers seeking investments with the highest ratings and bigger returns than corporate bonds pushed the amount of credit protection sold through such synthetic CDOs in that period to about $1 trillion, according to a Morgan Stanley estimate in February 2008. Credit- default swaps rose to more than $62 trillion at the end of 2007, a 100-fold increase in seven years, surveys by the New York- based International Swaps and Derivatives Association show. As Wall Street recommends more complex trades, investors are also augmenting bets with borrowed money. Some banks are offering as much as 10-to-1 leverage on securities backed by prime-jumbo home loans, said Scott Eichel, global co-head of asset- and mortgage-backed securities at RBS Securities Inc. in Stamford, Connecticut, a Royal Bank of Scotland Group Plc unit. Fed data show that as of Jan. 6, the 18 primary dealers required to bid at Treasury auctions held $32.7 billion of securities aside from government, agency and agency mortgage bonds as collateral for financings lasting more than one day. On May 6, the amount was $15.8 billion and in 2007 the figure reached as high as $113.9 billion. Obama Proposal “There is added liquidity and greater price transparency than 12 months ago,” said Ashish Shah, a credit strategist at Barclays Capital in New York. “Leverage is coming back into the system, and that’s a good thing.” Former Fed Chairman Volcker said last month there’s no clear link between financial innovations to limit risk, such as credit-default swaps, and increased economic productivity. Obama called for limiting the size and trading activities of banks to reduce risk-taking and avert another financial crisis. “We intend to close loopholes that allowed big financial firms to trade risky financial products like credit-default swaps and other derivatives without oversight,” Obama said Jan. 21 in Washington. Legislation is being debated in Congress designed to prevent the type of derivatives bets that pushed American International Group Inc. to the brink of bankruptcy in September 2008, threatening the global financial system. The proposed rules would require dealers and major market participants to process trades through a clearinghouse designed to contain losses if a firm fails. More capital would also need to be set aside for derivatives that aren’t cleared. New rules may prevent a return to the riskiest bets in structured credit, said Kakodkar at CreditSights. “Regulatory changes are likely to increase capital charges for bespoke or customized tranche trades,” he wrote in a report last month. That will force investors to focus on less risky versions of the swaps, he said.

Shannon D. Harrington and Pierre Paulden Banks Reviving Synthetic Bets as Volcker Blasts Default Swaps Jan. 26 http://www.bloomberg.com/apps/news?pid=20601109&sid=aCb6JDT0sOWc&pos=14#

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Existing-home sales take a big fall in December By Renae Merle Washington Post Staff Writer Tuesday, January 26, 2010; A12 Sales of previously owned homes took their biggest tumble in at least 40 years last month as the impact of a buying spree spurred by a tax credit for first-time buyers waned, according to industry data released Monday. Those who rushed to meet the original November deadline to take advantage of an $8,000 tax credit for first-time home buyers caused a surge in sales earlier in 2009, but left the market wobbly by the end of the year. First-time buyers, who made up more than 50 percent of sales earlier last year, represented just 43 percent of the market in December. The shift also resulted in fewer sales of lower-cost homes, which first-time buyers typically seek. After three months of increases, sales of existing homes, including condos and single-family residences, fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million in December compared with the previous month, according to National Association of Realtors data. That was a bigger drop than analysts had expected and the lowest sales rate since August. It was also the biggest monthly decrease on records that date to 1968, according to the industry group. The December decline "was payback for the tax credit," said Patrick Newport, an economist for IHS Global Insight. Congress extended the tax credit until April 30 and expanded it to more potential buyers, raising hopes among some analysts that sales will pick up in the spring. The surprisingly large drop in December raises questions about the strength of the recovery once the revamped tax- credit program expires, analysts said. "Given that the tax credit appears to account for a good deal of the improvement in the housing market . . . we're becoming increasingly concerned that the housing recovery will falter once it is removed," said Paul Dales, economist for Capital Economics. The weak sales come as a Federal Reserve program that has kept interest rates near historic lows is set to expire. If interest rates rise this year, it could make a home purchase too expensive for some buyers, analysts have said. The weak labor market and an expected uptick in foreclosures are also expected to weigh on the housing market this year, they said. Every region in the country had a drop-off in sales in December. The Midwest had the deepest decline, 26 percent, compared with 16 percent in the South, which includes the Washington region. Excluding condos, sales in the Washington region rose 4 percent in December, compared with the same period last year, according to the industry data, and median homes prices in the region rose 7 percent to $310,200. Industry officials point to some bright spots in the data. Median home prices rose 1.5 percent to $178,300 in December compared with the same period a year ago -- the first yearly increase since August 2007. That was because first-time home buyers made up a smaller part of the market, shifting sales to more expensive homes. Also, sales were up 15 percent

179 compared with the corresponding period in 2008, and the inventory of homes on the market fell more than 6 percent, according to the Realtors. "It's significant that home sales remain above year-ago levels," said Lawrence Yun, the group's chief economist. "By early summer the overall market should benefit from [a] more balanced inventory, and sales are on track to rise again in 2010." Overall, the housing market in 2009 was better than the year before. About 5.1 million existing homes were sold last year, up 4.9 percent compared with 2008. That was the first annual sales gain since 2005, partly due to the precipitous decline in home prices. For all of 2009, the median existing-home prices fell to $173,500, down 12.4 percent from $198,100 in 2008.

http://www.washingtonpost.com/wp- dyn/content/article/2010/01/25/AR2010012502164_pf.html

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26.01.2010 “Greek crisis over”

Greece received €25bn in orders and sold already €8bn of its fixed-rate 5y bond for a 6.2% yield, reports Bloomberg. But this comes at a high price, a yield that is 30bp more than on the nation’s existing debt with similar maturities. But the success of this first auction since the downgrade was crucial to dispel doubts in the markets about the country’s ability to raise finance . Yields on existing 5y bonds declined 7bp to 5.88%, narrowing the difference with German benchmark to 358bp, down from 365bp last week. Credit default Swaps on Greek government debt dropped 9bp to 329bp, after reaching all time high of 350bp last week. Market participants now talk about a turnaround in market sentiment that could help Greece throughout the year as it needs to sell €53bn of debt, the equivalent of about 20% of GDP. Nowotny warns about bubbles In an interview with FT Deutschland, Austria’s central bank chief Ewald Nowotny warned about the danger of purely speculative money flows into emerging markets. He said this a problem central banks should be taking seriously. He also worries about a combination of speculative flows into commodities, combined with real demand from Asia, which could also produce dangerous bubbles. He called for much higher capital ratios for the proprietary trading of banks, which has been one of the major sources of capital flows. Socrates’ to present budget today The Portuguese prime minister Jose Socrates is to reveal his Budget 2010 today, reports Le Monde. The minority government had been under increasing pressure from the Commission and the IMF as well as the conservative opposition to present an austerity programme. Today’s budget is expected to include a freeze of civil servants salaries and a renouncement of some deer investment projects, Socrates has been campaigning on. Privatisations are also no longer excluded. For this, Socrates seeked the agreement with the conservative opposition in the name of the national interest.

181 European governments to borrow €2.2 trillion this year The FT reports that European governments will need to borrow a record €2200bn from capital markets this year to finance budget deficits. This is an increase of 3.7% over last year. The article quotes Fitch Ratings as saying that France would be the biggest issuer this year, raising an estimated €454bn, followed by Italy, Germany and the UK at €279bn. As a percentage of GDP, the ranking is topped by Italy, followed by Belgium, France and Ireland – all about 25%. German business confidence rises German business confidence rose to 95.1, the highest level since July 2008. As usual, Germany relies on exports, fueled by Asian demand, to offset a slide in domestic spending and ensure Germany’s economy continues to expand. Investors and consumers confidence declined this month. Sarkozy promises fall in unemployment Nicolas Sarkozy went on French TV1, French most watched channel, to explain his policy agenda and to ensure the French that unemployment is to fall from this year on. Just weeks ahead of key regional elections this intervention is seen as a litmus test. More about it in The Telegraph. According to Le Figaro, latest polls suggest that unemployment is the subject Nr 1 for the voters. Charlemagne on euro area Writing in his blog, Charlemagne says the EU Commission’s report on the euro area caused a lot of stir in Brussels, but should come as no surprise. He says the EU would risk to become very unpopular if it assume the role of the IMF within the euro area, by focusing on internal imbalances, and forcing governments to change policy. He concludes that any big changes in the EU are unlikely, both in the direction of closer union and disintegration, and that the future is one of a slow accumulation of misery. Goodhart’s Solution for the euro area: a national quasi- currency This is, as far as we can tell, a genuinely new proposal. Goodhart and Tsomocos says leaving the euro area is not option for Greece, Portugal and other southern European countries, nor is a Latvian-style policy of wages cuts. They propose the introduction of IOS, a quasi parallel currency through which all domestic transactions, minus taxes are paid. For Portugal they call those IOUs escudos. The escudo exchange rate to the euro would be flexible, but controlled by the national central bank. Here is how it would work: “Note that the government, whose taxes remain paid in euro, would be long in euro, whereas the Portuguese private sector would be long escudo, short euro. So, the government transfers its net long to the central bank and asks the central bank to manage the escudo/euro exchange rate, so that it is stabilised, say at a level that represents a 25 per cent internal devaluation, (the choice of number would need careful calculation). If the central bank does not want to do this, and under the Maastricht Treaty it could refuse, the Treasury could do this on its own.”

Goodhart’s Solution for the euro area: a national quasi-currency. European governments to borrow €2.2 trillion this year Charlemagne on euro area 26/01/2010 http://www.eurointelligence.com/article.581+M585d13ad811.0.html#

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Greece Raises $11.3 Billion Offering ‘Generous’ Bonds Yields By Caroline Hyde, Anchalee Worrachate and Sonja Cheung

Jan. 26 (Bloomberg) -- Greece sold 8 billion euros ($11.3 billion) of bonds at premium yields to ensure the country’s first debt issue since being downgraded was a success. The five-year securities yield 6.2 percent, the Greek ministry of finance said late yesterday in an e-mailed statement. The ministry said it received 25 billion euros in orders, after offering 0.3 percentage point more yield than on the nation’s existing debt with similar maturities. Prime Minister George Papandreou’s government is struggling to reduce a budget deficit of 12.7 percent of gross domestic product and needs to sell 53 billion euros of debt this year, the equivalent of about 20 percent of GDP. Greece’s credit rating was cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings last month. “It showed we have the ability to raise funds that we need,” Spyros Papanicolaou, head of the nation’s debt agency, said by phone from Athens yesterday before the sale was completed. “We expect the spread to start to tighten after the sale, because Greece has been misread and misjudged.” The cost of insuring against a default on Greece’s debt plunged from a record yesterday on speculation the issue will help the government cut the biggest budget deficit in the European Union. Credit-Default Swaps Credit-default swaps on Greek government debt dropped 9 basis points to 329, according to CMA DataVision, after reaching an all-time high of 350 basis points last week. An increase indicates deterioration in the perception of credit quality; a decline, the opposite. A basis point on a swap hedging $10 million of debt from default is equivalent to $1,000 a year. A successful sale “is absolutely crucial to market sentiment, which will help them in the future,” Fabrizio Fiorini, head of fixed-income at Aletti Gestielle SGR SpA in Milan, said before the offering was completed. The firm oversees $12 billion of assets. The new bonds yield 3.5 percentage points more than the benchmark mid-swap rate, after being first offered at 3.75 percentage points. That compares with 3.2 percentage points on

183 Greece’s 3.7 percent notes due July 2015, according to ING Groep NV prices on Bloomberg. “The Greece bond looks cheap and would make an interesting purchase for buy and hold investors, rather than for investors looking to make a quick buck,” said Harpreet Parhar, a London- based credit strategist at Calyon. Yields Fall The yield on Greece’s existing five-year bonds declined 7 basis points yesterday to 5.88 percent. That narrowed the difference with comparable German debt, the European benchmark, to 358 basis points, from 365 basis points last week, the widest since Greece joined the euro in 2001. “We should see a turnaround in the general spread widening we’ve seen in the past couple of weeks,” said Wilson Chin, a fixed-income strategist at ING Groep in Amsterdam. Finance Minister George Papaconstantinou said on Jan. 20 that Greece is under no pressure to sell debt. The government is also considering bond issues in Asia and the U.S. and may market debt to Greek retail investors, he said. The country is rated A2 by Moody’s, the fifth- lowest investment-grade ranking, and two steps lower at BBB+ by S&P. Credit Suisse Group AG, Deutsche Bank AG, EFG Eurobank Ergasias SA, Goldman Sachs Group Inc., Morgan Stanley and National Bank of Greece SA underwrote the new issue. Private Sale Greece sold 2 billion euros of bonds in a private sale in December, according to data compiled by Bloomberg. Earlier this month, the country issued about 3.6 billion euros of 52- week, 26-week and 13-week Treasury bills at auction. Greece’s debt has contributed to a slide in the euro against the U.S. dollar. The euro traded as low as $1.4029 last week, down from a three-month high of $1.5144 on Nov. 25. It rose as high as $1.4194 yesterday. Last week Papaconstantinou denied a report in EuropeanVoice that European Union officials were looking into a possible loan. Amelia Torres, the spokeswoman for EU Economic and Monetary Affairs Commissioner Joaquin Almunia, said she wasn’t aware of any talks on a loan. A spokesman for the European Central Bank declined to comment. Germany said it won’t support any EU loan to help Greece cut its deficit. “Greece must solve its problems through its own efforts,” German Finance Ministry spokesman Michael Offer said last week in an e-mailed statement. To contact the reporters on this story: Anchalee Worrachate in London at [email protected]; Caroline Hyde in London at [email protected]; Sonja Cheung in London at [email protected] Last Updated: January 25, 2010 17:00 EST Caroline Hyde, Anchalee Worrachate and Sonja Cheung Greece Raises $11.3 Billion Offering ‘Generous’ Bonds Yields http://www.bloomberg.com/apps/news?pid=20601085&sid=aujM.7_pRM3Y#

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German Business Confidence May Rise to 18-Month High in January By Gabi Thesing

Jan. 26 (Bloomberg) -- German business confidence probably rose to an 18-month high in January as the global economic recovery boosted exports. The Ifo institute in Munich will say its business climate index, based on a survey of 7,000 executives, increased to 95.1 from 94.7 in December, according to the median of 41 forecasts in a Bloomberg News survey. That would be the highest reading since July 2008. The index reached a 26-year low of 82.2 in March last year. Ifo releases the report at 10 a.m. today. Rising foreign sales, fueled by Asian demand, may help offset a slide in domestic spending and ensure Germany’s economy continues to expand. The government said last week it will raise its 2010 growth forecast to 1.5 percent from 1.2 percent even as some of its stimulus measures expire. Europe’s largest economy shrank 5 percent last year, the most since World War II. “We have kicked off the new year with a pretty healthy export picture,” Alexander Koch, an economist at UniCredit Group in Munich, said in a telephone interview. “Still, the economy is not going to power ahead at the same rate it did in the latter half of last year.” Ifo’s gauge of the current situation probably increased to 91.3 from 90.5 while an index of executives’ expectations may have stayed at 99.1, a two-year high, according to the survey of economists. Mixed Picture Recent data have painted a mixed picture of the state of the German recovery. While investor and consumer confidence declined this month, the country’s manufacturing industries expanded more than economists expected in January and the Economy Ministry unexpectedly revised up its estimate of November factory orders last week. That prompted Bundesbank President Axel Weber to say on Jan. 22 that he’s “a bit more optimistic” about the outlook for German growth. At the same time, cold weather and weak consumption “speak against too much euphoria,” Weber said. Germany’s Volkswagen AG, Europe’s largest carmaker, said Jan. 11 it wants to increase its

185 worldwide market share further in 2010 after reporting record sales for 2009. Sales in China surged 37 percent. Still, the company’s Skoda Auto division forecasts sales in Germany, the brand’s largest market, will fall 37 percent this year after a government subsidy on new car purchases expired. The prospect of rising unemployment will weigh on household spending in Germany, Klaus Baader, co-chief European economist at Societe Generale SA in London, wrote in a note to investors. There is “virtually no scope for gains in private consumption in 2010,” he said. The outlook for the global economy and the euro’s 6 percent drop against the dollar since November bode well for exporters. Confidence in the world economy rose in January, the Bloomberg Professional Global Confidence Index showed Jan. 14, with Asia’s index outpacing those of other economic blocs. The International Monetary Fund will probably raise its estimate for 2010 world growth this month from a 3.1 percent forecast in October, John Lipsky, the organization’s first deputy managing director, said Jan. 6. To contact the reporter on this story: Gabi Thesing in London at [email protected] Last Updated: January 25, 2010 19:00 EST http://www.bloomnerg.com/apps/news?pid=20601087&sid=acAvqEEVZX1w&pos=4# GRIFPBUS:IND Business Climate (December 2009)

Value94.70 ChangeN.A. % ChangeN.A. High94.70 Low94.70 Open94.70 Value for GRIFPBUS:IND Index Notes The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise theirsituation as 'good', 'satisfactorily' or 'poor' and their business expectations for the next six months as 'more favourable', 'unchanged' or 'more unfavourable'. The balance value of the current business situation is thedifference of the percentages of the responses 'good' and 'poor'; the balance value of the expectations is the difference of the percentages of the responses 'more favourable' and 'more unfavourable'. The business climate is a transformed mean of the balances of the business situation and the expectations. For calculating the index values the transformed balances are all normalised to the average of the year 2000. ***Please note: Current month data will not be seen until the last day of the current month. It can be viewed in GP, HP, etc. by changing the date range out to the last day of the current month.**** General Business Climate Index - The survey is conducted monthly by asking approximately 7000 companies throughout Germany two questions concerning firstly how business is performing in the current period and secondly about how they expect it to perform in the next 6 months. This index is for the total of Germany, based at 2000=100 as of February 24, 2004. For further economic statistics type: ECST .

http://www.bloomnerg.com/apps/quote?ticker=GRIFPBUS%3AIND http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk

186 COMMENT The Californian solution for the Club Med By Charles Goodhart and Dimitrios Tsomocos Published: January 24 2010 20:35 | Last updated: January 24 2010 20:35 Greece and Portugal have two severe economic problems. These are, first, a fiscal position, deficit and debt ratio verging on the unsustainable, and, second, a serious lack of competitiveness (a real exchange rate which is much too high). Italy and Spain may also soon face a similar precarious situation. These countries’ membership of the eurozone constrains the solution to this joint problem. For example, neither Greece nor any other country in a similar position could sensibly leave the eurozone, (indeed any sniff of thinking about that would cause an immediate banking crisis). Apart from the immediate effects on wages, prices and interest rates, existing debts are denominated in euros and any attempt to renege on that would, very likely, result in seizure of Greek assets abroad and expulsion from the eurozone, in addition to a cessation of European Union net transfers. In this respect Greece is far more constrained than Argentina was. Similarly, none of the Club Med countries could easily reduce its burdens by defaulting on its public sector debt. Even if they could, somehow, avoid the second-round effect on their domestic financial system, by ring-fencing banks and insurance companies against such default, they could not then borrow. If they could not borrow, they would have to cut spending into line with receipts. But if they had to do this latter anyhow, they could do so without defaulting in the first place. For default would accentuate, not reduce, their current fiscal problems, and precipitate a banking crisis in Germany, whose banks are loaded with their assets. Many Greeks are still hoping for a bail-out by richer eurozone neighbours, under the implicit threat that a Greek enforced withdrawal from the euro or default, even though it would not be in the self-interest of Greece, could cause contagion elsewhere. But that would represent moral hazard in spades. So, the road of devaluation that was chosen by the UK to fight the crisis is unavailable in a common currency area. On the other hand the Irish or Latvian road of a massive direct reduction in nominal wages and prices is politically unattainable in the Club Med countries and would greatly exacerbate the North-South divide. So what is to be done? When a subordinate state in a federal monetary union has severe fiscal problems and runs out of money, what does it do? It issues IOUs. Think California or the Argentine provinces before 2000. For example, in Portugal, we could coin a phrase and call such IOUs escudo. Essentially the government passes a decree that states that such escudo IOUs would be acceptable for all internal payments, except tax payments, between Portuguese residents, but not for any external payments between Portuguese residents and foreign residents. All public sector and private sector wage payments shift on to an escudo basis as do interest payments by a Portuguese resident to another resident. Portuguese residents’ deposits and borrowing with Portuguese banks shift to an escudo basis; others remain in euros.

187 What then would give the escudo value, apart from the accompanying commitment to restore the value of the escudo to parity against the euro, whose credibility would, of course, only be doubted by the most cynical! Note that the government, whose taxes remain paid in euro, would be long in euro, whereas the Portuguese private sector would be long escudo, short euro. So, the government transfers its net long to the central bank and asks the central bank to manage the escudo/euro exchange rate, so that it is stabilised, say at a level that represents a 25 per cent internal devaluation, (the choice of number would need careful calculation). If the central bank does not want to do this, and under the Maastricht Treaty it could refuse, the Treasury could do this on its own. While managed, the exchange rate should not be pegged. The escudo would be inconvertible, and non-residents would not be allowed to borrow it. After all, this would be but a humble state IOU, though written rather large and not a ‘proper’ currency; indeed its success would be evident in its disappearance within a defined horizon, say 4 years. All external monetary relationships, including interest payments, remain unchanged. Internally all price/wage relativities, tax rates, etc, remain unchanged. What changes is the relativity between internal and external payments, (all tourist payments remain in euros). Portuguese wages and costs fall relative to their prior level; tax rates remain the same, but the enhanced activity raises revenue, and there is a reduction, as measured in euros, in interest paid to Portuguese residents. It would be messy, and an unattractive dual currency mechanism. But it could work; it has done so before now in other countries and circumstances. It would protect the German banking system, safeguard the basic existence of the euro, and, for the eurozone countries in danger of default, it might be the least bad option. Charles Goodhart is a professor at the Financial Markets Group, London School of Economics. Dimitrios Tsomocos is a University Reader and fellow, Said Business School and St Edmund Hall at Oxford University Charles Goodhart and Dimitrios Tsomocos The Californian solution for the Club Med 24 2010 20:35 http://www.ft.com/cms/s/0/5ef30d32-0925-11df-ba88-00144feabdc0.html

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January 26, 2010 OP-ED CONTRIBUTORS A Payroll Tax Break for Jobs By CHARLES E. SCHUMER and ORRIN G. HATCH Washington WITH the national unemployment rate at 10 percent, and more than 15 million Americans looking for work, ideas to spur job creation are at the forefront of everyone’s minds. While we may represent different political philosophies, we recognize that high unemployment — particularly long-term unemployment — is not a liberal problem or a conservative problem; it’s a national problem that takes a huge toll on families. The idea for some sort of jobs tax credit is percolating again, but the jobs credit that existed in the late 1970s was of limited success, and it was excruciatingly complicated. Recalling this experience, members of Congress from both parties have been lukewarm to such a credit, and the idea was dropped from the stimulus package last year. We have an idea that is simple, straightforward and easy to explain and administer. In fact, it is so simple that the legislative text of the proposal is only a few pages long — a rarity when it comes to tax policy. Here’s the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain. The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is “front-loaded” in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500. Unlike some versions of a payroll-tax holiday, which provide a much bigger benefit for higher-paid workers, this proposal is not biased toward either low-wage or high-wage workers. Yes, if you pay people more, you save more in taxes — but the savings as a percentage of pay remains constant. Under this plan, a business saves 6.2 percent on both a $40,000 worker and a $90,000 worker. In the current environment, no business wants to wait until 2011 to receive a tax credit for someone it hires today. Another obvious benefit of this proposal to forgive payroll taxes is that it keeps money in a business’s pockets, since the tax is simply not collected in the first place. In addition, because the benefit starts on the date of hiring and does not have an arbitrary cap, more businesses will want to use it. And since it is an elimination of the employer’s share of the Social Security tax for these workers — rather than a fixed or capped dollar amount — the

189 complexities of making the incentive work with a firm’s payroll software are greatly reduced because employers will know simply to zero out the tax for these workers. To promote long-term employment as the recovery gains steam, we would also add the following bonus: For any eligible employee kept on payroll for a continuous 52 weeks, the employer would receive an additional $1,000 credit on its 2011 tax return. (This would apply to any worker hired in 2010.) Our two-pronged approach would be a far more efficient use of taxpayer dollars than other proposals under discussion, all of which could cost many times more with very little guaranteed improvement in unemployment. Imagine that three million unemployed workers were to be hired this year under our plan. If they all worked an average of six months in 2010 at a salary of $50,000, and every single one stayed on payroll for 52 consecutive weeks into 2011, the gross cost of the Social Security tax cut and the additional credit would be only $7.6 billion. And that’s before we consider the offsets from income and payroll taxes paid by these workers. There are some additional rules that would have to be put in place. For example, eligible workers would have to be hired for a minimum of 30 hours per week, and workers who are family members of the employer would not be eligible. The payroll tax reduction would be for private-sector jobs only; new jobs that are created by tax dollars in the first place would not be eligible. And any employer with a lower total payroll in 2010 than it had in 2009 would have to forfeit the benefit — businesses shouldn’t be allowed to shed jobs and still receive a tax benefit. We urge Congress and President Obama to consider this idea to help jumpstart hiring and turn our focus back on jobs. Charles E. Schumer is a Democratic senator from New York. Orrin G. Hatch is a Republican senator from Utah. http://www.nytimes.com/2010/01/26/opinion/26hatch.html?th=&emc=th&pagewanted=print

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January 26, 2010 OP-ED COLUMNIST Obama’s Credibility Gap

Bob Herbert By BOB HERBERT Who is Barack Obama? Americans are still looking for the answer, and if they don’t get it soon — or if they don’t like the answer — the president’s current political problems will look like a walk in the park. Mr. Obama may be personally very appealing, but he has positioned himself all over the political map: the anti-Iraq war candidate who escalated the war in Afghanistan; the opponent of health insurance mandates who made a mandate to buy insurance the centerpiece of his plan; the president who stocked his administration with Wall Street insiders and went to the mat for the banks and big corporations, but who is now trying to present himself as a born- again populist. Mr. Obama is in danger of being perceived as someone whose rhetoric, however skillful, cannot always be trusted. He is creating a credibility gap for himself, and if it widens much more he won’t be able to close it. Mr. Obama’s campaign mantra was “change” and most of his supporters took that to mean that he would change the way business was done in Washington and that he would reverse the disastrous economic policies that favored mega-corporations and the very wealthy at the expense of the middle class and the poor. “Tonight, more Americans are out of work, and more are working harder for less,” said Mr. Obama in his acceptance speech at the Democratic National Convention in August 2008. “More of you have lost your homes and even more are watching your home values plummet. More of you have cars you can’t afford to drive, credit card bills you can’t afford to pay, and tuition that’s beyond your reach.” Voters watching the straight-arrow candidate delivering that speech, in the midst of the worst economic crisis since the Depression, would not logically have thought that an obsessive focus

191 on health insurance would trump job creation as the top domestic priority of an Obama administration. But that’s what happened. Moreover, questions were raised about Mr. Obama’s candor when he spoke about health care. In his acceptance speech, for example, candidate Obama took a verbal shot at John McCain, sharply criticizing him for offering “a health care plan that would actually tax people’s benefits.” Now Mr. Obama favors a plan that would tax at least some people’s benefits. Mr. Obama also repeatedly said that policyholders who were pleased with their plans and happy with their doctors would be able to keep both under his reform proposals. Well, that wasn’t necessarily so, as the president eventually acknowledged. There would undoubtedly be changes in some people’s coverage as a result of “reform,” and some of those changes would be substantial. At a forum sponsored by ABC News last summer, Mr. Obama backed off of his frequent promise that no changes would occur, saying only that “if you are happy with your plan, and if you are happy with your doctor, we don’t want you to have to change.” These less-than-candid instances are emblematic of much bigger problems. Mr. Obama promised during the campaign that he would be a different kind of president, one who would preside over a more open, more high-minded administration that would be far more in touch with the economic needs of ordinary working Americans. But no sooner was he elected than he put together an economic team that would protect, above all, the interests of Wall Street, the pharmaceutical industry, the health insurance companies, and so on. How can you look out for the interests of working people with Tim Geithner whispering in one ear and Larry Summers in the other? Now with his poll numbers down and the Democrats’ filibuster-proof margin in the Senate about to vanish, Mr. Obama is trying again to position himself as a champion of the middle class. Suddenly, with the public appalled at the scandalous way the health care legislation was put together, and with Democrats facing a possible debacle in the fall, Mr. Obama is back in campaign mode. Every other utterance is about “fighting” for the middle class, “fighting” for jobs, “fighting” against the big bad banks. The president who has been aloof and remote and a pushover for the health insurance and pharmaceutical industries, who has been locked in the troubling embrace of the Geithners and Summers and Ben Bernankes of the world, all of a sudden is a man of the people. But even as he is promising to fight for jobs, a very expensive proposition, he’s proposing a spending freeze that can only hurt job-creating efforts. Mr. Obama will deliver his State of the Union address Wednesday night. The word is that he will offer some small bore assistance to the middle class. But more important than the content of this speech will be whether the president really means what he says. Americans want to know what he stands for, where his line in the sand is, what he’ll really fight for, and where he wants to lead this nation. They want to know who their president really is. http://www.nytimes.com/2010/01/26/opinion/26herbert.html?th=&emc=th&pagewanted=prin t

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Fareed Zakaria Obama should act more like a president than a prime minister By Fareed Zakaria Monday, January 25, 2010; A17 A great debate has begun as to how Barack Obama should respond to last week's election results in Massachusetts, which was clearly a protest vote against him, congressional Democrats and their signature policy proposal: the health-care bill. My own advice would be simple: Barack Obama needs to act like a president, especially the president he campaigned to become. In his enduring treatise, "The American Commonwealth," James Bryce, a British writer who toured the United States in the late 19th century, observed that the Founding Fathers had created a president who would, in a crucial sense, resemble the British king, "not only in being the head of the executive, but in standing apart from and above political parties (italics in the original). He was to represent the nation as a whole. . . . The independence of his position, with nothing either to gain or to fear from Congress, would, it was hoped, leave him free to think only of the welfare of the people." Obama began his presidency in this vein. In his response to the economic crisis, he steered a clear middle course, refusing to accept the left's cries for bank nationalization but also adopting a far more vigorous and Keynesian approach than the right could accept. In foreign policy, he reset America's image in the world in a manner that earned him kudos from the likes of James Baker and Brent Scowcroft. But that broader, presidential approach was partly set aside in passing the fiscal stimulus and then abandoned altogether in the drive to change the American health-care system. Over the past six months -- which have correlated with his dramatic drop in the polls -- Obama has behaved less like a president and more like a prime minister. He has not outlined a broad vision for the country. He has not embraced the best solutions -- from left and right -- for the nation's problems. Instead he has behaved as the head of the Democratic Party in Congress, working almost entirely with and through that caucus, slicing and dicing policy proposals to cobble together legislative majorities. He has allowed the great policy program of his presidency to be written and defined by a collection of congressional Democrats, accepting the lopsided bills that emerged and the corruption inherent in the process. If he represents all the people, Obama should remember that for 85 percent of Americans, the great health-care crisis is about cost. For about 15 percent, it is about extending coverage. Yet his plan does little about the first and focuses mostly on the second. It promotes too little of the real discipline that would force costs down and instead throws in a few ideas, experiments, and pilot programs that could, over time and if rigorously expanded, do so. Watching the legislative process, Bismarck allegedly observed, is like watching the making of sausages. The health-care bill is particularly sausage-like. It has special exemptions on future costs for five states, exemptions for unions, concessions to almost every special interest in the industry and of course no reform at all of the crazy legal system because the trial-lawyers bar remains untouchable for the Democratic Party.

193 Defenders argue that Obama has only acted realistically. Focusing too intently on cost reduction would have alienated all the same forces -- insurance companies, Big Pharma -- that derailed health-care reform under Bill Clinton. But the result is one that few can honestly call "reform" and one that has steadily lost public support as it has moved through Congress. In a recent Wall Street Journal poll, Obama fared reasonably well on all attributes of leadership. His lowest scores came when respondents were asked whether they agreed with his proposals, and whether he had changed the way business was done in Washington. In other words, he has moved too far from the center and too close to special interests. The Republican Party has decided to be utterly uncooperative (although on health care Obama never really reached out to them with serious compromises). But whether or not Republican senators would at first reward Obama for adopting a more nonpartisan approach, independent voters would, which would then change the political calculus in Washington. Rahm Emanuel quipped that the task was not to get health-care legislation through "the executive committee of the Brookings Institution, but the U.S. Congress." In fact, proposals that would impress experts would also impress tens of millions of independents, the vast middle ground where elections are won and lost in America. That is how Bill Clinton outmaneuvered Newt Gingrich, and how Tony Blair outfoxed the Tory party for 10 years. On health care, energy, taxes, immigration, deficits and everything else, Obama should get away from the politics of legislating and go back to being president. He should put forward the best proposals to help solve America's problems. He may or may not get much support from Republicans, but he will earn political capital and power, which in the long run is the only way to enact a big, transforming agenda. This approach is exactly what Obama campaigned on. He promised that he would reach out to all sections of the country, listen to the best ideas and appeal to the nation as a whole. "I don't see a blue America and a red America, I see only the United States of America," he said. Obama needs to shift course and govern as the president he promised to become. That's change I could believe in. Fareed Zakaria is editor of Newsweek International. His e-mail address is Fareed Zakaria Obama should act more like a president than a prime minister January 25, 2010 http://www.washingtonpost.com/wp- dyn/content/article/2010/01/24/AR2010012402300_pf.html

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Supreme Court ruling calls for a populist revolt By E.J. Dionne Jr. Monday, January 25, 2010; A17 "Populism" is the most overused and misused word in the lexicon of commentary. But thanks to a reckless decision by Chief Justice John Roberts's Supreme Court and the greed of the nation's financial barons, we have reached a true populist moment in American politics. The Supreme Court's 5-to-4 decision last week giving American corporations the right to unlimited political spending was an astonishing display of judicial arrogance, overreach and unjustified activism. Turning its back on a century of practice and decades of precedent, a narrow right-wing majority on the court decided to change the American political system by tilting it decisively in favor of corporate interests. An unusually blunt headline in Friday's print edition of The New York Times told the story succinctly: "Lobbies' New Power: Cross Us, and Our Cash Will Bury You." Think of this rather persuasive moment in a chat between a corporate lobbyist and a senator: "Are you going to block that taxpayer bailout we want? Well, I'm really sorry, but we're going to have to run $2 million worth of really vicious ads against you." The same exchange might take place on tax breaks, consumer protections, environmental rules and worker safeguards. Defenders of this vast expansion of corporate influence piously claim it's about "free speech." But since when is a corporation, a creation of laws passed by governments, entitled to the same rights as an individual citizen? This ruling will give large business entities far more power than any individual, unless you happen to be Michael Bloomberg or Bill Gates. The only proper response to this distortion of our political system by ideologically driven justices is a popular revolt. It would be a revolt of a sort deeply rooted in the American political tradition. The most vibrant reform alliances in our history have involved coalitions between populists (who stand up for the interests and values of average citizens) and progressives (who fight against corruption in government and for institutional changes to improve the workings of our democracy). It's time for a new populist-progressive alliance. This court ruling should also challenge the fake populism we have seen of late. It disguises a defense of the interests of the powerful behind crowd-pleasing rhetoric against "Washington," "taxes" and, yes, "Obama." President Obama has helped feed this faux populist revolt by failing to understand until recently how deeply frustrated politically moderate, middle-class Americans are over policies that bailed out the banks while leaving behind millions of unemployed and millions more alarmed about their economic futures. If average voters came to see government primarily as an instrument of the banks, why should they believe that the same government could help them on matters of health care and employment? This problem was aggravated by puffed-up, self-involved U.S. senators who conspired to make the legislative process look as ugly and chaotic as possible.

195 Obama began turning toward populism before the results of the Massachusetts Senate race rolled in. Republican Scott Brown's victory made the new turn imperative. The president has now offered a modest tax on the big financial institutions to cover the costs of bailouts, and a tougher approach to banks that will limit their size and their capacity to make economy-wrecking financial bets. It's a decent start, and it's about time. Next will come legislation to turn back the Supreme Court's effort to undermine American democracy. Sen. Charles E. Schumer and Rep. Chris Van Hollen are working with the White House on a measure to rein in the reach of the Supreme Court ruling. Their bill is still being written, but the ideas they're considering include prohibiting political spending by corporations that receive government money, hire lobbyists or make most of their income abroad. And shouldn't shareholders have the right to vote before a corporation spends money on politics? Do we want foreign-owned corporations, especially those owned by foreign governments, to exercise an undue influence in our politics? Imagine what an enterprise owned or influenced by the Chinese or Russian governments might try to do to a politician who campaigns too ardently for human rights? My favorite idea: Requiring chief executives to appear in ads their corporations sponsor, exactly as politicians have to do. ("I'm Joe Smith, the chief executive of Acme Consolidated Megacorporation, and I approve this message.") President Obama was right to invoke Teddy Roosevelt in his radio address on Saturday. American democracy and the square deal in government for which TR battled are in jeopardy. E.J. Dionne Jr.Supreme Court ruling calls for a populist revolt January 25, 2010; http://www.washingtonpost.com/wp- dyn/content/article/2010/01/24/AR2010012402298_pf.html

196 New DLC Report: Census Data Exposes 'Lost Decade' for United States lunes 25/01/2010 17:05 Dear Friends: This first decade in the new millennium has been a trying one for Americans, and the nation is still coming to terms with the scale of problems President Obama inherited. After a historic economic boom under President Clinton, the country experienced a painful bust. A new DLC report: http://www.dlc.org/documents/TheLostDecade.pdf looks at recent Census data to assess the damage. With the final year of George W. Bush's presidency on the books, the numbers are clear: much like Japan during the 1990s, the last 10 years have been a "Lost Decade" for the United States. The analysis reveals that, after a decade in which incomes rose, poverty fell, and the rate of Americans lacking health coverage shrank, the country has suffered setbacks across all three social indicators. The new report, "The Lost Decade: New Census Data Outlines Bush Era Setbacks in Poverty, Income, and Health Coverage," authored by DLC research associate Conor McKay, makes three principal findings: 1. Income: Inflation adjusted incomes fell further under President Bush than under any president since reporting began. Under President Clinton, per capita incomes rose 25 percent. 2. Poverty: The poverty rate jumped 17 percent under President Bush, with nearly 8 million more Americans in poverty today than were in 2000. In 2008, the country saw the largest single-year increase in the poverty rate in the last 25 years. The poverty rate fell 24 percent under President Clinton. 3. Health Coverage: The number of uninsured Americans increased over 20 percent to an all-time high of 46.3 million, including a dramatic 157 percent increase in the population of uninsured Americans over the age of 65. The uninsured rate dropped under President Clinton. The Obama administration is working hard to reverse these trends. The economic recovery package and other measures have pulled the economy back from the brink and helped to stem job losses -- and as the recovery develops, incomes will rise again and poverty will fall. As McKay's report reveals, after the past decade, America has a lot of catching up to do. As always, I look forward to your comments and feedback. Sincerely,

Bruce Reed CEO

P.S. If you have the chance, take a look at DLC vice president Marc Dunkelman's new op-ed in U.S. News and World Report, exploring the implications of the fact that a growing portion of the American electorate was born after the end of the Cold War. http://www.usnews.com/opinion/articles/2010/01/21/why-voters-are-so-angry-and-incumbents-are-so- scared.html

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25.01.2010 European Commission says survival of euro at risk

According to a report in Germany’s news magazine Der Spiegel the European Commission warned that the euro area’s chances of survival would depend criticially on adjusting the internal imbalances. The reported quoted from a paper by DG Ecfin, accourding to which internal imbalances would weaken confidence in the euro and endanger the cohesion of the monetary union. The problem, in the view of the European Commission, is the combination of rising deficits and weakening competitiveness in several countries, notably Ireland, Spain and Greece. The report also criticises the surplus countries like Germany and Austria for failing to stimulate domestic demand, as they needed to deregulate the service sector, their tax systems, and credit constraints for the private sector. The Commission says the necessary adjustment in the deficit countries would likely cause an increase in unemployment, which is best countered by a policy of wage moderation. Bernanke in trouble Our American friends are getting excited, or rather agitated, about this story. Ben Bernanke’s re-nomination as Fed chief has run into some opposition in the Senate, as a couple of Democrats have turned on him. The betting is that he will gets the fifty one votes he needs, but his supporters will first have to secure the support of 60 Senators to overthrow a filibuster. Krugman and Delong have written in favour of Bernanke’s renomination, while Calculated Risk, Naked Capitalism, Credit Writedowns are opposed. We watch this spectacle from afar. Greece announced five-year bond issues We guess that the Greek government must have received reassurances from various banks , for otherwise it would not have made this announcement, but it needed to announce a bond issue, for otherwise the markets would have gone crazy, assuming that Greece is not in a position to do so, and thus only a step away from default. The Wall Street Journal writes that

198 the bond will raise between €3 billion and €5 billion. http://online.wsj.com/article/SB10001424052748704509704575018532990127428.html Munchau on the consequences of a bailout Writing in the Financial Times, Wolfgang Munchau said one should not underestimate the political consequences of a bailout of Greece, with attached conditions. Such an act would provoke massive hostility in a country that has not been prepared for austerity by its political classes. Munchau lists various options out of the dilemma, and concludes the most likely one will be a fudge that solves nothing, but buys time. Germany wants to co-opt US into a coordinated strategy on banking Germany’s finance minister welcomed President Obama’s tough bank regulation proposals, but added that they needed to be co-ordinated. Wolfgang Schauble announced that Germany, too, will draft legislation to force the banks to participate in the costs of the crisis, but said future crisis prevention will depend crucially on how globally co-ordinated they are. Schauble has invited his G20 colleagues to a meeting in May to start the co-ordination process. Interestingly, he also said that he is open to a purely European solution. See FT Deutschland for more. Les Echos has the story that Christine Lagarde also supports the US initiative, saying that it fully corresponds to the French position. She said not all the details were on the table yet, but she said the change of the American position on this issue was impressive. Housing loans pick up in Spain El Pais leads its economic section with a story on a pickup in the housing market. While official statistics only go back until October, there appears to be anecdotal evidence that housing credit picked up in November with one analyst saying that November was more than the rest of the year combined. The terms, however, are restricted, compared to the boom years. The maximum LTV is 80%, which as the paper calculates requires the buyer to put up 30% of the total purchasing costs, including one-off transactions costs. Who suffered the most in the crisis Writing in Lavoce, Matteo Bugamelli , Riccardo Cristadoro and Giordano Zevi write that a recent microdata analysis by the Bank of Italy suggested that the economic sector most affected by last year’s recession were manufacturing companies with high export dependence, and producers of intermediate goods, including many smaller and mid-sized companies. Companies who restructured during the first half of the last decade were in a much better position to withstand the shock than those who did not.

Germany wants to co-opt US into a coordinated strategy on banking, Eurointelligence 25.01.2010, European Commission says survival of euro at risk Eurointelligence 25.01.2010 http://www.eurointelligence.com/article.581+M5e9c44bb0f6.0.html#

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January 25, 2010 OP-ED COLUMNIST The Bernanke Conundrum By PAUL KRUGMAN A Republican won in Massachusetts — and suddenly it’s not clear whether the Senate will confirm Ben Bernanke for a second term as Federal Reserve chairman. That’s not as strange as it sounds: Washington has suddenly noticed public rage over economic policies that bailed out big banks but failed to create jobs. And Mr. Bernanke has become a symbol of those policies. Where do I stand? I deeply admire Mr. Bernanke, both as an economist and for his response to the financial crisis. (Full disclosure: before going to the Fed he headed Princeton’s economics department, and hired me for my current position there.) Yet his critics have a strong case. In the end, I favor his reappointment, but only because rejecting him could make the Fed’s policies worse, not better. How did we get to the point where that’s the most I can say? Mr. Bernanke is a superb research economist. And from the spring of 2008 to the spring of 2009 his academic expertise and his policy role meshed perfectly, as he used aggressive, unorthodox tactics to head off a second Great Depression. Unfortunately, that’s not the whole story. Before the crisis struck, Mr. Bernanke was very much a conventional, mainstream Fed official, sharing fully in the institution’s complacency. Worse, after the acute phase of the crisis ended he slipped right back into that mainstream. Once again, the Fed is dangerously complacent — and once again, Mr. Bernanke seems to share that complacency. Consider two issues: financial reform and unemployment. Back in July, Mr. Bernanke spoke out against a key reform proposal: the creation of a new consumer financial protection agency. He urged Congress to maintain the current situation, in which protection of consumers from unfair financial practices is the Fed’s responsibility. But here’s the thing: During the run-up to the crisis, as financial abuses proliferated, the Fed did nothing. In particular, it ignored warnings about subprime lending. So it was striking that in his testimony Mr. Bernanke didn’t acknowledge that failure, didn’t explain why it happened, and gave no reason to believe that the Fed would behave differently in the future. His message boiled down to “We know what we’re doing — trust us.” As I said, the Fed has returned to a dangerous complacency. And then there’s unemployment. The economy may not have collapsed, but it’s in terrible shape, with job-seekers outnumbering job openings six to one. Nor does Mr. Bernanke expect any quick improvement: last month, while predicting that unemployment will fall, he conceded that the rate of decline will be “slower than we would like.” So what does he propose doing to create jobs? Nothing. Mr. Bernanke has offered no hint that he feels the need to adopt policies that might bring unemployment down faster. Instead, he has responded to suggestions for further Fed

200 action with boilerplate about “the anchoring of inflation expectations.” It’s harsh but true to say that he’s acting as if it’s Mission Accomplished now that the big banks have been rescued. What happened here? My sense is that Mr. Bernanke, like so many people who work closely with the financial sector, has ended up seeing the world through bankers’ eyes. The same can be said about Timothy Geithner, the Treasury secretary, and Larry Summers, the Obama administration’s top economist. But they’re not up before the Senate, while Mr. Bernanke is. Given that, why not reject Mr. Bernanke? There are other people with the intellectual heft and policy savvy to take on his role: among the possible choices would be my Princeton colleague Alan Blinder, a former Fed vice chairman, and Janet Yellen, the president of the San Francisco Fed. But — and here comes my defense of a Bernanke reappointment — any good alternative for the position would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy. Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation, many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation. That’s not a ringing endorsement, but it’s the best I can do. If Mr. Bernanke is reappointed, he and his colleagues need to realize that what they consider a policy success is actually a policy failure. We have avoided a second Great Depression, but we are facing mass unemployment — unemployment that will blight the lives of millions of Americans — for years to come. And it’s the Fed’s responsibility to do all it can to end that blight. PAUL KRUGMAN The Bernanke Conundrum January 25, 2010 http://www.nytimes.com/2010/01/25/opinion/25krugman.html?th&emc=th

January 24, 2010, 4:15 pm Know Your Feds I’m hearing a lot from people who want Paul Volcker as Fed chair. (Consider the joke about exemplifying too big to fail as having been made). There really is nobody with his stature (literally, as it happens) and moral authority. And he’s a powerful advocate of financial reform. You should know, however, is that Volcker is usually a hard-money guy. I haven’t had an opportunity to ask him, but my guess is that he’s suspicious of quantitative easing, and would be more likely to side with the Fed’s inflation hawks than with those of us who think the Fed should expand its balance sheet, target higher inflation, and in general do whatever it takes to bootstrap ourselves out of the liquidity trap.

201 This isn’t a simple question of good versus evil. There are substantive policy disputes, and some very good people are, in my view, on the wrong side of some issues.

January 24, 2010, 3:17 pm The Phantom Policy Conflict The idea that Obama made a mistake by focusing on health care instead of the economy seems to be catching on on the left as well as on the right. But my question remains: what are we talking about, specifically? There was a window early last year when Obama could have pushed for a bigger stimulus and could have pushed for a major recapitalization of the banks with public funds, so as to encourage more lending; that recapitalization would probably have required nationalizing a couple of institutions. At the time, the administration wasn’t at all focused on health care, which it was leaving largely up to Max Baucus. But Obama didn’t do that. And ever since, it’s been hard for me to see what options are left. Maybe, maybe, a relatively small job-creation program could have been pushed through this fall. And maybe, if it had been sufficiently unorthodox — say, a job-creation tax credit — it might have had enough bang for the buck to make a noticeable difference. But aside from that, what? We could have had a lot of speeches about the economy. Would that have helped, absent a policy to make things better? In my view, there are two defensible hypotheses: 1. Obama was doomed to have a bad economy regardless. 2. He missed a key window, early on, back when some of us were screaming at him to go bigger; but that window closed by the summer of 2009. Either way, I don’t see how punting on health care would have helped.

January 23, 2010, 10:54 am The Bernanke Conundrum A funny thing happened on the way to the Bernanke confirmation: the vote in Massachusetts turned an easy coronation into a tough fight. And this isn’t one of those cases where everyone who knows something is on one side. Look at two of my favorite econobloggers: the very judicious Calculated Risk says “We can do better”, while Brad DeLong says, “Don’t block Ben.” Where am I? Right now, I’m agonizing — which isn’t a place I ever expected to be, and not just because Bernanke hired me at Princeton.

January 23, 2010, 10:16 am Intimations Of Sanity Politico reports that Harry Reid and Nancy Pelosi are working on a strategy that just might save health care: get the House to pass the Senate bill, while the Senate uses reconciliation —

202 a process that avoids the need for a 60-vote supermajority — to address some of the concerns of House Democrats. That’s very good news. Of course, if they do this, there will be howls of protest — they’re defying the will of the 41- 59 Republican majority in the Senate! This violates the very strange rules the Senate has imposed on itself. But I hope Democrats have learned by now that the public doesn’t know or care about such things. Right now, the Democrats are, like it or not, the party of health reform. They can either be the party that passed reform, and at least stands for something, or the party that tried to get health reform but proved itself incompetent and weak in the process. They need to pull this out.

January 22, 2010, 2:30 pm Geithnerdaemmerung? One surprise consequences of the debacle in Massachusetts is that Democrats are suddenly turning on the architects of the financial rescue. Bernanke’s reappointment doesn’t look so certain; Geithner and Summers are apparently on the outs. How far this goes I don’t know. But it’s a remarkable turnaround from the Man of the Year stuff. Funny how evidence of an angry electorate concentrates the mind — concentrates it on the fact that an economy in which there are 6.4 job-seekers per opening isn’t a success story. And yes, this post is partly designed to put dibs on the term in the headline.

January 22, 2010, 10:18 am What did Geithner say? Various news reports that Tim Geithner is privately opposed to the new Obama bank plan — which isn’t that much of a surprise, but he should not be talking about it (if he is). What we do have is this PBS interview, in which he certainly isn’t doing much to back the concept. The correct answer to “In essence are you saying that big banks need to be broken up” is “Yes”; add some qualifiers if necessary — “we’re not talking about a sudden disruption, but about new rules of the game, but the eventual goal is smaller banks that aren’t engaged in inappropriate activities” or something like that. As it was, Geithner might as well have had a chyron underneath as he spoke, with the words DON’T WORRY, WE’RE NOT GOING TO TAKE ANY REAL ACTION. I don’t know what’s really going on here, but Obama needs to find some officials who can talk about taking on Wall Street as if they mean it. What did Geithner say? January 22, 2010, 10:18 am http://krugman.blogs.nytimes.com/

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Geithner: Banks With 'Privilege' Must Limit Risk Thursday, January 21, 2010 JUDY WOODRUFF: Now: President Obama takes on the banks and rolls out new plans to cut them down to size. The president opened with another verbal assault on the nation's mega-banks, accusing them of taking reckless risks in pursuit of quick profits. U.S. PRESIDENT BARACK OBAMA: We have to enact commonsense reforms that will protect American taxpayers and the American economy from future crises as well, for, while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near-collapse. JUDY WOODRUFF: In effect, Mr. Obama said, the banks want to rake in profits when their gambles pay off, but they want taxpayers to bail them out when things go south. Now, he said, it's time for Congress to adopt additional major reforms. First, to reduce risk, he called for a ban on commercial banks owning, investing in, or sponsoring hedge funds and private equity funds. He would also bar financial institutions from investing money for their own benefit, restoring curbs similar to those first enacted in the Great Depression. And the president said he wants to limit the size of any single firm in the financial sector. He said Americans should never again be held hostage by firms deemed too big to fail. Just a week ago, the president proposed a fee on large banks to cover shortfalls in the federal rescue fund. Today, he acknowledged getting action on his reform list won't be easy. BARACK OBAMA: But what we've seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and commonsense rules of the road that would protect our economy and the American people. So if these folks want a fight, it's a fight I'm ready to have. JUDY WOODRUFF: Wall Street reacted with a sell-off in financial stocks. And that pulled the broader market sharply lower. The Dow Jones industrial average fell 213 points, to close below 10,390. The Nasdaq index was down more than 25 points, closing at 2,265. To help us understand the administration's plan and the thinking behind it, I'm joined by Treasury Secretary Timothy Geithner. Thanks very much for being with us. TIM GEITHNER: Thank you, Judy. JUDY WOODRUFF: So if I'm a big bank, what does this mean for me? What changes do I need to make? TIM GEITHNER: The president proposed two simple principles today. One is that banks who have access to the safety net have the privilege of borrowing from the government in times of stress, should not take advantage of that privilege to subsidize risky activity that could threaten the stability of the system. The second is we're going to make sure that we don't have a system in the future where banks get to the point where they are so large that they threaten the stability of the system.

204 Those are two simple principles that are a part of this very important effort we're engaged in to try to encourage the Congress, work the Congress, to pass a set of financial reforms that would provide better protection for consumers, create a more stable, safer financial system. JUDY WOODRUFF: So how different would the banking sector look if everything you want is enacted? TIM GEITHNER: Well, we want to have a more stable system that does a better job of protecting consumers and meeting the needs of companies that need to raise capital, families that need to borrow to finance their kids' education. That's our basic objective in this. To do that, we need to make sure that banks aren't taking the kind of risks that will threaten the stability of the system. That requires a whole range of complicated, important reforms constraints. We've made a lot of progress in the House; we've got a very strong bill there. But we're now at a critical moment in the Senate and we wanted to make sure at this critical moment as we try to move this forward, we had the best set of ideas in place that offer the best prospect of a strong set of reforms. JUDY WOODRUFF: So in essence, are you saying, big banks need to be broken up? TIM GEITHNER: No, this does not propose that. What this does is try to make sure we limit risk-taking - the kind of risks that could threaten the stability of the system in the future. JUDY WOODRUFF: I ask because banks are already saying - and there was a CFO of Goldman Sachs who said today, this is not practical for us to separate, for example, private equity from the other work that we do. We hear other bankers saying, we're going to have to lay people off, it's going to hurt our business. TIM GEITHNER: You're going to hear a lot of concerns from bankers about this and, you know, we're involved in a very important cause, which is to try to work with Congress to put in place a set of reforms that will prevent this from happening again. And that's going to require a lot of changes. But our principle objective is to make the system safer and more stable so that the economy, the average American family and business, is not vulnerable again to this. And that, again, is going to require changes in behavior. The president said today - and you've heard him say this - even though we're 2 years, 3 years into this deep financial crisis, our financial system today is still operating under the same rules that helped create this crisis. And we need to move with Congress to change that system. JUDY WOODRUFF: Let me ask you about one particular aspect and that is banks that would separate some of their investment operations. Does it mean, for example, that at J. P. Morgan - without naming a bank, that in essence, would have to spin off its investment operations? TIM GEITHNER: Banks will have some choice about how they comply with this, and it's going to have to change, result in some changes. And we're going to work very carefully with the Congress and the regulators to make sure we do this in a sensible way. But again, the basic principle is that banks that have the privilege of taking advantage of the safety net should not use that to subsidize risky activity. I think it's a simple principle, I think people can understand that and we're going to do it in a careful, well-designed way. JUDY WOODRUFF: And when would you like to see this take effect? TIM GEITHNER: We'd like Congress to enact reforms as quickly as possible. And we're very close now, I think. And when those reforms are put in place and legislated, then we will work carefully with the regulators to put out the kind of detailed, complicated guidance to make sure we got the balance right. JUDY WOODRUFF: This would be legislated as you just referred to. I heard a lot of comment today about how much uncertainty there is, that this leaves the banking sector in limbo, in effect. They don't know what they're going to look like in a few years. What do you do about that?

205 TIM GEITHNER: The banking sector is in a substantially stronger shape today than it was really any time over the last two and a half years or so, much stronger shape today. But as you know, we have a deep obligation and responsibility to the American people to make sure that we are changing the types of practices and constraints that helped produce this crisis. That is very important for us to do. It's going to require changes going forward. And you should view these as part of a very strong broad package of reforms that again are designed to make sure consumers are protected and the American economy is never again left vulnerable to this kind of crisis. JUDY WOODRUFF: A couple of questions about the timing, Mr. Secretary. Former Federal Reserve Board Chairman Paul Volcker who heads up the Economic Recovery Board for the president, he has publicly advocated this for the last year. He's been very open about it. He told reporters last summer the president had said no to this. What changed the president's mind. TIM GEITHNER: I am - I would just want you to know - very close to Paul Volcker, have enormous respect for him. And the president and I have been talking to him about this for a long period of time. And you saw in the House bill that passed the House and even in the draft Senate bill a provision that was very responsive to Paul Volcker's ideas. And this provision would give the Fed the authority to impose these types of restrictions, exactly these types of restrictions. We thought it was time now to provide a little more clarity though about what this would mean because as I said we're at this critical moment where we need to make the last push to get reforms through the Senate. And that's why - JUDY WOODRUFF: But why not do it earlier? TIM GEITHNER: Well, we've been - again, we've been working on how best to do this for some time. And we thought now was the time to bring some clarity to it. JUDY WOODRUFF: And I also ask because as you well know, there are voices out there today saying this is largely politically driven, that coming on the heels of the Massachusetts Senate outcome, a Republican won. You have polls showing Americans increasingly unhappy about administration policies, a sense the administration has been too soft on Wall Street, that that's really what's behind this. TIM GEITHNER: That's not what's behind this. I've read that. I've heard that. But the president asked us to work on this going back several weeks. We've provided these recommendations to him two weeks ago. And again, the timing is driven by the fact that we're at this moment in this very important cause we're fighting, which is to get financial reform through this next stage of the process in the Senate. JUDY WOODRUFF: One final question you hear from Republicans, and that is, if you're going after the banks this way, why not also go after Fannie Mae and Freddie Mac, the government enterprise? TIM GEITHNER: Oh, we are going to have to bring very substantial reforms to Fannie and Freddie, absolutely. And we are completely committed to that. And we are committed to propose a set of detailed reforms beginning this year. I don't think we're going to be able to legislate that until that process can start until next year, because it's just a complicated thing to get right. But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country. JUDY WOODRUFF: Treasury Secretary Tim Geithner, thank you very much. TIM GEITHNER: Nice to see you. Geithner: Banks With 'Privilege' Must Limit Risk Thursday, January 21, 2010http://www.pbs.org/newshour/bb/business/jan-june10/banks_01-21.html#

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New York Fed documents reveal more detail about AIG bailout By Brady Dennis Washington Post Staff Writer Sunday, January 24, 2010; A10 On the frenzied day in September 2008 when the federal government bailed out insurance giant American International Group, Timothy F. Geithner logged dozens of calls with top Wall Street executives, Washington regulators, political leaders and even investor Warren Buffett. At the time, the Treasury secretary was head of the Federal Reserve Bank of New York, which played a lead role in organizing AIG's rescue. His call logs, obtained by The Washington Post, are among 250,000 pages of documents the New York Fed recently turned over in response to a subpoena from the chairman of the House Committee on Oversight and Government Reform. Records show that Geithner participated in nearly 70 calls between 7:45 a.m. and 10 p.m. on Tuesday, Sept. 16, as officials worked to stabilize AIG -- first through private loans and finally through public assistance. They feared the company's collapse might trigger other failures and endanger the financial system. Geithner spoke most often to Federal Reserve Chairman Ben S. Bernanke and then-Treasury Secretary Henry M. Paulson Jr., as well as with AIG chief executive Robert Willumstad. He also shared numerous calls with top financial executives, including Lloyd Blankfein of Goldman Sachs, Jamie Dimon of J.P. Morgan Chase and Vikram Pandit of Citigroup. At 10:16 a.m., documents show, Geithner spoke briefly with Berskshire Hathaway chief executive Warren E. Buffett. Buffett later said he was offered multiple chances to help rescue AIG before its bailout, but he declined. In addition, Geithner spoke that day to regulators including Securities and Exchange Commission Chairman Christopher Cox, Office of Thrift Supervision Director John M. Reich and New York Insurance Superintendent Eric R. Dinallo. He also talked with New York Mayor Michael Bloomberg, Sen. Charles E. Schumer (D-N.Y.) and Charles O'Byrne, a top aide to New York Gov. David A. Paterson. While Geithner's call list offers a fascinating glimpse into the hours leading up to the AIG bailout -- which eventually grew to $182 billion in aid -- the broader relationship between AIG and the New York Fed has drawn increased scrutiny on Capitol Hill. Kurt Bardella, a spokesman for Rep. Darrell Issa (R-Calif.), the ranking Republican on the House oversight committee, said the latest documents, which include e-mails and meeting notes, show how intimately New York Fed officials were involved in AIG's every move. In one e-mail days after the bailout, a New York Fed official writes that AIG's general counsel was told that "future SEC filings, press releases, and other significant communications should be run" first by lawyers for the New York Fed.

207 "The New York Fed was running the show," Bardella said. "They were giving orders, demanding everything be run through them. They weren't just casual observers here." The issue of AIG's payouts to trading partners remains one of the most controversial elements of the company's rescue. More than $62 billion flowed from the government through AIG and to its counterparties, which lawmakers have decried as "backdoor bailouts." Bardella said the documents confirm that there was never a push to persuade AIG's trading partners to accept less than what they were owed. "The New York Fed never made any serious effort to try to obtain any concessions for the counterparties on behalf of the American people who were footing the bill," he said. Republican and Democratic investigators on the House oversight committee on Thursday interviewed New York Fed general counsel Thomas C. Baxter Jr., who said that AIG's trading partners had quickly rejected taking a discount. Baxter told investigators he wasn't sure "why we even bothered," according to a person familiar with the interview. That account echoes a report last fall by the special inspector overseeing the government's bailout program, which showed that AIG's top trading partners balked when asked if they would be willing to accept less. The report noted that Geithner "had little hope" that trying to win concessions from counterparties would succeed, as the bailout had removed the threat of bankruptcy and weakened AIG's leverage. E-mails released earlier this month also showed that lawyers for the New York Fed advised AIG officials in late 2008 to withhold certain details in disclosures to the SEC, including information that could have revealed the names of banks receiving payments. The New York Fed has defended its actions, saying that it had "assisted AIG in ensuring the accuracy of its disclosures and protected important U.S. taxpayer interests." Baxter has said that the company's disclosures complied with the law and that there was no effort to mislead the public. Treasury and New York Fed officials have said that Geithner played no role in the disclosure decisions because he was a candidate for the Treasury post at the time and had recused himself. House Oversight Committee Chairman Rep. Edolphus Towns (D-N.Y.) has planned a hearing for Wednesday focusing on the AIG bailout. Geithner and Baxter are scheduled to testify, along with a former AIG executive and Neil M. Barofsky, the special inspector general for the bailout program. Brady Dennis New York Fed documents reveal more detail about AIG bailout Sunday, January 24, 2010; http://www.washingtonpost.com/wp- dyn/content/article/2010/01/23/AR2010012302832_pf.html

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Banques : le plan Obama "correspond aux positions" de la France 24/01/10 - 14H29 -

[ 24/01/10 - 14H29 - AFP ]

Les projets du président américain Barack Obama sur la taxation des banques et la limitation de leur taille et de leurs activités "correspond tout à fait aux positions que la France a soutenues", a jugé dimanche la ministre de l'Economie Christine Lagarde sur France 2. "On n'a pas encore tous les détails techniques, il ne faut pas prendre pour argent comptant, on n'est pas au bout de la route. Mais la modification de position est impressionnante, ça correspond tout à fait aux positions que la France a soutenues, que le président de la République a soutenues très fermement au sein du G20", a déclaré Christine Lagarde. Le président américain a dévoilé mercredi un plan visant à limiter la taille des banques et à les empêcher d'investir sur les marchés pour leur compte propre.

Il avait annoncé la semaine dernière un projet de taxation d'une cinquantaine de grandes banques visant à récupérer les fonds publics dépensés dans le cadre du plan de stabilisation du système financier, ébranlé par la crise. http://www.lesechos.fr/info/marches/afp_00 224385.htm?xtor=RSS-2009

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EDITORIAL Editorial Expectativas cautelosas 24/01/2010 En todas las economías de la OCDE se ha frenado el ritmo de deterioro. Algunas han abandonado la recesión y las señales de crecimiento del PIB son explícitas. Son los casos de Estados Unidos, Alemania, Francia, entre las que disponen de mayor capacidad de tracción de la economía mundial. Pero en todas ellas la recuperación se percibe por las empresas como vulnerable. Las cautelas derivan de la significación que han tenido los estímulos públicos: los directamente destinados al salvamento de empresas financieras y a facilitar la disposición de liquidez, o a contener el desplome de la demanda agregada, a través de aumentos en el gasto público de todo tipo. Las empresas en todos los países avanzados son conscientes de que la retirada antes de tiempo de esos estímulos excepcionales puede volver a enfriar la demanda y frenar la recuperación. España se encuentra entre los países donde las expectativas empresariales han ido suavizando el pesimismo, pero no son expresivas todavía de confianza. En realidad, son un reflejo del retraso con que está teniendo lugar la recuperación del crecimiento, y muy especialmente la mejora de las condiciones del mercado de trabajo. Así lo refleja el Barómetro de EL PAÍS sobre una muestra de 255 empresas que hoy publica este suplemento. Las respuestas son menos negativas que las aportadas en la primera mitad del pasado año. Los empresarios españoles creen que la crisis tocó fondo, pero ello no significa de ningún modo que la recuperación esté cercana o vaya a ser rápida. Sólo el 19% de los que responden considera que la economía española mejorará en el primer semestre de 2010; el 44% de las respuestas indica que no variará sustancialmente, y un tercio largo cree que el deterioro se acentuará en esta primera mitad del año. En esa percepción influye el deterioro de la confianza que para los encuestados merecen las actuaciones del gobierno en materia de política económica. Las expectativas sobre el empleo, aunque han moderado su pesimismo, siguen siendo el capítulo con peor comportamiento: se reduce en seis puntos y medio, al 41%, el grupo de empresas que prevé reducir plantilla en el primer semestre de 2010. Ésta es, lógicamente, la señal más vinculante. Sin mejora del empleo la demanda doméstica no repuntará de forma significativa y tampoco mejorará la disposición del sistema bancario a normalizar el crecimiento de la inversión crediticia. Es comprensible que las expectativas de los agentes económicos españoles estén más condicionadas que en otros países por las dificultades de apelación a la financiación. La dependencia del crédito bancario es de las más elevadas de nuestro entorno, y el sistema bancario español sigue siendo de los que en mayor medida han contraído el crédito a las empresas no financieras. Desde que se inició la crisis viene advirtiéndose que éste es el principal obstáculo que se interpone para que la economía española inicie la senda de recuperación. No es un problema exclusivo de la economía española. El Gobierno británico, por ejemplo, ha asumido como prioridad la reducción de la dependencia de los préstamos bancarios como vía de oxigenación de las empresas. Allí y aquí, las expectativas de los empresarios seguirán condicionadas por cautelas excesivas mientras el crédito bancario siga estancado. http://www.elpais.com/articulo/primer/plano/Expectativas/cautelosas/elpepueconeg/20100124 elpneglse_1/Tes

210 TRIBUNA: Laboratorio de ideas EMILIO ONTIVEROS Pedagogía de la crisis EMILIO ONTIVEROS 24/01/2010 La crisis está resultando muy cara. Determinar quién paga sus costes, cuándo y a través de qué vías es un aspecto importante cuya discusión en todo el mundo se intensificará a partir de ahora. De su clarificación también va a depender la legitimidad de las instituciones financieras y la de sus reguladores y supervisores. El balance de daños será muy superior a los ahora más explícitos. Sólo los que podrían considerarse costes directos, ya identificados y susceptibles de asignar de forma inequívoca a la convulsión iniciada en el verano de 2007, constituyen una parte considerable del dinero adelantado por los contribuyentes: de esa notable ampliación de los déficit públicos en los dos últimos años. Los costes indirectos, incluidas las externalidades negativas que las entidades financieras han creado sobre el resto de los agentes económicos, aunque de más difícil captación, son sin duda superiores. El racionamiento del crédito y el excepcional ascenso del desempleo han sido algunas de las manifestaciones más explícitas. En ese grupo de costes derivados de la crisis y de su gestión también habría que incluir aquellos de más difícil contabilización asociados a la erosión de la confianza en el propio sistema económico y en algunas de sus instituciones. Su complicada cuantificación y la dificultad para identificar a los agentes que han de sufragarlos no debe impedir que se sea suficientemente sensible a ese tipo de costes. Como era previsible, ha sido en EE UU donde primero han empezado a adoptarse decisiones correctoras de algunas de las consecuencias de esa crisis financiera, cuyas cenizas todavía despiden calor. Y eso es, en primer lugar, porque fue en ese país, en el corazón de su sistema financiero, donde se localizó el epicentro de la convulsión; donde sus autoridades se vieron obligadas a usar en cantidades extraordinarias el dinero de los contribuyentes para evitar el colapso de empresas financieras de todo tipo, desde bancos hasta compañías de seguros. En segundo, porque es allí donde la sensibilidad de sus ciudadanos, de los contribuyentes, es más explícita. La clase política, empezando por su presidente, no podía eludir la necesidad de conocer con suficiente detalle, de primera mano, el origen de esa crisis y pasar la factura de algunos de los daños más explícitos. Del cumplimiento de ambas exigencias tuvimos constancia la semana pasada en las sesiones de la comisión creada en el Congreso (Financial Crisis Inquiry Commission) y en el anuncio de la imposición de una tasa sobre parte del pasivo de los mayores bancos que operan en aquel país. Los banqueros que comparecieron no han aportado grandes novedades a las causas de la crisis, pero es probable que cuando concluyan las tareas de esa comisión se conozcan mejor las circunstancias que condujeron a la crisis financiera más grave desde la que precipitó la Gran Depresión. Siendo más relevante conocer causas que culpables, lo cierto es que fueron las prácticas de algunos operadores financieros las que precipitaron el colapso en los mercados crediticios en todo el mundo y la situación próxima a la quiebra de algunos de los más emblemáticos bancos y compañías de seguros. El Gobierno los salvó para evitar males peores utilizando fondos públicos. Y ahora quiere recuperar, en un plazo máximo de 12 años, parte de esos costes directos. No es precisamente una locura. La tasa propuesta por la Administración gravará con un 0,15% los pasivos no asegurados (los totales menos el capital de primera categoría y los depósitos asegurados por el Fondo de Garantía) de los mayores operadores financieros presentes en EE UU: bancos, compañías de

211 seguros y otros intermediarios, con independencia de su nacionalidad, con activos superiores a 50.000 millones de dólares. Estará en vigor a partir de junio, hasta recuperar los 117.000 millones de dólares que ha supuesto el desembolso neto del Gobierno en el TARP (Troubled Asset Relief Program), destinado a la adquisición de activos y acciones de empresas financieras en dificultades. Al tomar como base esos pasivos no asegurados se está procurando también limitar una excesiva asunción de riesgos por las entidades. Su impacto sobre la capacidad de generación de márgenes de las entidades gravadas no será muy oneroso: el total a pagar en los próximos 10 años por ese concepto será inferior a lo que las entidades financieras desembolsarán este mismo año en compensaciones excepcionales a sus directivos. Seis de los mayores bancos americanos pagarán 150.000 millones de dólares en compensaciones totales a sus ejecutivos correspondientes a 2009, poco menos que el récord de 164.000 millones alcanzado en 2007, antes de acusar los efectos de la crisis. Ésa no ha sido precisamente una decisión improvisada: cuando el pasado agosto el Tesoro de aquel país diseñó el TARP, se anticipó que habría que devolver esos recursos. Lo que ha sido objeto de análisis en estos meses es la forma concreta de recuperación, contemplando cuatro alternativas: una tasa sobre el conjunto de las transacciones financieras, un gravamen adicional sobre los beneficios, la eliminación de la deducción de los pagos por intereses y la finalmente adoptada tasa sobre parte de los pasivos. Esas alternativas forman parte del conjunto que está considerando el Fondo Monetario Internacional, en el contexto del encargo recibido por el G-20, el pasado septiembre en Pittsburg, de búsqueda de alternativas para que "el sistema financiero realice una sustancial y justa contribución al pago de las cargas asociadas con las intervenciones de los Gobiernos para reparar el sistema bancario". Que el director gerente del Fondo haya saludado la iniciativa americana no significa que el resto de los países que están planteándose decisiones similares opten por la misma modalidad. El Reino Unido, por ejemplo, hace tiempo que mostró sus preferencias por una especie de comisión sobre el volumen de transacciones. Otros Gobiernos europeos, sin necesidad de recuperar montantes equivalentes a los aportados en EE UU, han definido su preferencia por las dotaciones permanentes a un fondo destinado a sufragar los costes de crisis futuras, o la imposición de un gravamen sobre las remuneraciones consideradas excesivas. Aun cuando sea pronto para entrar en la consideración detallada de las ventajas e inconvenientes de cada una de las opciones (en junio, el FMI deberá presentar el informe requerido, aunque los ministros de finanzas del G-20 discutirán un borrador en abril), la coordinación internacional en este tipo de medidas es esencial, aunque sólo sea para evitar la generación de incentivos al arbitraje regulador o a la infundada redefinición de tamaños medios en la industria de servicios financieros allí donde se apliquen. Lo que es igualmente razonable, como ha reconocido el propio Fondo Monetario Internacional, es la necesidad de conseguir un adecuado, aunque nada fácil, equilibrio entre fiscalidad y regulación. La aplicación de tasas de este tipo en modo alguno debe excluir el fortalecimiento de las regulaciones identificadas como necesarias antes y después de esta crisis. El Gobierno del país donde nació la crisis financiera ya está contribuyendo favorablemente a fortalecer la pedagogía que ha de deducirse de la gestión de esta crisis mediante la identificación y exigencia de responsabilidades. Que lo haga el conjunto de las economías que están sufriendo los costes directos e indirectos facilitará la recuperación por las instituciones financieras de parte del otro capital perdido, el de naturaleza reputacional, fundamento de la confianza en las mismas; de su crédito, en definitiva. - http://www.elpais.com/articulo/primer/plano/Pedagogia/crisis/elpepueconeg/20100124elpneglse_6/Tes

212 REPORTAJE: Primer plano Malos, pero mejores tiempos Los empresarios creen que la crisis tocó fondo y que la recuperación va a ser muy lenta El Barómetro de Empresas desvela mejoras en ventas, beneficios e inversión Demanda interna y coste de la energía han lastrado el resultado empresarial El 57% de los empresarios prevé aumentar en 2010 sus exportaciones CARLOS GÓMEZ 24/01/2010 La economía española sigue muy débil. Sin embargo, empiezan a vislumbrarse las primeras luces al final del túnel de la recesión, según el Barómetro de Empresas de EL PAÍS El enfermo sigue grave, pero estable o en tenue mejoría. Las cosas no han ido muy bien en la economía y en las empresas españolas en el segundo semestre de 2009, pero desde luego no han sido tan horribles como en el primero -el peor semestre en 10 años-, han superado las expectativas iniciales de los empresarios y muestran algunos signos de que la leve mejoría seguirá su curso en el primer semestre de 2010. Pese a la actuación del Gobierno en materia económica, que alcanza cotas históricas de reprobación en los últimos meses, y pese a la persistente evolución negativa del empleo, las opiniones mayoritarias de los empresarios así lo atestiguan. Los datos del último barómetro de empresas de EL PAÍS, correspondiente a la segunda mitad del pasado ejercicio, que ha elaborado Deloitte sobre una muestra de 255 empresas cuya facturación conjunta supera el billón de euros y emplean a más de un millón de personas, revelan un cierto cambio positivo en la mayoría de los indicadores relativos a la actividad empresarial de los panelistas frente a los registrados en la primera mitad del pasado año.

Los datos de facturación-producción, rentabilidad e inversión recogidos, entre otros, en esta edición del barómetro, avalan un ligero pero significativo cambio de tendencia en la evolución de la economía en los últimos meses. Así, casi dos de cada tres empresarios consultados prevén que la economía española en el primer semestre de 2010 no varíe

213 sustancialmente (44% de las respuestas) o mejore (19% de las respuestas). El otro tercio largo de los panelistas -que en conjunto supone un 20% menos que hace seis meses- opina que la economía va a empeorar en la primera mitad de este año. En las respuestas, como causas del incremento de la facturación, los empresarios aluden al mercado doméstico, a la estacionalidad y al crecimiento de los mercados exteriores.

Algunos indicadores macroeconómicos que se han ido conociendo en las últimas semanas concuerdan, en parte, con las opiniones y tendencias recogidas por el barómetro. Aunque aún sea prematuro hablar de recuperación, hay varios indicadores que han dejado de caer en barrena. El PIB del cuarto trimestre podría hacerse público en los próximos días. Con este dato se sabrá si la economía española ha dejado atrás las tasas negativas -frente al trimestre anterior- tras más de año y medio en recesión. A la espera de las cifras del PIB, datos del Instituto Nacional de Estadística (INE) señalan que la cifra de negocios del sector industrial y del sector servicios seguían a la baja en noviembre pasado respecto al mismo mes de 2008, pero a un ritmo mucho menor que en octubre, y que el número de empresas creadas en España aumentó un 4,6% en tasa interanual en ese mismo mes (es la primera vez que crece el número de empresas creadas desde 2007). También se redujo en noviembre, un 36%, el número de efectos de comercio devueltos por impago de familias y empresas. Otros datos, como el consumo eléctrico en el cuarto trimestre, el indicador adelantado de diciembre de pedidos de bienes de inversión o las ventas minoristas en noviembre, caminan en sentido contrario. Hay incertidumbre, pero varias instituciones se inclinan también por un cambio de tendencia con el apuntado en esta edición del barómetro. Las previsiones de la escuela de negocios Esade, por ejemplo, destacan que la economía española va a dejar de estar "en caída libre" este año, ya que empezará a registrar las primeras tasas positivas del PIB en términos intertrimestrales, pero en el conjunto del ejercicio experimentará una caída interanual de entre el -0,1% y el -1,1%. No obstante, este informe sostiene que si la política económica y los agentes sociales consensúan las reformas y ajustes necesarios, la economía española podría acabar 2010 con tasas positivas de crecimiento, si bien España se verá "a remolque de los acontecimientos, como consecuencia del derrumbe inmobiliario". Ocurre, sin embargo, que se han cumplido seis meses de la ruptura del diálogo social, y esta misma semana, ante el segundo intento de abordar una reforma del mercado laboral propiciado por el Gobierno, sindicatos y patronal CEOE han pedido al Ejecutivo, y éste lo ha aceptado, que retrase unas semanas el calendario que había adelantado y les anticipe sus propuestas.

214 En cualquier caso, en sus previsiones para el conjunto del ejercicio 2010 más de la mitad de los empresarios participantes en la última edición del barómetro indican que aumentarán su producción-facturación y menos de una cuarta parte que las reducirá.

En cuanto al empleo, que es el capítulo que registra peor comportamiento, se reduce en seis puntos y medio, al 41%, el colectivo de empresas que prevé reducir plantilla en el primer semestre de 2010. Por el contrario, más de la mitad de las compañías consultadas prevé incrementar en el mismo periodo sus cifras de beneficio antes de impuestos. La inversión también ha mejorado respecto a los datos de hace seis meses y a las previsiones realizadas en el mes de julio de 2009. La inversión ha aumentado en el 45% de las empresas encuestadas frente al 33% anterior y eso que al inicio del verano tan sólo anticipaba incrementos el 35%. Además, sólo un 33% confiesa haber reducido sus inversiones, mejorando sensiblemente el 47% que lo hizo en el primer semestre. La previsión de la evolución de las exportaciones para el conjunto de 2010 con respecto al año precedente, muestra resultados moderadamente mejores que los obtenidos en la anterior edición del barómetro. El número de compañías integrantes del panel que considera que las exportaciones se mantendrán sin cambios asciende hasta un 57% desde el 50% anterior. También destaca el descenso del número de empresas que esperan reducir sus exportaciones, ya que el porcentaje desciende hasta el 7% desde el 30,6% apuntado para 2009. Y por último, las empresas que esperan un aumento en sus exportaciones, que se incrementa notablemente hasta el 36,1%, desde el 19,4%. Los panelistas prevén que los indicadores que tendrán un mejor comportamiento en 2010 serán el IPC y la matriculación de vehículos. La tasa de empleo, la morosidad en el crédito

215 bancario y la edificación residencial son las que han obtenido una peor valoración por parte de los empresarios, con porcentajes próximos al 100.

(*) previsión

Productividad, costes financieros, costes de las materias primas y costes laborales son las variables que mayor influencia positiva han tenido y están teniendo en los resultados de las empresas encuestadas. Demanda interna, costes energéticos y fiscalidad son, por el contrario, los que mayor influencia negativa han tenido, según los panelistas. Casi la mitad de los empresarios que han participado en el barómetro esperan que el euro se mantenga al menos hasta el verano en los niveles actuales. Un 46% de los panelistas reconoce que los actuales niveles del euro no están afectando a su empresa (un 38% dice que les perjudica, y un 16%, que les beneficia). Casi nueve de cada 10 empresarios, por otra parte, esperan que el Banco Central Europeo mantenga los tipos de interés sin cambios para el primer semestre de 2010. Aumentan hasta el 8,5% los panelistas que opinan que debería subirlos y tan sólo un 6,3% piensa que el BCE debería bajarlos. En cuanto a la evolución del precio del crudo en los próximos meses (en los últimos seis ha seguido encareciéndose hasta terminar 2009 por encima de los 80 dólares el barril), un 88% de los empresarios espera se sitúe entre los 70 y 90 dólares el barril. Y prácticamente ninguno espera que el precio baje de los 60 dólares o se sitúe por encima de los 100 dólares el barril. Al comparar la situación de la economía española con el resto de los países europeos, una amplia mayoría de los panelistas considera que nos encontramos en una peor situación en todas las variables analizadas. Ganancias al alza

En el segundo semestre de 2009, el beneficio antes de impuestos (BAI) mejora significativamente con respecto al primer semestre, según los testimonios recogidos por el Barómetro de Empresas. Una de cada dos compañías confiesa que ha incrementado sus beneficios en el periodo, mientras que entre enero y junio sólo lo hizo una de cada tres. El porcentaje de empresas que afirman haber disminuido su BAI durante el segundo semestre de 2009 se reduce casi 20 puntos hasta situarse en el 46%. Las principales razones que han motivado un incremento del BAI en el segundo semestre han sido la reducción de costes y el control de gastos (68% de las respuestas), el aumento de la facturación (61%) y la mejora de la productividad y la eficiencia (37%).

216 La previsión para la evolución del beneficio antes de impuestos para el primer semestre de 2010 se presenta optimista, esperándose unos resultados mejores a los alcanzados en la actual edición del Barómetro por el 51% de las empresas panelistas. Sólo un 13% afirma que su BAI se mantendrá sin cambios, y un 36% admite que reducirá sus ganancias en el semestre. Las previsiones positivas respecto al BAI del primer semestre de 2010 destacan sobre todo en el sector detallistas, donde un 70% de las empresas espera incrementar sus ganancias, y en el de transportes, comunicaciones y servicios públicos, donde el 67% también prevé mejoras. Seguros y bienes raíces es el sector menos optimista sobre la evolución de sus beneficios, sólo un 34% de sus empresas espera incrementarlos. Y finanzas, seguros y bienes raíces es el sector más pesimista, con un 55% de sus panelistas considerando que su BAI disminuirá. Las previsiones para el primer semestre de 2010 revelan también que las empresas con volúmenes bajos y medios de facturación son las más optimistas en cuanto a un aumento del BAI, ocupando la primera posición las empresas con una facturación menor a 30 millones de euros con un 75% de las respuestas. El segundo puesto lo comparten las empresas que facturan entre 30 y 60 millones de euros junto con las que facturan de 300 a 600 millones de euros con un 61,9% de las rwespuestas cada una. En tercer lugar se encuentran las empresas con un volumen de facturación de 600 a 3.000 millones de euros, con un porcentaje de respuestas positivas de 52,5%. -

Carlos Gómez Malos, pero mejores tiempos http://www.elpais.com/articulo/primer/plano/Malos/mejores/tiempos/elpepueconeg/20100124 elpneglse_2/Tes

217 REPORTAJE: Primer plano Las empresas anuncian nuevas reducciones de empleo en 2010 Más de la mitad de las compañías panelistas ha recortado sus plantillas en los últimos seis meses y más del 40% volverá a hacerlo antes del verano La coyuntura y las prejubilaciones se citan como causa de recortes de empleo Seis de cada diez constructoras y transportistas han reducido plantillas C. G. 24/01/2010 El desplome del empleo no cesa, aunque mejoren otros indicadores de la economía, y puede seguir agudizándose durante muchos trimestres más, en opinión de los empresarios. Durante el segundo semestre del pasado ejercicio, la evolución del empleo se ha mostrado nuevamente desfavorable respecto al semestre precedente. El 51% de los empresarios participantes en esta edición del barómetro afirma haber reducido el empleo, empeorando sustancialmente -casi diez puntos porcentuales- las previsiones iniciales de recorte laboral que tenían en el verano. También han sido mucho menos las compañías, un 31% del panel (15 puntos por debajo de las previsiones de junio), que han mantenido el número de empleados.

En cuanto a la evolución del empleo por actividad, en el segundo semestre de 2009 la mayoría de los sectores ha declarado recortes de plantilla. Destaca, entre ellos, Construcción y Contratas, y Transportes, Comunicaciones y Servicios Públicos -el 61% de las empresas de uno y otro colectivo aligeraron empleo-. Más de la mitad de las compañías encuadradas en los sectores de fabricación, agricultura, ganadería, minería y pesca, y servicios, han reducido también sus efectivos laborales en la segunda mitad del pasado ejercicio. En cuanto a las causas aducidas para el citado recorte de empleo, la más citada entre las compañías sondeadas para la última edición del barómetro es la coyuntura económica - señalada por el 71% de los panelistas-, seguida por las jubilaciones/prejubilaciones -citada por el 40%-, por un descenso en la cartera de pedidos -38%- , y finalmente por un incremento de la productividad -30% de las respuestas, diez puntos más que hace seis meses-. El Ministerio de Trabajo quiere poner coto, con ayuda de los sindicatos, al abuso de las prejubilaciones que son utilizadas por muchas empresas y trabajadores para encubrir despidos y reducciones pactadas de plantilla.

218 Los argumentos citados por los panelistas para explicar sus reducciones de plantilla poco tienen que ver con los esgrimidos esta misma semana, en vísperas de la reanudación del diálogo social, por el presidente de la Comisión de Economía de la patronal CEOE, José Luis Feito. La patronal achaca a los salarios y al elevado coste de los despidos el que la destrucción de empleo en España sea mucho mayor que en el resto de los países de la Unión Europea. Según José Luis Feito, si durante una recesión económica no se moderan los salarios y no se sitúan en línea con la productividad de las empresas habrá una masiva destrucción de empleo y será imposible avanzar en un nuevo modelo productivo.

Lo que el barómetro sí señala, más allá de los razonamientos expuestos por el dirigente de CEOE, es que las previsiones de empleo para el primer semestre de 2010 no cambian su negativa tendencia. La mayoría de las empresas participantes en la presente edición del barómetro -un 44% del total- señala que su número de empleados disminuirá entre el actual mes de enero y el próximo mes de junio. El colectivo de compañías que prevé mantener el número de empleados en este semestre se sitúa en el 43% y no llega al 13% el grupo de panelistas que declara planes para incrementar su plantilla antes del verano. "Para la creación de empresas y empleo habrá que esperar más que para el crecimiento del PIB, teniendo en cuenta que en esta fase cíclica éste se basa en el aumento de la productividad de los ocupados y no en el aumento de estos. Las previsiones iniciales dan una caída de los ocupados en media anual del 2,6% (casi 500.000 personas), aunque si el PIB llegara a crecer unas décimas, dicha caída podría reducirse en una tercera parte", escribía hace unos días en este mismo suplemento Ángel Laborda, director de coyuntura de la Fundación de las Cajas de Ahorro (FUNCAS). - http://www.elpais.com/articulo/primer/plano/empresas/anuncian/nuevas/reducciones/em pleo/2010/elpepueconeg/20100124elpneglse_4/Tes

219 REPORTAJE: Primer plano La asignatura del cambio climático Las empresas asumen su importancia, y un 46% lo ve como oportunidad de negocio A la mayoría les preocupa el cambio climático por el coste para su compañía Seis de cada diez compañías ignoran cuanto C02 emiten a la atmósfera C. G. 24/01/2010 Prácticamente la totalidad de las empresas integrantes del barómetro reconoce que el cambio climático, agregado como tema especial en la última consulta, les afecta directamente (sólo el 4,1% opina lo contrario), pero en la mayoría de los casos -casi nueve de cada diez respuestas- citan a la prensa en general como su principal fuente de información. A más de la mitad de la muestra, por otra parte, les preocupa sobre todo el cambio climático por los costes que puede suponer a sus compañías, y sólo un 46% cree que es una oportunidad para generar nuevas posibilidades de negocio. Sólo cuatro de cada diez empresas declara estar al corriente de la normativa vigente en relación con el cambio climático. Sin embargo, casi la mitad de los panelistas valora positivamente la reducción de los derechos de emisión de gases de efecto invernadero (GEI), gratuitos para las empresas reguladas en esta materia a partir de 2013, que plantea la nueva directiva europea (Directiva 2009/29/CE) para perfeccionar y ampliar el régimen de comercio de los derechos de emisión. Sobre la reciente conferencia internacional de Copenhague (COP 15), celebrada en diciembre pasado, siete de cada diez empresas creen que ha sido un fracaso y más de la mitad argumenta que no se ha avanzado mucho respecto a Kioto [conferencia sobre el cambio climático celebrada en esa ciudad japonesa en 1997 y que culminó con la aprobación de un protocolo en el que se restringía la emisión de dióxido de carbono (CO2) y de otros gases de efcto invernadero]. Los efectos de los acuerdos de la citada cumbre de Copenhague, en opinión de las empresas, se van a dejar sentir principalmente entre los grandes consumidores de energía (80% de las respuestas), en el sector eléctrico (77%) y el sector del petróleo (76%). Sobre la medición y minimización de las emisiones de dióxido de carbono, el 61% de las compañías declara que no dispone de herramientas ni de metodologías para medir sus emisiones o huella de carbono. A pesar de ello, el 42% de los panelistas piensa que las emisiones totales de CO2 de su empresa se han reducido en 2009, frente a un 2,3% que opina que han aumentado. Las principales causas que los panelistas señalan para explicar estas variaciones son las medidas de eficiencia energética adoptadas (66%), la inversión que han realizado en nuevas tecnologías (33%), los descensos de la producción (31%) provocados por la crisis económica y la formación específica que han recibido sus empleados (20%). Las perspectivas empresariales para 2010 confirman la tendencia apuntada el pasado ejercicio, ya que el 46,7% de las compañías espera que sus emisiones de dióxido de carbono se reduzcan y el 47% confía en que se mantengan en niveles similares. Entre las medidas que, a juicio de las empresas, pueden ser más necesarias para mejorar la estrategia de cambio climático destacan los incentivos a la inversión empresarial, propuestos por el 60% de los panelistas, y la mejora de la regulación, citada por el 26%.En relación a las

220 valoraciones de las medidas adoptadas por el Gobierno español para reducir las emisiones de dióxido de carbono en comparación con las medidas implantadas en otros países en las que operan las empresas, casi seis de cada diez panelistas las califican de positivas, dos las consideran negativas, y otros dos, muy negativas. -Abacus; Abengoa; Abertis Infraestructuras; Acieroid; Aegon Seguros; Aena (Aeropuertos Españoles y Navegación Aérea); Agbar; Agro Sevilla Aceitunas; Agrupación Coop. Valle del Jerte; Agrupación Guinovart Obras y Servicios Hispania; Air Liquide España; Akzo Nobel Coatings; Alliance Healthcare España; Alsimet; An S. Coop.; Andrés Pintaluba; Applus +; Arag Compañía Internacional de Seguros y Reaseguros; Arc Distribución Ibérica; Areas; Arteixo Telecom; Asea Brown Boveri (ABB); Asepeyo; Asprodibe; Avis Alquile un Coche; Azulev; Banca March; Bancaja Habitat; Banco Banif; Banco Caixa Geral; Banco Cooperativo Español; Banco de Valencia; Banco Guipuzcoano; Banco Popular Español; Banco Sabadell; Bankinter; Bayer Hispania; Becton Dickinson; Bimbo (Sara Lee); Bioiberica; Biokit; BNP Paribas; Bosal España; Bunge Iberica; Cacesa Compañía Auxiliar al Cargo Express; Caixa Catalunya; Caixa Galicia; Caixa Girona; Caixa Rural Altea; Caixa Rural Balears; Caixa Rural Torrent, Cooperativa de Crédit Valenciana; Caja Castilla - la Mancha; Caja de Ahorro de Guadalajara; Caja de Ahorros de la Rioja; Caja de Ahorros de Salamanca y Soria (Caja Duero); Caja de Ahorros de Santander y Cantabria; Caja de Ahorros y Monte de Piedad de Extremadura; Caja España; Caja General de Ahorros de Canarias; Caja Inmaculada; Caja Madrid; Caja Mediterráneo; Caja Navarra; Caja Rural Burgos Cooperativa de Crédito; Caja Rural de Asturias; Caja Rural de Granada; Caja Rural de Soria; Caja Rural de Teruel; Caja Rural de Zamora, Cooperativa de Crédito; Cajamurcia; Cajasiete, Caja Rural; Cajasol; Cajastur; Cajasur; Cámara de Comercio de Oviedo; Cargill; Central Lechera Asturiana; Centro de Cálculo de Sabadell; Cetelem; Cisco; CLH; CNH Maquinaria Spain; Cofares; Compañía de Seguros Adeslas; Confederación Española de Cajas de Ahorros; Contratas y Obras Empresa Constructora; Conway, The Convenience Company; Coop. del Camp D'ivars D'urgell I Secció de Credit; Copcisa; Copreci, S. Coop; Corporacion Alimentaria Peñasanta; Covaldroper Grupo; Coviran S.Coop. Andaluza; Crédito y Caución; Criber; Dédalo Grupo Gráfico; DHL Global Forwarding; Dibaq Diproteg; Diode España; Distribuiciones Froiz; Domecq Wines España; Durr Systems Spain; Elay; Electronic Trafic; Emasesa; Empresa Municipal Aguas de Málaga; Emte; Epcos Electronic Components; Eurocopter España; Europe Arab Bank PLC Sucursal en España; Explotacions Turistiques de Les Illes; Federico Paternina; Ferrovial; Fiatc; Fomento de Construcciones y Contratas (FCC); Ford España; Fujitsu; Fundicion Nodular; Gas Natural; Gct Hispania; Gestamp Servicios; Giraud Ibérica; Groupama Seguros; Grup Bon Preu; Grup Lasem; Grupo ACS; Grupo Antolin-Irausa; Grupo Banco Pastor; Grupo Cosentino; Grupo Gallego Vilar; Grupo General Cable Sistemas; Grupo G's España - Pascual Hermanos; Grupo Helios; Grupo Ortiz; Grupo Riberebro; Grupo Santillana España; Grupo UBE; Hansa Urbana; Havas Media; Hc Energía; Hella; Hewlett Packard Iberia; Himoinsa; Hortofruticola Costa de Almería; Hullera Vasco - Leonesa; Hunosa; Hunosa; Huntsman Performance Products Spain; Ibercaja; Iberia Líneas Aéras de España; Ibermutuamur; Igualatorio Médico Quirurgico; Impresia Ibérica; Indra; Industria de Maderas Aglomeradas; Ingeteam Corporación; Institut Pere Mata; Intecsa Ingeniería Industrial; Ipar Kutxa Rural; Isolux Corsá; Jorge; Julian Rus Cañibano; Juliano Bonny Gomez; Kutxa - Caja Gipuzkoa San Sebastián; Línea Directa Aseguradora; Lucta; Luis Caballero; Maxam; Mercados Centrales de Abastecimiento; Mercash Sar; Metro de Madrid; Michelin España Portugal; Mondragon; Monte de Piedad y Caja General de Ahorros de Badajoz; MRW; Musgrave España; Mutua Universal-Mugenat; National Atesa; Novartis; Oracle Iberica; Panrico; Pañalon; Pelayo Mutua de Seguros; Perez Rumbao; Pielcolor; Pierre Fabre Ibérica; Puig; Random House Mondadori; RBA Holding Editorial; Record Rent A Car; Red Electrica de España; Repsol; Reyal Urbis; SA Damm; Santalucia; Satocan; Scalevante; Seguros Groupama; Semat; Sniace; Sociedad Estatal Correos y Telégrafos; Sogecable; Sol Meliá; Stora Enso Barcelona; Suministros Electricos Industriales Anton Teixido; Surinver Hortofruticola; Suzuki Motor Iberica; Tableros de Fibras; Técnicas, Comercio y Servicios de Automoción; Tesa Tape; Toys'r'us; Transportes Ochoa; Uci; Unión Farmacéutica Guipuzcoana; Unipapel; Univar Iberia; UPM-Kymmene; Urende; USP Hospitales; Vegalsa Eroski; Velcro Europe; Vitalicio Seguros; Volkswagen Navarra; Xefar; Xeros España. - http://www.elpais.com/articulo/primer/plano/asignatura/cambio/climatico/elpepueconeg/20100124elp neglse_5/Tes

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222 REPORTAJE: Primer plano Suspenso mayúsculo al Gobierno Siete de cada 10 empresarios rechazan su política económica y casi ninguno la apoya Sólo un 0,9% de los encuestados cree que el Ejecutivo actua en economía muy bien Gasto público, mercado laboral y fiscalidad concitan las mayores críticas Cae también el apoyo a la gestión de las pensiones y de las cotizaciones sociales Siete de cada diez empresarios cree que la ley de Economía Sostenible no es útil La mayoría acepta que la retribución a directivos se publique en firmas cotizadas Trabajo y Educación son hoy las reformas clave para el 90% de los empresarios CARLOS GÓMEZ 24/01/2010 Todo es susceptible de empeorar, aunque parezca imposible. También la valoración que dan los empresarios al Gobierno que preside José Luis Rodríguez Zapatero. El presidente de la CEOE, Gerardo Díaz Ferrán llegó a asegurar que el problema de la economía no es "la grave crisis, sino los años de Zapatero" en el Gobierno. Hizo estas declaraciones en un acto que presidía, en mayo pasado y ante mil empresarios, creyendo que su micrófono estaba cerrado. Los panelistas de esta edición del barómetro no llegan al nivel de crítica mostrado por el líder de la patronal pero sí le han dado al Gobierno un varapalo histórico. Nunca la reprobación de la política económica del Ejecutivo había llegado a tales niveles como en el segundo semestre del pasado año. Siete de cada 10 empresarios califican su política de mala o muy mala, cuando seis meses antes sólo eran 6 de cada 10 los que la reprobaban. Hay que destacar además que, en esta edición del Barómetro, sólo un 0,9% del total de encuestados considera que la actuación gubernamental es muy buena y el 8,2% buena. El resto se muestra indiferente. La valoración de la actuación del Gobierno en aspectos concretos es, en general, muy similar a la registrada en el Barómetro del primer semestre. Destaca, sin embargo, un claro empeoramiento en la percepción empresarial sobre la política de gasto público: la apoya un 14,5% de los panelistas, diez puntos menos que en el verano, y la censura un 76%, trece puntos más que al término del primer semestre. Quien sale mejor parado en esta edición y en la anterior del Barómetro es el ministro de Fomento, José Blanco, aunque sólo un tercio de los panelistas respalda la política de infraestructuras y cuatro de cada 10 empresarios encuestados la reprueban.

223 Entre los aspectos peor valorados destaca también la liberalización del mercado laboral y la fiscalidad. Sobre las medidas adoptadas por el Gobierno en torno a la liberalización del mercado laboral, la discrepancia empresarial alcanza a ocho de cada 10 encuestados y a siete de cada 10 en las medidas fiscales.

En otros temas, como las pensiones, las cotizaciones sociales, el fomento de la competencia y el fomento de las exportaciones, también ha mermado significativamente el respaldo empresarial y ha crecido el desacuerdo con la gestión del Gobierno en los últimos seis meses. Las empresas se han mostrado muy criticas, además, sobre el anteproyecto de ley de Economía Sostenible, que ha servido al Gobierno como soporte a un amplio conjunto de cambios normativos destinados a proporcionar un mejor entorno regulatorio a los agentes económicos con el objetivo de dotarles de una posición más competitiva en el momento en que comience la recuperación económica. Siete de cada 10 empresas encuestadas, sin embargo, han sentenciado que no va a ayudar a mejorar el modelo productivo español, y no llegan a dos (18,8% del total de opiniones recogidas) las que sí lo creen. Las respuestas acerca de si se considera que se está primando en exceso a las energías renovables dentro del anteproyecto citado están muy igualadas: un 41% afirma que sí se están primando en exceso, y un 40,5% considera lo contrario. Continuando con el contenido del anteproyecto de ley de Economía Sostenible, el equipo del barómetro planteó a las empresas del panel si estaban de acuerdo con la medida acerca de la publicación de información relativa a las prácticas y políticas de remuneración del equipo

224 directivo de las empresas cotizadas. Seis de cada 10 empresas dicen que está de acuerdo, y una de cada cuatro opina lo contrario. En cuanto al grado de importancia que las empresas dan a la reforma estructural de diferentes ámbitos prevista por el Gobierno, un 90% señala como muy importante la reforma del mercado de trabajo, que empata en primera posición con la reforma de la educación. En segundo lugar se encuentra la reforma de la energía que concita el 61% de las respuestas, seguido de las pensiones con un 51%. Entre los ámbitos de reforma a los que las empresas del barómetro dan poca importancia se encuentran la sanidad y las pensiones, con un 4,6% del total de respuestas para ambas. - http://www.elpais.com/articulo/primer/plano/Suspenso/mayusculo/Gobierno/elpepueconeg/20 100124elpneglse_3/Tes

225 REPORTAJE: Laboratorio de ideas - BREAKINGVIEWS Reuters Obama marca el camino EE UU olvida el consenso internacional y pone en marcha su reforma financiera PETER THAL LARSEN 24/01/2010

La coordinación internacional se ha ido a hacer gárgaras. El último plan del presidente Obama para la banca no sólo ha sorprendido a Wall Street, sino que también ha hecho trizas el consenso posterior a la crisis -repetido hasta la saciedad el año pasado en las reuniones del G- 20- de que la reforma financiera debería pensarse y aplicarse a escala mundial. Otros países tendrán ahora libertad para actuar por su cuenta. El proyecto estadounidense, que el presidente ha denominado "regla de Volcker" en honor al ex presidente de la Reserva Federal, vuelve a poner en el orden del día mundial una importante reforma estructural del sector financiero. Hasta esta semana, la mayoría de los Gobiernos han procurado explícitamente no fragmentar los grandes bancos. Esa medida no ha sido producto de un acuerdo internacional. Y cualquier país que actúe por su cuenta se arriesgaría a perjudicar a su sector bancario y beneficiar a los rivales extranjeros. La medida de Obama cambia el equilibrio. Puede que algunos países vean en ella una oportunidad. Naciones como Francia y Alemania, que tienen sectores bancarios pequeños en relación con el tamaño de su economía y que no se han visto obligados a dedicar grandes cantidades a ayudas, podrían desear que sus bancos se beneficien de la retirada y la confusión de los rivales estadounidenses. Y sin duda, centros financieros asiáticos como Hong Kong, Shanghai y Singapur también intentarán sacar tajada de los problemas de Wall Street. Sin embargo, otros intentarán reabrir el debate sobre la fragmentación de los bancos. En el Reino Unido, el gobernador del Banco de Inglaterra, Mervyn King, y el Partido Conservador, en la oposición, abogan por separar las secciones comerciales y de inversión de los bancos. La City londinense ha salido beneficiada por lo general siempre que la reglamentación se ha endurecido en Estados Unidos. Pero, dado que hay elecciones previstas para junio, el Gobierno laborista hará cuanto esté en su mano para evitar que lo retraten como defensor de las grandes finanzas. Y también es posible que los políticos suizos se atrevan a ser más radicales con los dos grandes bancos del país. Hay muchas y buenas razones para oponerse a la regla de Volcker. Es ambigua, y está claro que se redactó con prisas. Será difícil ponerla en práctica. Y no ataca la crisis de raíz. Pero el aliciente político de enfrentarse a los bancos podría resultar irresistible. La medida de Obama es una invitación abierta a que otros sigan su ejemplo. - http://www.elpais.com/articulo/primer/plano/Obama/marca/camino/elpepueconeg/20100124el pneglse_8/Tes

226 REPORTAJE: Empresas & sectores Información privilegiada Aprietos para modernizar las cajas La ley gallega, nuevo ejemplo de los atropellos por la politización del sector MIGUEL Á. NOCEDA 24/01/2010 El presidente de la Confederación Española de Cajas de Ahorros (CECA), Juan Ramón Quintás, va a iniciar de forma inmediata el periodo de consultas para proceder a la sucesión en el cargo. El relevo se producirá en abril, y Quintás quiere acelerar el proceso durante febrero y marzo para llegar a la asamblea general con un nombre lo más consensuado posible. Sin embargo, y muy a su pesar, el profesor gallego dejará el cargo sin haber resuelto el reto de modificar la Ley Orgánica de Regulación de Cajas de Ahorros (LORCA), que data de 1985. O, lo que es lo mismo, de despolitizar el sector, obsesión que comparte con el Banco de España. Las reticencias de las comunidades autónomas a perder el poder han empantanado, hasta la fecha, los movimientos de integración de las cajas como a éstas les hubiera gustado. De ahí que sólo hayan avanzado algunas operaciones intrarregionales, como en Cataluña. Pero se resiste a fusiones interregionales. No hay más que ver, en ese sentido, los cambios programados en la ley por el Gobierno de Galicia para fusionar las dos cajas de la región (Caixa Galicia y Caixa Nova) y evitar que otra entidad de fuera (por ejemplo, Caja Madrid) se meta por medio. Las modificaciones han recibido críticas en el sector y de la autoridad, que lo consideran un atropello. Ahora que se pretende restar poder político, precisamente va en sentido contrario. Llama la atención que haya sido un Gobierno del PP el que haya dado ese paso cuando el grupo presidido por Mariano Rajoy se ha hartado de criticar la politización de las cajas. Pero está claro que a Alberto Núñez Feijóo no le importa ponerlo todo patas arriba. Según algunas fuentes, parte de las medidas de la ley gallega son inconstitucionales. En todo caso, lo que sí ha levantado es una polvareda que para muchos deja pequeñas las pretensiones de Esperanza Aguirre en la Comunidad de Madrid para controlar la caja de la región. Entre otras cosas criticadas, la ley gallega impone un registro de altos cargos; ninguna institución puede tener más de un representante, con excepción de la Xunta; la Xunta nombra la cuarta parte de los representantes de entidades de interés general; control de la obra social, ya que un alto porcentaje se decide por acuerdo entre la Xunta y las cajas, y lo más llamativo es que se puede aprobar sin mayoría cualificada la fusión. El gobernador del Banco de España, Miguel Ángel Fernández Ordóñez, tiene previsto visitar Galicia esta semana para comprobar in situ la situación. La sensatez indica que lo lógico es que sea el regulador el que tenga la autoridad total sobre las cajas. Tanto sus responsables como los de Economía parecen de acuerdo, pero nadie se ha atrevido a poner el cascabel al gato. En definitiva, representa un cambio de modelo que terminaría con el tradicional sistema de cajas. Cada vez resulta más raro en el panorama europeo, donde las exigencias obligan a contar con entidades más grandes y fuertes. Además de las fusiones catalanas, hasta la fecha sólo se ha llegado a la constitución de los Sistemas de Protección Institucional (SIP), una especie de holding del que cuelgan las cajas que los integran, que se inventó ante las dificultades para realizar fusiones entre cajas de distintas regiones. Esta figura tiene, además de que las cajas son los accionistas, la virtud de

227 que no desaparecen y que permite que la obra social se mantenga en cada una de ellas. Además, a la larga, puede permitir la entrada de participación privada. A Quintás le hubiera gustado irse con este tema más avanzado. Ahora va a centrarse en sondear los pareceres de los miembros del consejo de la CECA y otros presidentes de cajas y del Banco de España para proponer al sucesor. Los estatutos estipulan que el presidente debe ocupar la presidencia o la dirección general de una de las cajas que la integran, en la actualidad, 45. En el caso de Quintás, fue una excepción, ya que llegó al cargo desde la dirección general de la CECA y no de ninguna caja. Pero al pie de la letra no se vulneró la norma, ya que la CECA tiene estatuto de caja de ahorros. El relevo supondrá volver al modelo tradicional. Es decir, el sustituto será, casi con seguridad, el presidente de una caja. Aunque en teoría podría serlo, se da por descartado que sea el director general de la CECA (José Antonio Olavarrieta). Los nombres que han salido a la luz son los de Carlos Egea, presidente de Caja Murcia; Amado Franco, de Ibercaja, y Braulio Medel, de Unicaja, que ya presidió la CECA en los noventa. Los tres han conducido sus entidades con seriedad y los tres tienen predicamento en el sector. Rato toma el mando tras un periodo de intrigas

El jueves se producirá el relevo en Caja Madrid: Rodrigo Rato sustituye a Miguel Blesa. La llegada del ex vicepresidente del Gobierno supone el fin de un periodo de intrigas que obligó a mediar a Mariano Rajoy ante el intento de Esperanza Aguirre de colocar a Ignacio González. Éste se tendrá que conformar con estar en la asamblea como Ana Botella y Francisco Granados. Rato contará con viejos colaboradores como Norniella, José Folgado, Elena Pisonero, Isabel Mariño, Elvira Rodríguez o Pedro Antonio Martín. En el reparto han entrado conocidos empresarios como Enrique Cerezo, Arturo Fernández o Santos Campano. http://www.elpais.com/articulo/empresas/sectores/Aprietos/modernizar/cajas/elpepueco neg/20100124elpnegemp_2/Tes

228 REPORTAJE: Economía global Malos presagios para Portugal La creciente deuda pública frena las perspectivas de crecimiento económico El país recibe varapalos del FMI y de las agencias de calificación de riesgo El Gobierno de Sócrates busca un pacto para aprobar los presupuestos FRANCESC RELEA 24/01/2010

A Portugal le crecen los enanos. En una semana, el país vecino ha recibido dos solemnes varapalos de Moody's y del Fondo Monetario Internacional (FMI) por su mal desempeño económico. La presión de los mercados y de las agencias calificadoras, siempre tan sospechosas, se intensifica a medida que se acerca el debate de los presupuestos del Estado de 2010, previsto para la semana entrante. El pasado 13 de enero, Moody's advirtió que la economía de Portugal corre un "alto riesgo" de "muerte lenta" en los próximos años. Y equiparaba los problemas lusos a los de Grecia en estos términos: "Son dos ejemplos de países con baja competitividad dentro de la unión monetaria, que se traducen en déficit externos muy elevados". El escenario que dibuja sobre el futuro de Portugal la agencia estadounidense de calificación no puede ser más sombrío. El pago de intereses a la banca internacional absorberá un porcentaje de la creación de riqueza cada vez mayor, y el país será más y más dependiente. Paralelamente, los inversores extranjeros exigirán intereses más altos para comprar deuda portuguesa y, en un contexto de crecimiento casi nulo, el Gobierno se verá obligado a subir impuestos para equilibrar el déficit presupuestario. La situación no hará sino empeorar, en un ciclo vicioso que bloqueará el crecimiento. No es el primer mensaje envenenado que Moody's y otras agencias de análisis de riesgo lanzan a Portugal. En septiembre pasado, Fitch revisó a la baja la perspectiva de la deuda portuguesa, de "estable" a "negativa". En diciembre, Standard & Poor's dio idéntica señal ante los problemas de crecimiento y de alto endeudamiento. Este tipo de pronósticos, como las encuestas, vale lo que vale, y así ha sido recibido en algunos círculos económicos y empresariales portugueses. Los más beligerantes hablan de presiones inaceptables para crear alarma social. Más allá de la respetabilidad que merezcan las premoniciones de las agencias de riesgo, Portugal vive una realidad económica incuestionable: el déficit presupuestario alcanza el 8% del producto interior bruto (PIB), y la deuda pública es la cuarta más elevada de la zona euro. Las razones hay que buscarlas en la crisis y en los fallos de cálculo del Gobierno del socialista José Sócrates en algunas políticas de consolidación presupuestaria durante 2009, año en el que se sucedieron tres elecciones.

229 El FMI ha añadido más leña el fuego en el informe divulgado el pasado 20 de enero, que insiste en señalar al déficit, la deuda pública y la falta de competitividad como las principales causas de la vulnerabilidad de la economía portuguesa, con el efecto consiguiente en la destrucción de empleo (los puestos de trabajo perdidos alcanzarán el medio millón en 2013) y un crecimiento al ralentí, que no llegará al 1% en los cuatro años de la presente legislatura. A las causas internas de Portugal, el Fondo añade los estrechos lazos económicos y financieros con España, que ha dado pie a que algunos medios lusos ironicen con la recurrente "relación peligrosa". Describe el FMI a España como el socio comercial clave de Portugal, al que vende entre el 25% y el 30% de las exportaciones, del que recibe el 15% de los ingresos turísticos y con vínculos casi de sangre entre los bancos de ambos países. En este escenario es inevitable concluir que si a España le van mal las cosas, a Portugal no le pueden ir mejor. El debate parlamentario sobre los presupuestos del Estado de 2010 se prevé de alto voltaje ante la distancia que separa a las distintas fuerzas políticas. Consciente de que es imposible un acuerdo con los dos partidos a su izquierda, Bloco de Esquerda y comunistas, el Partido Socialista (en el Gobierno) busca los votos en los partidos conservadores. Las negociaciones con el derechista Centro Democrático Social-Partido Popular (CDS-PP) han sido intensas los últimos días. Al concluir la semana, el acuerdo parece cercano. Falta sólo encontrar la manera de presentar a la opinión pública que las cuentas del Estado estarán en orden tras el pacto. Lo que no es un detalle menor. Cada parte ha cedido hasta acercar posiciones en asuntos como la reducción del pago especial a cuenta (PEC) del Impuesto sobre el Rendimiento de Personas Colectivas (IRC), aplicado a las empresas, aumento de las asignaciones al mundo rural e incremento de los efectivos policiales. El primer ministro, José Sócrates, tenía previsto recibir el sábado a Manuela Ferreira Leite, presidenta del Partido Social Demócrata (PSD), principal fuerza de la oposición, para tratar de lograr el apoyo o la abstención de este partido cuando se voten los presupuestos en la Asamblea de la República. A la vista de que el acuerdo del Gobierno con los partidos conservadores está más que maduro, la oposición de izquierda calienta motores para descalificarlo y el viernes pasado trató de convertir la sesión plenaria del Parlamento en un primer debate sobre los presupuestos, aunque a discusión había otro tema: las propuestas de ampliación del seguro de desempleo presentadas por el Bloco de Esquerda (BE) y el Partido Comunista, que fueron rechazadas en una sesión salpicada de gritos e insultos. Los socialistas alegaron que el Estado no tiene la capacidad financiera para sostener la propuesta del BE, estimada en 340 millones de euros. El Consejo de Ministros había aprobado la semana pasada la ampliación para 2010 de la medida excepcional adoptada en 2009 de ampliar por un periodo de seis meses el subsidio de desempleo. La semana que empieza mañana será decisiva no sólo por la importancia en sí del debate de los presupuestos, eje de la política económica en tiempos de crisis. Será ocasión de comprobar, también, la fortaleza del Gobierno minoritario surgido de las elecciones de septiembre pasado a la hora de lograr apoyos para sacar adelante sus iniciativas legislativas. - http://www.elpais.com/articulo/economia/global/Malos/presagios/Portugal/elpepueconeg/201 00124elpnegeco_1/Tes

230 ENTREVISTA: Economía global PETER WESTAWAY Economista de Nomura "Los mercados castigan en exceso a Grecia" ALICIA GONZÁLEZ 24/01/2010 Hasta hace apenas tres meses, Peter Westaway (Wimbledon, 1958) trabajaba en el Banco de Inglaterra (BoE, por sus siglas en inglés). Y la marca que imprime trabajar en un banco central todavía se deja sentir durante la conversación ["es difícil para los bancos centrales manejar ahora la política monetaria", asegura benévolo]. Como economista jefe para Europa de Nomura, Westaway está de gira por todo el mundo explicando sus previsiones económicas a los clientes, en una clara muestra de la nueva etapa que vive el banco. Pregunta. ¿Qué nos deparará la economía mundial en los próximos meses? Respuesta. Hace 12 meses el mundo parecía dirigirse al abismo. Sin duda, la agresiva política de los bancos centrales y de los gobiernos ha conseguido evitar lo peor, pero aun así hemos sufrido la peor recesión desde los años treinta. Probablemente, hacia el verano eso ya había quedado claro. Y desde entonces nuestras previsiones han remontado, especialmente para el mundo emergente, y entre ellos Asia y, claramente, China. Porque aunque no se vieron afectados por la crisis del sector financiero, propiamente dicha, todo el mundo notó el colapso del comercio y del consumo. Pero ahora su recuperación está siendo bastante fuerte. De hecho nuestras previsiones globales se titulan "el cuento de las dos recuperaciones" porque no está siendo igual para el mundo emergente que para el desarrollado, donde el consumo, y por tanto el crecimiento, va a ser muy débil en los dos próximos años. P. ¿Cuál debe ser la respuesta de las autoridades, entonces? R. El problema ahora, realmente, es que no sabemos cuál es el crecimiento potencial. En el pasado, en las recesiones asociadas a crisis bancarias hay evidencias de que buena parte del crecimiento de la producción se destruye de forma permanente. Eso ha pasado también en esta crisis, aunque todavía no sabemos hasta qué punto. Y saber dónde se sitúa ahora el crecimiento potencial es muy importante a la hora de fijar la estrategia de salida por parte de los bancos centrales. Pero es muy difícil. P. ¿Podemos ver una segunda oleada de quiebras bancarias? R. Bueno, cuando el BCE o la Reserva Federal empiecen a retirar el excepcional nivel de liquidez actual, los Estados, con toda probabilidad, van a tener que aportar más ayudas a los bancos. No estamos hablando de los bancos grandes, como el Santander, pero sí de los bancos de los Estados federados alemanes o algunos bancos o cajas en España, por ejemplo. Y en esas circunstancias no es fácil que el crédito se recupere. Pero ése es sólo uno de los riesgos. P. ¿Y los otros? R. No hay duda de que con la recuperación de países como China y otros asiáticos los precios de las materias primas pueden sufrir un fuerte repunte, lo que reducirá más la renta disponible de los consumidores de los países desarrollados. Con esto no quiero decir que veamos un crash del petróleo, algo que tampoco interesa a los países productores, y desde luego no ahora, aunque quizá sí en dos o tres años. El tercer riesgo está relacionado con la política fiscal, que ha jugado un papel muy importante en proporcionar estímulos a la economía pero que ahora obliga a las autoridades a decidir entre mantener esas ayudas o intentar poner en orden las cuentas públicas. Y ahí el riesgo es si el ajuste es mayor y más rápido de lo que debiera. En el Reino Unido, por ejemplo, parece que hay una carrera electoral por ver quién es más duro con la política fiscal. Luego están países como Grecia, en un tremendo lío fiscal.

231 P. ¿Es tan fea la situación griega como la pintan los mercados? R. Sinceramente, creo que los diferenciales de crédito están reflejando riesgos en exceso para Grecia en comparación con otros países de la zona euro como Irlanda, España, Portugal. La posición fiscal de estos países no está tan deteriorada como la de Grecia, pero creo que los mercados están malinterpretando la situación. Porque si hay economías cuyos ratings no son apropiados y no reflejan la situación real, ésas son, claramente, las del Reino Unido y Estados Unidos [las dos con máxima calificación, la triple A]. P. ¿Qué calendario prevé para las subidas de tipos? R. Lo que ha dicho el BCE de momento es que en los próximos meses, calculamos que hasta junio, irá retirando la liquidez y eso hará que la tasa interbancaria se sitúe poco a poco a nivel de los tipos oficiales, el 1%. Llegados a ese punto, probablemente hacia octubre, el banco puede empezar a subir los tipos de interés. En noviembre le seguiría el Banco de Inglaterra y la Reserva Federal esperará hasta el primer trimestre de 2011. P. ¿Puede verse afectado ese calendario por las crecientes diferencias de recuperación entre los países de la eurozona? R. Esos son, sin duda, los inconvenientes de una unión monetaria. Se gobierna para la mayoría, aunque se parezca sospechosamente a la situación de Alemania. De hecho, en el año 2002 en el BoE hicimos muchos informes sobre cómo se podría superar una crisis dentro de una unión monetaria. Muchos de aquellos problemas teóricos son los que están sufriendo ahora en primera persona Irlanda o Grecia. Y hay poco que se pueda hacer salvo recortes de gastos tremendos, de salarios y de precios, con el fin de recuperar la competitividad e iniciar la recuperación. Aun así, creo que la unión monetaria ha funcionado más que bien en estos diez años. No hay una respuesta fácil en este momento para el BCE. Quizá ha llegado la hora de que gobiernos y autoridades hagan lo que hay que hacer, aunque no sea ni bonito ni popular. P. Ese "lo que hay que hacer", ¿qué significa para España? R. Creo que España hace lo correcto al empezar a reducir su elevado déficit, dada la carga derivada de un paro tan elevado. Pero mi preocupación es si lo hace en el momento apropiado y si no sería mejor subir el IVA más adelante. De todas formas, no creemos que España vaya a cumplir sus propias previsiones de ajuste, somos escépticos ante su capacidad de reducir gastos. - http://www.elpais.com/articulo/economia/global/mercados/castigan/exceso/Grecia/elpepueco neg/20100124elpnegeco_2/Tes

232 ANÁLISIS: Economía global - coyuntura nacional La deuda familiar y empresarial empieza a reducirse Los indicadores apuntan que el último trimestre de 2009 no fue todo lo positivo que cabía esperar El que quiera aumentar ventas tiene que mirar al mercado exterior, pues el doméstico sigue de ajuste ÁNGEL LABORDA 24/01/2010

Mientras la economía china avanza a ritmos superiores al 10%, la española intenta estabilizarse y llegar al fondo de la recesión. Los indicadores conocidos esta semana, como las entradas de pedidos industriales, las cifras de negocios de la industria, los servicios de noviembre y las pernoctaciones en hoteles de diciembre, vienen a sumarse a otros muchos que indican que el último trimestre de 2009 no está siendo todo lo positivo que cabía esperar. En

233 el tercero se produjo una mejora importante, frenándose casi en seco la tendencia de fuerte deterioro, lo que llevó a algunos analistas a pronosticar que en el cuarto podría registrarse una tasa trimestral del PIB positiva. Pero no parece que haya sido así. En todo caso, esta tasa se habrá situado cercana a cero, lo que permite concluir que la fase de recesión está tocando fondo por lo que respecta al PIB. No se puede decir lo mismo del mercado laboral. Esta semana conoceremos la EPA del cuarto trimestre y veremos que el empleo sigue disminuyendo, y el paro, aumentando. Dicho periodo no es especialmente favorable desde el punto de vista estacional, por lo que cabe esperar cifras bastante negativas en términos originales, pero mucho menos en términos desestacionalizados. Nuestras previsiones apuntan a una disminución trimestral de unos 260.000 ocupados y un alza de 160.000 parados. La tasa de paro pasaría del 17,9% en el tercer trimestre al 18,7% en el cuarto. Todo ello apunta que la recuperación que esperamos en este año está plagada de riesgos e incertidumbres. Nos lo recuerdan constantemente los analistas de los organismos internacionales y de los bancos centrales, aunque hay que recordar que el grado de acierto de las predicciones desde que comenzó la crisis deja bastante que desear. Lo importante no es tanto las cifras concretas para los distintos agregados macroeconómicos, sino que unánimemente nos recuerdan que la situación, especialmente para la economía española, es muy complicada y que hay riesgos serios de que en los próximos tres o cuatro años nuestra economía crezca significativamente por debajo de su tasa tendencial de largo plazo de en torno al 3%, con escasa creación de empleo, lo que complicaría la reducción del déficit público a niveles sostenibles.

Además, el Banco de España publicó la semana última las cuentas trimestrales financieras del conjunto de la economía y de los sectores institucionales, que vienen a completar las cuentas no financieras que publicó el INE a comienzos de mes y que no habíamos comentado. Lo esencial, recogido en los gráficos adjuntos, es que el sector privado sigue ajustando sus posiciones económico-financieras a un ritmo endiablado en cuanto a flujos de renta, consumo, ahorro y déficit, lo que se empieza a notar en la reducción del endeudamiento. Las familias han visto cómo su renta disponible casi se ha estancado, y ello gracias a las enormes transferencias netas recibidas desde el sector público y a la fuerte reducción de sus cargas financieras, ya que sus rentas primarias principales, los salarios, han descendido debido a la destrucción de empleo. Pero, aun en este contexto, no han tenido otra opción que

234 aumentar su tasa de ahorro y reducir al mismo tiempo su inversión en capital fijo (vivienda fundamentalmente), lo que les ha llevado a una posición excedentaria con la que han podido comenzar a reducir moderadamente su endeudamiento bruto. Éste, tras alcanzar un máximo en 2007 de casi un 130% de su renta disponible bruta (RDB), se redujo en 2008 al 127,6% y se estima que quede en el 124% en 2009. Por lo que respecta a las empresas, el ajuste es similar. Su déficit, superior al 11% del PIB en 2007, se ha reducido al 3,6% en los últimos cuatro trimestres, y su endeudamiento bruto, del 136,2% del PIB en 2008, se reducirá al 129% en 2009. Es muy difícil determinar cuáles pueden ser los niveles de deuda óptimos, pero no cabe duda que los actuales aún deberán reducirse sustancialmente. Otro argumento para pensar que durante unos años las familias y las empresas van a mantener una política de austeridad en sus gastos. Dicho de otra manera, el que quiera aumentar significativamente sus ventas y cifra de negocios tiene que ir mirando a los mercados exteriores, pues el doméstico no va a dar para mucho. http://www.elpais.com/articulo/economia/global/deuda/familiar/empresarial/empieza/reducirs e/elpepueconeg/20100124elpnegeco_6/Tes

235 ANÁLISIS: Economía global Crisis y negociación colectiva Abogar por un ajuste en los salarios es una idea contraria a la necesidad de estabilizar la economía La actual crisis de empleo es herencia de un modelo de crecimiento intensivo en trabajo hoy moribundo ANTONIO FERRER SAIS 24/01/2010 La crisis financiera ha puesto fin al modelo de crecimiento de la demanda estimulada mediante el endeudamiento del sector privado. Ese modelo, dominante desde el triunfo de las políticas neoliberales en los años ochenta, se caracteriza básicamente por la caída de la parte salarial en el PIB. La sistemática deformación de la distribución de la renta a favor de los beneficios ha ido privando a la inmensa mayoría de los trabajadores de su justa participación en el progreso económico. Las rentas económicas generadas por ese proceso han beneficiado a una reducida élite de accionistas, directivos y ejecutivos empresariales. Para compensar las pérdidas de la dinámica salarial, la demanda y la actividad económica se han estado sosteniendo en el creciente endeudamiento de los hogares y en la formación de burbujas especulativas. Esto explicaría por qué la recesión actual no se reduce a la crisis de los mercados financieros: es también la crisis de un modelo de crecimiento sustentado en las desigualdades. La ruptura del mecanismo que sostenía el crecimiento ha desencadenado una dinámica de ahorro y caída de la inversión de los agentes económicos privados, agravada por las restricciones de acceso al crédito que ha hundido la demanda interior: ha desaparecido la parte de la demanda que antes de la crisis se financiaba aumentando el grado de endeudamiento privado. La economía española previsiblemente seguirá sumida en la recesión y la tasa de paro no tocará techo hasta 2011. La contracción de la actividad económica será más prolongada que en la mayoría de los países europeos donde, contrariamente a lo sucedido aquí, el consumo de los hogares ha caído a menor ritmo que el PIB probablemente porque el brutal ajuste del empleo, la temporalidad, la debilidad de los salarios y las presiones en la negociación colectiva lastran la recuperación de la demanda privada en España, a pesar del volumen de recursos activados por las políticas públicas y de la coyuntura favorable de los precios del petróleo. La repercusión de la recesión en el empleo ha sido extremadamente virulenta. En dos años se ha duplicado la tasa de paro, anulando los logros del período de bonanza económica. No tiene parangón en Europa, donde las principales economías han logrado atenuar las pérdidas de empleo y contener el paro activando políticas de reparto del volumen de trabajo (reducción de jornadas, paro parcial, etc.). Entre el cuarto trimestre de 2008 y el tercero de 2009 cada punto de contracción del PIB indujo una caída del empleo de 1,8 puntos porcentuales en España, mientras la destrucción promedio en la UE fue de 0,46 puntos y nula en Alemania. Esta evidencia empírica debería enterrar las obsoletas creencias de la rigidez de las instituciones del mercado de trabajo en España. Como admite el FMI, la flexibilidad del mercado de trabajo es un concepto con múltiples facetas. La aguda crisis de empleo de esta recesión es la herencia de un modelo de crecimiento intensivo en trabajo, hoy moribundo, y del comportamiento de los empresarios. Pero no es el único coste pagado por los asalariados españoles por el boom especulativo de la pasada década. También han pagado con la pérdida de salarios inducida por la transferencia

236 sistemática de empleos hacia sectores de poco valor añadido y baja productividad y por la política de moderación salarial practicada en las negociaciones colectivas. El resultado de esa dinámica ha sido la pérdida de 4,2 puntos de la parte salarial ajustada en el PIB, al coste de los factores, entre 1998 y 2008 (AMECO, base de datos de la CE). Mientras, la masa salarial se ha contraído progresivamente durante los tres primeros trimestres de 2009. La caída promedio es de 2,7 puntos, según la Contabilidad Nacional Trimestral y la caída prevista por la CE para el conjunto de la UE es de 0,5 puntos. En cambio, el excedente bruto empresarial en nuestro país se ha reducido sólo un 0,8 en el mismo periodo. En este contexto, abogar por un ajuste de salarios nominales y reales es una idea errónea y contraria a la necesidad de estabilizar la economía y poner freno a la destrucción de empleo. Este mecanismo podría tener efecto si el origen del paro se debiera a un desbordamiento de los costes salariales (o cualquier otro choque de oferta negativo). Pero si la destrucción de empleo tiene su origen en la brutal contracción de la demanda, como ahora, la caída de los salarios impide que los asalariados (la mayoría de la población) se beneficien del frenazo de la inflación y podría desencadenar una espiral deflacionista o, en el mejor de los casos, un ciclo de estancamiento en el que sería ilusorio esperar que se reduzca el paro. Aunque durante 2009 los salarios reales hayan crecido debido al proceso desinflacionista, los nominales han seguido una tendencia bajista: los incrementos salariales medios han ido ralentizándose a lo largo de año y, sobre todo, los de los nuevos convenios son inferiores a los de los revisados. Si esta tendencia se prolongara en la próxima ronda de negociaciones la consecuencia será una depresión suplementaria de la demanda, nefasta para la recuperación del empleo. El diálogo social es el marco adecuado para que los salarios se conviertan en potentes estabilizadores de la economía, contribuyan a estimular la demanda y a mantener y recuperar el empleo. Además, obviamente, de impedir que todo el peso de la crisis recaiga en los trabajadores, que no son en absoluto responsables de ella. Los acuerdos para la negociación colectiva deberían tener como objetivo proteger y mejorar el nivel adquisitivo de los salarios para impulsar la demanda e invertir la caída del consumo privado. Evitar que los salarios se vean determinados por las fluctuaciones a corto plazo de la economía; y, al contrario, conseguir relacionarlos con las tendencias a medio plazo de la productividad y la inflación. Finalmente, habría que comprometerse a aumentar la cobertura de la negociación colectiva para corregir las presiones, en el ámbito de la empresa, destinadas a reducir salarios frente a la amenaza del paro. Es exactamente ese tipo de política salarial, la que seguirá destruyendo empleo añadiendo más debilidad a la demanda global, pues las reducciones de salarios en situaciones de crisis profunda de la demanda en lugar de resolver el problema del paro lo agravan. http://www.elpais.com/articulo/economia/global/Crisis/negociacion/colectiva/elpepueconeg/2 0100124elpnegeco_8/Tes

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Diálogo, pero en voz baja La reforma laboral que planea el Gobierno recogerá medidas tibias que garanticen la firma de patronal y sindicatos - El objetivo es revitalizar los acuerdos sociales El pacto sobre convenios tiene más opciones de incidir en la recuperación La clave reside en cómo mitigar la temporalidad sin herir a nadie Los apuros de Díaz Ferrán determinan en parte la posición de la CEOE UGT y CC OO sostienen que la crisis no deriva del marco laboral Existe unanimidad sobre el necesario impulso a la contratación juvenil Las bonificaciones se concentrarán en muy pocos colectivos LUCÍA ABELLÁN - Madrid - 24/01/2010 Antes siquiera de arrancar la negociación sobre la reforma laboral, los agentes sociales han ganado la partida. Sindicatos y patronal se saben importantes en un proceso por el que el presidente del Gobierno ha trastocado las fechas que comprometió en el Parlamento. Antes siquiera de arrancar la negociación sobre la reforma laboral, los agentes sociales han ganado la partida. Sindicatos y patronal se saben importantes en un proceso por el que el presidente del Gobierno ha trastocado las fechas que comprometió en el Parlamento. Con el beneplácito de José Luis Rodríguez Zapatero, el ministro de Trabajo ha accedido a demorar 15 días su propuesta laboral para no importunar a empresarios y sindicalistas en sus conversaciones bilaterales. De igual modo aceptará cerrar un acuerdo tibio, sin grandes cambios legislativos, que garantice la firma de todas las partes y legitime el diálogo social, en horas bajas desde hace seis meses. Aun con un acuerdo poco ambicioso, la foto con los agentes sociales cumple un doble objetivo: insufla confianza en la recuperación económica y sirve de aval al Gobierno, muy debilitado por la devastación de la crisis. También beneficia, al menos ante la opinión pública, a sindicatos y empresarios, que transmiten la imagen de estar remando para que el barco no se hunda. Más que las propuestas reales, el Gobierno ha enfatizado en todo este tiempo lo que no se debe esperar de la llamada -quizás con cierta grandilocuencia- reforma laboral. No habrá rebaja del coste del despido ni reducción generalizada de cuotas a la Seguridad Social. Éstas eran las principales demandas de la patronal CEOE, que tendrá que conformarse con objetivos más modestos. Los sindicatos no han formulado peticiones tan ambiciosas, en gran medida porque siempre han sostenido que el germen de la crisis no procedía del mercado laboral y, por tanto, no era necesario cambiar el marco legal. "Si este proceso no va acompañado de un cambio de modelo productivo, fracasará", vaticina Toni Ferrer, responsable de acción sindical de UGT. Con matices, el secretario general de CEOE, José María Lacasa, dice confiar en el diálogo aunque, en su opinión, "el mercado de trabajo necesita algo más de lo que está planteando el Gobierno". El negociador de Comisiones Obreras, Ramón Górriz, se muestra más confiado y niega que los planes del Ejecutivo persigan únicamente contentar a todos. "No se trata tanto de que no molesten a nadie como de reactivar la economía". No obstante, esta organización ha sido la más activa en pedir al Gobierno una prórroga para culminar el acuerdo de negociación colectiva. El pacto que ultiman patronal y sindicatos condicionará más la esencia del mercado laboral -salarios y empleo- que cualquier arreglo legal.

238 La clave de la minirreforma laboral reside en cómo mitigar la temporalidad sin herir a ninguna de las partes. El compromiso de "reducir la segmentación laboral" entre temporales e indefinidos figura en la estrategia de la economía sostenible que esbozó Zapatero en el Congreso a final de año, pero no hay pistas sobre cómo. "Tenemos muy claro que la clave es la flexiseguridad", afirma Lacasa. Esa fórmula consiste en combinar un marco de contratación y despido fácil con una protección social alta para los periodos de desempleo. Los sindicatos oponen que España carece de una red social tan tupida como para permitirse esa flexibilidad. El elemento que más unanimidad concita es la necesidad de dar un impulso a los jóvenes. La tasa de paro en este colectivo se acerca al 40% y el Gobierno cree que ha llegado la hora de atenderlos. Con la idea de concentrar en ellos casi todos los incentivos a la contratación, se hará una revisión general de las bonificaciones, que cuestan 3.000 millones de euros al año. "Y los jóvenes son los menos bonificados", apunta Toni Ferrer, de UGT. Entre los cuatro grandes colectivos destinatarios de estímulos, la contratación de jóvenes es la menos premiada, con 800 euros anuales durante cuatro ejercicios. "Estamos en condiciones de mantener bonificaciones sólo para jóvenes, mujeres maltratadas, discapacitados e inmigrantes", sostiene Ramón Górriz, de Comisiones Obreras. En la actualidad hay muchos más colectivos, entre ellos, las mujeres en general, los mayores de 45 años y los parados con familia a cargo. Trabajo insiste en que no se trata de ahorrar en las ayudas a las empresas, sino de orientarlas hacia donde más se necesitan. Uno de los puntos ineludibles, muy a pesar de los sindicatos, es el papel de las empresas de trabajo temporal. El Ejecutivo se ha comprometido a adaptar, antes de mayo, una directiva europea que obliga a quitar trabas a ese sector. En la actualidad tienen prohibido intermediar en puestos fijos -la competencia corresponde a los servicios públicos de empleo- y operar en la construcción y en el sector público. Previsiblemente, el Gobierno eliminará esa veda y les permitirá colaborar con los servicios de empleo, poco activos en la colocación de trabajadores. Los sindicatos son reacios y, en caso de aceptarlo, exigirán supervisión pública. También formará parte de la reforma la implantación del llamado modelo alemán. Consiste en incentivar a las empresas para que mantengan el empleo en momentos de crisis. El empresario reduce la jornada del trabajador y la parte correspondiente del salario, que abona el Estado. La empresa conserva así al empleado, éste su ocupación y las arcas públicas pagan una pequeña cantidad en lugar de la prestación por desempleo completa, una verdadera sangría para los Presupuestos del Estado. El modelo alemán ha perdido fuerza respecto a la formulación inicial, cuando se consideró el eje del salto laboral que requería España. Más que en la ley, el sistema tiene visos de prosperar en el acuerdo de negociación colectiva, que debe estar listo antes del 5 de febrero. Ese día el Gobierno dará por terminada la tregua que le han pedido los agentes sociales con la presentación de su propuesta de reforma laboral. Tampoco tiene sentido demorar más la negociación de una guía para los convenios de 2010. "No nos podemos poner a vender paraguas en el mes de julio", ejemplifica el secretario general de CEOE. Tanto empresarios como sindicatos creen muy probable el acuerdo salarial. "Se dan las condiciones para alcanzarlo", asegura el representante de CC OO. Más incierto es el tripartito. Fuentes de la patronal subrayan que vendrá condicionado, en buena medida, por el futuro de Gerardo Díaz Ferrán al frente de la CEOE y la resolución de sus problemas financieros. En la organización pesa la iniciativa de la fiscalía para investigar un posible fraude en Air Comet -la aerolínea dijo ayer haberse sometido "siempre al estricto cumplimiento de la legalidad"-, pues consideran que el Ejecutivo no es ajeno a ese movimiento. En el otro lado de la balanza, admiten un cierto apoyo gubernamental para que Díaz Ferrán halle financiación. Dos ideas contrapuestas cuyo peso se medirá en el diálogo social.

239 SALARIOS. La negociación bilateral

Contención a cambio de empleo La negociación más avanzada, y la que tiene más posibilidades de influir en el mercado laboral, es la de convenios. La patronal y los sindicatos -el Gobierno no participa en este terreno- ultiman un pacto de salarios y empleo que sirva de guía para los convenios colectivos de este año y, previsiblemente, hasta 2012. Por el éxito de este proceso ha aceptado el Ejecutivo guardar en el cajón su reforma laboral a la espera de que los agentes sociales lo culminen. Aunque las conversaciones van por buen camino, la parte más espinosa, la de política salarial, aún está por definir. Los sindicatos proponen una subida de entre el 1% y el 2%, con cláusulas de garantía por si la inflación se desvía por encima de esa horquilla. La patronal lo encuentra excesivo y aboga por un modelo inspirado en el que se ha aplicado este año a los funcionarios, según explica el secretario general de CEOE, José María Lacasa. Es decir, una subida del 0,3% "como parte baja de la banda". La inflación cerró 2009 en el 0,8%, aunque para este año se espera una cifra más cercana a la horquilla que sugieren los sindicatos. El pacto, que los agentes sociales no fueron capaces de firmar en 2009, debería estar listo la primera semana de febrero. Comisiones Obreras y UGT aceptarán una mejora salarial por debajo de sus expectativas a cambio de compromisos en el empleo. Es decir, que, si vienen mal dadas, las empresas recurran a reducciones de jornada o suspensiones temporales de empleo antes de despedir. "Las cláusulas de descuelgue [las que eximen a la empresa de aplicar las mejoras por problemas económicos] deben vincularse al mantenimiento del empleo", explica Toni Ferrer, de UGT. La CEOE exige un anejo al acuerdo que aborde asuntos nuevos como la flexibilidad de las empresas para organizarse en tiempos de crisis, la necesidad de reformar la negociación colectiva y el compromiso de incentivar el empleo juvenil y la jornada a tiempo parcial, poco ensayada en España.

DESPIDO. El término tabú

Sin espacio en la negociación El coste del despido se ha convertido en un término tabú para esta negociación. Ni quien defiende abaratarlo -la CEOE- ni quien aboga por mantenerlo -el Gobierno y los sindicatos- aluden a él en sus discursos. Optan por encerrarlo en otra nomenclatura, como contrato de crisis, en el primer caso, o recorte de derechos, en el segundo. Es casi la única idea que el Gobierno se ha negado a debatir antes de arrancar el proceso. Con el argumento de que instaurar un contrato con menor indenmización por despido no revitalizaría el mercado laboral -se necesitan incentivos para contratar, no para despedir-, el Ejecutivo resiste las acometidas de la CEOE y de numerosos expertos, que centran en esta medida su ideario de reforma laboral. Para ahuyentar los recelos, la patronal se esfuerza en recalcar que no existe recorte de derechos, pues el nuevo contrato no afectaría a quienes ya disponen de uno indefinido. Se trata de un argumento obvio, ya que los cambios legales no se aplican con carácter retroactivo y el recorte de derechos se produciría en los nuevos contratados respecto a los antiguos. Lo cierto es que ya existe un contrato indefinido con despido más barato que el ordinario (33 días por año trabajado frente a los 45 tradicionales) y no tiene el tirón que cabría esperar si los empresarios consideraran ésta la mejor receta laboral. De los contratos fijos firmados cada

240 mes, apenas un 13% corresponde a esta modalidad, según datos del Ministerio de Trabajo, pese a que se puede aplicar a casi todos los colectivos, salvo a los hombres de 30 a 45 años. Descartada la idea del contrato único con despido más barato, un argumento que ahora también abandera abiertamente el Partido Popular, sólo queda una penalización al contrato temporal para intentar reducirla. Esto satisfaría a los sindicatos, pero soliviantaría a la patronal, por lo que es difícil que el Gobierno opte por esta vía.

ABSENTISMO LABORAL. La novedad de este proceso

Más flexibilidad de horarios Nunca el diálogo social ha abordado el absentismo laboral, un problema del que la CEOE ha venido alertando, hasta ahora con poco éxito. El Gobierno no quiere dar la impresión de rehuir la materia, así que se inclina por incluirla en la reforma laboral, aunque sin tintes coercitivos. Se trata, según un portavoz del Ministerio de Trabajo, de intentar reducir las ausencias otorgando más flexibilidad en la organización laboral. Es decir, la posibilidad de adaptar los horarios de entrada y salida a las necesidades del trabajador, el fomento del trabajo desde casa, la evaluación por objetivos y no por jornada... una retahíla de medidas que defienden con ardor las empresas pioneras en conciliación pero que en España están poco extendidas. La discusión se antoja compleja. Es difícil que este enfoque buenista -parte de la idea de que el trabajador faltará menos si tiene posibilidades de organizarse- satisfaga a la patronal, impulsora de este asunto como parte de la negociación. Y los sindicatos recelan de tratar el absentismo, al menos de forma aislada. "Se puede hablar de absentismo, pero también de la participación de los trabajadores en las mutuas", opone Ramón Górriz, de Comisiones Obreras. Las mutuas gestionan, por encargo de la Seguridad Social, los recursos previstos para accidentes de trabajo y enfermedades profesionales. Los sindicatos cuestionan su modo de operar, en ocasiones poco transparente, pese a la gran cantidad de dinero que manejan. Vinculado a esta materia, la Seguridad Social ha puesto en marcha programas para reducir el gasto en bajas médicas cuando no estén justificadas. Aunque el objetivo último es atajar los abusos -la empresa paga, en general, los primeros 15 días de baja médica y la Seguridad Social, el resto-, el mayor control provoca, al mismo tiempo, una reducción del absentismo motivado por incapacidad temporal. http://www.elpais.com/articulo/economia/Dialogo/voz/baja/elpepueco/20100124elpepieco_1/ Tes

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Alemania promueve un pacto internacional sobre finanzas Merkel convocará en mayo a los países del G-20 para hablar de regulación AFP - Berlín - 24/01/2010 Alemania va a organizar una conferencia internacional sobre la regulación de los mercados financieros antes del próximo encuentro del G-20, que aglutina a los países más ricos y a los emergentes. La cita se celebrará en Berlín en mayo, antes de que el G-20 se reúna en Toronto el próximo junio, según informa el semanario alemán Der Spiegel. Al encuentro acudirán los ministros de Finanzas y los responsables de los bancos centrales de los países que componen el G-20, así como diferentes expertos del mundo financiero. En una entrevista que aparece hoy en el periódico Welt am Sonntag, el ministro alemán de Finanzas, el conservador Wolfgang Schäuble, destaca "la importancia de reflexionar sobre el esfuerzo internacional para obtener una mejor regulación". Schäuble celebra las propuestas del presidente estadounidense, Barack Obama, destinadas a regular mejor los mercados en general y la banca en particular. Europa, en su opinión, debería tomar la iniciativa en caso de que el acuerdo internacional fracase. "En definitiva, nosotros hemos contribuido de forma determinante a conformar la dinámica de la globalización". Como Estados Unidos, el Gobierno alemán quiere "que el sector financiero participe de forma determinante en los costes de la crisis actual y de otras venideras". Alemania promueve un pacto internacional sobre finanzas AFP - Berlín - 24/01/2010 http://www.elpais.com/articulo/economia/Alemania/promueve/pacto/internacional/finanzas/el pepueco/20100124elpepieco_3/Tes

242 Reforma financiera en EE UU Wall Street sufre su peor semana desde marzo por el plan de Obama Los cinco grandes de la banca de inversión de EE UU pierden 33.000 millones de valor en dos días - Las dudas sobre Bernanke también pesan La calle cree que se ha hecho mucho por los bancos y poco por la gente SANDRO POZZI - Nueva York - 23/01/2010 La Bolsa de Nueva York cerró ayer su peor semana desde marzo de 2009, cuando la crisis financiera causaba estragos. La principal razón ha sido la guerra declarada por el presidente de Estados Unidos, Barack Obama, a Wall Street, que tendrá un alto coste para la banca de inversión. La Bolsa de Nueva York cerró ayer su peor semana desde marzo de 2009, cuando la crisis financiera causaba estragos. La principal razón ha sido la guerra declarada por el presidente de Estados Unidos, Barack Obama, a Wall Street, que tendrá un alto coste para la banca de inversión. Pero en los mercados han pesado también algunos malos resultados y, ayer, las dudas sobre la reelección de Ben Bernanke como presidente de la Reserva Federal. En los últimos tres días, el Dow Jones ha caído un 5%, lastrado sobre todo por el sector financiero. Los cinco grandes de la banca de inversión han perdido unos 48.000 millones de dólares (33.000 millones de euros) de valor en Bolsa en sólo dos días, con caídas que han rondado el 10%. JPMorgan Chase vale ahora 17.000 millones de dólares menos que antes de que Obama anunciase su plan, y Bank of America (que entró de lleno en banca de inversión al rescatar Merrill Lynch empujada por las autoridades) se ha dejado 13.500 millones. Goldman Sachs, Morgan Stanley y Citigroup también se han visto severamente castigadas. El nuevo plan de Obama prohíbe a los bancos especular por cuenta propia y tener fondos apalancados (hedge funds) o de capital riesgo, algunas de las actividades más lucrativas de la banca de inversión. De prosperar la reforma en los términos planteados, las entidades perderán miles de millones de dólares de ingresos o incluso se verán obligadas a escindir parte de su negocio. Los analistas de una de las entidades afectadas, JPMorgan Chase, cifraron en 13.000 millones de dólares anuales (unos 9.000 millones de euros) el impacto de tales medidas en Goldman Sachs, Morgan Stanley, Credit Suisse, UBS y Deutsche Bank. De las cinco, Goldman Sachs sería la más afectada, con un impacto de casi 4.700 millones de dólares en sus resultados, mientras que UBS, con 1.900 millones, sería la menos dañada. Con todo, es pronto para hacer cálculos, pues la nueva propuesta carece de detalles y queda un largo camino para su aprobación. En Europa, las mayores caídas de estos dos días las han sufrido Barclays (-10,9%), RBS (- 9,8%), Société Générale (-9,5%) y Credit Suisse (-7,7%), que se hallan entre las más expuestas al tipo de negocios proscritos. En España, donde los bancos tienen poca presencia en esos negocios, la banca frenó ayer su caída en un día convulso y de fuerte actividad. El Santander, que cayó el 0,4%, intercambió ayer acciones en el mercado continuo por 1.200 millones, siendo el título más negociado del Euro Stoxx 50.

243 El endurecimiento de la estrategia contra el riesgo excesivo ha movido en EE UU su acento de la supervisión a la regulación. Ese giro revela, además, una fuerte división en el equipo económico del presidente, pues contradice la posición del secretario del Tesoro, Timothy Geithner, muy dañado por el rescate de AIG, expresada ante el Congreso en una audiencia sobre la reforma financiera en septiembre. La desautorización implícita de Geithner y las dudas sobre la reelección de Bernanke -cuyo mandato vence el 31 de enero- por la pérdida de apoyos en el bando demócrata deja en mal lugar a las dos cabezas visibles de la economía de EE UU. De alguna forma, vuelve el pasado. En pleno golpe de la Gran Depresión, hace ocho décadas, EE UU buscó enseguida la manera de evitar que otra crisis financiera volviera a tumbar a la economía. Entonces, los senadores Carter Glass y Henry Steagall propusieron una legislación que permitió en 1933 crear el Fondo de Garantía de Depósitos (FDIC) y separar los bancos comerciales de la banca de inversión. La historia se repite con grandes similitudes, en medio de un clima político enrarecido por la percepción popular de que hasta ahora se ha hecho más desde Washington por rescatar a los bancos que por salvar los empleos y las casas de la gente corriente. Aguijoneada por la derrota demócrata en Massachusetts, la Administración Obama ha optado por abandonar la vía moderada y actuar de una forma más agresiva, instaurando una versión actualizada de la Glass-Steagall, que fue dejada de lado en los noventa. http://www.elpais.com/articulo/economia/Wall/Street/sufre/peor/semana/marzo/plan/Obama/e lpepueco/20100123elpepieco_6/Tes

244 Reforma financiera en EE UU La vuelta de Paul Volcker S. P. - Nueva York - 23/01/2010 Paul Volcker es una especie de héroe para Wall Street por cómo lidió, a comienzos de los años 1980 desde la Reserva Federal, con los problemas inflacionistas que acusaba la economía de EE UU. O al menos lo era antes de que el presidente Barack Obama decidiera apoyarse en él para su nueva estrategia de ataque contra los guardianes del sector financiero. Volcker, a sus 82 años de edad, preside el Consejo Asesor para la Recuperación Económica, creado por Obama para desarrollar ideas y sacar a EE UU de la peor crisis desde la Gran Depresión. Sirvió como presidente del banco central más poderoso del mundo con Jimmy Carter y Ronald Reagan (1979-1987). Antes, presidió la Reserva Federal de Nueva York y trabajó para el Tesoro. Es fácil distinguirlo entre el equipo de consejeros que acompaña a Obama en sus apariciones públicas. "El hombre alto detrás de mí", dijo el presidente el jueves cuando presentó su nueva iniciativa, que ya es bautizada en el parqué como la Volcker Rule. Ya antes de llegar a la Casa Blanca, echó mano de su experiencia para definir su programa económico de campaña. Obama lo mantuvo cerrado en el armario hasta el jueves. Volcker es de ideas fijas. Durante último año fue muy crítico con los grandes bancos. Su receta para prevenir otra crisis como la vivida tras el colapso de Lehman Brothers pasa por reinstaurar la conocida como Ley Glass- Steagall, por la que en 1933 se partieron los bancos, para separar el negocio de banca comercial del de inversión. Igual que se le alaba la forma en la que mantuvo la inflación a raya, también se le considera responsable del brutal alza de tipos que hundió antes a EE UU en la peor recesión que se había visto desde el crack de los años 1930. Y como le sucede a Ben Bernanke, fue víctima de una fuerte oposición política que puso en vilo su reelección para un segundo mandato en la Fed. A pesar de su agresiva idea para afrontar la crisis, en Wall Street se le respeta. Y no son pocos los economistas que se preguntan por qué Barack Obama no lo sacó antes a escena. http://www.elpais.com/articulo/economia/vuelta/Paul/Volcker/elpepueco/20100123elpepieco _5/Tes

245 vox

Research-based policy analysis and commentary from leading economists A modest proposal

Axel Leijonhufvud 23 January 2010

What happened to the capitalist system where everyone was supposed to pay for their own mistakes? Bankers have been playing “I win, you lose” with the general public. This column suggests a return to double liability for bank managers in an attempt to change the game to “If I lose, then I have to pay.” The crisis has shown that the commercial banks, the investment banks, the shadow banks, and sundry other financial institutions have assumed too much risk. It has also been demonstrated that when risks do materialise, the costs are borne by the taxpayers and the unemployed – not by bankers. The bankers have been playing “I win, you lose” with the general public. What happened to the capitalist system where everyone was supposed to pay for their own mistakes, not for those of others? Proposed reforms: Less than reassuring The reforms proposed to deal with this problem have, by and large, been limited to reformulated capital requirements for banks and macroprudential supervision of the system as a whole. To date, the ideas advanced are less than reassuring. • The Basel capital requirements were actually procyclical. That problem will presumably be fixed somehow. But it is quite another matter to formulate capital requirements that cannot be circumvented by highly motivated and very smart people, and that will effectively constrain leverage in the financial system as a whole. • As for macroprudence, a reliable methodology does not yet exist. Even if it did, it is far from obvious that macroprudential forewarnings would produce timely political action. Fixing the distortion at its source: Restructuring bankers’ liability What has been received little attention so far is the structuring of liability in banking (Sin 2008). In the early days of fractional reserve banking, bank owners were subject to unlimited liability. In the US, double liability for bank shareholders was common up to the Great Depression. All American investment banks were partnerships into the 1970’s and the last one, Goldman Sachs, only converted itself into a limited liability corporation about a decade ago. Back in the 70s, US financial sector liabilities were less than 20% of GDP. Today the figure is close to 120%. Leverage has increased enormously. Back then, stringent liability rules inhibited risk taking. In the days when such liability provisions applied to banks, “conservative” was the adjective habitually attached to “banker.” It does not fit the high- stakes gambling “quants” of recent years. If bank stockholders were subject to double liability today, it would hardly be possible to attract enough capital into banking for the needs of a modern economy. Most stockholders have little or no ability to control the risks that bank managements assume. Liability

246 provisions, however, could be applied directly to managers rather than to stockholders so as to change the incentives to assume risk that bank executives face. Equity for shareholders and equity for employees: The E-shares proposal To do this, one would first have to create a special type of equity for bank employees. These E-shares would be subject to double liability. If the bank were to fail, the holders would be liable for a sum equal to the value of their shares on the date that they were originally received. E-shares would be non-marketable but exchangeable one-for-one for ordinary shares at market value five years after the owner has left the employ of the financial institution in question. The second element of such a liability scheme would regulate the extent to which executive compensation would have to be in the form of E-shares. Lower-level employees who are not among the decision makers of the bank should naturally not be part of the program. So, the first $150,000 – or wherever the poverty line is supposed to go in banking nowadays – would be exempt. Compensation would be entirely in ordinary salary. Starting at some such level part of compensation would have to be in E-shares with the proportion rising to, say, 80% at the CEO and CFO level. Obviously, the specific rules of a liability scheme of this sort can be tweaked in a number of ways. Indeed, only recently Neil Record suggested a similar proposal in the Financial Times (Record 2010). Benefits of linking decision makers’ liability to their risk taking Within wide limits such a scheme should have a socially beneficial effect on risk attitudes within the institutions affected – it might even bring back the conservative banker species from the brink of extinction. The policy can be expected to have some interesting subsidiary effects as well. In the internal politics of banks, double liability should strengthen the influence of risk managers and make it less countercyclical than it has been in recent years. Some of the admirable capacity for innovation that the financial sector has exhibited in recent years would be diverted to risk management (although no doubt much of it would go towards circumventing the accountability that the double liability system would impose). Within the financial institutions, double liability would cause executives to take a lively interest in the activities of divisions for which they have no direct responsibility. On occasion, one must imagine, dissension might severely strain internal relations. For the individual bank, all this would raise the cost of operations, but from the standpoint of systemic risk the effects would be desirable. If all the insurance executives of AIG had had the personal incentive to learn what was going on in that London unit, internal opposition to its operations might well have brought it under control. These predictable consequences of double liability would reduce the perceived advantages of conglomerate banking. It will not solve the too-big-to-fail problem by itself, but it just might induce the big banks to spin-off some lines of business. Conclusion • The banks have found high leverage a simple way to gain rates of return several times higher than the rates of profit earned in the rest of the economy – as long as the going is good. • The great escalation of executive compensation in finance derives mainly from this

247 business strategy. • Double liability would change the risk-return calculation that executives would apply to the strategy. We would expect to see lower leverage ratios – and a moderation in executive compensation packages. This way of doing it just might work better than Basel rules of leverage and government imposed limits on compensation. A variant of the scheme would make E-shares marketable. It would be somewhat more cumbersome to administer. Investors who are not bank employees would have to post collateral adequate to back the double liability and records tracking all transfers of shares would have to be maintained. It might however make the market more efficient. The discount on E-shares relative to ordinary shares would reveal to the market what insider’s think of the bank’s prospects. And when E-shares start to trade at negative prices, it is time for the regulatory agencies to step in and take over the bank. Double liability – or some variant thereof – makes eminent sense. Too much so, perhaps, to be politically feasible. References Record, Neill (2010), “How to make the bankers share the losses”, Financial Times, 6 January. Sin, Hans-Werner (2008), “What can be learned from the banking crisis”, VoxEU.org, 17 December. Axel Leijonhufvud A modest proposal23 January 2010 http://www.voxeu.org/index.php?q=node/4516

248 Opinion

January 22, 2010 OP-ED COLUMNIST Do the Right Thing By PAUL KRUGMAN A message to House Democrats: This is your moment of truth. You can do the right thing and pass the Senate health care bill. Or you can look for an easy way out, make excuses and fail the test of history. Tuesday’s Republican victory in the Massachusetts special election means that Democrats can’t send a modified health care bill back to the Senate. That’s a shame because the bill that would have emerged from House-Senate negotiations would have been better than the bill the Senate has already passed. But the Senate bill is much, much better than nothing. And all that has to happen to make it law is for the House to pass the same bill, and send it to President Obama’s desk. Right now, Nancy Pelosi, the speaker of the House, says that she doesn’t have the votes to pass the Senate bill. But there is no good alternative. Some are urging Democrats to scale back their proposals in the hope of gaining Republican support. But anyone who thinks that would work must have spent the past year living on another planet. The fact is that the Senate bill is a centrist document, which moderate Republicans should find entirely acceptable. In fact, it’s very similar to the plan Mitt Romney introduced in Massachusetts just a few years ago. Yet it has faced lock-step opposition from the G.O.P., which is determined to prevent Democrats from achieving any successes. Why would this change now that Republicans think they’re on a roll? Alternatively, some call for breaking the health care plan into pieces so that the Senate can vote the popular pieces into law. But anyone who thinks that would work hasn’t paid attention to the actual policy issues. Think of health care reform as being like a three-legged stool. You would, rightly, ridicule anyone who proposed saving money by leaving off one or two of the legs. Well, those who propose doing only the popular pieces of health care reform deserve the same kind of ridicule. Reform won’t work unless all the essential pieces are in place. Suppose, for example, that Congress took the advice of those who want to ban insurance discrimination on the basis of medical history, and stopped there. What would happen next? The answer, as any health care economist will tell you, is that if Congress didn’t simultaneously require that healthy people buy insurance, there would be a “death spiral”: healthier Americans would choose not to buy insurance, leading to high premiums for those who remain, driving out more people, and so on. And if Congress tried to avoid the death spiral by requiring that healthy Americans buy insurance, it would have to offer financial aid to lower-income families to make that insurance affordable — aid at least as generous as that in the Senate bill. There just isn’t any way to do reform on a smaller scale.

249 So reaching out to Republicans won’t work, and neither will trying to pass only the crowd- pleasing pieces of reform. What about the suggestion that Democrats use reconciliation — the Senate procedure for finalizing budget legislation, which bypasses the filibuster — to enact health reform? That’s a real option, which may become necessary (and could be used to improve the Senate bill after the fact). But reconciliation, which is basically limited to matters of taxing and spending, probably can’t be used to enact many important aspects of reform. In fact, it’s not even clear if it could be used to ban discrimination based on medical history. Finally, some Democrats want to just give up on the whole thing. That would be an act of utter political folly. It wouldn’t protect Democrats from charges that they voted for “socialist” health care — remember, both houses of Congress have already passed reform. All it would do is solidify the public perception of Democrats as hapless and ineffectual. And anyway, politics is supposed to be about achieving something more than your own re- election. America desperately needs health care reform; it would be a betrayal of trust if Democrats fold simply because they hope (wrongly) that this would slightly reduce their losses in the midterm elections. Now, part of Democrats’ problem since Tuesday’s special election has been that they have been waiting in vain for leadership from the White House, where Mr. Obama has conspicuously failed to rise to the occasion. But members of Congress, who were sent to Washington to serve the public, don’t have the right to hide behind the president’s passivity. Bear in mind that the horrors of health insurance — outrageous premiums, coverage denied to those who need it most and dropped when you actually get sick — will get only worse if reform fails, and insurance companies know that they’re off the hook. And voters will blame politicians who, when they had a chance to do something, made excuses instead. Ladies and gentlemen, the nation is waiting. Stop whining, and do what needs to be done. http://www.nytimes.com/2010/01/22/opinion/22krugman.html?th&emc=th

January 21, 2010, 5:00 pm Glass-Steagal, Part Deux So what do I think about the new White House initiative on limiting bank size and restricting the activities of depository institutions? 1. It’s OK as part of a broader financial reform, and is a good sign that the WH is getting ready to rumble with the banks. but 2. I’m from Missouri — show me. Actually, that’s a lie: I’m from New Jersey by way of New York, but whatever. I liked the Treasury reform plan from last spring, too. What remains to be seen is how much fight there is behind it.

250 As I’ve written repeatedly, I don’t think that too-big-to-fail is at the heart of our financial problems. Nor do I think a sharp separation between narrow banking depository institutions and other financial players is a silver bullet: unless the shadow banking system is really reined in, financial institutions will create things that look like deposits, act like deposits, but don’t have an FDIC guarantee; yet in crisis, there will be strong incentives to bail them out anyway. Still, you have to admit that the growth of the shadow system was fueled, in part, by FDIC- backed players providing credit lines and so on to their shadow-banking arms, and that the sheer size of some players has posed real difficulties for resolving crisis. So in the context of a broader financial reform, this stuff could help. Whatever. I’m still reeling from the collapse on health care. January 20, 2010, 9:56 am A Note On Financial Reform Whatever happens on health care — if House Democrats have any sense, they’ll just pass the Senate bill, but that’s a big if — financial reform is next up. But that leaves us with a question: what strategy should the Democrats follow? They could do what they did with health care, which is to make a lot of compromises with interest groups so as to round up just enough votes. But that would be the wrong strategy, both substantively and politically. On the substance, a financial reform that’s too weak will provide nothing more than the illusion of stability, and by creating that illusion could actually make the next crisis worse. On the politics, the Obama administration desperately needs to distance itself from Wall Street; a deal that the street likes will, almost by definition, be political poison. So what to do? The House has passed a pretty good bill; but the Senate should try for something stronger, not weaker. Crucially, the Consumer Financial Protection Agency must be in the bill; it’s a good idea economically, but even more important, it’s essential to making the case that this is not a bill of the bankers, by the bankers, for the bankers. Oh, and put that Obama bank tax before Congress too, ASAP. What if all of this faces uniform opposition from Republicans, with the support of some Democrats? That’s easy: make them vote against it. Expose the hollowness of their populist posing. And do what can be done with simple majority votes: I’m not a parliamentary expert, but as I understand it a bank tax could be enacted through reconciliation, bypassing the filibuster. In short, take on the banks — and force those who are covering for them into the open. January 19, 2010, 1:39 pm The Real Pigou Every intro text in economics talks about market-based techniques for dealing with pollution, and refers to Pigouvian taxes — effluent charges — as the right way to go (cap and trade can be equivalent). And I’d always assumed that Pigou himself wrote about pollution. But as part of a longer-term project I’m working on I actually looked at The Economics of Welfare, and here’s the passage in question: Corresponding to the above investments in which marginal private net product falls short of marginal social net product, there are a number of others, in

251 which, owing to the technical difficulty of enforcing compensation for incidental disservices, marginal private net product is greater than marginal social net product. Thus, incidental uncharged disservices are rendered to third parties when the game-preserving activities of one occupier involve the overrunning of a neighbouring occupier’s land by rabbits—unless, indeed, the two occupiers stand in the relation of landlord and tenant, so that compensation is given in an adjustment of the rent. They are rendered, again, when the owner of a site in a residential quarter of a city builds a factory there and so destroys a great part of the amenities of the neighbouring sites; or, in a less degree, when he uses his site in such a way as to spoil the lighting of the houses opposite … The principle is there, all right. But, I mean, rabbits? And no, this wasn’t written in an era when England was still a green and pleasant land; this was written in 1920, when much of the population lived in sooty, smog-ridden industrial conurbations. Not what I expected. Update: On the other hand, if we’re talking about the Killer Rabbit of Caerbannog … January 18, 2010, 3:57 pm Destructive creativity I don’t always agree with Naomi Klein, and I don’t always disagree with David Frum, but Klein wins this one hands down: Frum worries that financial regulation might crush “the creativity of the system,” Klein counters that “we could all do with them being a little less creative.” This is usually framed, less colorfully, in terms of “financial innovation”, but the point needs to be repeated again and again: at this point, there is no reason to take it on faith that cleverness in the financial industry is a net social good. Unless you can provide some clear evidence of productive innovations since regulation began to unravel — and ATMs don’t count — the balance of the evidence suggests that smart people have been devising ingenious ways to concentrate risk and direct capital to the wrong uses. January 18, 2010, 3:32 pm Texas Textbooks Oh, boy. Paul Samuelson famously declared, “I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks.” But guess who’s going to be writing our textbooks? The conservative bloc on the Texas State Board of Education won a string of victories Friday, obtaining approval for an amendment requiring high school U.S. history students to know about Phyllis Schlafly and the Contract with America as well as inserting a clause that aims to justify McCarthyism. Outspoken conservative board member Don McLeroy, who reportedly spent over three hours personally proposing changes to the textbook standards, even wanted to cut “hip-hop” in favor of “country” in a section about the impact of cultural movements. That amendment failed. Actually, Samuelson’s remark had more resonance than most readers imagined. After World War II, there was actually a concerted attempt to prevent the teaching of Keynesian economics at American universities, as described by Collender and Landreth (pdf). This

252 campaign killed the first US Keynesian text, by Lorie Tarshis, but Samuelson’s book — which he said he “wrote carefully and lawyer-like” — managed to make it through the hazing. I do have some personal interest here, of course: I’m the co-author of two college textbooks, and royalties from the intro book are a large part of our family income. But the high-school level is really where you want to worry about politicization.

January 18, 2010, 11:20 am Can We Make Chutzpah A Crime? Because if we can, we can send a bunch of bankers to jail right away: Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter. OK, this isn’t quite the classic definition of chutzpah, which is when you murder your parents, then plead for mercy because you’re an orphan. It’s more like being a drunk driver who, after killing a number of pedestrians, received life-saving treatment at a nearby hospital — and responds by suing the doctor. I’d say it was unbelievable, but it actually should have been predictable. Http://krugman.blogs.nytimes.com/

January 18, 2010 Wall St. Weighs a Challenge to a Proposed Tax By ERIC DASH Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter. In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members. The message said the association had hired Carter G. Phillips of Sidley Austin, who has argued dozens of cases before the Supreme Court, to study whether a tax on one industry could be considered arbitrary and punitive, providing the basis for a constitutional challenge, they said. Administration officials and other legal experts have called those claims dubious. Indeed, President Obama urged the financial lobby to stand down when he introduced the tax proposal last week: “Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities.” A spokesman for the lobbying group, Andrew DeSouza, confirmed on Sunday that Mr. Phillips was working with the group on a series of regulatory and legislative matters, including the tax. But because no formal tax legislation has been proposed by Congress, Mr. DeSouza said it was “premature to speculate on any potential actions beyond opposing the proposal itself as both punitive and counterproductive to increasing lending.”

253 A court challenge would open a new front in the banking industry’s assault on additional financial regulation. It might also further splinter the powerful financial lobby. The issue has already pitted smaller banks, which would be exempt from the tax, against their less popular Wall Street peers, and it has even stirred debate within the large banks over whether such an aggressive legal strategy would be politically wise. Privately, executives at several large banks said they believed a legal battle was doomed to fail in Washington and risked escalating public rage over the bailouts of the banks. These executives say the industry may be better off pushing for a watered-down version of the tax. Most banks are just beginning to consider how, or whether, they would oppose it. This political tug of war is centered on Wall Street bonuses, which have already returned to precrisis levels. The banks have tried to head off criticism by starting new charitable programs and by structuring executive bonuses in line with principles set by the federal pay adviser, like paying bonuses mostly in stock instead of cash and deferring the payout of some bonus money in case business declines again. Administration officials hoped their proposed bank tax would serve much the same purpose. Democratic leaders in Congress have welcomed the plan, which could raise up to $117 billion to recoup projected losses from the bank bailout program. Republicans have remained unusually silent on the tax, hoping to avoid a choice between supporting a tax increase and defending big bankers. Meanwhile, some liberal Democrats have gone further than the administration has, proposing a heavy tax on bank bonuses. Political analysts expect the bank tax to pass easily in the House but face resistance in the Senate. There may be room for compromise. Administration officials hope to keep the proposed tax limited to major financial institutions with more than $50 billion in assets but consider that a difficult line to draw. For example, the proposed tax would not apply to large hedge funds; the mortgage finance giants Fannie Mae and Freddie Mac; or the carmakers Chrysler and General Motors. “We believe the lines we have drawn are sound and sensible,” said Gene B. Sperling, a senior Treasury Department official. “We understand these are the type of things we will need to keep an open mind on in negotiations with Congress.” The financial lobby has insisted that it is unfair for banks to cover the cost of losses tied to nonbank bailout recipients like the automakers and the American International Group, the giant insurer that is now majority-owned by the government. In an appearance on CNBC on Thursday, Representative Barney Frank, chairman of the House Financial Services Committee, called the argument over including the automakers legitimate. At the lobbying group, the selection of Mr. Phillips of Sidley Austin raised eyebrows because it suggests that Wall Street may be spoiling for a fight. Davis Polk & Wardwell, another white-shoe law firm, has been advising the same lobbying group on legal matters tied to new financial regulation. Mr. Phillips, who was an appellate lawyer in the Justice Department during the Reagan administration, brought his first case in front of the Supreme Court when he was just 29 years old. Since then, he has appeared before the court more than 60 times. Mr. Phillips declined to comment about his work for the industry, referring all questions to the lobbying group. The group has hired him before. Last spring, it retained Mr. Phillips to examine similar legal questions after lawmakers prepared to heavily tax Wall Street bonuses in response to the public’s outrage over bonuses for A.I.G. traders. Through an extensive phone campaign and relentless lobbying on Capitol Hill, the financial lobby successfully beat back the legislation without using the courts. This time around, Mr. Phillips is working with the group to determine whether it has legal grounds to challenge the tax proposal, including the possibility that the tax might amount to a retroactive policy. The original bailout bill, however, spelled out that the government needed to recover that money. Mr. Phillips’s primary argument, however, might be that a tax so narrowly focused would penalize a specific group. Legal scholars say the Supreme Court has overturned only a handful of laws on those

254 grounds, and those were typically rules that singled out political outcasts like former members of the Confederacy or people accused of being communists. Officials of the lobbying group suggest that a bank tax would be punitive because it would seek to recoup bailout losses from companies that have already paid back their money — with warrants and interest. But Mr. Sperling, the Treasury official who was one of the architects of the proposal, said the industry’s claims had little standing. “That sounds more like a political sound bite masquerading as a legal argument,” he said. Outside legal scholars agree. “It seems to me that it is not even a close question,” said Laurence H. Tribe, a constitutional law professor at Harvard who was a legal adviser to the Obama campaign. Mr. Tribe contends that imposing a fee or requirement to return a sum of money cannot be construed as a punishment. Even more important, the administration’s proposal lays out a clear set of criteria, not a list of individual culprits, Mr. Tribe said. The Securities Industry and Financial Markets Association, an umbrella group for hundreds of financial institutions, is under intense pressure. It has been weakened significantly by the financial collapse that claimed Bear Stearns, Merrill Lynch and other large, dues-paying members. Just last week, the group ended an eight-year affiliation with the American Securitization Forum, its bondholder lobbying unit, after the groups failed to resolve how they would treat their members’ increasingly divergent interests. http://www.nytimes.com/2010/01/18/business/18bank.html?hpw

See On the Finance & Markets Monitor, President Obama’s proposal for new banking limits spurred reaction. Please read: Please, Listen to the Man by Daniel Alpert Why Obama is Now (finally) Getting Tough on Wall Street by Robert Reich Obama to Propose Rules to Restrict Proprietary Trading by Yves Smith Obama Proposes Volcker-Style Financial Reform by Mark Thoma Does Conventional Wisdom Miss the Boat on Banker Bonuses? by Rene Stulz Why Banks Should Clean up their House and How they Can Take Advantage of the Opportunity of Modern Times by Carlo Resta Breaking the Banks by Rick Bookstaber Taxing Bailed-Out Financial Institutions by Mark Thoma Barry Ritholtz points out the subtle but critical difference in deciding whether to protect the banks or the banking system when crisis hits. Read Who Bears the Costs of Post-Crisis Recovery? In The Outlook for 2010: A Critique of Modern Monetary Policy, Joseph Mason recognizes that the recent era of managing the Fed funds rate to reduce the path and duration of business cycles is failing, and examines how monetary policy has evolved. In Grading Obama’s Economic Policy after One Year, Edward Harrison gives the President a failing grade for not seeing the differences between 2010 and 1994.

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Obama's 'Volcker Rule' shifts power away from Geithner By David Cho and Binyamin Appelbaum Washington Post Staff Writer Friday, January 22, 2010; A01 For much of last year, Paul Volcker wandered the country arguing for tougher restraints on big banks while the Obama administration pursued a more moderate regulatory agenda driven by Treasury Secretary Timothy F. Geithner. Thursday morning at the White House, it seemed as if the two men had swapped places. A beaming Volcker stood at Obama's right as the president endorsed his proposal and branded it the "Volcker Rule." Geithner stood farther away, compelled to accommodate a stance he once considered less effective than his own. The moment was the product of Volcker's persistence and a desire by the White House to impose sharper checks on the financial industry than Geithner had been advocating, according to some government sources and political analysts. It was Obama's most visible break yet from the reform philosophy that Geithner and his allies had been promoting earlier. Senior administration officials say there is now broad consensus within the White House and the Treasury for the plan advanced by Volcker, who leads an outside economic advisory group for the president. At its heart, Volcker's plan restricts banks from making speculative investments that do not benefit their customers. He has argued that such speculative activity played a key role in the financial crisis. The administration also wants to limit the ability of the largest banks to use borrowed money to fund expansion plans. The proposals, which require congressional approval, are the most explicit restrictions the administration has tried to impose on the banking industry. It will help to have Volcker, a legendary former Federal Reserve chairman who garners respect on both sides of the aisle, on Obama's side as the White House makes a final push for a financial reform bill on Capitol Hill, a senior official noted. Advocates of Volcker's ideas were delighted. "This is a complete change of policy that was announced today. It's a fundamental shift," said Simon Johnson, a professor at MIT's Sloan School of Management. "This is coming from the political side. There are classic signs of major policy changes under pressure . . . but in a new and much more sensible direction." Industry officials, however, said they were startled and disheartened that Geithner was overruled, in part because they supported the more moderate approach Geithner proposed last year. "His influence may have slipped," said a senior industry official who spoke on the condition of anonymity to preserve his relationship with the administration. "But you could also argue that it wasn't Geithner who lost power. It's just that the president needed Volcker politically" to look tough on big banks. Geithner agreed with Volcker that banks' risk-taking needed to be constrained.

256 But through much of the past year, Geithner said the best approach to limiting it is to require banks to hold more capital in reserve to cover losses, reducing their potential profits. Geithner said blanket prohibitions on specific activities would be less effective, in part because such bans would eliminate some legitimate activity unnecessarily. The shift toward Volcker's thinking began last fall, according to government officials who spoke on the condition of anonymity because the deliberations were private. Volcker had been arguing that banks, which are sheltered by the government because lending is important to the economy, should be prevented from taking advantage of that safety net to make speculative investments. To make his case, he met with lawmakers on Capitol Hill and gave numerous speeches on the subject, traveling to at least nine cities on several continents to warn that banks had developed "unmanageable conflicts of interest" as they made investments for clients and themselves simultaneously. "We ought to have some very large institutions whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit," he said during one speech in Toronto. "They ought to be the core of the credit and financial system. Those institutions should not engage in highly risky entrepreneurial activity." Gradually, Volcker picked up allies. John Reed, the former chairman of Citigroup, expressed his public support. So did Mervyn King, governor of the Bank of England. His ideas began gaining traction within the administration in late October, when the president convened a meeting of his senior economic advisers in the Oval Office to hear a detailed presentation by the former Fed chairman. There was no immediate change of course. But after the House passed a regulatory reform bill on Dec. 11 that was largely based on the Geithner's vision, the administration began to warm to Volcker's ideas, which had the political value of seeming tough on Wall Street, said sources in contact with the Treasury and White House. At the time, administration officials were growing concerned that government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks' speculative investments and fueling soaring profits, said Austan Goolsbee, a member of the president's Council of Economic Advisers. "We started coming out of the rescue and you saw some of the biggest financial institutions . . . who had access to cheap financing . . . use that money without lending or anything, just doing their own investments," he said. "That clearly started putting [the issue] on the radar screen for us." Goolsbee said that Vice President Biden became a particular advocate for Volcker's approach. In mid-December, the president formally endorsed Volcker's approach and asked Geithner and Lawrence H. Summers, the director of the National Economic Council, to work closely with the former Fed chairman to develop proposals that could be sent to Capitol Hill. The three men had long discussions about the idea, including a lengthy one-on-one lunch between Geithner and Volcker on Christmas Eve. Summers and Geithner had been reluctant to take on battles that weren't at the heart of the problem that fueled the crisis. But ultimately, an administration official said, the two men concluded that reform needs to be about more than just fighting the last war -- it needs to address sources of future risk as well. http://www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935_pf.html

257 La casa torcida @Fernando Suárez - 22/01/2010 06:00h Deja tu comentario (10) Como manda la tradición, cuando las dificultades crecen, los propósitos de enmienda devienen increíbles, y los andamios se alabean, toca escurrir el bulto. El alboroto orquestado en torno a las opciones de salida de la UEM ha vuelto a evidenciarlo. Pese a que el documento en cuestión, de exquisita claridad, se limita a poner en negro sobre blanco hipótesis en absoluto novedosas, una vez más, la coyuntura ha sido aprovechada para devolver el debate secesionista a primera plana. El aumento de áreas políticas cuyas decisiones se tomarán por mayoría cualificada, los efectos del Pacto de Estabilidad y Crecimiento (PEC) en un entorno recesivo, y las penurias económicas que aquejan a la mayoría de Estados Miembros, atribuidas total o parcialmente al corsé del euro, son razones que justifican, según su autor, examinar de manera explícita la exit clause contenida en el Tratado de Lisboa, tras su reciente entrada en vigor. Aunque ésta había venido obviándose; a fin de eludir controversias en el proceso de integración detallando un procedimiento proceloso, de inciertas consecuencias, que alimentase su probabilidad de acaecimiento; su inclusión obedece a la necesidad de contemplar tal contingencia a modo de estrategia institucional preventiva, y como mero reconocimiento de una realidad práctica del derecho de soberanía política. Así, el artículo 50 establece que un Estado Miembro que desee retirarse de la Unión Europea deberá informar al Consejo de su intención; éste elaborará directrices para lograr un acuerdo en dicho sentido, de manera que por mayoría cualificada, y previa aprobación del Parlamento Europeo, se concluya el mismo en nombre de la UE. La retirada se haría efectiva en la fecha pactada o, en su defecto, dos años después de la notificación original. En caso de arrepentimiento una vez fuera, tocaría ponerse de nuevo a la cola para cumplir con los requisitos de admisión de cualquier otro candidato, esencialmente, los criterios de Copenhague y, para los encuentros en la tercera fase, Maastricht. Teniendo en cuenta que la retirada voluntaria puede ser consensuada o unilateral, que la UME resulta obligatoria a largo plazo, excepto para quienes hubiesen negociado con anterioridad cláusulas opt-out, y puesto que la única forma de salirse del euro es mediante el abandono simultáneo de la UE, la disposición podría ser utilizada por algunos socios como elemento de coerción permanente para obtener concesiones. Free-riding. Un temor fundado también en el uso de la eurofobia, histórica o sobrevenida, por parte de fuerzas políticas interesadas en contentar a su electorado, real o potencial, con promesas independentistas, lo cual aconseja su enmienda de forma que la retirada tuviese que ser aprobada, con carácter previo, mediante referéndum local. Asunto diferente sería una hipotética expulsión. Legal y conceptualmente cuestionable, el TUE permite la suspensión de ciertos derechos de un Estado Miembro por violación grave y persistente de sus obligaciones. Pero dado que el derecho de expulsión no existe como tal, que la reforma de los Tratados requiere unanimidad, y que el excluido lo sería en contra de su voluntad, esta posibilidad, de momento, es considerada inviable. Además de tratarse del proceso más complejo de todos, por cuanto afecta a bienes jurídicos vinculados a una membresía de la que se pretende privar, ya sea como remedio o como sanción, resulta contrario a la letra y el espíritu de la casa común. En cualquier caso, el informe aduce dos vías indirectas para hacerle el vacío a uno o varios de los socios: el procedimiento de cooperación reforzada, y la posibilidad de crear una "nueva Unión", en la que sólo participase la crème de la crème. Por último, se aborda una potencial euroización, es decir, la circulación del euro

258 dentro de un territorio ex UEM, quedando relegada tal eventualidad al supuesto de una retirada negociada, para evitar un precedente de integración à la carte e incumplimiento selectivo de las disposiciones comunitarias. Llegados a este punto, cabría conjeturar de manera específica respecto a España. Si hace apenas un año abordábamos su inexcusable permanencia, reitero marco teórico, contexto global, y argumentos a su favor. Pacta sunt servanda. Lo contrario sería aceptar, a priori, recibir la puntilla a cambio de premiar dejación de funciones y electoralismo de garrafón, incentivando los conflictos de interés propios de un laissez faire-laissez passer mal engendrado y peor administrado, tras décadas de corrupta partitocracia feudal. Ruina definitiva. Y ahí me planto. Las políticas devaluacionistas, además de empobrecedoras y adictivas, generan perversos efectos secundarios en forma de tolerancia cruzada con actividades productivas demasiado sensibles a los precios, destruyendo el tejido competitivo basado en estándares de calidad y generación de valor añadido. Rigideces estructurales, escasa cualificación, y caros costes sociales en relación a diferenciales de productividad, realimentan una economía abonada a bienes y servicios no-exportables, de no-mercado. Causalidad circular y acumulativa. Dada la heterogeneidad de países core vs. periféricos, la observancia transitoria de la convergencia nominal precisaba el concurso de profundas modificaciones en los fundamentos reales de las regiones más atrasadas, a fin de garantizar en el futuro, de un lado, la disciplina impuesta por el PEC y, de otro, la senda de cohesión y catching-up. La difusión tecnológica a través de un espacio único aportaba golosos beneficios, aunque también elevaba los riesgos de shocks asimétricos, al partirse desde diferentes niveles que ahondarían los gaps iniciales, cuyos ajustes más inmediatos descansarían en movilidad de factores y transferencias fiscales. De ahí la importancia de la eficiente aplicación de los Fondos Estructurales y la financiación alternativa. La mejora de infraestructuras, equipamiento tecnológico, educación, y formación profesional, debía permitir incrementos de competitividad, merced a una mano de obra suficientemente especializada, productiva, capaz de redimir la permanente condena de escasa cualificación y creciente mileurismo. Capital humano, pilar de convergencia real. Ahora que los desequilibrios que tanto nos afligen requieren, más que nunca, visión de largo plazo, sentido de la responsabilidad, y esfuerzo colectivo, de nada sirve imaginar escenarios ideales pero imposibles, buscándose salidas de emergencia que sólo conducen a otra generación perdida. Tal vez sea pedir demasiado. Quizá merezcamos la lección que dimos por sabida. Y, sin embargo, haciendo honor a los compromisos adquiridos, no queda otra que deconstruir esta casa torcida.

@Fernando Suárez

Fernando Suárez es economista y analista independiente. Desde este Teatro del Dinero pretende analizar, de modo académico y con su particular estilo, el devenir presente y futuro de la economía y las finanzas a nivel global, un escenario en el que, muchas veces, nada es lo que parece. O sí. Ocupen su localidad. http://www.cotizalia.com/el-teatro-del-dinero/torcida-20100122.html

259

22.01.2010 Greek liquidity speculation reaches fever pitch

FT Deutschland has an article according to which a growing number of market observers believe that the Greek government is very likely to run into financial difficulties. It quotes analysts as saying that the Greek government needs to raise new capital in the next three or four weeks merely to repay old debts. If this is not happening, the nervousness in financial markets is likely to increase proportionately. If the government announces a capital increases, but failed to raise the necessary funds, the situation would deteriorate dramatically, leading to default, or bailout. (Note: this story only reflects views among analysts, but these views, correct or not, now seem to dominate market sentiment.) George Provopoulos says no point in quitting the euro area Writing in the FT, Greek central bank governor George Provopoulos says the arguments for a Greek exit from the euro area are wrong. He acknowledges the depth of the crisis, but says it would be much easier to solve the problems from within the euro area than from the outside. A reintroduction of a national currency would raise inflation, the monetary policy would lack credibility, expectation of further devaluations would take hold, interest rates would rise, trade with the euro area would be impaired, it would increase the debt burden, and Greece would lose the euro area’s benefits of economy of scale in areas such as the foreign exchange market. Investors more trust in companies than governments CDS prices suggest that investors have less trust in government bonds than in corporate bonds, writes Der Standard. The iTraxx Europe index for 125 European companies is at 77.80bp, that is it costs $77800 to insure $10m in corporate bonds. By contrast, the respective European SovX Index for government bonds reached 83.90bp. This suggests that investors consider it more likely that euro area goverments go bust than European companies. The Greek CDS is currently at 350bp, Austria’s at 85.26bp. Simon Derrick on a deja-vu Also writing in the FT, Simon Derrick says there is a similar pattern to crisis such as in Iceland, or Greece now, a built-up of speculation in the first 30 days, a sharp rise in pressure during the next, a temporary truce, followed by a dramatic resumption of the assault.

Euro area growth is slowing down The recovery of the euro area is very unlikely to continue at the same speed as it speed in the second half of 2009, according to a bunch of recent surveys. The latest is the euro area PMI,

260 which fell from 54.2 in December to 53.6, a value consistent with a continued, albeit slower recovery. The FT also quotes Jurgen Stark of the ECB as saying that first half growth would be weaker, though there would be no double-dip recession. The chief economist of Markit, which compiles the index, said there is still a lot of momentum in the economy, especially in manufacturing. La Repubblica is quoting from the ECB’s monthly bulletin, according to which the prospects remained clouded with uncertainty, as the euro area embarked on a moderate expansion. The ECB also expects unemployment to continue to raise, and for investment activity to be weal. There is also some good news: consumers’ confidence in the euro area improved with the start of the new year. Les Echos reports that the first flash estimate of the indicator is -13.3 in January compared to -14.3 in December. Final figures will be published in February. Sceptical reaction to Obama’s plan outside the US The Financial press is carpet-covering Obama’s decision to crack down on banks. Bloomberg did a survey of opinion by asking lawyers and regulation experts on their views about Obama’s financial market crackdown. The overwhelming view is that it is uncoordinated, as governments are fixed on national politics when it comes financial regulation. A London-based lawyer was quoted a criticising the measures as unilateral, calling it Glass-Steagall Mark II. Another commentator said the proposals would take as away from the Basel approach. Also note an interesting comment by Ed Harrison about the sudden resurgence of Paul Volcker in the Obama administration. FT Alphaville sayd that European banks could be the big winner of this move, as they could switch some proprietary trading out of New York to London or continental Europe. Yves Smith makes the same point, saying that restrictions on proprietary trade won’t work unless globally co-ordinated. Bundesbank wants bank supervision rigths from 2011 FT Deutschland has an article according to which the Bundesbank wants to obtain responsibility for banking supervision as early as January 2011, which puts the government under pressure to act. But this is not a done deal yet, despite the fact that it is part of the coalition agreement. There are still proposals to create an entirely new supervising structure outside the central bank, while others want all supervision, including for securities and insurance, to be concentrated inside the Bundesbank. A call for joint Franco-German leadership Jacques Mistral and Henrik Uterwedde write in a joint article in FT Deutschland that the Lisbon Treaty gives France and Germany a new opportunity to develop a joint agenda, and the best area to do so is the international economy. At European level, a priority should be to give the eurogroup responsibility over crisis management. France and German should also find a join position on budgetary consolidation, and they should jointly champion a new global governance architecture. http://www.eurointelligence.com/article.581+M5f31377ac89.0.html#

261

Updated: New York, Jan 22 07:40 London, Jan 22 12:40 Tokyo, Jan 22 21:40 Obama Bank Plan Shows Global Coordination Dearth (Update1) By Gavin Finch, Andrew MacAskill and Caroline Binham

Jan. 22 (Bloomberg) -- President Barack Obama’s plan to curb proprietary trading shows banking regulations are being implemented unilaterally, not on the global scale lenders urged, according to lawyers. Obama proposed yesterday to limit the size of banks and prohibit them from investing in hedge funds and private equity funds as a way to reduce risk-taking and prevent a repeat of the credit crisis. Other countries, including the U.K., are pushing firms to cut risk by boosting their capital reserves instead. “There seems to be an element of governments trying to outbid each other in regulation proposals,” said Michael Wainwright, a London-based partner in financial services at law firm Eversheds LLP. “They are all trying to catch the mood of the moment with the electorate.” Governments are stepping up regulation of banks and insurers after pumping in trillions of dollars to bail out firms from American International Group Inc. to Edinburgh-based Royal Bank of Scotland Group Plc. Deutsche Bank AG Chief Executive Officer Josef Ackermann and Barclays Plc Chairman Marcus Agius said yesterday regulation that wasn’t globally coordinated may threaten both their industry and the economic recovery. “You must eschew the temptation to seek refuge in the alleged safety of national borders,” Ackermann said at a London conference yesterday, before Obama announced details of his plan. “The re-fragmentation of global markets is in nobody’s interests. It will leave us all poor. We need internationally harmonized rules and global and consistent implementation.” Too Big To Fail While lawmakers and policy makers around the world have been grappling with what to do with banks that are deemed too- big-to-fail, measures taken by governments so far have

262 tended to favor surcharges rather than a legal split to make risky trades less economically viable. In the U.S., the Glass-Steagall Act separated retail banking from investment banking until 1999. “This is absolutely unilateral,” said Simon Gleeson, a regulatory lawyer at Clifford Chance LLP in London. “This is Glass-Steagall Mark Two,” he added. “Banks can take just as much risk in commercial lending as they can in proprietary trading as Northern Rock and HBOS show,” he said referring to two lenders bailed out by the U.K. government. Obama’s call “is moving a long way from the existing Basel recommendations on capital charges, which is another way of dealing with this issue,” said David Green, a former Bank of England and U.K. Financial Services Authority official who now advises regulators outside Britain. He was referring to the Switzerland-based Basel Committee on Banking Supervision, which will raise capital standards for banks. Global Coordination “When one leader tries to take matters into his own hands without coordination, you create a lot of differences,” Morgan Stanley Asia Chairman Stephen Roach said in a Bloomberg Television interview today. “When you have these differences, markets get into cross-border regulator arbitrage. That’s very destabilizing.” The Financial Stability Board, which is trying to coordinate financial regulators’ and supervisors’ response to the global economic crisis, is due to present proposals on banks and insurers in June and have a final plan by October. The FSB combines government officials, regulators and central bankers from 24 countries and territories, including the U.S. “This is not pre-empting our timetable,” Svein Andresen, the FSB’s secretary general, said in an e-mail to Bloomberg News. Obama’s proposals are among “options and approaches under consideration” that have been discussed by the Basel-based organization since the middle of 2009, he said. Obama’s Loss Obama’s plan is subject to approval by Congress, where his previous regulatory proposals have hit resistance from some lawmakers and opposition from financial firms. He announced the plan on the day Goldman Sachs Group Inc., facing criticism from politicians and labor unions for near-record compensation pools, set aside $16.2 billion to pay employees. This week, Republicans won a victory in the race for the U.S. Senate seat in Massachusetts, a state represented by the late Senator Edward M. Kennedy for almost half a century. “The events of the last few days politically with Obama’s loss may be a factor,” said Jonathan Herbst, a former FSA attorney now at London-based Norton Rose LLP. “This is a U.S. solution, which effectively has a historical resonance in the U.S.,” he said. “European policy makers have been very skeptical about this as a solution to the problem.” ‘Obama is Right’ Others welcomed Obama’s plan. “If banks engage in very high-risk activities, they can endanger the money of their depositors,” Antonio Borges, chairman of the Hedge Fund Standards Board, said in a telephone interview in London. “In this sense, Obama is right.” French Finance Minister Christine Lagarde said Obama’s plan fits with France’s push for tougher regulation. “I think it’s a very, very good advance,” Lagarde said on Europe1 radio. In October, U.K. Chancellor of the Exchequer Alistair Darling ruled out Bank of England Governor Mervyn King’s suggestion to separate investment banks from operations that take

263 deposits from consumers and manage payment systems. Banks conduct proprietary trading for their own benefit, not for that of their clients. U.K. Banks U.K. banks with the most to lose under Obama’s plan would be Barclays Plc, RBS and HSBC Holdings Plc, said Simon Maughan, an analyst at MF Global Securities in London. Barclays fell 4.5 percent to 270 pence in London trading as of 10:30 a.m. today, RBS slid 3.7 percent to 34.03 pence and HSBC slipped 0.4 percent to 672 pence. The U.K. Treasury will consider proposals, an official said. The British Bankers’ Association, an industry trade group, said it was studying Obama’s plans to see how they align with what has already been discussed in the U.K. and abroad, spokesman Brian Mairs said in an e- mailed statement. Obama’s plan follows a slew of banking regulations proposed since the credit crisis. The U.K. government last month imposed a one-time 50 percent tax on bonuses, to be paid by banks. France’s government also said it will impose a similar levy. George Osborne, the Conservative lawmaker that shadows Darling in the U.K. Parliament, said that if elected his party would implement a similar plan to Obama’s in the U.K. A YouGov survey for the Sunday Times this week showed the opposition Conservatives at 40 percent, 9 points ahead of the ruling Labour party, with an election due by June. “The whole process of re-regulating the banks is just starting,” said Florian Esterer, a money manager at Swisscanto Asset Management in Zurich, which oversees about $58 billion. “This is just the early warning shots.” http://www.bloomberg.com/apps/news?pid=20601085&sid=aXOSAF.hJfHc

Greece to Sell Bonds in Near Future, Debt Chief Says (Update1) By Maria Petrakis

Jan. 22 (Bloomberg) -- Greece plans to sell a minimum of 3 billion euros ($4.2 billion) of 5- or 10-year bonds in the “near future,” the head of the country’s debt agency said, in the first sale of government bonds this year.

264 The amount of the sale may be increased if demand permits, Spyros Papanicolaou, head of the country’s debt-management agency, said today in an interview in Athens. The banks that will be involved in the syndication haven’t been chosen yet, he said. Prime Minister George Papandreou’s government is struggling to cut the European Union’s largest budget deficit of 12.7 percent of gross domestic product and needs to sell 53 billion euros of debt this year, the equivalent of about 20 percent of GDP. Greece had its creditworthiness cut in December on concern about the deficit, and the risk premium investors demand to buy Greek debt reached a post-euro record yesterday. The yield on Greece’s benchmark 10-year bond rose 7 basis points today to 6.16 percent. That pushed the difference with comparable German debt to 298.7 basis points, after breaking 300 basis points yesterday, the highest since the euro’s debut in 1999. Private Sales The government has no immediate plans to sell debt through private placements, Papanicolaou said. In private placements, issuers offer securities directly to chosen investors rather than sell them through an auction or via a group of banks in a syndicate, reducing the risk inadequate demand will drive up borrowing costs. Greece ended the year with a private sale of 2 billion euros of bonds in December to provide financing for this year. Earlier this month, the country sold about 3.6 billion euros of 52- week, 26-week and 13-week Treasury bills in an auction. The government still prefers to decide on debt sales as market conditions permit, rather than announce a schedule in advance, Papanicolaou said. “If the market is not in the best state and the market is volatile like it is, we never issue a detailed program,” he said. “We plan as we go along.” Greece’s 3-year deficit-reduction plans calls for selling 53 billion euros of debt this year, down from 67 billion euros in 2009. The government faces the biggest redemptions in April and May when more than 20 billion euros of bonds and bills mature, more than two thirds the total for 2010. http://www.bloomberg.com/apps/news?pid=20601085&sid=aM20vhkc5Uyo# BOE’s Tucker Calls for ‘Shadow Banking’ Regulation Overhaul By Svenja O’Donnell and Scott Hamilton

265 Jan. 22 (Bloomberg) -- Bank of England Deputy Governor Paul Tucker said regulators need rules to curb banking activities by institutions outside the commercial banking system. “Where a form of shadow banking provides an alternative home for liquid savings, offering de facto deposit and monetary services, then I think we should be ready to bring them into the banking world itself,” Tucker said in a speech in London yesterday. “In the latest episode, constant net-asset value, instant-access money funds and the prime brokerage units of the dealers seem to have been examples of that.” U.S. President Barack Obama yesterday called for limits on the size and trading activities of institutions as a way to reduce risk-taking and preventing another financial crisis. Bank of England Governor Mervyn King has already suggested the need for a split of banks’ retail operations and investment banking units as a way of avoiding a repeat of the crisis. “As the governor of the bank has underlined, it is vital we debate the structure of the financial system,” Tucker said. “I am interested this evening in those instruments, structures, firms or markets which, alone or in combination, and to a greater or lesser extent, replicate the core features of commercial banks: liquidity services, maturity mismatch and leverage.” List of Concerns Tucker cataloged a list of areas where better rules and changes in regulators’ approaches could be addressed. On securities lending, he said officials should consider “whether it might lend itself to central counterparty clearing,” or else if transactions could “usefully be registered with a trade repository with aggregate data published -- along the lines now provided for the CDS market.” Tucker also said that officials may need to consider limiting the collateral that regulated firms can take against securities lending, or else ensure better disclosure of credit and investment risks to investors. Many money market mutual funds offer bank-like services, in particular so-called constant net asset value funds, Tucker said. “They promise to return to savers, on demand, at least as much as they invest,” he said. “If this sounds like a bank, it is because it is just like a bank” and they “should not exist in their current form,” he said. Tucker also said that banks should maybe stop using asset- backed commercial paper and structured investment vehicles as devices to move assets off-balance sheet while keeping de facto control. “We need to think through how to avoid the problems of the past few years replicating themselves beyond the perimeter of the regulated banking sector,” Tucker said. He spoke at a seminar at Bloomberg LP’s London headquarters organized by BGC Partners. Svenja O’Donnell and Scott Hamilton BOE’s Tucker Calls for ‘Shadow Banking’ Regulation Overhaul http://www.bloomberg.com/apps/news?pid=20601085&sid=aLD2oNrmLsGw www.businessweek.com/

266 Morgan Stanley’s Roach Says Obama Is ‘Bank Bashing’ (Update1) January 22, 2010, 07:29 AM EST By Mark Deen and Andrea Catherwood. Jan. 22 (Bloomberg) -- Morgan Stanley Asia Chairman Stephen Roach said President Barack Obama’s plan to restrict banks’ investment activities amounts to “bank bashing” and called on politicians to take a more balanced approach. Obama asked Congress yesterday to prohibit banks from owning or making investments in private-equity and hedge funds that “are unrelated to serving customers.” Stock indexes around the world dropped after the pronouncement, led by financial firms, on expectations the rule would hurt profits. “In this highly charge political season, bank bashing has become a favorite sport for politicians all over the world,” Roach said today in an interview from Hong Kong. “Bankers alone weren’t responsible for this major crisis,” he said, adding that central bankers, regulators and politicians also bear blame. The comments from Roach, a former Federal Reserve economist, underline the opposition Obama is likely to face for his plan in the finance industry even as foreign politicians such as the U.K. conservative party and the French finance minister welcome the move. The proposals themselves, based on the ideas of former Federal Reserve Chairman Paul Volker, deserve to be considered soberly by lawmakers, Roach said. “This is a remaking of the financial services model as we know it today,” he said. “I have enormous respect for the man who conceived the plan, Paul Volker. His points are extremely well taken. I would hope someone like him would add a sense of seriousness to the debate as it unfolds.” --Editors: James M. Gomez, Douglas Lytle To contact the reporter on this story: Mark Deen in London at +33-1-5365-5066 or [email protected] Andrea Catherwood in London at +44-20-7073-5312 or [email protected] To contact the editor responsible for this story: Simon Kennedy at +33-1-5530-6290 or [email protected] http://www.businessweek.com/news/2010-01-22/morgan-stanley-s-roach-says-obama-is- bank-bashing-update2-.html

267 Credit Writedowns Obama backs Volcker regulatory plan in dramatic about face Posted by Edward Harrison on 21 January 2010 at 9:04 am 21 Jan Today President Obama is set to propose wide-ranging moves on bank regulation first proposed by his economic advisor Paul Volcker, the former Federal Reserve Chairman. Details of the proposal have yet to be released. However, the focus is expected to center on strict bank size limits and a limitation on proprietary trading at regulated banks with access to the Fed discount window. This is a dramatic re-alignment in policy away from the no-strings attached bailouts backed by Geithner and Summers last year toward much more substantive financial reform. Sources close to the White House are saying that Volcker is behind this move. As for the politics of this, we will need to see the details to understand whether this is a workable proposal which can pass Congress. Apparently, Obama does realize that the election result in Massachusetts was a rebuke of his financial reform policy of the last year that has put pressure on Congressional Democrats in the upcoming mid-term elections. The word around Washington is that the Democrats are desperate to demonstrate their anti-bank mettle in the lead up to November 2010 and want to see something which allows them to tap into anti-bank fervor among likely voters. While the recent bank tax proposal was a start, many – including me – have lambasted it as a political stunt; and that is unlikely to win over voters. Below are a few quotes from the financial media on this turn of events. The New York Times: The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading… Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout. The president will speak at an appearance on Thursday at the White House with Treasury Secretary Timothy F. Geithner, an administration official said, speaking on the condition of anonymity because the talks were private. It will come after a meeting with Mr. Volcker. Bloomberg:

268 “We’ve got a financial regulatory system that is completely inadequate to control the excessive risks and irresponsible behavior of financial players all around the world,” Obama said in an interview with ABC News yesterday. “People are angry and they’re frustrated,” Obama told ABC. “From their perspective, the only thing that happens is that we bail out the banks.” Voter anger helped Republican Scott Brown win the late Edward Kennedy’s U.S. Senate seat in Massachusetts this week, giving Republicans the ability to block Obama’s top legislative priority, a health-care overhaul. The Massachusetts seat had been held by Democrats for more than 50 years. Reuters: The Obama official did not provide details of the plan, which would require congressional approval. But U.S. lawmakers are already reviewing measures that, in some cases, recall the scope of financial reform enacted after the Great Depression. Democratic Senator Jeff Merkley told Reuters earlier this week that there should be a firewall to separate risky trading activities and normal bank- lending. A more aggressive proposal was put forth last month by former Republican presidential nominee John McCain and Democratic Senator Maria Cantwell. Their measure would reinstate the 1930s-era Glass-Steagall limits on banking by barring large banks from affiliating with securities firms and being in the insurance business. Passage of the Cantwell-McCain bill would force firms at the center of last year’s financial crisis — such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo — to rethink their banking, investment and insurance operations. An announcement is expected at 1140AM EST. Let’s see how markets and bank shares react both before and after this announcement. As I see it, a key is structural reform i.e no sunsetting of reform legislation or targeting of specific institutions as we saw in the bank tax proposal. What is needed is a comprehensive industry-wide piece of legislation that says “if you want access to the fed window, these are the limitations we now impose.” For example, banks with fed window access should not be hedge funds – which Goldman effectively is. Further, the limit on size and leverage is also key. It is the leverage which did in the big banks. And this is not just in the U.S. Look at RBS as a prime example of excess leverage bringing a large institution to its knees. Many of the articles on this development acknowledge similar measures are likely to be taken in the U.K. as well. Finally, Glass-Steagall is dead. We shouldn’t look to bring it back. Bear Stearns and Lehman were not commercial banks and so their bust had absolutely nothing to do with Glass- Steagall. Those looking to a reinstatement of this 1934 legislation as a silver bullet are living in the past. This is just a first salvo. Other issues to be settled more comprehensively include a comprehensive bank resolution process, OTC derivatives, securitization, consumer protection, anti-trust violations, and criminal prosecution of fraud. As for Volcker, the New York Times reports his saying:

269 The heart of my argument is who we are going to save and who we are not going to save. And I don’t want to save what is not at the heart of commercial banking. This is exactly right. The commercial banking function is what is at the heart of our economy. All the rest is peripheral. Paul Volcker was right that he would “eventually” get his way. His persuasiveness is increasing.

Sources Obama to Propose Limits on Risks Taken by Banks – NYTimes.com Obama to Propose New Rules on Banks’ Size, Trading – Bloomberg.com Obama to target excessive financial risk-taking – Reuters Proposal Set to Curb Bank Giants – WSJ.com Obama to set limits on bank trading – FT.com http://www.creditwritedowns.com/2010/01/obama-backs-volcker-regulatory-plan-in- dramatic-about- face.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+creditwri tedowns+%28Credit+Writedowns%29

ft.com/alphaville All times are London time US rules could boost Europe banks Posted by Gwen Robinson on Jan 22 05:39. Bankers said on Thursday that European groups such as Credit Suisse, UBS, Deutsche Bank and Barclays could benefit over US rivals from US bank trading rules announced Thursday. The rules would hit foreign banks with proprietary trading operations. But some foreign banks believe they could escape the ban by switching some operations from Wall Street to London or continental Europe. Many European banks say pure prop trading amounts to only 1-2% of revenues, against more than 10% for Goldman. This entry was posted by Gwen Robinson on Friday, January 22nd, 2010 at 5:39 and is filed under Briefings, Capital markets. Tagged with barclays, credit suisse, deutsche bank, goldman sachs, ubs. http://ftalphaville.ft.com/blog/2010/01/22/132071/us-rules-could-boost-europe-banks/

270 Loan market (Esta página ha sido traducida por Reverso de Softissimo) Failure risk of governments higher than from firms 21. Jänner in 2010, 19:27 Before the crisis state obligations were considered practically as free of risk. The turbulence in Dubai and Greece shook the trust obviously Vienna - After state obligations were considered up to the financial crisis as practical free of risk, the financial turbulence in Dubai and Greece has shaken the trust of the investors in government securities obviously. For a few days investors estimate the credit standing of European groups better one than this a lot of governments loaded with crises. Appropriate risk indications show this in the finance markets. The strongly growing indebtedness of a lot of European countries has substantially increased the concerns of the investors about the solvency in the youngest time. First of all, the turbulence in Dubai and Greece cared for insecurity in the markets. " Dubai has tuned us for the subject State bankruptcy ", explained Kornelius Purps, loan expert with the UniCredit. The insecurity has led to the fact that it is more expensive in the markets for the first time to cover itself against the failure of European governments, than against the inability to pay of an enterprise with top-credit standing mark, reported them Financial Times Germany last week. ITraxx Europe the index which illustrates the risk for 125 European enterprises lies current with 77.80 basis points. Therefore it costs 77.800 US dollars to assure of 10 Mil. dollars in obligations for five years. Massive risk premium However, the counterpart for 15 European governments, the SovX index, quotes with 83.90 basis points. Therefore, investors are anxious more about the aggregierte failure risk of countries like Germany, Great Britain or France as big groups European around the inability to pay. There is a massive risk premium current on Greek government securities: the expenses for a security against a failure of Greece stand for a moment with 350 basis points. On the contrary the appropriate credit failure derivatives lie for Austria in a moderate frame of 85.26 basis points. UniCredit expert Purps sees 2010 as the year of the "macrorisks". The markets would react much more sensitively to economic data than on enterprise results. Without exception all European governments have a budget problem with which the concerns will also not die down during the next months, the specialist is convinced. The fact that the rolling offer wave could find no buyers in the loan markets in view of the turbulence, however, Purps does not believe. The new issues from Ireland and Spain would show that demand for at fixed interest exists. Possible problems would been regulated according to Purps anyway about the price what leaves open current a wide span in risk happiness to the investors. " One can diversify himself in the market by risk wish, before the crisis all risk impacts were de facto the loan specialist with zero ", so. (APA) http://derstandard.at/1263705701125/Anleihenmarkt-Ausfallsrisiko-von-Staaten-hoeher-als-von-Firmen

271 COMMENT Greece will fix itself from inside the eurozone By George Provopoulos Published: January 21 2010 21:57 | Last updated: January 21 2010 21:57 In recent months, some commentators have argued that Europe’s single currency project is destined to become unstuck. According to this line of reasoning, the fiscal crisis in Greece is unfailingly pushing that country towards an exit from its immutable fixed exchange rate arrangement within the eurozone. Greece, in other words, will suffer the same fate as all undisciplined countries that previously adopted hard pegs, such as Argentina in the early 2000s. Another Greek tragedy, so the argument goes, is waiting to be played out. This view is based on flawed reasoning. At the heart of Greece’s recent economic problems has been a loss of competitiveness since Greece joined the euro area in 2001. This loss is due to structural weaknesses, including fiscal profligacy in a period of robust growth when fiscal adjustment was called for, and a large government sector, up by 6 percentage points of gross domestic product (to 51 per cent) since Greece joined the eurozone. Rigidities in labour and product markets have contributed to persistently higher wage and price inflation than in the rest of the euro area, undermining competitiveness. Rising fiscal deficits have pushed up borrowing costs, adding to those deficits. The expanded public sector has eroded the export base and exacerbated inefficiency. The net result has been a twin deficit problem – large and unsustainable fiscal and external imbalances. The problems faced by the Greek economy are extremely serious. However, the key question is whether it will be easier to solve them from inside or outside the eurozone. My answer is that it will be unequivocally easier to solve these problems from within the euro area. Those who argue that Greece will wind up leaving the eurozone believe it lacks the will to slash the structural fiscal deficit and to implement the cost adjustments and structural reforms needed to restore competitiveness. They argue that a devaluation of a new national currency would be like waving a magic wand, thereby restoring competitiveness. But would it? During the 1980s, Greece had another twin-deficit problem and its own national currency, the drachma. It waved the magic wand twice, with large devaluations of the drachma in 1983 and in 1985, but in the absence of long-lasting structural adjustment and sustained fiscal contraction. The devaluations were followed by higher wage growth and inflation, with no sustained improvement in competitiveness. Speculative attacks against the drachma were avoided only because of strict controls on capital flows, an option that is no longer feasible or desirable. The twin-deficit problem remained. So much for the magic wand of currency devaluation. Suppose, however, that Greece were to neglect these lessons and adopt a new national currency. What would an exit from the eurozone imply? Here are some likely consequences. ●Any devaluation of the new currency would increase the cost of imports, raising inflation. ●Monetary policy would lack the credibility established by the European Central Bank. As a

272 result, inflation expectations would rise. ●Expectations of further devaluations would arise, increasing both currency-risk and country-risk premiums. ●The above factors would push up nominal interest rates, leading to higher costs of servicing the public debt and undermining fiscal adjustment, thereby taking resources away from other, productive areas. ●The costs of converting currencies with the remaining members of the eurozone would be re-introduced, inhibiting trade and investment. ●The exchange-rate uncertainty with the euro area would increase the costs of conducting business, further deterring trade and investment. ●Existing euro-denominated debt would become foreign-currency debt. Any devaluation of the new domestic currency against the euro would increase the debt burden. ●Greece would no longer benefit from the economies of scale, including the enlargement of the foreign exchange market, which decreases the volatility of prices in that market, derived from sharing the euro. The Greek economy currently stands at a crossroads. The fact of the matter is that it will be immensely less costly for Greece to eradicate its problems from within the eurozone. Rather than a Greek tragedy, a more appropriate analogy for the Greek economy stems from Homer’s Odyssey. In that epic, the enchanting sounds of the sirens enticed sailors to jump to their deaths in the sea. Those who suggest Greece might leave the eurozone are like Homer’s sirens. Greece will not be tempted by these short-term options, but will undertake the necessary, bold adjustments. The future of its economy is unwaveringly tied to the mast provided by the euro. The writer is governor of the Bank of Greece and a member of the ECB Governing Council George Provopoulos Greece will fix itself from inside the eurozone January 21 2010 21:57 http://www.ft.com/cms/s/0/018d0a1e-06cb-11df-b058-00144feabdc0.html

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China Losing to U.S. Among Investments of Choice (Update1) By Mike Dorning and Catherine Dodge

Jan. 21 (Bloomberg) -- Investors have turned bullish on the U.S. while tempering their enthusiasm for China as they worry about a market bubble there, according to a Bloomberg survey. An overwhelming majority also see a government debt default on the horizon this year, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. Greece is considered the riskiest government, followed by Argentina, Russia, Ireland, Portugal, Italy, Spain and Mexico. Sentiment toward the U.S. investment climate has flipped in just three months. Almost six of 10 respondents are now optimistic about the U.S. while a majority held a pessimistic outlook in an October poll. A nine-month rally in U.S. stocks has pushed up the Standard & Poor’s 500 Index 68 percent through yesterday’s close. “There appears to be a surge in interest in the U.S., and it’s in marked contrast to tepid attitudes only three months ago,” said Ann Selzer, the president of Selzer & Co., a Des Moines, Iowa-based polling firm that conducted the survey. “American consumers are regaining confidence, and with that alone, there should be no impediments for current business to resume the growth of the past decade,” said poll respondent Drew Beatty, a commodity derivatives sales analyst with Wells Fargo & Co. in Dallas. The number of U.S. investors who see their economy improving has steadily marched upward over the past two quarterly polls, more than doubling since July. Tie With Brazil China, the world’s fastest-growing major economy, is viewed as a bubble by 62 percent. About one-third of respondents said China offered the best investment opportunities over the coming year, almost tied for first place with the U.S. and Brazil, though down sharply from October, when 44 percent ranked China best. This time, almost three out of 10 investors said China posed the greatest downside risk, ranking it the second-riskiest market behind the European Union. “We think that China is producing and is building up inventories at a rate that no other country or region can follow at the moment,” said poll respondent Alcibiades Angelakis, head of marketing and research at EPIC Investments in Athens. “This cannot continue for a long

274 time, and we fear that in the second half of this year things will slow down.” Concerns over a potential bubble in China have been mounting. Hedge fund-investor James Chanos, president and founder of New York-based Kynikos Associates Ltd., one of the first investors to foresee the 2001 collapse of Houston-based energy company Enron Corp., has said China looks like “Dubai times 1,000 -- or worse.” China Lending Limits After new bank lending in China last year surged to a record 9.59 trillion yuan, banking regulator Liu Mingkang said in an interview yesterday that he has told some banks to limit lending and restrict overall credit growth to 7.5 trillion yuan. China’s benchmark Shanghai Composite Index dropped 95.02 points, or 2.9 percent on concerns the nation’s central bank may raise interest rates. The index has lost 3.8 percent this year, making China the worst performer among the world’s 10 largest stock markets. China’s gross domestic product rose 10.7 percent in the fourth quarter, the fastest pace since 2007, a statistics bureau report showed in Beijing today. Asset-price gains, particularly in property, are creating problems for the government to guide the economy, Ma Jiantang, who heads the bureau, told reporters after the release. Global Poll The quarterly Bloomberg Global Poll of investors, traders and analysts in six continents was conducted Jan. 19. It is based on interviews with a random sample of 873 Bloomberg subscribers, representing decision makers in markets, finance and economics. The poll has a margin of error of plus or minus 3.3 percentage points. Overall, market professionals in the poll are increasingly confident in the global economy, with a 43 percent plurality now viewing the international economic outlook as improving, up from 37 percent in October. The optimism cuts across all regions, with respondents in Asia, Europe and the U.S. alike saying the global situation is getting better. The prospect of a strengthening global economy is reflected in poll respondents’ market analyses. Stocks are considered the most promising asset class over the coming year, followed closely by commodities. Bonds are judged likely to have the worst returns over the same period. Over the next six months, oil, copper, corn and soybean prices all are expected to rise. Interest Rates Poll respondents said they expect monetary authorities to remain accommodating in the near future. Almost two-thirds of investors believe central banks in their country will hold their benchmark interest rates stable over the next six months and more than half expect overall short-term interest rates to vary little. Six of 10 predict long-term rates will rise. The rising confidence is most pronounced when it comes to the world’s largest economy. Investors, asked the one or two markets that offer the best opportunities this year, rate the U.S. in a statistical dead heat with some emerging markets: 30 percent chose the U.S., just behind China, 33 percent, and Brazil, 32 percent. Three months ago, the U.S. was a distant fourth, chosen by only 18 percent. Poll respondents expect to see U.S. stocks continue to go up in the near term, with 42 percent forecasting a rise in the S&P 500 in the next six months, compared with 31 percent who expect a decline. A quarter of respondents expect the index to vary little. ‘Double-Digit Gains’ “Although the growth in the economy is likely to be relatively moderate in 2010, we think it

275 will be accompanied by double-digit gains in corporate profits through 2011,” said poll respondent John Ryding, chief economist at RDQ Economics in New York. Asked to assess potential perils to the U.S. economy during the next two years, seven of 10 rated persistently high unemployment and chronic budget deficits a big risk. Four of 10 rated higher taxes a major risk. No more than a quarter considered higher inflation, a plunge in the dollar or trade tensions with China to be big risks. Respondents were evenly split on whether it is more important to stimulate job growth or reduce the deficit, with 48 percent choosing each option. Investors expect declines in benchmark stock indexes for the European Union, Britain and Japan. Sovereign Default The risks this year in Europe are related to the potential of a sovereign default debt in the region “that could fully blow into a crisis that can impact the currency, equity and fixed- income markets,” said poll respondent Sivanesan Muthusamy, a senior vice president in funding and investments at Alliance Bank in Kuala Lumpur. More than three-quarters of respondents believe a government debt default is likely this year, with 30 percent saying it is very likely. Six of 10 rate Greece’s sovereign bonds highly risky. Behind Greece, Argentina’s government bonds were rated highly risky by 42 percent, followed by Russia, 34 percent; Ireland, 32 percent; Portugal, 28 percent; Italy, 21 percent; Spain, 20 percent; and Mexico, 19 percent. Only 3 percent rated U.S. Treasury bonds highly risky. Greece’s deteriorating finances prompted Fitch Ratings, Moody’s Investors Service and Standard & Poor’s to cut the nation’s sovereign debt ratings last month, spurring a sell-off in its bonds. The country faces pressure from other European Union governments to tackle the crisis caused by a budget deficit more than four times the EU limit of 3 percent of gross domestic product. ‘Serious Problem’ International Monetary Fund Director Dominique Strauss-Kahn called Greece’s fiscal situation “a serious problem” in an interview with Bloomberg Television in Hong Kong yesterday, though he said he believes the euro zone will withstand the turmoil caused by Greece’s credit downgrade. Greek bonds tumbled yesterday, pushing the two-year yield up by the most since before the country adopted the euro, on concern the government will struggle to sell the debt it needs to fund the European Union’s biggest deficit. The two-year note yield jumped 56 basis points to 4.23 percent as of 6 p.m. in London. It earlier rose 89 basis points to 4.66 percent, the biggest gain since 1998. The 10-year bond yield climbed 25 basis points to 6.17 percent, with the premium investors demand to hold the debt instead of benchmark German bunds at 295 basis points, the most since March 13. To see methodology and exact question wording, click on the attachment tab at the top of the story. http://www.bloomberg.com/apps/news?pid=20601070&sid=aC.dvoXM.MD8#

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Emerging Stocks Head for Steepest Two- Day Drop in 2010 on China By Laura Cochrane Jan. 21 (Bloomberg) -- Emerging-market stocks fell, heading for the steepest two-day decline this year, as metals prices retreated and the strongest economic growth in China since 2007 deepened concern policy makers will hasten the withdrawal of stimulus measures. Weichai Power Co., the Chinese maker of diesel engines, and Larsen & Toubro Ltd., India’s biggest engineering company, led a 1.3 percent drop in the MSCI EM Industrials Index. The FTSE/JSE Africa All Share Index in South Africa, the world’s biggest producer of precious metals, also slid 1 percent as gold, silver and platinum prices dropped. The MSCI Emerging Markets Index of 22 developing countries slid 0.7 percent to 990.23 at 1:10 p.m. in London, losing 2.3 percent in two days. The statistics bureau in China, the world’s largest metals user and second-biggest energy consumer, said today the economy expanded 10.7 percent in the fourth quarter from a year earlier and that asset-price gains are creating problems. “We expect the government will make an effort to direct the stimuli more towards private consumption,” Commerzbank AG analysts wrote today in a client note. “We do not expect to see a rate hike before the summer, but if inflation pressure intensifies, the central bank may take action sooner.” Developing Asian economies face the risk of asset bubbles, the World Bank said today, echoing a World Economic Forum a report this month saying an overheating of the Chinese economy poses a “major risk” to global growth. China’s Shanghai Composite Index has surged 59 percent in the past year, adding 0.2 percent today. ‘Significant Correction’ Failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the U.S. and around the world, may cause an “unraveling and a significant correction of asset prices,” Nouriel Roubini, the Harvard-schooled New York University professor who in 2006 foresaw the financial crisis, said in Hong Kong today. The MSCI gauge for emerging markets has dropped 3 percent from a 17-month high on Jan. 11 after China ordered banks to increase reserves to guard against a rise in inflation. The DFM General Index for stocks in Dubai declined 1.5 percent to the lowest level in more than a month on concern banks will report a drop in earnings. Dubai Islamic Bank PJSC, the United Arab Emirates’ biggest bank complying with Muslim banking rules, dropped more than 3 percent. The MSCI EM Financials index slipped 1 percent to the lowest since Dec. 23. Gold declined for a second day in London, sliding 0.5 percent to the lowest in more than two weeks. Silver lost 0.9 percent, and platinum fell 1.3 percent. The extra yield investors demand to own emerging-market dollar bonds instead of U.S. Treasuries was unchanged at 2.88 percent, the highest level in a month, according to JPMorgan Chase & Co.’s EMBI+ Index. Laura Cochrane Emerging Stocks Head for Steepest Two-Day Drop in 2010 on China http://www.bloomberg.com/apps/news?pid=20601087&sid=asqZE.UsivdE

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China’s GDP Growth Accelerates to Fastest Since 2007 (Update4) By Bloomberg News

Jan. 21 (Bloomberg) -- China’s growth accelerated to the fastest pace since 2007 in the fourth quarter, capping Premier Wen Jiabao’s success in shielding the nation from the global recession and adding pressure to rein in a surge in credit. Gross domestic product rose 10.7 percent from a year before, more than the median forecast of 10.5 percent in a Bloomberg News survey, a statistics bureau report showed in Beijing today. Asset-price gains, particularly in property, are creating problems for the government to guide the economy, Ma Jiantang, who heads the bureau, told reporters after the release. The report stokes speculation the central bank will start raising its benchmark interest rate and tighten restrictions on the nation’s lenders. The one-year swap rate, an indicator of future changes in borrowing costs, climbed and the People’s Bank of China guided three-month bill yields higher for the second time in two weeks. “Today’s data suggest that tighter policy is just around the corner,” said Brian Jackson,a Hong Kong-based strategist on emerging markets at Royal Bank of Canada. “Policy makers will need to move soon to stop the economy from overheating,” he said, forecasting officials will end an exchange-rate peg and boost interest rates starting this quarter. Stocks across Asia were mixed today, with Japan’s Nikkei 225 Average rising 1.2 percent at the close and Australia’s Standard & Poor’s/ASX 200 Index falling 0.8%. The Shanghai Composite Index was up 0.5 percent at 2:55 p.m. local time. The one-year swap rate, the fixed cost for receiving a floating rate for 12 months, rose three basis points to 2.32 percent. Global Engine The world may again this year count on China as the biggest engine of growth. The World Bank late yesterday raised its forecast for the global expansion in 2010 to 2.7 percent from 2 percent in June, and predicted 9 percent growth in China, which is poised to overtake Japan as No. 2 in GDP rankings this year. Mining company Rio Tinto Group reported a 49 percent jump in fourth-quarter iron ore output on China’s demand, while companies ranging from Ford Motor Co. and Volkswagen AG to Hong Kong billionaire Cheng Yu-tung’sNew World Department Store China Ltd. are

278 expanding in the nation. Consumer prices rose a more-than-forecast 1.9 percent in December from a year earlier, the second straight gain after nine declines. Producer prices climbed 1.7 percent, after declining for the previous 12 months, today’s report showed. ‘Too Worrisome’ “The inflation trend is too worrisome for the government and we will continue to see policy tightened,” said Isaac Meng, senior economist at BNP Paribas SA in Beijing. Meng predicted that the consumer-price inflation rate will exceed 3 percent in coming months, and that the PBOC will increase banks’ ratio of assets held as reserves by 1.5 percentage points by July 1. The statement from the statistics bureau today mirrored a Wen speech on Jan. 19 by omitting a pledge to keep monetary policy “moderately loose.” Ma, the head of the National Bureau of Statistics, did cite that pledge in his press briefing. After last year overtaking the U.S. as the biggest auto market and Germany as the biggest exporter, China is poised to slot behind America this year as the second-largest economy. China’s GDP last year was 33.535 trillion yuan ($4.9 trillion), the statistics bureau said today, almost the same as the World Bank’s 2008 estimate for Japan. China Versus Japan Bank of America-Merrill Lynch said today that its estimates showed China didn’t surpass Japan last year. While Japan’s economy shrank, calculations are also affected by currency fluctuations. According to Wen, policy makers’ key tasks this year include managing credit growth, controlling inflation and countering property speculation. For the full year, GDP gained 8.7 percent, beating Wen’s 8 percent target. Retail sales rose 16.9 percent after adjusting for consumer price changes, the bureau said. The government previously said that gain was the biggest since 1986. Wen this week indicated that he’s putting more emphasis on monthly data than year-on-year figures exaggerated by the slowdown from late 2008. December retail sales of 1.26 trillion yuan compared with a previously announced 1.13 trillion yuan in November, indicating an increase of more than 11 percent. China will begin releasing month-on-month comparisons for key economic indicators from March, Ma said today. Sales, Production Sales quickened in December on a year-earlier basis, climbing 17.5 percent, while industrial production increased at a slower pace of 18.5 percent, today’s report showed. Urban fixed- asset investment jumped 30.5 percent in 2009, the statistics bureau said. The economy’s third straight quarterly acceleration highlights risks that inflation may surge and asset bubbles form after monetary policy committee member Fan Gang said in November that growth of more than 10 percent is excessive. Banking regulator Liu Mingkang confirmed yesterday that lending limits exist for some banks and said credit growth will slow this year. Fourth-quarter economic growth was driven by an unprecedented $586 billion stimulus package, subsidies for consumer purchases and a credit-fueled investment boom. The property market has rebounded and a 13-month slump in exports ended last month. Managing the economy may become more difficult because of so-called hot money pouring

279 in from investors betting on the nation’s recovery and gains in the yuan, which has been held at about 6.83 per dollar since July 2008 to help exporters. As much as $30 billion a month of speculative capital may flow in during the first half of this year, according to Bank of America- Merrill Lynch. Bubble Concern China is already a bubble, 62 percent of investors and analysts said in a quarterly Bloomberg survey of subscribers. Liu, the banking regulator, said yesterday in Hong Kong that banks will extend 7.5 trillion yuan of loans this year, about 22 percent less than last year’s unprecedented 9.59 trillion yuan. The central bank this month ordered lenders to set aside a larger proportion of deposits as reserves and has guided bill yields higher after 2010 began with a surge in lending. China’s 2009 GDP growth rate was down from 9.6 percent in the previous year. The statistics bureau today revised its estimate of growth in the third quarter of 2009 to 9.1 percent from 8.9 percent. It changed the first-quarter figure to 6.2 percent from 6.1 percent. --Li Yanping, Kevin Hamlin, Jay Wang. Editors: Paul Panckhurst, Russell Ward.

China’s GDP Growth Accelerates to Fastest Since 2007 (Update4) Jan. 21 http://www.bloomberg.com/apps/news?pid=20601087&sid=asqZE.UsivdE#

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21.01.2010 German supports Constancio for ECB VP. Guess why?

Germany stepped up their campaign for Axel Weber to become successor of Trichet next year. German officials told the FT that they were now leaning towards Vitor Constancio, Portuguese central bank chief, for vice-president, a move that would stop the bloc’s “southern flank” bidding for the top job. Meanwhile, France has signaled that it would probably back the Portuguese while Italy is pushing for Yves Mersch to raise the chances of Mario Draghi, Weber’s competitor as a candidate. So everybody is supporting a candidate whom they do not really want. The FTD makes the point that the EU’s double majority rule is logically impaired when you have two or more candidates. One candidate may get the required support from 11, out of 16, euro area members, while the other candidate might get the required votes of 155. If Weber were to become ECB president, the Germans would need to consider the future of Juergen Stark, whose terms has still six years to run. Two two German members on the ECB board will not be acceptable. And there is no way they can push out Stark against his will. So he is in a very strong negotiating position. President of the Bundesbank? Or perhaps successor of Wolfgang Schäuble as finance minister? Greek bonds slide Greek bonds tumbled, pushing the two-year yield up 56bp to 4.23%, the highest rise since before the country adopted the euro, Bloomberg reports. The 10-year bond yield climbed 25bp to 6.17%, 295bp above German bunds. Amid surging borrowing costs the Greek finance ministry may sell bonds privately to banks this month, as it did last month, instead of offering them via auction or through a syndicate of banks. This uncertainty puts further market pressure on Greece. Greek stocks declined and credit default swaps surged 28.5bn to a record 345.5. Dominique Strauss Kahn told Bloomberg, that Greece’s fiscal situation is “a serious problem” for the region, but he did not think that it will cause dissolution of the eurozone. Les Echos writes that the fiscal problems of Greece only reveal the structural weaknesses of the monetary union. Kathimerini writes that the fate of the Greek economy will be determined in June, when the European Commission’s progress report will be published. Finance minister George Papaconstantinou said that by June the deficit should be reduced by 2 pp of GDP (about

281 €5bn). The euro meanwhile continued to fall to $1.41, as the currency markets perceive the Greek situation to affect the chances of the euro’s long-term survival. Sweden suggests European banking tax Sweden suggested at the Ecofin meeting a tax on European banks to recuperate the fiscal costs from the financial crisis, reports Le Monde. While Eurogroup president Jean Claude Junker still finds it hard to conceive a tax similar to the one suggested by Barak Obama, the lines are moving amid rising public concerns. Germany is apparently open to the Swedish idea, to tax banks on their balance sheet, eventually differenciated according to the risk exposure. Der Standard argues that instead of a diffuse tax the EU should set up a risk fond to be prepared for the next crisis to come. Dutch bonus cuts The Dutch finance minister has cut bonuses at the nationalised ABN Amro bank, reports NRC Handelsblad. Bonuses will no longer exceed 60% of their fixed salaries and will only be paid if they perform above expectations. The French government as private equity group France’s Strategic Investment Fund (FSI), launched by Nicholas Sarkozy in a fanfare of patriotism in late 2008, seem to invest more like a private equity group in its first year of operation and €1,4bn of investments in equity of French businesses. This is at least what the economist Elie Cohen told the FT. With €14bn in shares and €6bn in cash, the fund intends to take stakes of between 5 % and 10% in small to mid-sized companies, with the aim of reinforcing those with the potential to enhance the competitiveness of the French economy. The question remains whether the FSI was needed in the first place. The merit and demerit of capital flow taxes Writing in FTD Ansgar Belke and Gunther Schnabl discuss the benefits and demerits of capital flow taxes, which might seem an attracted response by member states if confronted with an early exit by the ECB. Such taxes could quell speculative capital inflows, help repay debt, and stabilise the capital markets. One idea is to create a financial stability zone of countries with similar capital tax structures, and make it subject to a Schengen-style agreement. The trouble with any such idea, as the authors note, is that there are practical and institutional limits. Market participants will eventually find ways to circumvent the tax, which could lead to further controls, and possibly hinder the single European market. Such taxes would also distort factor allocation inside the euro area. They conclude that there is no alternative to a co-ordinated monetary policy exit, between the Fed and the ECB. German supports Constancio for ECB VP. Guess why? 21.01.2010 http://www.eurointelligence.com/article.581+M556542c489e.0.html

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Quand les déboires de la Grèce mettent la pression sur l'ensemble de la zone euro

[ 21/01/10 ] Compte tenu de la taille de l'économie grecque, les difficultés financières d'Athènes ne menacent pas directement la zone euro. Mais elles ont agi comme un révélateur des faiblesses structurelles du Vieux Continent, et poussé l'euro à la baisse.

« Un sérieux problème. » C'est en ces mots que Dominique Strauss-Kahn, le directeur général du Fonds monétaire international (FMI), a évoqué, hier, le cas de la Grèce. Même s'il s'est empressé de préciser qu'il ne craignait pas une « fragmentation de la zone euro », cette déclaration vient s'ajouter à celles de plusieurs dirigeants européens qui, au cours des derniers jours, n'ont pas mâché leurs mots face à la dérive des finances grecques. En particulier, Angela Merkel a estimé que les mésaventures de la Grèce menaçaient de faire traverser à l'euro « une phase très difficile ». La seule arithmétique européenne ne suffit pas à expliquer cette inquiétude. Avec un produit intérieur brut (PIB) qui ne pèse que 3 % de l'ensemble de la zone euro, la Grèce n'est, pour ses partenaires, qu'une variable d'ajustement. Même sa faillite serait surmontable d'un point de vue strictement comptable. Une « mort lente » Sur le même sujet Le FMI s'inquiète des risques de reconstitution de bulles financières spéculatives La crise bouleverse le financement des pays en développement, selon la Banque mondiale Si « sérieux problème » il y a, c'est du côté de la psychologie des marchés qu'il se trouve. La crainte est que l'épisode grec, conjugué à l'inquiétude autour des finances de l'émirat de Dubaï, ait provoqué un changement d'attitude de la part des investisseurs internationaux. Après s'être rués sur les titres d'Etat, ceux-ci vont-ils cesser de voir dans les obligations européennes des placements sûrs ? Question corollaire : la Grèce est-elle l'arbre qui cache la forêt d'une zone euro financièrement fragilisée ?

283 Rétrospectivement, le comportement des investisseurs internationaux au début de la crise financière apparaît excessif. Comme un seul homme, ils se sont rués sur des produits financiers considérés comme sécurisés : les obligations d'Etat. Mais cette « ruée vers la qualité » (« flight to quality ») a débouché sur un paradoxe : elle a été si massive qu'elle a permis aux Etats en question de s'endetter à des taux très bas, alors même qu'ils s'endettaient lourdement pour financer leurs plans de relance. Le FMI a ainsi estimé que la dette totale des Etats s'était accrue d'un tiers en deux ans. N'a-t-on pas affaire à une bulle lorsque des émetteurs de dette (les Etats) parviennent à emprunter à des taux plus bas au moment même où ils s'endettent fortement ? L'épisode grec sera-t-il le point de retournement pour les obligations d'Etat, notamment européennes ? Le fait est que les taux auxquels les Etats européens les plus fragiles financièrement s'endettent s'apprécient depuis la fin 2009 (voir graphique). Les « spreads », qui mesurent le surcoût que doit payer un Etat par rapport à l'Allemagne pour s'endetter, s'envolent. Hier, les obligations à dix ans de la Grèce étaient rémunérées 6,05 %, soit un « spread » en hausse de 17 points, un record depuis mars dernier. Le Portugal connaissait un mouvement similaire : le taux à dix ans a augmenté de 8 points de base, à 4,27 %. Une fébrilité à l'image du dernier rapport de l'agence Moody's, qui a prédit, la semaine dernière, une « mort lente » à la Grèce et au Portugal s'ils ne mettent pas en oeuvre des mesures courageuses pour redresser leurs finances et leur compétitivité. Hier le FMI a d'ailleurs appelé Lisbonne à mette rapidement en oeuvre un programe budgétaire « crédible ». On pourrait en dire autant de l'Espagne, qui a aussi revu à la hausse les taux auxquels elle emprunte. Mardi, la ministre des Finances espagnole s'est d'ailleurs singularisée en affichant sa sérénité face au cas grec. On la comprend : il semble désormais acquis que Madrid fait indirectement les frais de l'inquiétude actuelle sur les marchés. Autre conséquence de cette fébrilité : l'euro a touché, hier, un plus bas en cinq mois face au dollar. Ce qui traduit aussi « des perspectives économiques moins bonnes qu'aux Etats-Unis », note l'économiste Clemente de Lucia. D'où un lot de consolation pour les Européens dans cette période sombre : leurs exportations pourraient regagner en compétitivité. Gabriel Grésillon, Quand les déboires de la Grèce mettent la pression sur l'ensemble de la zone euro Les Echos, 21/01/2010. http://www.lesechos.fr/info/inter/020323474583.htm?xtor=RSS-2059

284 How Strong will Global Growth Be in 2010? The World Bank argued that global growth will rebound to 2.7% by market exchange rates (3.5% by market exchange rates and 3.2% (4%) in 2011 following a decline of 2.2% (-1%) in 2009). Developing economies will outperform developed ones, as they have already done in 2009. Moreover, it will take time to recover to the levels of previous wealth and risk aversion, regulatory changes and curbing risk practices could reduce the availability of capital for developing countries. (01/21/10) http://www.roubini.com/briefings/66502.php#66504 How Strong Is the U.S. Economic Recovery? The Index of Leading Indicators rose 1.1% in December 2009, the ninth consecutive month of increase, after rising 1% in November and 0.3% in October. Eight of the ten indicators for the LEI index increased in December, with the largest positive contribution coming from the interest rate spread and housing permits. The six-month average of the index rose to 5.2%, substantially higher than earlier in 2009. The coincident indicators index, a measure of current economic activity, rose 0.1% in December, boosted by industrial production, personal income and manufacturing and trade sales, while nonfarm payrolls contributed negatively to the index. Conference Board economist Ken Goldstein says, "The indicators point to an economy in early recovery...The leading economic index suggests that the pace of improvement could pick up this spring." (The Conference Board, 01/20/10) http://www.roubini.com/briefings/46848.php#46853

Spain Gets Frobbed-Off by the EU Commission Edward Hugh Jan 20, 2010 8:23PM FROB, for those of you who are wondering, stands for "Fund for Orderly Bank Restructuring" and is an entity created by the Spanish government in June last year, in order to facilitate (in particular) the restructuring of Spain's hard hit Savings Banks (Cajas). There is just one problem: as of the present time - and over seven months later - the FROB still is waiting to receive approval from the European Commission. "The essence of the FROB in fostering the reorganisation of the sector in an orderly manner and in the most financially efficient way, as well as the key role of the Bank of Spain in most of the phases of the restructuring and integration processes, are positive." says Carmen Munoz, Senior Director, Fitch's Financial Institutions group. "Fitch will assess the rating impact, if any, on a case-by-case basis with respect to financial institutions."

285 "While the number of financial institutions that could receive support from the plan remains uncertain, Fitch believes that the orderly consolidation process reduces the risk of multi-notch downgrades for financial institutions that act as counterparties in securitizations," says Rui J. Pereira, Managing Director, Fitch's Structured Finance group. "At present, FROB will have a neutral affect on outstanding Spanish structured finance ratings and any later developments will be analyzed on a case-by case basis." The FROB came into existence, or was officially born, on 28 June 2009. At the present point in time it is not clear when it will be able to get to work. Having denied for so long that the banking system was having any major problems, it may well be that the country's banking system have missed out on the near free lunch that was offered to everyone else (Monsieur Trichet recently said there would be no second opportunity for the banks), and so the first tentative efforts to clean up the mess are now hitting straight up against the EUs unfair competition regulations. Initially furbished with 9 billion euros in capital, the Fund was also empowered to issue up to 27 billion euros in third party debt during the remainder of 2009, and a further quanity from 1 January 2010, up to a grand total of 90 billion euros. Fitch actually assigned a AAA rating to FROB's first bond issue, on the basis of the fact that it was backed by the Kingdom of Spain, which also currently enjoys an AAA rating (from Fitch at least, if no longer from Standard and Poor's). As Fitch point out, "the 'AAA' rating reflects the explicit, irrevocable and unconditional guarantee provided by the Kingdom of Spain, the Bank of Spain will act as paying agent, under a Spanish Treasury arrangement, and bond issues are zero risk weighted and ECB repo-eligible". (well, you can read a bit more about Fitch's assessment of FROB here). The key point to notice about FROB is, I feel, that while debt issued is guaranteed by the government, it does not form part of gross Spanish government debt for Eurostat audit purposes. You could call its debt, if you want, a form off-balance-sheet debt, and the FROB could be thought of as some kind of Spanish Sovereign SIV. Indeed, the condition that the bonds are repo-eligible suggests that the Spanish banks can simply earn carry from the spread by taking them over to the ECB as collateral for loans. As we know, Spain's banks have been making considerable us of ECB funding in recent months - although it is not clear what happens as the ECB longer term enhanced liquidity programme is wound down.

286 Indeed, the Irish government in their October 2009 letter to Eurostat explicitly describe Ireland's bad bank NAMA as an SPV, and interestingly enough the EU Commission in their November 2009 Forecast for Ireland say the following: "In line with the 19 October 2009 preliminary view of Eurostat, the bonds (around 30% of GDP) expected to be issued by the Special Purpose Vehicle associated to the NAMA to finance the purchase of loan books from certain financial institutions are not recorded as government debt, while the majority of those bonds are guaranteed by the Irish State." So clearly, financing the removal of toxic assets from Spain's banks and cajas in this way has one big advantage - it doesn't add to sovereign debt on a one for one basis - but it has the peculiar disadvantage that no one really knows what happens if the people receiving the aid cannot pay up eventually. That is, if the issue to hand is a solvency and not a liquidity one. Well, it is known what would happen in the sense that Spain's government would have to assume its responsibilities, but the unwinding would evidently be messy. So what is the delay? Well basically, when this whole structure was set up the Bank of Spain didn't seem to be fully aware that the EU Competition rules put a limit on direct aid to banks and cajas at 2 percent of their risk capital. Aid above this level would violate the EU unfair competition regulations. The FROB is mainly directed at Spain's Cajas, since the 45 largely unlisted savings banks have been hit badly by the slump in the country's property sector after a decade-long boom and have some of the highest non-performing loan ratios in the financial sector. Now it appears that the needs of the first three Caixas (the Catalan version of Caja) seeking to restructure under the FROB (Manresa, Tarragona and Catalunya) may well go beyond the 1.315 billion euros currently available under the regulations. And they may therefore need additional aid from the Spanish government under another heading. And it is just how to go about effecting this support that seems to be the sticking point in the negotiations - negotiations which have now dragged out over several months, depsite the fact that the situation needs somewhat urgent resolution. Help does however now seem to be at hand. The three savings banks in question agreed last week to postpone plans to merge until the European Union's executive Commission had ratified the FROB restructuring plan, and the European Commission said on Monday it was confident of issuing a positive decision on Spanish government scheme. The Commission, which has the responsibility for ensuring that state aid does not skew competition across the 27-country EU, is in "constructive discussions" with the Spanish authorities over the plan, according to Commission spokesman Jonathan Todd. And just in case the discussions need that little bit extra gusto, the Spanish Economy Commission Joaquin Almunia will shortly be taking over as Competition Commissioner in the forthcoming reshufle. According to Jonathan Todd "The Spanish authorities have to clarify what their intentions are". Honourable I hope!. Todd also stated that while there was no fundamental problem, the Commission had to ensure that the scheme complied with EU state aid rules. In particular the sticking points seem to revolve around the interest rate the Cajas will have to pay to the FROB, and whether or not any additional bailouts from the Spanish government will need to go to Brussels on a case by case basis. Whoever was it who said, sometimes trying to make things easy you end up making them more difficult. "The Commission is confident that we will be able to come to a positive outcome on the regime."

287 Housing Stats Under The Spotlight Moving on to other matters, a great deal of attention has been showered of late on the perceived weaknesses of the Greek statistical agency. But Greece is far from being the only example of a European country were the process of statistics gathering is rather unsatisfactory. Enrico Giovannini, chairman of the Italy’s national statistics institute, also recently argued that national statistic agencies should have the same autonomy as central banks to avoid attempts by government to influence economic data. Well, Spanish Property Insight blogger Mark Stucklin just drew attention to another example of a practice which is far from perfect - the Spanish housing ministry's property prices statistics. Mark draws our attention to the fact that the Economist, in their latest house affordability survey, find that Spanish house prices are "still 55% above their fair value despite Spain’s property market crash". Indeed using its "fair-value measure" methodology for property "based on the ratio of house prices to rents" the Economist find that Spain's property is the most overvalued among the countries surveyed -overvalued by 55%, followed by Hong Kong (+53%), Australia (+50%), France (+40%), Sweden (+35%), Ireland (+30%), and Britain (+29%). Not so says Mark: The problem with this method is it’s based on official housing market price statistics, which in Spain’s case are detached from reality. As I explain in my last article Spanish property prices down just 6pc in 2009 says Government, everyone in Spain knows that the Ministry of Housing’s figures are baloney. There are no reliable figures for the Spanish property market, but I guess that prices are probably down by more than 10% on average last year, and by 30% or more since the peak. If The Economist used real transaction price figures it would find that Spanish housing prices are much closer to fair value than they think. and as Mark also points out: Given how damaging it is for Spain to have international creditors read in a prestigious magazine like The Economist that Spanish property prices are the most overvalued in the world, you would think the Ministry of Housing would be racing to make its figures more accurate. That one step alone would do more good than all the ineffective initiatives produced by the Ministry of Housing in the last decade. You would think Spain's Housing Ministry would eventually recognise this, wouldn't you? We live in hope. In the meantime EU Finance ministers agreed this week to seek powers for the EU’s statistics division to audit official financial information from member states. An earlier - 2005 - Commission proposal would have given just this “audit capacity” to Eurostat, but it was rejected by the EU governments. The failure to take this decision then is something which is bitterly regreted by many of those involved. “We asked for these audit capacities in some cases, not every day, not every time, not under every condition, but under several conditions that will justify this kind of audit capacity,” Mr Almunia told reporters in Brussels. “We didn’t get it. We intend to repeat the same proposal now with the new evidence about the need for having this capacity.”

288 Spanish economy minister Elena Salgado, who chaired the Finance Ministers meeting, in subsequent questions with journalists dismissed a suggestion that Greece would default on its debt. “I think Greece is going to do all that is necessary so we’re not worried about that,” she reportedly told journalists. I only wish I could bring myself to think that M. Salgado was going to do all that was necessary to bring down Spain's deficit by taking the economy back to job creation and growth. Unlike her, I am worried about that, and remain unconvinced by all her statements to the contrary.

Originally published at Global Economy Matters and reproduced here with the author's permission. Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE. http://www.roubini.com/euro-monitor/258299/spain_gets_frobbed- off_by_the_eu_commission

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Government cuts bonuses at ABN Amro bank Published: 20 January 2010 12:44 | Changed: 20 January 2010 16:41, By our news staff Finance minister Wouter Bos has capped bonuses at the nationalised ABN Amro bank. ABN Amro managers’ bonus packages will no longer exceed 60 percent of their fixed salaries, and will only be paid if they perform above expectations. Merely meeting one’s targets will only merit a bonus worth 50 percent. Finance minister Wouter Bos announced the new remuneration plan for the nationalised bank in a letter to parliament on Tuesday. The bonus payouts are lower than agreed on by Dutch banks in a system of self-imposed system of regulations, which capped bonuses at 100 percent of fixed salaries. The new bonus payouts are also far less lucrative than those common before October 2008, when the bank was nationalised after the credit crisis hit. In 2006, members of the board chaired by Rijkman Groenink, received bonuses worth 125 percent of their fixed salaries. Perverse incentives According to Bos, ABN Amro will now follow a remuneration policy that “is in line with current thought on sustainable remuneration, and is a clear break with the past, while still standing in proper relation to relevant job markets”. The new policy will be instituted retroactively per January 1, 2009 for members of the board. Lower management will be affected as of January 1 this year. According to the minister, the new remuneration policy “avoids creating perverse incentives” with payouts dependent on “clearly defined criteria”, in line with long term objectives relevant to “all stakeholders involved in the company”, including employees and clients. The remuneration scheme contains another novelty: the supervisory board will have authority to adjust bonus payouts if it feels they would lead to “undesirable or unintended consequences.” If a bonus was paid based on financial data which later turned out to be incorrect, the supervisory board can demand repayment of the money. A big pay raise According to Bos, total variable payouts to senior management will be effectively reduced by 65 percent. The same cannot be said for fixed salaries. A normal member of the board will earn 600,000 euros under government ownership. In 2007, when the board was still chaired by Groenink, members earned 667,000 euros, 11 percent more than they do now. Still, for most members of the board, the current salary amounts to a substantial pay rise from their former positions at other Dutch companies. Former finance minister Gerrit Zalm, chairman of the board of ABN Amro, will be making 750,000 euros, equal to what he received as financial director for the now defunct DSB Bank. Zalm’s bonus will be determined by a special remuneration scheme Bos already announced in September. His payout will be determined by the amount of money the Dutch government will make from the sale of ABN Amro. Zalm will receive 100,000 euros for every billion euros in profit the government makes, up to a maximum of 375,000 euros per year. http://www.nrc.nl/international/article2463271.ece/Government_cuts_bonuses_at_ABN_Amro_bank?service=Print

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ECB’s Weber Sees Refinancing Operations Normalizing During Year By Christian Vits and Frances Robinson Jan. 21 (Bloomberg) -- Bundesbank President Axel Weber said the European Central Bank’s operations to lend cash to markets should be normalizing over the course of this year as the economic recovery continues. “We are in a process of progressively normalizing our refinancing operation framework in the course of the year,” Weber, who also sits on the ECB’s Governing Council, told reporters in Berlin today. “I see a bumpy road ahead for the euro-zone recovery, but the underlying dynamic is intact.” The Frankfurt-based ECB is focusing on how to exit from the emergency measures introduced to unfreeze bank lending before it begins to raise interest rates from the low of 1 percent it reached in fighting the crisis. Still, rising unemployment in the 16-nation euro region and the fiscal woes of countries such as Greece are clouding the economic outlook. “There’s a significant challenge for Greece,” Weber said. “The country must design a credible strategy for the consolidation of its budget and has to convince the rating agencies that there’s a will to go this way. Actions speak louder than words. This relates in particular to expenditure cuts.” Weber said he sees euro-zone inflation about 1.5 percent this year, at the end of the year it might rise to 1.8 to 1.9 due to base effects. “Inflation risks are balanced,” he said. “There are upside risks due to possibly higher indirect taxes and higher government expenditure.” On the German economy, Weber said he “can’t rule out flat growth in Germany in the first quarter. It’s not likely that economic growth in Germany was flat in the fourth quarter.”

Christian Vits and Frances Robinson ECB’s Weber Sees Refinancing Operations Normalizing During Year Jan. 21http://www.bloomberg.com/apps/news?pid=20601087&sid=aXFI1_1e1tYE

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Greece Won’t Need Rescue Package on Debt, Papaconstantinou Says By Natalie Weeks and Maria Petrakis

Jan. 21 (Bloomberg) -- Greece won’t need a rescue package to tame the European Union’s biggest budget deficit, Finance Minister George Papaconstantinou said as the risk premium on holding Greek government debt rose to the highest since the launch of the euro. “We are not expecting anyone to come to our rescue,” he said today at a conference in Athens. He denied a report that the European Union was preparing a loan to help Greece and said the government will be able to satisfy its borrowing needs this year on schedule. Investor concern that the government will struggle to rein in its deficit drove the yield premium investors demand to hold Greek debt instead of German bunds to the highest since the euro’s debut. Greece has pledged about 10 billion euros ($14 billion) in budget cuts this year to bring down the deficit from more than four times the EU limit at 12.7 percent of economic output. The difference in yield, or spread, between the securities widened to more than 300 basis points as of 9:22 a.m. in London, the most since the introduction of the euro in 1999. The 10- year Greek bond yield climbed as much as 9 basis points to 6.25 percent, the highest since Jan. 26, 2009. The concerns about Greece also have contributed to a slide in the euro against the dollar. The euro declined to $1.4031 today, the lowest in more than five months. ‘Not Valid’ The report about discussions on a possible EU loan to Greece is “not valid,” Papaconstantinou said when asked about the story. The EuropeanVoice reported today that EU officials are looking into a possible “heavily conditioned” loan for Greece to ease its fiscal crisis and stop the country from seeking aid from the International Monetary Fund. Options include tapping the EU’s 50 billion-euro program to help members with balance- of-payments difficulties or having governments provide short- term guarantees, the newspaper said without citing anyone.

292 EU finance ministers didn’t discuss such a loan at a meeting in Brussels earlier this week, Spanish Deputy Finance Minister Carlos Ocana said today in Madrid. Germany said it won’t support any EU loan to help Greece cut its deficit. “Greece must solve its problems through its own efforts,” German Finance Ministry spokesman Michael Offer said today in an e-mailed statement. Sovereign Bonds Credit-default swaps on Greece’s five-year sovereign bonds climbed to a record yesterday on concern the country might need a bailout. The euro will decline further, said analysts at UniCredit SpA. “The euro has clearly become a full Greek tragedy and a self-fulfilling prophecy, with whatever bad news -- lower U.S. stocks, China’s tighter monetary policy -- being an excuse to sell,” a team of analysts including Roberto Mialich in Milan wrote in a report today. “Stay short as reversal is only above $1.43 and the pair will target $1.39 once $1.4080 has gone.” http://www.bloomberg.com/apps/news?pid=20601087&sid=aj67NaKAwvCk

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Greek Bonds Slide on Concern Investors May Shun New Debt Sales By Matthew Brown and Keith Jenkins

Jan. 20 (Bloomberg) -- Greek bonds tumbled, pushing the two-year yield up by the most since before the country adopted the euro, on concern the government will struggle to sell the debt it needs to fund the European union’s biggest deficit. The two-year note yield jumped 56 basis points to 4.23 percent as of 6 p.m. in London. It earlier rose 89 basis points to 4.66 percent, the biggest gain since 1998. The 10-year bond yield climbed 25 basis points to 6.17 percent, with the premium investors demand to hold the debt instead of benchmark German bunds at 295 basis points, the most since March 13. The Greek finance ministry may sell five-year bonds privately to banks this month, Imerisia newspaper reported today. Greece issued bonds directly to selected investors last month, instead of offering them via auction or through a syndicate of banks, after its borrowing costs surged in the wake of three credit downgrades. “Uncertainty over whether it will sell bonds privately or through a syndication is putting Greece under pressure,” said Patrick Jacq, a senior fixed-income strategist in Paris at BNP Paribas SA. Greece’s credit was lowered by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings last month on concern Prime Minister George Papandreou will struggle to cut a budget deficit that was 12.7 percent of gross domestic product in 2009. International Monetary Fund Managing Director Dominique Strauss- Kahn said in Hong Kong today Greece’s fiscal situation is “a serious problem” for the region. Stocks Fall Greek stocks declined, with the benchmark ASE Index falling as much as 3.4 percent. National Bank of Greece SA, the country’s biggest lender, declined 5.5 percent after UniCredit SpA analyst Tania Gold cut her recommendation to “sell” from “hold” in a report dated Jan. 19. EFG Eurobank Ergasias SA, the second-biggest bank, lost 5.9 percent. Credit-default swaps on Greek government debt surged 28.5 basis points to a record 345.5, according to CMA DataVision prices. The cost was 174 on Dec. 1. Portuguese and Spanish securities also fell as investors bet Greece’s difficulties will be replicated in other countries as governments raise unprecedented amounts of debt to finance

294 economic stimulus measures. European Commission President Jose Barroso said the region’s economy is at a “delicate moment.” The Portuguese 10-year bond yield advanced 6 basis points to 4.25 percent, with the equivalent-maturity Spanish security’s yield rising 1 basis point to 4.01 percent. Greece plans to sell more than 53 billion euros ($75 billion) of debt this year, according to the government’s deficit-reduction plan. About half will be sold in the second quarter, when more than 16 billion euros of bonds mature, Finance Minister George Papaconstantinou said today. The government may resort to a private placement again this month, Spyros Papanicolaou, head of the Public Debt Management Agency, said Jan. 5. Three-Year Plan Greece will reduce spending and raise revenue by about 10 billion euros this year as part of a three-year plan adopted last week to bring the deficit within the EU’s limit of 3 percent of GDP in 2012. The proposal aims to cut the gap to 8.7 percent this year partly by freezing hiring and capping wages for some public workers. The plan, presented to the European Commission on Jan. 15, “is consistent with Moody’s A2 rating on Greek government bonds,” the New York-based ratings company said yesterday. Doubts about the nation’s “ability to implement the program” prompted it to keep a negative outlook on Greece, Moody’s said. Fitch cut Greece’s debt to BBB+ on Dec. 8. S&P followed eight days later, also lowering the grade to BBB+. Moody’s cut Greece to A2 on Dec. 22. Statistics Accuracy Papaconstantinou today blamed the rising Greek yield premium on investor concern about the reliability of the nation’s economic data. The European Commission on Jan. 12 said “severe irregularities” in Greek statistics left the accuracy of the estimate in doubt. “Greece is paying the price of statistical irregularities by paying higher spread,” Papaconstantinou said at a press conference in Athens. “The move shows how vulnerable the market is,” said Steve Mansell, director of interest-rate strategy at Citigroup Inc. in London. “If Greece wants to bring debt into the market in the current environment, they will have to come at a discount to surrounding issues.”

Matthew Brown and Keith Jenkins Greek Bonds Slide on Concern Investors May Shun New Debt Sales http://www.bloomberg.com/apps/news?pid=20601085&sid=aevOKOk7ZQ1c#

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Obama Says No Bank Should Have Proprietary Trading (Text) Jan. 21 (Bloomberg) -- Following is the text of President Barack Obama’s announcement calling for restrictions on the size and scope of financial institutions: President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President’s economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers. The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress. “While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.” The proposal would: 1. Limit the Scope-The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit. 2. Limit the Size- The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits. In the coming weeks, the President will continue to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too Big to Fail.” Chairman Barney Frank’s financial reform legislation, which passed the House in December, laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively risky activities. As part of the previously announced reform program, the proposals announced today will help put an end to the risky practices that contributed significantly to the financial crisis. http://www.bloomberg.com/apps/news?pid=20601087&sid=an56Bfueode4&pos=2

296

Obama Calls for Limiting Banks’ Size, Trading (Update1) By Nicholas Johnston and Julianna Goldman

Jan. 21 (Bloomberg) -- President Barack Obama called for limiting the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis. The proposals will be part of an overhaul of regulations and would specifically prohibit banks from running proprietary trading operations or investing in hedge funds and private equity funds. “While the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse,” Obama said at the White House after meeting with former Federal Reserve Chairman Paul Volcker, who has been an advocate of taking such steps. “Never again will the American taxpayer be held hostage by a bank that is too big to fail.” The proposals could affect trading at some of the nation’s largest banks, including New York-based Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., said Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. Banks conduct proprietary trading for their own benefit, not for that of their clients. Congressional Approval The plan is subject to approval by Congress, where the president’s earlier regulatory proposal has hit resistance from some lawmakers and opposition from financial firms. “If these folks want a fight, it’s a fight I’m ready to have,” Obama said. The president is renewing his focus on economic issues, tapping into voter anger about the struggling economy, taxpayer bailouts and growing bank profits at a time of 10 percent unemployment, as well as a federal deficit that rose to $1.4 trillion last year. Those economic concerns will figure in the campaigns for November elections that will determine whether Obama’s Democratic Party can sustain majorities in the House and Senate. Obama said he wants to “strengthen capability and liquidity requirements to make the system more stable.” Obama in June proposed an overhaul of U.S. financial regulations to fix lapses in oversight and excessive risk-taking that helped push the economy into a prolonged recession.

297 Last week the president announced a plan to impose a fee on as many as 50 financial companies to recover losses from the federal government’s Troubled Asset Relief Program. It would be imposed starting June 30 on companies such as New York-based Citigroup Inc. and American International Group Inc. and Bank of America Corp. based in Charlotte, North Carolina. To contact the reporters on this story: Nicholas Johnston in Washington at [email protected]; Julianna Goldman in Washington at [email protected] Last Updated: January 21, 2010 11:51 EST http://www.bloomberg.com/apps/news?pid=20601087&sid=ar0vT4CxfF3Q# Obama to Propose New Rules on Banks’ Size, Proprietary Trading By Nicholas Johnston and Julianna Goldman

Jan. 21 (Bloomberg) -- President Barack Obama will offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking, an administration official said. Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House. The proposals will be part of an overhaul of regulations and will specifically address firms’ proprietary trading, the official said yesterday on the condition of anonymity. Obama is renewing his focus on economic issues in an effort to tap into voter anger about the struggling economy, taxpayer bailouts and growing bank profits at a time of 10 percent unemployment and a federal deficit that rose to $1.4 trillion last year. The proposals could affect trading at some of the nation’s largest banks, including New York- based Goldman Sachs Group Inc.,

Morgan Stanley and JPMorgan Chase & Co., said Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. Banks conduct proprietary trading for their own benefit, not for that of their clients. “It is an obvious target,” Dickson said. “It has been a highly profitable business for those firms that have superior platforms. Whatever the details of the restrictions, it will draw Wall Street’s attention.” Obama in June proposed an overhaul of U.S. financial regulations to fix lapses in oversight and excessive risk-taking that helped push the economy into a prolonged recession.

298 Fee on Financial Companies Last week the president announced a plan to impose a fee on as many as 50 financial companies to recover losses from the federal government’s Troubled Asset Relief Program. It would be imposed starting June 30 on companies such as New York-based Citigroup Inc., and American International Group Inc. and Bank of America Corp. headquartered in Charlotte, North Carolina. “We’ve got a financial regulatory system that is completely inadequate to control the excessive risks and irresponsible behavior of financial players all around the world,” Obama said in an interview with ABC News yesterday. “People are angry and they’re frustrated,” Obama told ABC. “From their perspective, the only thing that happens is that we bail out the banks.” Voter anger helped Republican Scott Brown win the late Edward Kennedy’s U.S. Senate seat in Massachusetts this week, giving Republicans the ability to block Obama’s top legislative priority, a health-care overhaul. The Massachusetts seat had been held by Democrats for more than 50 years. Most Profitable Details on the proposed rules are to be spelled out later today. They could limit activities of banks like Goldman, the most profitable investment bank in Wall Street history. Goldman reaped more than 90 percent of its pretax earnings last year from trading and so-called principal investments, which include market bets on securities and stakes in companies. Goldman reports its quarterly earnings today. Morgan Stanley reported yesterday, and JPMorgan published its results last week. Volcker, chairman of the President’s Economic Recovery Board, has criticized as “reform light” the financial industry’s efforts to weaken financial regulation proposals in Congress. A year ago, Volcker issued a report from the Group of Thirty, a panel of former central bankers, finance ministers and academics, calling for separation between commercial banks and businesses that engage in speculative risk-taking such as hedge funds and proprietary trading. ‘A Bad Dream’ “Some market participants, possibly some in this room, seem to be suggesting that the events of the past couple of years were like a bad dream - a truly unsettling bad dream, but nonetheless something that in the cold light of day need not require a really substantive change in the structure of markets or corporate lifestyle,” Volcker told an audience that included bankers Jan. 14. Four U.S. institutions - Bank of America, San Francisco- based Wells Fargo & Co., JPMorgan and Citigroup - held 35 percent of the country’s deposits on June 30, compared with 28 percent by the four biggest two years before, according to the Federal Deposit Insurance Corp. and the Federal Reserve. John S. Reed, the former co-chief executive officer of Citigroup, said he regrets helping engineer the merger that created the bank. “I’m sorry,” Reed said in an interview last year. U.S. lawmakers were wrong in 1999 to repeal the Depression-era Glass- Steagall Act, he said. The act required the separation of institutions involved in capital markets from those engaged primarily in traditional customer services, such as taking deposits and making loans.

299 Reinstating Glass-Steagall Republican Senator John McCain of Arizona and Democrat Maria Cantwell have proposed legislation to reinstate the Glass- Steagall law as a way to stem the rise of banking conglomerates such as Citigroup, JPMorgan and Bank of America that are active in retail banking, insurance and proprietary trading. The Securities and Exchange Commission under Chairman Mary Schapiro is beginning its own review of financial markets, including an examination of so-called high frequency trading, in which professional investors execute orders in milliseconds to capture tiny price discrepancies. The strategies make up more than 60 percent of all U.S. stock transactions, according to New York-based research firm Tabb Group. The House of Representatives passed a package of new financial rules in December while the Senate continues to work on legislation that has the support of Republicans and Democrats. Nicholas Johnston and Julianna Goldman Obama to Propose New Rules on Banks’ Size, Proprietary Trading http://www.bloomberg.com/apps/news?pid=20601087&sid=azgIuqSiSTsA&pos=1

Business

January 21, 2010 Obama to Propose Limits on Risks Taken by Banks By JACKIE CALMES and LOUIS UCHITELLE WASHINGTON — President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk- taking activities, an administration official said late Wednesday.

Jin Lee/Bloomberg: Paul Volcker The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading. The White House intends to work closely with the House and Senate to include these proposals in whatever bill dealing with financial regulation finally emerges from Congress. Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout.

300 The president will speak at an appearance on Thursday at the White House with Treasury Secretary Timothy F. Geithner, an administration official said, speaking on the condition of anonymity because the talks were private. It will come after a meeting with Mr. Volcker. A similar discussion is percolating in Europe, led by Mervyn King, head of the Bank of England. The president’s announcement comes as his popularity in public opinion polls is falling because of stubborn unemployment and the stagnant economy, and just days after he suffered a stinging loss when the Republicans won the Senate seat from Massachusetts. It will be the third time in just a week that he has waded into the battle heating up in Congress over tightening regulation of financial institutions to avoid the sort of abuses that contributed to the near collapse on Wall Street. Last week he proposed a new tax on some 50 of the largest banks to raise enough money to recover the losses from the financial bailout, which ultimately could cost up to $117 billion, the Treasury estimates. And this week, he served notice to senior lawmakers that he wants an independent agency to protect consumers as part of any financial overhaul legislation. Only a handful of large banks would be the targets of the proposal, among them Citigroup, Bank of America, JPMorgan Chase and Wells Fargo. Goldman Sachs, the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to give up that status. “The heart of my argument,” Mr. Volcker said, “is who we are going to save and who we are not going to save. And I don’t want to save what is not at the heart of commercial banking.” Mr. Volcker has been trying for weeks to drum up support — on Wall Street and in Washington — for restrictions similar to those passed in the Glass-Steagall Act in 1933. That law separated commercial banking and investment banking, so that the investment arm could no longer use a depositor’s money to purchase stocks, sometimes drawing money from a savings account, for example, without the depositor’s knowledge. The 1929 stock market crash and subsequent Depression made a shambles of that practice. But Glass-Steagall was watered down over the years and revoked in 1999. Now the concern is a new type of activity in which financial giants like Citigroup, Bank of America and JPMorgan Chase engage. They now operate on two fronts. On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation’s payment system. On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout. Mr. Volcker, chairman of the president’s Economic Recovery Advisory Board, a panel of outside advisers set up at the start of the Obama administration, has gradually lined up big- name support for restrictions on such trading. But the Obama administration until now focused on regulating the activities of the existing financial institutions, not breaking them up or limiting their activities. Under the new approach, commercial banks would no longer be allowed to engage in proprietary trading, using customers’ deposits and borrowed money to carry out these trades. “Major institutions with a deposit facility should not be allowed to invest in subprime obligations under any conditions,” said Henry Kaufman, an economist and money manager, and one of a dozen prominent Wall Street figures who have told Mr. Volcker that they support his proposal, in principle if not in detail. Others include William H. Donaldson, former chairman of the Securities and Exchange Commission; Roger C. Altman, chairman of Evercore and a Treasury official in the Clinton administration, and John S. Reed, a former chairman of Citigroup. “When I was running Citi,” Mr. Reed said of his tenure in the 1980s and 1990s, “we simply did not trade for our own account.”

301 Jackie Calmes reported from Washington, and Louis Uchitelle from New York. JACKIE CALMES and LOUIS UCHITELLE Obama to Propose Limits on Risks Taken by Banks http://www.nytimes.com/2010/01/21/business/21volcker.html?th&emc=th

At SEC, the system can be deaf to whistleblowing By Zachary A. Goldfarb Washington Post Staff Writer Thursday, January 21, 2010; A01 Eric Kolchinsky was an executive at Moody's, the credit rating company, when he called a top official at the Securities and Exchange Commission in September to warn that his firm might be violating securities law. He reported that Moody's was blessing mortgage-backed investments that it knew were dangerous, according to a person familiar with the conversation. The SEC official assured Kolchinsky that someone from the agency would call him back shortly. But the call never came, Kolchinsky later told congressional investigators who were examining how the credit rating industry's failures contributed to the financial crisis. He had gone to Congress after losing patience with the SEC. Kolchinsky is one in a series of whistleblowers who in recent years tried to tip off the SEC to potential wrongdoing, only to be ignored, misunderstood or left to wonder whether they were being listened to. The SEC has no system in place to guide how officials should handle tips and complaints from outsiders, making it difficult for investigators to take advantage of an invaluable source of information. This failure helped to continue two of the most celebrated frauds of the last decade for several years, potentially costing unwitting investors millions of dollars. Countless others may have been left vulnerable to shysters because of warnings that went unheeded. Since SEC Chairman Mary L. Schapiro took office last year, she has said that fixing the holes in the process for handling tips and complaints has been a top priority. But improving the way hundreds of thousands of tips are analyzed and pursued has proven difficult. The SEC's enforcement division got back in touch with Kolchinsky about his allegations only after he told the story publicly to a congressional committee last fall, according to a person familiar with the matter. The SEC said it responded to Kolchinsky's concerns but declined to provide details or to say how fast it did so. Moody's said it examined his allegations and found nothing improper. The SEC has a haphazard, decentralized system for analyzing outsider information. Tips arrive by phone, mail and e-mail to officials throughout the agency -- investor education to enforcement divisions. A study commissioned by the SEC last year and conducted by Mitre, a nonprofit group that does research for the federal government, found that the SEC lacks technology to analyze tips and complaints, as well as cohesive policies for what officials should do when they get information.

302 Whistleblower complaints are one of the main ways that investigators should be tipped to wrongdoing, SEC officials say, along with inconsistencies in financial filings and alerts from financial exchanges about suspicious trading patterns. But the SEC lags behind some other federal agencies in handling tips. The Internal Revenue Service, for instance, pays reward money to whistleblowers who provide credible information about tax fraud. The Federal Trade Commission has set up a call center for tips and complaints. On top of structural problems at the SEC, agency officials individually made mistakes in handling several recent cases, sometimes violating agency rules. Members of Schapiro's management team said they recognized problems with the system for handling whistleblowers shortly after taking over. "There was no uniformity to it. Every division and office had its own system of recording, tracking or handling tips and complaints. That system was pretty rudimentary," said Steve Cohen, the official tasked by Schapiro to overhaul the agency's tips, complaints and whistleblower program. "We're already working to acquire and deploy technology that centralizes all of the agency's tips and complaints so they can be sorted, reviewed, analyzed and tracked." No shortage of witnesses The SEC's struggles were underlined over the past two years with the revelation of two huge Ponzi schemes. In the case of Bernard L. Madoff, whistleblowers had provided credible information to various SEC units for years. The most prominent of these informants, a Boston financial analyst named Harry Markopolos, contacted the enforcement division on numerous occasions, according to the SEC's inspector general. In one instance, Markopolos provided a detailed explanation of why Madoff's business was probably a fraud. Enforcement officials listened, but they dismissed him in their internal discussions. Two former enforcement officials told the inspector general that they discounted Markopolos's information because he was not an insider in Madoff's company. Then, a few months after the Madoff scheme exploded into the headlines, the SEC exposed a second large Ponzi scheme, run by R. Allen Stanford. But that happened five years after an insider went to the SEC, warning that Stanford might be conducting a fraudulent business. Leyla Wydler had been a vice president at Stanford's Houston-based company when she first started asking her supervisors tough questions about what the firm did with clients' money, according to her testimony before Congress last year. Her superiors were evasive, and she ultimately was fired. After that, she went to the National Association of Securities Dealers, a private industry regulator overseen by the SEC. The NASD dismissed her concerns. Then in September 2004, she contacted the SEC's Fort Worth office, according to her congressional testimony. She followed up with a letter to an official there, questioning whether clients' money had been invested in the way Stanford said. She never heard from the SEC again -- until January 2009, days before the SEC finally filed a case against Stanford, according to her testimony. The agency wanted to know more about her allegations. An inspector general report from June 2009 said the SEC began looking into Stanford years earlier but struggled to build a case against him. Turning in the tipster In one case, it was the SEC that blew the whistle on Peter Sivere, an informant.

303 Sivere worked in the compliance office of New York investment bank J.P. Morgan Chase. As part of a team helping the bank furnish documents related to a 2004 SEC probe into suspected illegal trading, he found an e-mail that he thought was incriminating. According to a subsequent report by the SEC inspector general, the e-mail said J.P. Morgan was knowingly providing hundreds of millions of dollars in credit to a firm "in the business of day trading mutual funds" -- which is illegal. Sivere asked his superiors if this e-mail had been turned over to the SEC but did not get an answer. Instead, he was taken off the SEC project, according to the inspector general report. Sivere accessed his superiors' e-mail accounts to retrieve relevant e-mails, then contacted the SEC. He told the agency that he had relevant documents and asked whether he could receive a reward. He was told he was not eligible, but he turned over the documents anyway. Sivere informed J.P. Morgan that he had contacted the SEC. The company fired him, partly on the grounds that he had "sought payment from the SEC to provide documents and information to them outside of the normal scope of their investigation," according to a letter company lawyers wrote defending his dismissal. J.P. Morgan declined to comment for this article. Sivere was shocked to learn that J.P. Morgan knew he had inquired about a bounty. He had been promised that his discussions with the SEC were confidential. An SEC internal probe found that an investigator working on the case disclosed Sivere's information to J.P. Morgan's lawyers, violating the agency's confidentiality rules. The inspector general recommended that the SEC official who made the disclosure be referred for disciplinary action. None was taken, according to agency documents. Retraining the watchdog Cohen, who is overhauling the SEC's whistleblower practices, said a database, jury-rigged from existing technology, will be in place this month to centralize all tips and complaints. Officials said that by the end of 2010, they hope to develop technology that would not only centralize the data but also automatically analyze them for patterns to help officials prioritize cases. Currently, the SEC is setting procedures for responding to whistleblowers and is creating an office of market intelligence to coordinate how the agency's various units respond to tips. The agency also wants to be able to reward whistleblowers, which it can only do now for insider-trading cases. The SEC has requested that Congress pass legislation giving it the ability to offer financial rewards to people who provide evidence of violations of securities law http://www.washingtonpost.com/wp- dyn/content/article/2010/01/20/AR2010012005125_pf.html

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Money & Policy

January 21, 2010 Obama Weighs Paring Goals for Health Bill By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN WASHINGTON — President Obama signaled on Wednesday that he might be willing to scale back his proposed health care overhaul to a version that could attract bipartisan support, as the White House and Congressional Democrats grappled with a political landscape transformed by the Republican victory in the Massachusetts Senate race. “I would advise that we try to move quickly to coalesce around those elements of the package that people agree on,” Mr. Obama said in an interview on ABC News, notably leaving near- universal insurance coverage off his list of core goals. But it was not clear that even a stripped-down bill could get through Congress anytime soon. Throughout the day, White House officials and Democratic Congressional leaders struggled to find a viable way forward for the health care bill and to digest the reality that much of their agenda, including an energy measure and an overhaul of banking regulations, had been derailed by the outcome in Massachusetts. Inside the White House, top aides to the president said Mr. Obama had made no decision on how to proceed, and insisted that his preference was still to win passage of a far-reaching health care measure, like the House and Senate bills, which would extend coverage to more than 30 million people by 2019. On Capitol Hill, Democratic leaders said they were weighing several options. But some lawmakers in both parties began calling for a scaled-back bill that could be adopted quickly with bipartisan support, and Mr. Obama seemed to suggest that if he could not pass an ambitious health care bill, he would be willing to settle for what he could get. In the interview with ABC, he cited two specific goals: cracking down on insurance industry practices that hurt consumers and reining in health costs. “We know that we need insurance reform, that the health insurance companies are taking advantage of people,” Mr. Obama said. “We know that we have to have some form of cost containment because if we don’t, then our budgets are going to blow up, and we know that small businesses are going to need help so that they can provide health insurance to their families. Those are the core, some of the core elements to this bill.” Republican Congressional aides said a compromise bill could include new insurance industry regulations, including a ban on denying coverage based on pre-existing medical conditions, as well as aid for small businesses for health costs and possible steps to restrict malpractice lawsuits. But as Mr. Obama noted on ABC, a pared-down package imposing restrictions on insurers might make coverage unaffordable, which is one reason he prefers a broad overhaul. As the full Congress returned to Washington to start a new legislative year on the first anniversary of Mr. Obama’s inauguration options were limited and there were signs of a divide between the White House and Democrats on Capitol Hill. House leaders signaled that they had effectively ruled out the idea of adopting the Senate bill, which would send it directly to the president for his signature. Yet close advisers to the president said such a move was still on the table.

305 Mr. Brown’s victory in Massachusetts on Tuesday denies Democrats the 60th vote that they need to surmount filibusters and advance a revised health measure. Senate leaders said they would not risk antagonizing voters by trying to rush a bill through before Mr. Brown could be sworn in, and Mr. Obama agreed.“People in Massachusetts spoke,” the president told ABC. “He’s got to be part of that process.” Another option considered by Democrats would be to use the procedural maneuver known as reconciliation to pass chunks of the health care bill attached to a budget measure, which requires only a simple majority. But there appeared to be little appetite for such a move on Capitol Hill. Democrats also wrestled with the implications of losing their 60-vote majority for their wider legislative agenda, including efforts to tighten regulation of the financial system and combat global warming, even as they sensed new urgency to turn their attention to creating jobs and improving the economy. Democratic efforts to pass a bill on energy and global warming were in trouble even before the special election; administration officials and Senate Democratic leaders have been quietly negotiating a scaled-back package focusing more on job-creating technologies than on limits for climate-altering pollution. Even the president’s new proposal to tax big banks for the government’s bailout losses, which Republicans privately conceded was a political winner given widespread anti-Wall Street sentiment, suddenly did not look like such a sure thing. Industry lobbyists noted that Mr. Brown publicly opposed the bank tax and that Mr. Obama had spotlighted that opposition during a campaign appearance in Massachusetts on Sunday — to no avail. But the outcome might put further impetus behind efforts to bring down the budget deficit, a topic the White House has addressed more visibly in recent days. On Tuesday, the administration and Congressional Democrats agreed to create a commission to attack the deficit and the national debt. At a news conference at the Capitol, the Senate majority leader, Harry Reid of Nevada, sought to minimize health care as compared with jobs and the economy. But he made clear that Democrats did not see a clear path forward. “The election in Massachusetts changes the math in the Senate,” Mr. Reid said. “But it doesn’t change the fact that people are hurting.” Pressed about the health care legislation, Mr. Reid said, “The problems out there — it’s certainly more than health care.” Pressed again, he said: “No decision has been made.” Senior Republicans showed little new willingness to collaborate with the Democrats. Asked where he might be willing to work across the aisle, the Senate Republican leader, Mitch McConnell of Kentucky, offered praise for Mr. Obama’s strategy in Afghanistan but not a single example on domestic policy. Mr. McConnell was asked if the health care bill was dead. “I sure hope so,” he said. Senator Susan Collins, Republican of Maine, said she was eager to work with Democrats in devising an alternative to the health care bill passed four weeks ago by the Senate on a party- line vote. “What I hope the White House will do is start from scratch and, instead of pushing this bill through the House, work with a bipartisan group of senators to achieve a consensus bill that would have widespread support,” Ms. Collins said. “There are many provisions of the bill that have bipartisan support. And I believe the president would be wise to draft a new bill that he could get through both the House and the Senate with supermajority votes.” Robert Pear contributed reporting. http://www.nytimes.com/2010/01/21/health/policy/21health.html?th&emc=th

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Merkel’s ‘Muppet Show’ May Upset E.ON’s Nuclear Plans (Update1) By Tony Czuczka Jan. 21 (Bloomberg) -- Chancellor Angela Merkel may have to put plans to extend the life of Germany’s nuclear-power plants on ice as falling poll ratings diminish her ability to overcome a unified opposition. Weeks of coalition infighting over tax cuts and the war in Afghanistan have eroded Merkel’s political standing, making it harder to promote nuclear power, “the most difficult task she has on her agenda,” said Claudia Kemfert, chief energy analyst at the DIW economic institute. “The government has had a very bad start,” Kemfert said in a phone interview in Berlin. “People have the feeling that she’s not really a leader at the moment, and nuclear is not the best topic for her to win.” Government officials will today hold their first meeting since Merkel’s re-election with representatives of utilities RWE AG, E.ON AG, Vattenfall AG and EnBW Energie Baden- Wuerttemberg AG to discuss Germany’s future energy mix. Merkel says extending nuclear power, shrinking the budget deficit and reviving the economy after a recession that ended in the second quarter of 2009 are top priorities of her second term. Merkel won Sept. 27 elections pledging to reverse a 2002 law mandating the closure of Germany’s 17 nuclear plants by about 2021. At stake is what her party estimates will be 25 billion euros ($35.2 billion) in windfall profit for utilities if they’re given an extra 20 years to operate. She has said the utilities will have to pay part of the money generated from an extension. ‘Enormous’ Challenge “It’s going to be anything but easy for the government as it tries to forge a new energy policy,” E.ON Chief Executive Officer Wulf Bernotat said Jan. 19 at the Handelsblatt energy congress in Berlin. “The scale of the challenge is enormous.” E.ON, Germany’s largest utility, has lagged gains in the 30-member benchmark DAX index since the election. While the DAX gained 2.6 percent since Sept. 28, the first day of trading in Frankfurt after the election, E.ON’s shares slipped 4 percent. E.On shares rose 0.9 percent to 28.27 euros at 10:17 a.m. in Frankfurt, while RWE gained 1.2 percent to 67.99 euros. Merkel’s coalition is on the defensive as polls suggest voters are losing confidence in her handling of the economy, Europe’s biggest, and worry about a budget deficit forecast to soar to a record this year. The chancellor, whose approval rating plunged to a three- year low on Jan. 8, was criticized for her leadership style in a Jan. 10 newspaper commentary written by members of her own

307 party. She was forced to issue a denial after Asian market speculation that she planned to resign helped drive down the euro on Jan. 15. ‘Throwing Mud’ “This has been a kind of Muppet Show for two months now” with the coalition parties “just throwing mud at each other,” Carsten Brzeski, an economist at ING SA in Brussels, said in a phone interview. “It would be wise for her to put the emphasis back on the economy and not managing the coalition.” Germany’s economic recovery is showing signs of losing momentum after the deepest recession since World War II. Investor confidence fell for a fourth month in January, and the economy probably stagnated in the fourth quarter after expanding 0.7 percent in the previous three months, according to the Economy Ministry. Merkel’s party, which already watered down its support for nuclear plants in its election campaign platform, has so far failed to act on its coalition pledge to reverse the nuclear phase- out. Today’s meeting also won’t reach any decisions, Ulrich Wilhelm, Merkel’s spokesman, told reporters yesterday. ‘We Need It’ “I say, yes we need it,” Merkel said of extending the operating life of nuclear plants in a speech to lawmakers in Berlin yesterday. “It doesn’t make sense to avoid facing the truth.” She didn’t give any details. Joachim Pfeiffer, energy spokesman in parliament for Merkel’s Christian Democratic Union, said in a Jan. 19 interview that he will press for an extension of 20 years for the life- cycle of nuclear reactors and a “fair division” of the windfall profit. Forty-one percent of German voters back the government’s policy of extending nuclear power, while 52 percent oppose it, according to an FG Wahlen poll for ZDF television in October. The poll of 1,298 people had a margin of error of about 3 percentage points. Anti- nuclear demonstrators plan to protest outside the Chancellery today. Germany’s three opposition parties are united in resisting the nuclear extension, saying nuclear power dangerous and outmoded. Merkel’s position is made all the more difficult after support for her coalition fell to the lowest since the elections in a Forsa poll published Jan. 13. Merkel’s nuclear bid also clashes with her coalition parties’ effort to retain power in May elections in North Rhine- Westphalia, Germany’s most populous state, according to the DIW’s Kemfert. “This is coal country,” so it’s difficult for Merkel to champion nuclear power, Kemfert said. “The problem is that the companies don’t want to wait.” http://www.bloomberg.com/apps/news?pid=20601109&sid=aETV4TvAENaE&pos=10

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20.01.2010 Greek crisis is hitting confidence in euro area

The euro fell to $1.4188, the lowest level in more than four months, on concerns about Greece’s deteriorating fiscal situation and its impact on the region’s economic recovery, reports Bloomberg .The euro depreciated for a fifth consecutive day yesterday after Moody’s said the success of the Greek budget plan “cannot be taken for granted”, and Commissioner Joaquin Almunia who told after the Ecofin meeting that “the situation in Greece is having effects on other countries”. Austrian finance minister against sanction threats Austrian finance minister Josef Proell warns that threatening Greece with sanctions is counter-productive reports Der Standard. Olli Rehn threatened last week with sanctions if Grece would not follow the condolidation plan. Proell is also skeptical about the Commission’s plan to give Eurostat more rights in approving the accounts in Greece. In February the member countries will decide whether or not to sharpen the deficit procedure against Greece. Selling austerity to the Greek public While Greece tries to convince rating agencies and its European partners that it is ready for tough measures, the hard part will be to convince the Greek public that it has to raise €25bn in taxes and spending cuts in the coming years all while the country is experiencing its first recession in 16 years. The government currently faces an escalating protest of farmers who are blocking major highways to press demands for financial help. How the government faces down these protests and the ones that will surely follow will be key to the success of its deficit cutting plan , writes Wall Street Journal. Similar protests last year prompted the previous government to provide a €500m support program. Martin Wolf on Greece Writing in the FT, Martin Wolf says when you create a monetary union without political controls, situations such as the one we are seeing Greece happen from time to time. This is to be expected. The question is how do we deal with this. He says default is unlikely. The more likely option is a bailout with strict conditionality attached to it, which brings the euro area a step towards closer political union. In the end, those who said from the outset the political

309 union is a prerequisite for monetary union will ultimately be proved right. King advocates G20 as governing body of the IMF The G20 should develop voting procedures and “metamorphose” to become the governing body of the IMF to enhance its legitimacy and promote balanced world growth, the FT quotes Mervyn King, governor of the Bank of England. Concerned that the global economic recovery has started to widen trade imbalances, King warned that protectionist forces would rise unless countries tackled unbalanced growth and misaligned real exchange rates. His message was that surplus countries – China, other Asian nations, Japan, Germany and oil exporters – “must expand domestic demand and allow their trade surpluses to shrink”.

Productivity dived in 2009 The output of employees in advanced economies fell last year for the first time in more than 40 years, reports the FT, though the trends were different either side of the Atlantic. US employers reacted to the recession by cutting jobs and keeping labour productivity rising, while European unemployment rose much less and productivity dived. These figures are from the latest annual report of the Conference Board. Germany and the UK were fared particularly poorly on productivity measures, as employers hoarded labour while waiting for a recovery. Insurer sues German central bank FT Deutschland has the story that Talanx, one of Germany’s biggest insurer companies, is suing the German Bundesbank in order to get the right to hold a current account with the central bank. Behind this spectacular suit is the deep mistrust of the company against commercial banks. “Only an account with the Bundesbank is really save against insolvency. The insurer used the argument that insurers have a competitive disadvantage compared to banks which are allowed to hold an account with the Bundesbank.

Belka calls on a progressive exit strategy Marek Belka writes in Europe Econmonitor that the exit strategy was to be well timed. The time is not now, for a variety of factors: markets participants have still not fully bought into the recovery, bank lending is weak, unemployment is rising, and the REER of the euro is high. For that reason, fiscal and monetary policies must continue to support the recovery. But he also says that we have gone well beyond the point where we are facing a systemic risk. He concludes that the time has come to begin a progressive exit strategy. Wofgang Munchau on Germany’s financial debate Commenting on Germany’s heated debate on whether tax cuts are admissible in the current clime, Wolfgang Munchau writes in his FTD column that this debate is based on two fundamental errors that made time and again in Germany’s economic discourse. The first is all the pessimistic projections omit the dynamic effects. This is not a book keeping excerise. Second, the debate is carried out as though Germany was not a member of a monetary union. A massive fiscal tightening, which is on the cards from 2011 onwards would have severe repercussions on the euro area, and would increase its internal imbalances. http://www.eurointelligence.com/article.581+M5f7787dcb00.0.html#

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Euro Weakens to Five-Month Low Versus Dollar on Greece Concerns By Yasuhiko Seki and Ron Harui Jan. 20 (Bloomberg) -- The euro fell to the lowest level in five months against the dollar on concern Greece’s deteriorating finances will weigh on the region’s economic recovery. The 16-nation currency also approached the lowest level in more than nine years against the Australian dollar on speculation European Central Bank Executive Board member Juergen Stark will reiterate his bearish outlook for the region’s economy and the budget deficit in Greece when he speaks today. The New Zealand dollar fell for a second day after a government report showed consumer prices declined last quarter, damping prospects for an interest-rate increase. “Greece’s debt problems look to be deep-rooted and they cannot be resolved immediately,” said Takeshi Makita, a Tokyo- based economist at Japan Research Institute Ltd., a unit of Japan’s third-largest banking group. “The euro will remain under selling pressure.” The euro fell to $1.4167, the lowest since Aug. 19, before trading at $1.4199 as of 7:50 a.m. in London from $1.4288 in New York yesterday. The currency slid to 129.15 yen from 130.22 after earlier dropping to 129.07, the weakest since Dec. 21. New Zealand’s dollar dropped 1.1 percent to 72.73 U.S. cents. The euro weakened to 0.6479 against the Australian dollar, near the lowest since September 2000, before trading at 0.6441. Europe’s single currency dropped for a fifth day versus the dollar after Moody’s Investors Service said yesterday the Greek budget plan’s success “cannot be taken for granted” and kept its debt rating at A2, the lowest among the 16 euro-area members. EU Finance Chiefs European finance chiefs said Greece’s fiscal crisis is affecting other nations and called on the government to step up its budget-cutting efforts. “The fate of one is the fate of all,” European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said at a press conference yesterday after a meeting of EU finance ministers in Brussels. “This situation in Greece is having effects on other countries.” ECB member Stark said on Jan. 15 the euro-group is not liable for member countries debt. Stark also said he expects money supply growth to be around zero in coming months. He will speak at the University of Leipzig today. “Ongoing concerns about Greece may continue to weigh on the single currency,” analysts led by Marc Chandler, New York- based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a research note yesterday. “Pressure has intensified in recent days as European support seems half- hearted.” ‘Serious Problem’ International Monetary Fund Managing Director Dominique Strauss-Kahn said the euro

311 region will withstand the turmoil caused by Greece’s credit rating downgrades last month. “It’s a serious problem,” Strauss-Kahn said in an interview with Bloomberg Television in Hong Kong today, referring to the Greek fiscal situation. “But I don’t think that would lead to the fragmentation of the euro zone.” New Zealand’s dollar declined against all 16 of its most- traded counterparts after the nation’s statistics department said consumer prices slipped 0.2 percent in the fourth quarter from the previous three months. Reserve Bank of New Zealand Governor Alan Bollard, who predicted prices would fall, said last month he expects to keep the benchmark interest rate at 2.5 percent until the middle of this year to help the economy recover from a recession. Benchmark Rates “This suggests that the Reserve Bank has time up its sleeve to continue to monitor how the economy develops and they won’t be in any rush to bring forward the timing of the hiking cycle,” said Khoon Goh, a senior markets economist at ANZ National Bank Ltd. in Wellington. The currency is likely to find buyers toward 73.30 U.S. cents, he said. Benchmark rates are 2.5 percent in New Zealand and 3.75 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. Overseas investors are funneling money into Asian assets as the region leads a global recovery that’s being driven by interest-rate cuts and more than $2 trillion in government spending worldwide. Foreign direct investment in China more than doubled in December, while the MSCI Asia Pacific Index of shares advanced 49 percent over the past year. “Underlying risk sentiment remains intact as long as stocks maintain their momentum and the Chinese economy is improving,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co. “The dollar and the yen will underperform against higher- yielding or commodity currencies.”

Yasuhiko Seki and Ron Harui Euro Weakens to Five-Month Low Versus Dollar on Greece Concerns Jan. 20 (Bloomberg) http://www.bloomberg.com/apps/news?pid=20601085&sid=aVjOZYK3re2o# Chinese Stocks Fall After Regulator Cuts Lending; Dollar Rises by Rocky Swift and Yoshiaki Nohara , 20 enero 2010 http://www.bloomberg.com/apps/news?pid=20601087&sid=aGhiPA73AWiM&pos=2#

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No New Normal on Wall Street as Economists Dismiss Pimco’s GDP By Michael McKee

Jan. 19 (Bloomberg) -- “New normal” may not be the new norm after all. Wall Street economists aren’t buying the theory propounded by Bill Gross and Mohamed El- Erian, co-chief investment officers at Pacific Investment Management Co., that the U.S. will be mired in long-term sluggish growth averaging 2 percent a year. They see potential real growth, or the rate of expansion at which inflation is steady, at 2.5 percent, matching the average quarterly rate of the past 20 years, according to the median forecast in a Bloomberg News survey of 46 economists. “I don’t think it’s different this time,” said Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who pegs potential growth at 2.6 percent. “We’ve had financial-market crises and big workforce changes before, and growth has pretty consistently come in around 2.5 percent over the past 50 to 60 years.” While the half-percentage point between Pimco’s projection and the survey median may seem small, it makes a big difference over time, especially to investors. Expanding by 2.5 percent a year rather than 2 percent would leave the $13 trillion U.S. economy almost $400 billion larger five years from now, about equal to the gross domestic product of Argentina. Such growth likely means higher corporate sales and earnings, according to Kevin Gardiner, head of investment strategy at Barclays Wealth in London, offering greater returns on equities than the 5 percent forecast by Newport Beach, California-based Pimco, which controls the world’s biggest bond fund. Above Trend “Growth in the economy and profits is likely to accelerate,” Gardiner said. Historically, “returns have been about 7 percent. We think they’ll likely be above that for some period.” Investors have been betting on that more-optimistic outlook. The Standard & Poor’s 500 Index is up 25 percent since early May, when Gross and El-Erian made their forecast. U.S. corporate and government bonds, which Pimco has been buying, have returned an annualized 9.2 percent in the past eight months, according to a Bank of America Merrill Lynch index.

313 Gross also has suggested that stocks paying dividends are worth purchasing, recommending utilities in December. All but one of the 34 stocks in the S&P 500 Utilities Index -- which includes Chicago-based Exelon Corp., Southern Co. of Atlanta, and Richmond, Virginia’s Dominion Resources Inc. -- pay dividends. The index rose 7 percent last year. As the economy recovers, it is down 0.5 percent so far in 2010. Earnings Growth Earnings for the S&P 500 companies will grow 24.9 percent in 2010, according to data compiled by Bloomberg. Utility- company earnings are forecast to rise 6.6 percent for the year. A higher long-term growth rate would bode well for companies whose profits are closely linked to the economy, including capital goods and consumer discretionary stocks such as autos, media and retailers, Gardiner said. If investors agree potential growth is 2.5 percent or higher, “then most equities would likely share to some extent,” he said. A “new normal” growth rate would be bad news for President Barack Obama’s administration and Congress as they struggle to deal with a budget deficit projected to reach $1.4 trillion in the current fiscal year. Faster growth means higher tax revenue, making it easier to close the shortfall. Reaching Bottom The economy was reaching bottom when the Pimco executives said an extended period of greater government regulation and lower consumer spending would hamstring the economy for years. Gross domestic product had contracted 6.4 percent in the first quarter of 2009, and unemployment reached 8.9 percent in April, a 26-year high at the time. “The system will not reset quickly and without permanent changes,” El-Erian wrote in a May 12 commentary. “This will feel like a new normal.” While the jobless rate continued to climb, peaking at 10.1 percent in October, the $787 billion federal stimulus program that took effect in February helped the economy begin expanding in the third quarter, growing at a 2.2 percent annual rate. Fourth-quarter GDP is on track to rise 5.6 percent, according to Macroeconomic Advisers LLC, a St. Louis-based consulting firm founded by former Federal Reserve Governor Laurence Meyer. The turnaround is only temporary and Pimco is sticking to its outlook, El-Erian said in an interview. “After an inventory-driven bounce in the GDP growth rate, we are expecting a 2 percent annual pace,” he said. “Also, importantly, it will take years for the U.S. economy to recover to the level of GDP attained before the crisis.” Rising Inventories Companies that drew down stockpiles during the recession are restocking to meet increased demand. Business inventories rose 0.4 percent in November for a second month after 13 months of decline. Pimco Managing Director Paul McCulley forecast 2010 growth of between 1.5 percent and 2.5 percent in the firm’s annual outlook, issued in December. “The inventory cycle is a turbocharger right now,” McCulley said in the report. “But when we talk about the ‘new normal’ growth rate, we’re talking in trends as opposed to single quarters.” While the U.S. will experience faster growth in the short run as the recovery builds, the pace

314 will slow, said Drew Matus, a senior economist at Bank of America Merrill Lynch in New York. Catching Up “The next couple of years we’ll be accelerating to catch up, and then we delve into the new- normal environment,” he said. His firm sees potential growth of 2.25 percent, “not substantively different” from Pimco, he said, and down from a 2.75 percent estimate before the recession began in December 2007. “When people talk about the new normal, they’re not talking about 2010 or 2011, they’re talking 2013 and beyond,” said Matus, one of 12 economists in the Bloomberg survey whose forecasts were consistent with El-Erian’s. The other 34 economists line up with White House economic adviser Lawrence Summers, who said he “would be very reluctant to accept the idea that the American economy no longer has the potential to grow rapidly,” in an Oct. 8 interview with Bloomberg News. “Because the economy is coming out of a business-cycle trough, there is room for growth at rates that are above average historical levels,” Summers said in a Jan. 15 interview. “U.S. business is as innovative as it has ever been, we have a uniquely talented and hardworking labor force, and our economy is resilient by global standards. For all these reasons, we can expect that the productive potential of the American economy will continue to grow.” Economic Assumptions Summers declined to give a specific potential-growth rate because the administration will release a new set of economic assumptions next month. In the budget for the current fiscal year, Obama’s economic team forecast growth averaging 2.5 percent over 10 years. The “working assumption” at New York-based Goldman Sachs Group Inc. for potential growth is between 2.5 percent and 3 percent, the bank’s economists wrote in their Dec. 2 long-term economic outlook. “We do not share the view, expressed by some observers, that the recession has reduced the potential growth rate materially,” they said. Economists Richard Berner at New York-based Morgan Stanley and David Resler at Nomura Securities in New York see a rate of 2.5 percent, the same as before the recession. Permanently Different While Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut, has trimmed his estimate to 2.6 percent from 2.75 percent, he rejects the idea that the economy is permanently different. Potential growth comes from increases in the labor force, which grows with the population, and “the business cycle doesn’t change that,” Stanley said in an interview. Productivity also contributes, “and we don’t see evidence” that it “has really changed in any meaningful way,” he added. Nonfarm productivity rose at a 4 percent annual rate in the third quarter, almost double the average of the past two decades. Productivity typically accelerates coming out of recession, as companies first push existing workers harder to meet rising demand before beginning to hire. Employment may not recover as quickly, given that the jobless rate was as low as 4.4 percent in May 2007. Historically, it takes between one to three years after a recession ends for unemployment to reach pre-recession levels. El-Erian forecast in July that the rate may eventually reach 11 percent.

315 Jobless Rate While economists in the Bloomberg survey expect unemployment to average 9.1 percent in 2011, they do see the jobs picture improving. The median estimate for the nonaccelerating inflation rate of unemployment, or NAIRU -- essentially how low economists expect the jobless rate to fall - - is 5.5 percent, compared with a 5.7 percent average jobless rate during the past 20 years. The Fed’s latest economic forecast, released Nov. 24, anticipates unemployment in a range between 6.8 percent to 7.5 percent in 2012, even as growth speeds up to between 3.5 percent to 4.5 percent. During what the Fed calls the “longer run,” essentially their view of potential growth, policy makers see expansion between 2.5 percent and 2.8 percent, with unemployment between 5 percent and 5.2 percent. When growth does pick up, the Fed will begin raising interest rates, according the Bloomberg survey, conducted Jan. 5 to Jan. 12. The median forecast is for the benchmark overnight bank lending rate to rise to 0.75 percent by the end of 2010 from a range of zero to 0.25 percent today. More Bearish Morgan Stanley sees the fed funds target reaching 1.5 percent by year-end and 2 percent in the first quarter of 2011. Goldman Sachs is more bearish in the short run, agreeing with Pimco’s forecast of no change before 2011. Goldman Sachs anticipates a rise in the two-year note yield to 1 percent by the end of 2010 from 0.87 now, while most economists see market rates rising more quickly. The median forecast in the Bloomberg survey is 1.9 percent by the end of the year. Morgan Stanley estimates 2.75 percent. The yield on the 10-year note will rise to 4.2 percent from 3.67 percent, according to the median forecast, higher than the Goldman Sachs forecast of a decline to 3.25 percent. The economy will continue to adapt, said Robert MacIntosh, chief economist at Eaton Vance Management in Boston and the most accurate forecaster of labor trends in Bloomberg News surveys last year. “The potential for jobs may be lower, but I don’t see it for growth,” said MacIntosh, who sees long-term expansion at 3.75 percent. “We’re still Americans and we’re still going to consume.”

Michael McKee No New Normal on Wall Street as Economists Dismiss Pimco’s GDP Jan. 19 (Bloomberg http://www.bloomberg.com/apps/news?pid=20601109&sid=apfl_Mic9Dns&pos=11#

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A Better Way to Manage Knowledge 10:43 PM Tuesday January 19, 2010 By John Hagel III and John Seely Brown We give a lot of talks and presentations about the ways and places companies and their employees learn the fastest. We call these learning environments creation spaces — places where individuals and teams interact and collaborate within a broader learning ecology so that performance accelerates. During these discussions, it's inevitable that somebody raises their hand. "Wait a minute," they say, "isn't this just knowledge management all over again?" It's an understandable concern. Knowledge management, after all, was probably the hottest topic in management in the 1990s. "If only our company knew what our company knows" was the mantra in those days. With knowledge becoming the most important factor of production, surely competitive success awaited those companies that could effectively manage what their employees knew. But we all know by now that despite massive investments and a lot of highly motivated people knowledge management in some instances didn't yield all the benefits it could have. The best KM systems succeeded at capturing and institutionalizing the knowledge of the firm. But for the most part the repositories and directories remained fragmentary and the resources didn't get used. The folks with the knowledge were often reluctant to put what they knew into the database. The folks seeking the knowledge often had trouble finding what they needed. Moreover, in their quest to capture what the firm already knows, most knowledge managers lost sight of the fact that the real value is in creating new knowledge, rather than simply "managing" existing knowledge. In this fast moving world, what we know — our "stocks" of knowledge — depreciate faster than they used to. So we've got to keep creating new knowledge in order to keep pace. Most of us, as individuals, know this. That's why we're not keen to spend time entering our latest document into a knowledge management system. We know we're better off engaging in the interactions and collaborations that create new knowledge about how to get things done. In these circumstances, the last thing the world needs is another knowledge management scheme focusing on capturing knowledge that already exists. What we need are new approaches to creating knowledge, ones that take advantage of the new digital infrastructure's ability to lower the interaction costs among us all — ones that mobilize big, diverse groups of participants to innovate and create new value. We've found in our research into environments like World of Warcraft (WoW) that new knowledge comes into being when people who share passions for a given endeavor interact and collaborate around difficult performance challenges. Most long-time gamers, for instance, figured it would be months before anybody made it all the way through the many difficult performance "levels" involved in The Burning Crusade, the World of Warcraft extension

317 released in 2007. But a French player named Gullerbone did so little more than 28 hours after the extension was released. His accomplishment made headlines in the gamer world. Gullerbone succeeded by taking advantage of the tools and resources available to him (and his "guild" of teammates) in the vast creation space that has emerged within and around World of Warcraft. Creation spaces emerge from a careful recipe of participants, interactions, and environments blended by insightful designers. And they succeed where knowledge management fails. Why? Because these creation spaces, heavily relying on shared network platforms, provide tools and forums for knowledge creation while at the same time capturing the discussion, analysis, and actions in ways that make it easier to share across a broader range of participants. Soon after Gullerbone and his guild figured out how to get through the new performance levels of the Burning Crusade, the details about how they did it soon became widely available in the social media "knowledge economy" surrounding the game — videos, blogs, wikis, etc. This focus on knowledge creation shifts the motivations of participants. Knowledge management systems desperately try to persuade participants to invest time and effort to contribute existing knowledge with the vague and long-term promise that they themselves might eventually derive value from the contributions of others. In contrast, creation spaces focus on providing immediate value to participants in terms of helping them tackle difficult performance challenges while at the same time reducing the effort required to capture and disseminate the knowledge created. Creation spaces have the potential to generate increasing returns — the more participants that join, the faster new knowledge gets created and the more rapidly performance improves. They bring into play network effects in the generation of new knowledge. In contrast, traditional knowledge management systems are inherently diminishing returns propositions. Since existing knowledge is by definition limited, it requires more and more effort to squeeze the next increment of performance improvement as existing knowledge gets more broadly distributed. Here's another important contrast between creation spaces and conventional knowledge management systems. Knowledge management traditionally has focused on capturing knowledge that already exists within the firm — its systems rarely extend beyond the boundaries of the enterprise. Creation spaces instead focus on mobilizing and focusing participants across all institutional boundaries. Sure, there are lots of smart people within your enterprise, but imagine the power of connecting with and engaging a more diverse collection of smart people beyond your enterprise. That is another source of the increasing returns in creation spaces — participation is not limited by the boundaries of the enterprise. What is your assessment of the limitations of traditional knowledge management systems? What are the major barriers that prevent them from delivering even more value to the firm? What issues need to be overcome to gain wider adoption of creation spaces as an alternative means of creating and capturing knowledge? http://www.bloomberg.com/apps/harvardbusiness?sid=H02713005d6002a5abd7fc0593b28eb 8f

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Beware global economic imbalances, Mervyn King warns Bank governor calls for reform of UK and world economy. Stimulus packages just a 'massive sticking plaster' Ashley Seager Wednesday 20 January 2010

The governor of the Bank of England, Mervyn King. Photograph: Lewis Whyld/PA The British economy faces "a long period of healing" as it recovers from the recession and the government needs to ensure it reduces the budget deficit sharply, Bank of England governor Mervyn King warned last night. Speaking at the University of Exeter, King said the extraordinary degree of monetary and fiscal stimulus administered by governments and central banks represented little more than a "massive sticking plaster on the wounds" and that the international community had to do something about the huge trade and current account imbalances between countries if it was to avoid future crises. King said national output fell by 5% last year – the biggest drop since 1931 – and by 10% compared to where it would have been had the recession not happened. Recovery was starting but it was gradual. "There is a long period of healing ahead. Although quarterly growth rates of GDP may soon turn positive in the United Kingdom, unemployment is likely to remain high. "The sharp monetary squeeze resulting from the efforts by banks to contract their balance sheets is still casting a shadow over the future path of output and employment." He felt the £200bn of asset purchases the Bank of England has carried out over the past year had averted a "potentially disastrous monetary squeeze." Such bold action by global authorities helped to end the collapse in confidence and spending last year, but equally bold action would be needed to prevent a similar crisis. "The origins of the crisis lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire – in a word, globalisation. The benefits in terms of trade were visible; the costs of the implied capital flows were not." King has long warned about the need to address the fact that some countries such as the America and Britain have run huge trade deficits for years while China and Japan, among others, ran big surpluses. The capital flows from reinvestment of the surpluses in western markets led to the excessive risk-taking by banks that threatened the global financial system.

319 "To prevent another crisis will require reform to both the regulation and structure of banking and the international monetary system". King compared choices for economies to a game of sudoku in which issues such as economic growth, trade deficits and employment levels are inter-related. "Sudoku for economists shows that countries cannot pursue for long incompatible economic policy frameworks." On China's reserves of $2tn (£1.2tn) and Japan's of $1tn he said: "Adding inexorably to the stock of international assets and liabilities is like adding one brick on top of another to form a tower. With skill, it can be done for a surprisingly long time, but eventually the moment comes when adding one more causes the tower to fall. "If countries do not work together to reduce the "too high to last" imbalances, a crisis of one sort or another in financial markets is only too likely." He urged the G20, which accounts for more than 90% of world GDP, to ensure it evolved into a stronger body for tackling this issue. But he added that the need to sort out imbalances globally did not change the need for Britain to address its own problem. "Monetary and fiscal policy together must help to bring about a switch of demand from private and public consumption to net exports and business investment as the recovery takes hold." He repeated his call to the government to ensure that it took seriously the task of reducing the country's enormous budget deficit, without which neither healthy growth nor financial stability were possible. But, he noted: "The chancellor has made clear that the spring budget provides the opportunity to do precisely that." He warned: "The patience of UK households is likely to be sorely tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers." The latest unemployment figures, due out today, are expected to show that the broad ILO measure of joblessness rose by about 35,000 in the three months to November, taking the unemployment rate up to 8%. The claimant count is expected to be little changed for December at 1.63 million. MPC's time is over: Blanchflower David Blanchflower, the former monetary policy committee member who was a lone voice calling for rate cuts in the slump, has called for the committee to be disbanded as it is "not fit for purpose". In his economics column for the New Statesman, out on Thursday, he says: "The MPC's days are numbered, certainly in terms of its remit and probably its membership. After the election we are going to have to reconsider who sets monetary policy. The MPC missed the recession entirely. The recession was much deeper because of their failure to act. The MPC was asleep at the wheel. Its inability to communicate adequately what quantitative easing is supposed to do suggests it has learned little." He singles out MPC colleague Andrew Sentance, who has warned in recent days that interest rate rises might be imminent. "The first rule, for an MPC member, should be to do no harm. He was the one who throughout 2008 denied there was going to be a recession," said Blanchflower. During his time on the committee, Blanchflower repeatedly called for interest rates to be slashed and is hailed by many as the earliest member to spot the severity of the financial crisis. Ashley Seager Beware global economic imbalances, Mervyn King warns 20 January 2010 http://www.guardian.co.uk/business/2010/jan/20/mervyn-king-internationaltrade

320 COLUMNISTS The Greek tragedy deserves a global audience By Martin Wolf Published: January 19 2010 22:22 | Last updated: January 19 2010 22:22 The Greek government has promised to slash its fiscal deficit from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012. Is it plausible that this will happen? Not very. But Greece is merely the canary in the fiscal coal mine. Other eurozone members are also under pressure to slash fiscal deficits. What might such pressure do to vulnerable members, to the eurozone and to the world economy? Having falsified its figures for years, violating the trust of its partners, Greece is in the doghouse. Yet, even if it bears much of the blame, the task it is undertaking is huge. In particular, unlike most countries with massive fiscal deficits – the UK, for example – Greece cannot offset the impact of fiscal tightening by loosening monetary policy or depreciating its currency.

Greece is a member of a currency union that has the tightest monetary policy of any large economy (see chart), as Paul de Grauwe of Leuven university pointed out in the FT this week. According to the Organisation for Economic Co-operation and Development, eurozone

321 real final domestic demand will stagnate in 2010. Germany’s is forecast to grow by 0.2 per cent. The euro has also strengthened by more in real terms since its launch in 1999 than any other leading currency. To add insult to injury, Greece and the other peripheral countries have lost competitiveness within the zone. On one measure, Greek unit labour costs rose by 23 per cent against Germany’s between early 2000 and the second quarter of 2009. This is in line with the experience of other peripheral members (see charts). Finally, even if fiscal tightening were to lower spreads on Greek bonds over German bunds – a measure of Greece’s default risk – the benefit for the public finances and the economy would not be large. True, early this week, the Greek spread over bunds was as big as 2.74 percentage points. But spreads have only been wide for two years. The impact of lower public sector interest rates on rates paid by the private sector is also likely to be quite small. Given these tight constraints, a big structural fiscal tightening will generate a deep recession. That is sure to increase the cyclical deficit. Assume, cautiously, that for every percentage point of structural tightening there would be 0.2 points of offsetting fiscal deterioration. Then the structural tightening needed to reduce the actual deficit to 3 per cent of GDP would be close to 12 percentage points. The Greek government would find that, for every step it takes forward, it would slip a bit backwards. So far Greece has not suffered a significant recession. That seems sure to change. The government will soon be facing miserable public and private sectors, with no policy levers. The problems of Greece are extreme, because it alone of the vulnerable eurozone member countries has both high fiscal deficits and high debt. Other countries with large fiscal deficits are Ireland (12.2 per cent of GDP in 2009) and Spain (9.6 per cent). But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively. Meanwhile, Italy, with a net debt ratio of 97 per cent, had a deficit of “only” 5.5 per cent. Portugal is in the middle, with net debt of 56 per cent of GDP and a deficit of 6.7 per cent of GDP. Thus, the challenge for Greece is larger and more urgent than for the others. In an article in the FT last week, Desmond Lachman of the American Enterprise Institute concluded that Greece will be forced to leave the eurozone. Simon Tilford of the Centre for European Reform in London argued on these pages that it must be bailed out, instead. There are two other possibilities: Greece toughs it out; or Greece just defaults. Which is most likely? I do not know. But default cannot be a solution. Greece would then be forced to close its deficit in the midst of a national economic debacle. Leaving the eurozone would be a political catastrophe. Either of these eventualities (let alone both together) would also create lethal contagion for vulnerable members. Suddenly, the unthinkable would be thinkable. The eurozone could then confront a wave of sovereign debt and financial sector crises that would make what happened in 2009 look like a party. At the same time, a bail-out by the eurozone as a whole would create a monstrous moral hazard for politicians. It would only be possible if the eurozone subsequently exercised a degree of direct control over the fiscal decisions of member states. It would, in short, be the fastest route to the political union that many initially believed was a necessary condition for success. Given the horrendous difficulty of all alternatives, I am sure the effort will be made to tough it out for as long as possible. That will also be the case elsewhere. All will be forced to accept lengthy recessions. But in the absence of either strong demand elsewhere in the eurozone or a weaker exchange rate, both of which depend on decisions by the European

322 Central Bank, the competitive disinflation route to prosperity seems highly likely to fail. Some countries may find themselves stuck in long-term stagnation. Meanwhile, the eurozone as a whole, having lost its erstwhile internal demand engines, must now hope for faster growth of net exports. So do countries hit by the financial shock, such as the UK and US. So, too, does recession-hit Japan. So, not least, does China. Either the rest of the world has a spending binge, or these countries – which make up 70 per cent of the world economy – are going to be disappointed. Some, knowing of my opposition to UK membership of the eurozone, may suppose that I find some pleasure in these looming difficulties. On the contrary, I fear the dangerous consequences. But these are certainly the sorts of difficulties that have worried me. Most of the time having an independent currency is nothing but a nuisance. But every so often and quite unpredictably, countries desperately need a safety valve. As Prof de Grauwe reminds us, the 1930s were a time when such relief was needed. Our own era is posing what look like similar challenges. Stuff does, indeed, happen. Having willed the creation of the euro, its members must overcome the difficulties that arise when, as now, stuff happens. Martin Wolf The Greek tragedy deserves a global audience, 19 enero, 2010, http://www.ft.com/cms/s/0/eeef5996-0532-11df-a85e-00144feabdc0.html

BRUSSELS King calls for G20 ‘metamorphosis’ By Chris Giles in London and Tony Barber in Brussels Published: January 19 2010 08:53 | Last updated: January 19 2010 19:19 The Group of 20 should develop voting procedures and “metamorphose” to become the governing body of the International Monetary Fund to enhance its legitimacy and promote balanced world growth, Mervyn King, governor of the Bank of England, said on Tuesday night. Setting out his concerns that the global economic recovery has started to widen trade imbalances, Mr King warned that protectionist forces would rise unless countries tackled unbalanced growth and misaligned real exchange rates. Ministers look at boosting eurozone links - Jan-17 Money Supply: A downbeat ECB worldview - Jan-19 Martin Wolf: The eurozone’s tough years ahead - Jan-05 In depth: G20 - Jan-19 “There is a risk that countries will, out of frustration, impose unilateral and ultimately self- defeating protectionist responses,” he said. He praised the G20 as a body that represented 90 per cent of global output but said its reputation would soon be damaged if the body did not go further than simply talking to each other. “Smiling family photographs marking the attendance at international gatherings are no substitute for specific actions.”

323 His main message was that surplus countries – China, other Asian nations, Japan, Germany and oil exporters – “must expand domestic demand and allow their trade surpluses to shrink”. Although Mr King stressed this was easier said than done, he warned that low-savings countries – such as the US and UK – would no longer be able to play the role of consumer of last resort. “It will require changes in prices and most obviously in real exchange rates,” the governor said. To enhance agreements reached at the G20 to reduce imbalances, he suggested its “legitimacy and leadership ... would be enhanced if it were seen as representing views of other countries, too”. “That could be achieved if the G20 were to metamorphose into a governing council for the IMF, and at the same time acquire a procedure for voting on decisions,” Mr King said. But in a sign that the fights over the legitimacy of the G20 were still only at an early stage, Jean-Claude Juncker, who heads the eurogroup of eurozone finance ministers, said it was unsatisfactory that the only eurozone representative at G20 events was Jean-Claude Trichet, the European Central Bank president. The European Commission is expected to propose soon that a political representative of the 16-nation eurozone should attend meetings of the G20, partly to strengthen Europe’s voice in exchange rate discussions. Mr Juncker’s remarks underlined the determination of policymakers to boost the eurozone’s international profile and strengthen its internal cohesion under the provisions of the European Union’s Lisbon treaty, which came into effect in December. “The eurogroup has to become a member of the G20 because the currency isn’t at the moment represented by its political president, if I may say so, but only by its monetary policy arm, which is Mr Trichet,” Mr Juncker told reporters. “This creates an imbalance in the representation of the eurozone.” Europeans are already present in large numbers at G20 summits. France, Germany, Italy and the UK are permanent G20 members, Spain has attended recent events and the EU is represented separately by the Commission and the ECB. This has led to criticism from some non-Europeans that Europe has too many seats at the table. The same point crops up in discussions of the relative weights of countries in the the IMF. Olli Rehn, the Finn who has been nominated as the EU’s next economic and monetary affairs commissioner, said last week that he intended to draft proposals for boosting the eurozone’s representation at the G20 and other international economic forums. “Currently we punch below our weight. By standing united, we can lead, not only follow,” Mr Rehn told his confirmation hearing at the European parliament. Mr Juncker made clear that one factor purpose driving the quest for G20 representation was the view of some EU leaders, such as Nicolas Sarkozy, the French president, that the eurozone was suffering from global currency misalignments. “The relationship between the major currencies isn’t adequately regulated from a eurozone point of view,” Mr Juncker said, in an implicit echo of Mr Sarkozy’s criticism of the US authorities this month for letting the dollar depreciate against the euro. Mr Juncker said the goal of eurozone governments was an exchange rate policy “more focused on the representation of European interests”.

324 Mr Juncker, who was reappointed on Monday as the eurogroup’s leader for a two-and-a-half 2½-year term, indicated that he was not proposing to substitute himself at G20 events for representatives of individual eurozone countries. Europeans are already present in large numbers at G20 summits. France, Germany, Italy and the UK are permanent G20 members, Spain has attended recent G20 events and the EU is represented separately by the Commission and the ECB. This has led to criticism from some non-Europeans that Europe has too many seats at the table. Chris Giles in London and Tony Barber King calls for G20 ‘metamorphosis’ January 19 2010 http://www.ft.com/cms/s/0/0d872930-04d2-11df-9a4f-00144feabdc0.html

EUROPE ECONOMONITOR Unwinding Crisis Policies in Europe: Are We There Yet? Marek Belka Jan 19, 2010 4:44PM Much is riding on getting the timing of the exit right from the stimulative policies used to combat the global economic and financial crisis. This is something that IMF Managing Director Dominique Strauss-Kahn has repeatedly emphasized.Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis, as Wolfgang Munchau and others have argued recently. I also agree with Jean Pisani-Ferry and his colleagues that exiting in an uncoordinated fashion will lead to a renewed build up of financial instability. To successfully unwind the extraordinary policy measures taken in response to the crisis, we need more than just a good sense of the state of the economic recovery and the degree of financial stability. We also need to know to what extent the global economy currently is influenced by those supportive policy measures. Is it safe yet to change course? Continued macroeconomic support We are no longer at the edge of the abyss that loomed in early 2009, with all but a handful of Europe’s economies now pulling out of recession. But it is less clear that we have reached safe ground: • Financial market participants do not seem to be able to make up their mind about the scenario we are in: equity valuations anticipate a solid and durable recovery, yet investors are willing to meet governments’ extraordinary financing needs at very low interest rates as if growth prospects were poor. • Bank lending, crucial for Europe’s smaller and medium sized enterprises, remains tight, but capital markets are very active in funding larger corporations. • Unemployment is still rising but consumers appear to be “believing in inflation again”, which is helping dispel lingering worries over deflation.

325 • The euro is close to a historic high in real effective terms, and tensions in the euro area from divergences in economic performance and policy implementation have risen. I will return to this issue in depth in my next blog. This ambivalence can perhaps be attributed to the fact that extraordinary policy support, not just in Europe but also globally, impairs our ability to read the underlying economic fundamentals. The crisis has been very deep, and is likely to require economic restructuring and widespread balance sheet repair–processes that necessarily take time. Taking these factors together, I believe that it is important for fiscal and monetary policies to continue to support the recovery. While a rebound is under way, the recovery is still fragile, subject to important downside risks, and uneven across the continent. We plan to publish revised growth forecasts at the end of January in the next quarterly update of the World Economic Outlook. Cautious switch from systemic to specific financial intervention With so many policy measures shoring up the financial system, it is hard to get an accurate read of its pulse and see whether it is stable enough to leave the emergency room. Yet equally important is the concern about these supportive policies turning into an addiction. So, where are we? There is ground for guarded optimism. As ECB Vice-President Lucas Papademos noted when presenting the ECB’s Financial Stability Review, confidence and resilience in financial markets has improved and remaining problems appear to be no longer systemic. But I also share his view that vulnerabilities are still high. Will banks be able to sustain the recent increase in profitability? Will they succumb to concentrations in lending to commercial property or emerging markets? And how would they handle a sharp increase in sovereign yields if fears about fiscal sustainability became widespread? Still, on balance, the time seems to have come to begin to progressively unwind some of the financial sector support measures. Technically, such unwinding is made easy because most of Europe’s supportive measures have built in sunset clauses (most enhanced credit support measures), provisions linked to market conditions (for instance, debt guarantees), or costs that become more onerous as time progresses (for instance, recapitalization schemes). I would encourage policymakers to remove financial system supports in line with their built- in expiration dates. Indeed, the ECB has started doing this by ending its one year liquidity support measures and some countries have allowed debt guarantee schemes to lapse. The policy priority, instead, is to tackle remaining weaknesses with specific interventions. Next: financial sector reform and credible fiscal consolidation As IMF First Deputy Managing Director John Lipsky pointed out two weeks ago, we should not forget the need for fundamental reforms in the financial sector. Europe has seized the crisis as an opportunity to put in place new pan-European financial stability arrangements. It now needs to play its part in implementing global regulatory reform. Clarifying quickly what the new rules will be would allow financial institutions to focus on their core business: provide credit where credit is due. The crisis has also exposed the weak underlying state of public finances in Europe. While a strong fiscal policy response to the crisis was necessary, I worry about the surge in government indebtedness and the potential for an adverse shift in sentiment about fiscal sustainability. To avert this, countries need to demonstrate credible plans for fiscal consolidation. Yet while Europe’s finance ministers tabled ambitious intentions, guided by the Stability and Growth Pact, translating these promises into credible plans has become more

326 urgent than is generally perceived. Some of these issues are particularly pertinent for the euro area. I plan to blog on this next. Marek Belka Unwinding Crisis Policies in Europe: Are We There Yet? Jan 19, 2010http://www.roubini.com/euro- monitor/258286/unwinding_crisis_policies_in_europe__are_we_there_yet_?utm_source=fee dburner&utm_medium=feed&utm_campaign=Feed%3A+EuropeanEconomonitor+%28Euro pean+EconoMonitor%29

FT's rolling global market overview China and eurozone fears hit risk appetite By Jamie Chisholm, Global Markets Commentator Published: January 20 2010 08:28 | Last updated: January 20 2010 12:04 11:55 GMT. Two recent bugbears returned to knock global risk appetite on Wednesday, as monetary tightening in China and worries about the fiscal position of the eurozone periphery knocked stocks and the single currency. The developments took the shine off what is developing into a broadly positive US fourth- quarter earnings season, with IBM overnight seemingly providing bulls with further propulsion to force stocks beyond their fresh 15-month highs. Q&A: Outlook for markets in 2010 - Jan-19 FT Alphaville: Which governments are at risk? - Nov-26 Monetary policy takes centre stage in London - Jan-20 Stars aligned for emerging markets in 2010 - Jan-19 Risk appetite returns to pre-crisis levels - Jan-19 Nikkei slips as brokerages drop after broker downgrade - Jan-20 Bank of America, Morgan Stanley and Ebay report on Wednesday. But before that, traders will had to contend with sharp falls in Asian stocks following news that the Chinese authorities had instructed some of the nation’s big banks to stop lending for the rest of the month. The sector had lent Rmb1,100bn ($161bn) in the first two week’s of January, according to sources quoted by Reuters. Beijing is concerned that the economy is overheating but some investors are worried that such actions may crimp China’s growth to such an extent that it damages a fragile global recovery. Note, China fourth-quarter GDP data are set for release on Thursday. Meanwhile, followers of financial fashion will be intrigued to see whether the tumble in the euro to a five-month trough against the dollar brings back the trend for making bets on the buck’s negative correlation to riskier assets. The relationship – where a rise in the dollar would see a drop in stocks and commodities, and vice versa – had broken down of late. But the dollar’s surge through some crucial technical levels may hurt greenback-denominated commodities and tempt traders to clamber back on to the “risk-on/risk-off” wagon. The Market Eye Nothing to see here. Move along now. Mervyn King, the UK’s monetary cop, attempted to usher the market away from the view that Britain faced sustained inflationary pressures following the sharp jump in prices last month. He may

327 have had some success. The 10-year breakeven rate, a gauge for measuring inflation concerns that is calculated from the difference between conventional government bond yields and inflation-linked bond yields, dipped 1 basis point to just above 3 per cent. However, the breakeven remains close to 16-month highs and those worried about inflation will have noted Wednesday’s release of much better than expected labour market data – figures that helped sterling move to a five-month peak versus the euro.

● Banks led the Shanghai Composite into a 2.9 per cent tumble after Beijing’s lending restrictions were unveiled. The Hang Seng in Hong Kong lost 1.8 per cent and the FTSE Asia Pacific index fell 0.7 per cent. European bourses, which had been slated to open higher following Wall Street’s 1.3 per cent advance to a fresh 15-month peak, saw selling from the off. The FTSE 100 in London lost 0.9 per cent as resource stocks did their usual swoon whenever the possibility of slower Chinese growth is mooted. The FTSE Eurofirst 300 dropped 0.5 per cent. The FTSE World equity index declined 0.6 per cent and the S&P 500 futures contract suggested the US benchmark would start trading with a 8 point loss at 1,142.

● The euro was the main feature in forex markets as investors continued to fret about the budgetary challenges facing Greece and other fiscally challenged eurozone members, and its decline encouraged a move into dollars. The single currency broke below support levels at $1.4250 and $1.4200, and was later off 1 per cent at $1.4140. The euro also lost 1.3 per cent versus the yen. The dollar rose 0.9 per cent on a trade-weighted basis, breaching the 78.0 level.

● Gold’s relationship with the dollar seemed intact. The precious metal fell 0.9 per cent to $1,128 as the buck rallied. Oil was hurt, too, losing 1.7 per cent to $77.70 a barrel. Platinum hit a new 17-month high, breaching $1,650 an ounce, before paring some of its gains.

● The shift away from risk gave a boost to government bonds. The yield on the US 10-year Treasury dipped 3 basis points to 3.67 per cent. Greek 10-year bonds saw selling, pushing the yield up 23bp to 6.19 and the spread with German Bunds to 293bp. Jamie Chisholm China and eurozone fears hit risk appetite January 20 2010 08:28 http://www.ft.com/cms/s/0/bb7fda8c-0590-11df-88ee-00144feabdc0.html

328 Opinion

January 20, 2010 OP-ED COLUMNIST Is China an Enron? (Part 2) By THOMAS L. FRIEDMAN Last week, I wrote a column suggesting that while some overheated Chinese markets, like real estate, may offer shorting opportunities, I’d be wary of the argument that China’s economy today is just one big short-inviting bubble, à la Dubai. Your honor, I’d like to now revise and amend my remarks. There is one short position, one big short, that does intrigue me in China. I am not sure who makes a market in this area, but here goes: If China forces out Google, I’d like to short the Chinese Communist Party. Here is why: Chinese companies today are both more backward and more advanced than most Americans realize. There are actually two Chinese economies today. There is the Communist Party and its affiliates; let’s call them Command China. These are the very traditional state- owned enterprises. Alongside them, there is a second China, largely concentrated in coastal cities like Shanghai and Hong Kong. This is a highly entrepreneurial sector that has developed sophisticated techniques to generate and participate in diverse, high-value flows of business knowledge. I call that Network China. What is so important about knowledge flows? This, for me, is the key to understanding the Google story and why one might decide to short the Chinese Communist Party. John Hagel, the noted business writer and management consultant argues in his recently released “Shift Index” that we’re in the midst of “The Big Shift.” We are shifting from a world where the key source of strategic advantage was in protecting and extracting value from a given set of knowledge stocks — the sum total of what we know at any point in time, which is now depreciating at an accelerating pace — into a world in which the focus of value creation is effective participation in knowledge flows, which are constantly being renewed. “Finding ways to connect with people and institutions possessing new knowledge becomes increasingly important,” says Hagel. “Since there are far more smart people outside any one organization than inside.” And in today’s flat world, you can now access them all. Therefore, the more your company or country can connect with relevant and diverse sources to create new knowledge, the more it will thrive. And if you don’t, others will. I would argue that Command China, in its efforts to suppress, curtail and channel knowledge flows into politically acceptable domains that will indefinitely sustain the control of the Communist Party — i.e., censoring Google — is increasingly at odds with Network China, which is thriving by participating in global knowledge flows. That is what the war over Google is really all about: It is a proxy and a symbol for whether the Chinese will be able to freely search and connect wherever their imaginations and creative impulses take them, which is critical for the future of Network China.

329 Have no doubt, China has some world-class networked companies that are “in the flow” already, such as Li & Fung, a $14 billion apparel company with a network of 10,000 specialized business partners, and Dachangjiang, the motorcycle maker. The flows occurring on a daily basis in the networks of these Chinese companies to do design, product innovation and supply-chain management and to pool the best global expertise “are unlike anything that U.S. companies have figured out,” said Hagel. The orchestrators of these networks, he added, “encourage participants to gather among themselves in an ad hoc fashion to address unexpected performance challenges, learn from each other and pull in outsiders as they need them. More traditional companies driven by a desire to protect and exploit knowledge stocks carefully limit the partners they deal with.” Command China has thrived up to now largely by perfecting the 20th-century model for low- cost manufacturing based on mining knowledge stocks and limiting flows. But China will only thrive in the 21st century — and the Communist Party survive in power — if it can get more of its firms to shift to the 21st-century model of Network China. That means enabling more and more Chinese people, universities and companies to participate in the world’s great knowledge flows, especially ones that connect well beyond the established industry and market boundaries. Alas, though, China seems to be betting that it can straddle three impulses — control flows for political reasons, maintain 20th-century Command Chinese factories for employment reasons and expand 21st-century Network China for growth reasons. But the contradictions within this straddle could undermine all three. The 20th-century Command model will be under pressure. The future belongs to those who promote richer and ever more diverse knowledge flows and develop the institutions and practices required to harness them. So there you have it: Command China, which wants to censor Google, is working against Network China, which thrives on Google. For now, it looks as if Command China will have its way. If that turns out to be the case, then I’d like to short the Communist Party. THOMAS L. FRIEDMAN Is China an Enron? (Part 2) January 20, 2010 http://www.nytimes.com/2010/01/20/opinion/20friedman.html?th&emc=th

The Shift Index 2009 Corporate returns are under pressure from far more than the recession. The patterns we’ve uncovered span decades and deeply affect even the highest performing companies, with the single greatest driver of these challenges, and indeed future opportunities, being our underlying digital infrastructure. Regardless of when the economy shifts back to an upturn, the long-term implications for continued erosion of return-on-assets will continue. We have just unveiled the “Shift Index,” a new economic indicator that suggests the current recession is masking long-term competitive challenges for U.S. businesses. DOWNLOAD THE REPORT HERE: Among the key findings, U.S. companies’ return-on-assets (ROA) have progressively dropped 75 percent from their 1965 level despite rising labor productivity. Even the highest

330 performing companies are struggling to maintain their ROA rates and increasingly losing market leadership positions. Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance. The Shift Index tracks 25 metrics across three sets of main indicators: • Foundations, which set the stage for major change • Flows of resources, such as knowledge, which allow businesses to enhance productivity • Impacts, which help gauge progress at an economy-wide level These three indexes combine to provide a measure of economic performance specifically designed for the digital era — focusing on the computing, storage and bandwidth technologies and the practices and protocols of those technologies, which define our new infrastructure. Deloitte’s Center for the Edge also views these indicators as phases of transformation in what it calls the “Big Shift” in the global business environment. Foundations: Digital Infrastructure and Economic Policy Lead the Way Rapidly intensifying competition, which has more than doubled in the United States in the last 40 years, is at the heart of this decline. This change is driven by the emergence and spread of digital technology infrastructure reinforced by long-term policy shifts toward economic liberalization. The metrics in the Foundation Index monitor changes in these key foundations and provide leading indicators of the potential for change on other fronts that will ultimately manifest in the second and third phases of this Big Shift. The adoption rate of digital infrastructure is two to five times faster than that of previous infrastructure such as electricity, railroads and telephone networks. Changes currently manifest themselves as challenges rather than opportunities because our institutions and practices are still geared to earlier infrastructures. Key metrics in the Foundations Index track the changes in technology components underlying the digital infrastructure, growth in the adoption rate of this infrastructure and long-term public policy shifts. Changes in these foundations have significantly reduced the barriers to market entry and movement, leading to the increase in competitive intensity. Knowledge Flows: Key Drivers of Performance The Flow Index focuses on the key drivers of performance in a world increasingly shaped by digital infrastructure. This includes both physical and virtual flows of knowledge, capital and talent enabled by the foundational advances as well as the amplifiers of these flows. Such amplifiers include the increased use of social media and the degree of passion with which employees are engaged in their jobs. Developments in this second wave will likely lag the foundations metrics because of the time required to understand changes in foundations and develop new practices consistent with opportunities. Improving performance starts with recognizing that knowledge flows can help a company gain a competitive advantage in an age of near-constant disruption. The number and quality of knowledge flows at a firm — both within the organization and especially across institutions — will be a key indicator of any company’s ability to master the Big Shift. Impact: Rising to the Challenge The Impact Index measures how well companies are exploiting the foundational changes in the capabilities of the digital infrastructure by creating and sharing knowledge and what impact those changes are having on markets, firms and individuals.

331 According to Impact Index metrics: • U.S. firms’ ROA has steadily fallen to almost one-quarter of 1965 levels at the same time that we have seen improvements in labor productivity • The ROA performance gap between corporate winners and losers has increased over time, with the “winners” barely maintaining previous performance levels while the losers experience rapid performance deterioration — falling from positive returns in 1965 to largely negative ones today • The “topple rate” at which big companies lose their leadership positions has more than doubled, suggesting the “winners” have increasingly precarious positions • The benefits of productivity improvements increasingly accrue not to the firm or its shareholders, but to two stakeholders: top creative talent, or knowledge workers, who have experienced significant growth in compensation, and customers, who are gaining and wielding unprecedented power as reflected in increasing customer disloyalty This third phase in the Big Shift provides the greatest lagging indicator because of the time it takes for foundations and knowledge flows to play out across equity markets, consumer choice and the value captured by talent. While current trends in firm performance indicate a sustained deterioration, over time, corporate performance is expected to improve as companies learn how to effectively participate in and harness knowledge flows. http://www.edgeperspectives.com/ sea also Cloud computing A collection of working papers http://www.deloitte.com/assets/Dcom- UnitedStates/Local%20Assets/Documents/us_tmt_ce_CloudPapers_73009.pdf

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Kolumne 19.01.2010, 18:16 Münchau - Die ewigen Irrtümer der Erbsenzähler Die aktuelle Steuersenkungsdebatte in Deutschland krankt daran, dass die meisten Menschen nicht in dynamischen Systemen denken. Zudem verkennen die vermeintlichen Experten die Kraft des Wachstums. von Wolfgang Münchau Die ewige deutsche Steuerdebatte ist ein Paradebeispiel für zwei fundamentale Irrtümer, wie sie in der volkswirtschaftlichen Diskussion in Deutschland immer wieder auftreten. Der erste liegt in einer schon reflexartigen Unterschlagung der ökonomischen Dynamik. Mir graut es vor den viel zitierten Haushaltsexperten, die so reden, als ob sie einem das Taschengeld kürzen wollen, wenn sie die von der Koalition vereinbarte Steuersenkung ablehnen. Der entscheidende Faktor, der die zukünftigen Steuereinnahmen hierzulande bestimmt, ist das Wachstum. Mir scheint, dass dieser Faktor von den angeblichen Experten ausgeklammert wird. Ein Professor der Betriebswirtschaft schrieb mir einmal, dass die Schuldengrenze die Schulden bei 17,5 Prozent stabilisieren würde unter der Annahme eines Nominalwachstums von zwei Prozent. Rein rechnerisch stimmt das. Das Problem ist die Annahme eines Nominalwachstums von zwei Prozent. Dieser "Experte" ging also bei seiner Rechnung davon aus, dass das Realwachstum in Deutschland nahe bei null liegen muss, denn Realwachstum ist gleich Nominalwachstum minus Inflation. Da die Europäische Zentralbank ihr Inflationsziel von etwas unter zwei Prozent in der Zukunft wahrscheinlich ähnlich erfolgreich umsetzen wird wie in der Vergangenheit, wäre damit in dieser Rechnung das Realwachstum mit knapp über null Prozent beziffert. Nur unter der Annahme von Nullwachstum kann man die elende Erbsenzählerei verteidigen. Ungläubige Wachstumsskeptiker Bei positivem Realwachstum treten dynamische Effekte auf. Reales Wachstum beeinflusst die Haushaltslage durch das Steueraufkommen. Die Haushaltslage selbst ist die Differenz von Steuereinnahmen und Ausgaben. Die Höhe der Steuern und die Staatsausgaben wiederum beeinflussen das Wachstum. Wir haben also ein dynamisches System, in dem die brachiale Anwendung der vier Grundrechenarten nicht mehr funktioniert. Wenn wir eine Steuersenkung ökonomisch bewerten wollen, dann müssen wir versuchen, dieser Dynamik Rechnung zu tragen, und beurteilen, welche Effekte diese Steuersenkung auf Investitionen und Konsum hat. Mir ist bewusst, dass auch die FDP, deren Position ich hier indirekt verteidige, nicht so argumentiert. Doch selbst wenn ihre Argumente nicht überzeugen: Die Liberalen sollten sich nicht von diesen moralisierenden Haushaltsexperten kirre machen lassen. Eine Senkung der Steuersätze und eine Vereinfachung des Steuersystems sind gerade dann wichtig, wenn aus Sicht der Erbsenzähler die Haushaltslage es nicht zulässt. Der zweite Irrtum besteht darin, dass man nationale Haushaltspolitik in einer Währungsunion nicht autonom betreiben kann. Warum spielt die Währungsunion hier eine

333 Rolle? Schließlich ist nur die Währung europäisiert, die Haushaltspolitik unterliegt lediglich der Regel, dass Defizite im Normalfall nicht höher sein dürfen als drei Prozent des Bruttoinlandsprodukts. Das stimmt natürlich rechtlich, aber es unterschlägt die ökonomischen Wirkungen. • Mehr zum Thema • Kolumne Andreas Theyssen - Jetzt sparen wir mal (http://www.ftd.de/politik/deutschland/:kolumne-andreas-theyssen-jetzt-sparen-wir-mal/50061777.html) • Koalitionsstreit um Steuersenkung Staat nimmt deutlich weniger ein (http://www.ftd.de/politik/deutschland/:koalitionsstreit-um-steuersenkung-staat-nimmt-deutlich-weniger- ein/50060127.html) • Bilanzreform Latentes Mittelstandsproblem (http://www.ftd.de/karriere-management/management/:bilanzreform-latentes- mittelstandsproblem/50054788.html) • Schwenk in der Steuerpolitik Schwieriger Balanceakt der Union (http://www.ftd.de/politik/deutschland/:schwenk-in-der-steuerpolitik-schwieriger-balanceakt-der- union/50059609.html) • Pressestimmen Gegenwind für "schwarz-gelbe Selbsterfahrungsgruppe" (http://www.ftd.de/politik/deutschland/:pressestimmen-gegenwind-fuer-schwarz-gelbe- selbsterfahrungsgruppe/50058127.html) Mehr zu: Steuersenkungen Die Haushaltspolitik der großen Industriestaaten ist ein wichtiger Faktor hinter den Ungleichgewichten im Euro-Raum und in der Weltwirtschaft. Deutschlands Leistungsbilanzüberschuss etwa wird hauptsächlich vom Exportüberschuss bestimmt. Es fließen auch noch andere Faktoren in die Leistungsbilanz ein, aber - bei uns zumindest - dominiert die Handelsbilanz die Leistungsbilanz. Man kann aber die Leistungsbilanz auch anders auffassen: als Summe der Bilanzen des privaten und des öffentlichen Sektors. Wenn der öffentliche Sektor sein Defizit abbaut, dann beeinflusst das die Leistungsbilanz. Wenn wir also in Deutschland den ausgeglichenen Haushalt anstreben, dann hat das Auswirkungen auf den Rest der Welt. Jetzt ist Deutschland ein relativ kleines Rädchen in der Weltwirtschaft, in seiner volkswirtschaftlichen Gesamtgröße mittlerweile auf Platz vier nach den USA, China und Japan. Im Euro-Gebiet sind wir aber weiterhin ein Gigant. Wenn wir im nationalen Alleingang den Haushalt ausgleichen und wenn gleichzeitig der Privatsektor weiter massive Überschüsse einfährt, dann steigen die Ungleichgewichte innerhalb des Euro-Gebiets weiter an, und die Wahrscheinlichkeit eines Bruchs nimmt zu. Sollbruchstelle in Euroland Unklar ist, wo eine solche hypothetische Bruchstelle verlaufen würde. Spanien, Portugal und Griechenland halten sich momentan weit jenseits einer solchen Bruchstelle auf. Niederländer und Österreicher sind in unserer Nähe. Wenn wir die Situation schleifen lassen, kommen Länder wie Griechenland und Spanien irgendwann an einen Punkt, an dem ihnen die strategischen Optionen ausgehen. Wäre Griechenland mit seiner Haushaltskrise jetzt nicht in der Währungsunion, hätte man schon längst ein Hilfspaket geschnürt, das Sparrunden sowie eine Währungsabwertung beinhaltet hätte. Aber in einer Währungsunion kann man nur "real", nicht "nominal" abwerten, das heißt, Griechenland und Spanien werden die Löhne senken müssen. Ob das politisch möglich ist, ist nicht klar. Wenn wir aber die extrem hohen Ungleichgewichte noch weiter ansteigen lassen, was die Stoßrichtung der deutschen Politik ist, hängt die langfristige Existenz der Währungsunion von unberechenbaren politischen Konstellationen ab. Ein Zusammenbruch des Euro-Raums kann nicht in Deutschlands Interesse sein, denn dann würde Deutschlands Wettbewerbsfähigkeit brutal durch die Abwertungen der Nachbarländer beschnitten.

334 Somit gibt es nicht nur eine interne Wachstumsdynamik, sondern auch eine europäische. Die Lösung liegt in einer koordinierten Wirtschaftspolitik, die für Deutschland und Frankreich die Voraussetzung für ein Realwachstum von zwei bis drei Prozent schafft, mit einer langfristigen Schuldenquote von ungefähr 40 Prozent. Damit konsistent wäre ein durchschnittliches Haushaltsdefizit irgendwo zwischen 1,6 und 2 Prozent. Unter diesen Voraussetzungen wäre eine moderate Steuersenkung realistisch. Münchau - Die ewigen Irrtümer der Erbsenzähler von Wolfgang Münchau http://www.ftd.de/politik/deutschland/:kolumne-muenchau-die-ewigen-irrtuemer-der- erbsenzaehler/50062822.html

Esta página ha sido traducida por Reverso de Softissimo The eternal German tax debate is a prime example for two fundamental errors how they appear in the economical discussion in Germany again. The first one lies in a suppression already as reflex of the economic dynamism. I dread the much quoted budget experts who talk so, as if they want to shorten the pocket-money to one if they reject the tax cut arranged by the coalition. • More on the subject • Column Andreas Theyssen - Now we save • Coalition quarrel around tax cutGovernment takes clearly less • Balance reformLatent middle class problem • Turn in the fiscal policyDifficult balancing act of the union • Press commentsHead wind for " black-yellow self-awareness group " More to: Tax cuts The crucial factor which determines the future inland revenue in these parts is the growth. Appears to me that this factor is excluded by the alleged experts. Once a professor of the industrial management wrote to me that the responsible border stabilized the debts with 17.5 per cent under the acceptance of a nominal growth of two per cent. Purely computationally this votes. The problem is the acceptance of a nominal growth of two per cent. This "expert" assumed with his bill of the fact that the real growth must lie in Germany near with zero, because real growth is like nominal growth below an inflation. Because the European central bank will move their inflation aim of something less than two per cent in the future likely similarly successfully like in the past, the real growth with briefly about zero per cent would be numbered with it in this bill. Only under the acceptance of zero growth one can defend the miserable miserliness. Unbelieving growth sceptics With positive real growth dynamic effects appear. Real growth affects the budget position by the inland revenue. The budget position itself is the difference of inland revenue and issues. The height of the taxes and the public expenditures affect the growth again. We have a dynamic system in which the brachiale application of four basic rake kinds does not function any more. If we want to value a tax cut economically, we must try to take into account this dynamism, and judge which effects this tax cut on investments and consumption has. To me is conscious that also the FDP whose position I defend here indirectly does not argue so. But even if their arguments do not convince: the Liberals should not be done from these moralizing budget experts kirre. A lowering of the rates of taxation and a simplification of the control system are important just when from sight of the pedants the budget position it does not admit.

335 The second error consists in the fact that one cannot pursue national budget policy in a monetary union autonomous. Why does the monetary union play here a roll? Finally, only the currency is europeanized, budget policy is defeated only by the rule that deficits may not be higher normally than three per cent of the gross domestic product. This votes naturally legally, but it suppresses the economic effects. Budget policy of the big industrial nations is an important factor behind the imbalances in the euro-space and in the world economy. Balance of payments surplus of Germany possibly is determined mainly by the export surplus. Other factors still flow in onto the balance of payments, but - with us at least - there dominates the commercial balance sheet the balance of payments. However, one can understand the balance of payments also in a different way: as a sum of the balances of the private one and the public sector. If the public sector diminishes his deficit, that affects the balance of payments. If we aim at the balanced budget in Germany, the effects on the rest of the world have. Now Germany is a relatively small cog in the world economy, in his economical whole size in the meantime on place four to the USA, China and Japan. However, in the euro-area we are furthermore a giant. If we balance the budget in the national solo attempt and if at the same moment the private sector runs farther massive surpluses, the imbalances within the euro-area farther rise, and the probability of a break increases. Sollbruchstelle in eurocountry Is unclear where such a hypothetical location of fracture would run. Spain, Portugal and Greece stop for a moment far beyond such a location of fracture. Dutchmen and Austrians are in our nearness. If we allow to drag the situation, countries come like Greece and Spain sometime to a point in which to them the strategic options go out. If Greece with his budget crisis was not now in the monetary union, one would have laced long time ago an auxiliary package which would have contained savings rounds as well as a currency devaluation. But in a monetary union one can only "really", not "nominally" depreciate, that is Greece and Spain will have to lower the wages. Whether this is politically possible, is not clear. If we allow to farther still rise, however, the extremely high imbalances what is the direction of attack of German policy, the long-term existence of the monetary union depends on unpredictable political constellations. A breakdown of the euro-space cannot be in interest of Germany, because then competitive ability of Germany would be cut brutally by the devaluations of the neighbouring countries. Therefore there is not only an internal growth dynamism, but also a European one. The solution lies in a coordinated economic policy which creates the presupposition for a real growth of two to three per cent, with a long-term responsible ratio by chance 40 per cent for Germany and France. With it consistent an average budget deficit would be somewhere between 1.6 and 2 per cent. Under these presuppositions a moderate tax cut would be realistic. Wolfgang Münchau is FTD-and FT columnist. He leads the news service Eurointelligence.

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19.01.2010 Shock: decision about the ECB-vice presidency will not be a backroom stitch-up, but be taken by a vote

The Eurogroup decided to take a vote on the succession of ECB vice president Nicolas Papademos at the next Eurogroup meeting in February, reports Bloomberg. The choice is between three candidates: Luxembourg’s central bank chief Yves Mersch, his Portuguese counterpart Vitor Constancio and ECB Banking Supervision Committee Chairman Peter Praet. Jean Claude Juncker said there had never been a choice of three candidates before. The European Council will ratify the choice in March. ... with consequences for choice of ECB president The choice of the next Vice president also foreshadows the decision on Trichet’s successor due in May 2011. FT Deutschland writes that for this choice they are likely to respect a geographical balance between Northern and Southern countries. Axel Weber, a candidate the German foreign ministry now openly lobbies for (see interview with Werner Hoyer in Les Echos ), would have greater chances if the Constancio would be confirmed. If one of the other two candidates were to become Vice President, it would raise the chances of Mario Draghi, the only other strong candidate. Both Germany and Italy would need the support of France. Eurogroup calls on Greece to do more The finance ministers of Eurogoup also said that Greece has to step up its consolidation efforts, writes the FT Deutschland. The Greek government handed in their stability programme last week planning to reduce the deficit from 12.7% to below 3% in 2012. The eurogroup president Junker said that these are steps in the right direction, but that the measures might not be sufficient. Wouter Bos said that the Greek proposals rely too much on the income side and one-time measures, quotes Bloomberg. Sanctions have not been mentioned but the Commission is considering it as well as they no longer exclude to block Greece from receiving EU funds. Meanwhile, the Greek newspaper Kathimerini focused on the positive messages instead and quotes from the press conference: Move towards the right direction.... satisfactory budget measures and structural reforms....swift reaction of the Greek government.... The reading suggests that the only remaining problem is to ensure reliable statistics. The other, non-surprising, news is that Jean Claude Juncker has been reconfirmed as head of Eurogroup.

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Strauss-Kahn see danger of double dip recession IMF director Strauss Kahn said that the developed countries still risk to fall back into recession if they were to decide to withdraw their stimulus packages, reports La Repubblica. Strauss Kahn considers a recovery in private demand and employment a necessary condition for the governments to withdraw their support without danger for the economic recovery. Mixed signals on the economy The French and German governments raised their growth forecasts for 2010 in a further sign that the eurozone’s two largest economies are set for a steady recovery, reports the FT. The French expect their economy to expand by 1.4% instead of 0.75% while Germany upgraded its forecast from 1.2% to 1.5%. The revision also caused France to revise its deficit for from 8.5% to 8.2%, according to Les Echos. But Bloomberg reports that German investor confidence has probably declined for a fourth successive month in January. The news agency says that this reflected that the recovery may be running out of steam (we have a slightly different explanation. The recovery is largely inventory-driven, therefore technical. We should not be fooled by data such as 2% annual growth. This is not enough growth to increase employment. ) The Bloomberg story was based on a prediction of the ZEW indicator, which will be released later today.

The ultimate comparison In a comment in the FT, Peter Boone and Simon Johnson make the ultimate comparison: our response to the financial crisis is similar to the response of the Soviet establishment when the empire disintegrated. Ours, and their instinct was to tinker with regulation. Bernanke, like Gorbachev, believes that if only all the rules are right, the system might just work. But unlike the Russians at the time, we do not have leaders like Yeltsin, or the late Yegor Gaidar, who will lead from the front. And this means we are very likely heading for another collapse. About Merkel The FT has been a fan of Angel Merkel, but appears to have changed its mind in an editorial which says that Merkel’s halo is slipping, a criticism of a constant dithering. The article makes an important substantive point, that Germany should not discuss fiscal policy in isolation, as it has done. Merkel has failed to end what has become a very provincial debate. http://www.eurointelligence.com/article.581+M5a1895134fc.0.html

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Werner Hoyer : " nous avons besoin d'une meilleure coordination des politiques économiques en Europe" [ 17/01/10 - 10H01 - actualisé à 14:14:00 ] Nouveau secrétaire d'Etat aux affaires européennes dans le cabinet Merkel II,Werner Hoyer met en garde contre une éventuelle perte de confiance dans l'euro. Il conseille à la Chine d'abandonner sa politique d'accumulation de réserves de devises et verrait d'un bon oeil une candidature d'Axel Weber, président de la Bundesbank, pour succéder à Jean-Claude Trichet à la tête de la BCE. Dans le dossier de l'A400M, il s'attend à un processus laborieux pour le règlement du problème des surcoûts. Français et Allemands ont-ils analysé la crise de la même façon ?

Je crois que la Chancelière et le Président de la République ont bien identifié le risque qui menace ce bien, extraordinairement précieux, qu'est l'euro, si nous ne donnons pas, d'un côté, une impulsion pour sortir de la crise, et, de l'autre côté, si nous ne saisissions pas le bon moment pour laisser la stabilisation se développer d'elle-même. Car une perte de confiance dans la monnaie unique serait désastreuse. C'est une prise de conscience qui ne se limite pas à l'Allemagne, mais que je peux aussi percevoir dans mes entretiens en France. Etes-vous déçu par la Grèce ? Je vous mentirais si je vous disais le contraire. Je suis un vieil hellénophile et j'ai en Grèce beaucoup de contacts. La situation est devenue vraiment préoccupante et j'espère que mon vieil ami George Papandreou va réussir à renverser la vapeur. Pensez-vous que d'autres pays devraient inscrire dans leur constitution un mécanisme de frein à la dette, comme l'a fait l'Allemagne l'an dernier ? Je ne donne pas de recommandations aux autres pays. Mais nous avons l'obligation d'exiger de nos partenaires une politique de stabilisation à long terme, parce que nous évoluons dans un espace monétaire commun, avec une politique monétaire unique, décidée par une banque centrale indépendante, que nous voulons conserver.

339 Puisque vous évoquez les questions monétaires, l'économie allemande souffre-t-elle de la sous-évaluation du yuan et les Européens peuvent-ils agir de concert pour tenter d'y remédier ? L'évolution du cours du yuan me cause de grand soucis et j'espère qu'avec nos partenaires américains et chinois nous pourrons trouver prochainement une démarche rationnelle. Les Chinois sont assis sur des réserves de bien plus de 1.000 milliards d'euros de devises. La logique derrière cette accumulation de réserves monétaires ne m'apparaît pas bien, c'est une stratégie d'hier. Nous, Allemands, avons longtemps fait la même erreur. Cette recherche continue d'excédents commerciaux conduit naturellement à de telles accumulations de devises. Or, quand ces réserves finalement subissent une dévaluation, on a fait une très mauvaise affaire. Les Chinois seraient bien avisés de ne pas s'accrocher à cette façon de penser. Toujours à la rubrique monétaire, serait-ce une bonne chose de voir Axel Weber, président de la Bundesbank, remplacer Jean-Claude Trichet à la tête de la BCE en 2011 ? C'est au gouvernement allemand de décider s'il veut soumettre une candidature. Mais, dans une zone euro dans la situation où elle se trouve aujourd'hui, l'Allemagne serait sans aucun doute en mesure de proposer un président d'excellence pour succéder à Jean-Claude Trichet. Et dans l'hypothèse d'une telle candidature, il ne serait pas non plus infondé que succède à Messieurs Duisenberg et Trichet un membre du conseil des Gouverneurs de la BCE aussi expérimenté et couronné de succès que M. Weber. Que pensez-vous de la proposition espagnole de créer un gouvernement économique européen avec de potentielles sanctions pour les Etats-membres qui ne feraient pas assez pour la croissance ? J'ai cherché aujourd'hui [ le 11 janvier, ndlr] à comprendre, en parlant avec mes amis espagnols, ce qu'ils voulaient véritablement dire. J'ai remarqué que l'on ne parlait plus de " sanctions ", pour ne pas semer le trouble. Le recours au concept de gouvernement économique peut être très facilement mal compris, en Allemagne du moins. Mais personne à Berlin ne met en doute que nous ayons besoin d'une meilleure coordination des politiques économiques. La question est juste de savoir où mettre l'accent. Quelles sont nos priorités ? A mon sens, nous devons nous concentrer sur les thèmes signalisés par le Conseil européen en 2006 et où on n'a pas suffisamment agi jusqu'ici. Investissements dans la formation, la recherche- développement. Je dirais aussi renforcement de l'entrepreneuriat, l'employabilité, et enfin le complexe énergie/climat. Mais tout cela ne peut fonctionner que si nous réussissons à assainir nos finances publiques. Venons-y. La situation en Allemagne est particulièrement confuse, entre le parti libéral, le vôtre, qui persiste à demander des allégements fiscaux massifs dès 2011, et les unions chrétiennes, qui semblent ne plus voir de marge de manoeuvre. Quelle lecture faites-vous de la situation ? Il faut les voir de façon apaisée. Nous ne faisons actuellement qu'appliquer scrupuleusement le contrat de coalition approuvé unanimement dans les congrès des trois partis au pouvoir, il y a moins de trois mois. C'est pourquoi nous ne devons nous laisser irriter par l'opposition, au demeurant à peine existante, dans la poursuite de la mise en place de l'accord de coalition.

340 Le financement de l'A400M rencontre de grandes difficultés, les Etats commanditaires ne s'entendant pas sur le partage des surcoûts. Comment expliquez- vous que les Européens n'arrivent pas à coopérer plus sereinement en matière industrielle ? Il y a des engagements, sur les spécifications techniques, mais aussi sur les coûts, qui visiblement n'ont pu être tenus. C'est pour les politiques une grosse déception. Et quand, comme moi, on croit à de tels projets européens, c'est aussi un revers. Comment on peut résoudre le problème, cela m'échappe encore. Cela sera pour tous les gouvernements impliqués un processus laborieux, dans lequel on ne doit pas essayer de se profiler trop tôt, car alors, soit les coûts dérapent, soit nous manquons peut-être une grande opportunité technologique pour notre industrie de pointe. Sans compter qu'un nombre énorme d'emplois est en jeu. Le dossier de l'A400M ne démontre-t-il pas que l'Allemagne défend plus âprement ses intérêts ? Mais nous avons aussi des responsabilités à l'égard de nos contribuables ! A l'égard de nos forces armées ! Nos forces ont besoin, rapidement et de manière fiable, d'un " saut quantique " dans leur capacité de transport aérien. Mais on ne peut pas dire, comme ça, " peu importe le nombre d'avions que nous recevons pour notre argent, du moment qu'un appareil vole à un moment ou à un autre ". Et, en passant : la France en a aussi un besoin urgent de l'A400M, parce que les capacités du Transall sont encore plus entamées qu'en Allemagne. Werner Hoyer : " nous avons besoin d'une meilleure coordination des politiques économiques en Europe"17/01/10 http://www.lesechos.fr/info/inter/300403923-werner-hoyer-----nous-avons-besoin-d-une- meilleure-coordination-des-politiques-economiques-en-europe-.htm

341 COMMENT Editorial Merkel’s halo slips Published: January 17 2010 17:58 | Last updated: January 17 2010 17:58 Angela Merkel is by far the most popular politician in Germany, although her poll ratings have slipped in recent weeks. The German chancellor is popular precisely because she is a pragmatic deal-maker, a consensual politician who prefers to craft compromises rather than lead from the front. But her centre-right coalition has had a bumpy start in office. Ministers have squabbled in public over the size and speed of promised tax cuts and over pressure from Washington to send more German troops to Afghanistan. Within her own party ranks there is muttering that Ms Merkel is ignoring her conservative roots and paying too much attention to swing voters in the centre. Rumours that she might even resign briefly dented the value of the euro in currency markets last week. They were absurd, but their very existence suggests that the chancellor needs to take a grip. German FDP vows to push on with tax cut plan - Jan-06 German bank cards hit by ‘2010’ bug - Jan-06 Merkel faces growing dissent on Afghanistan - Dec-21 German justice on trial in Nazi case - Nov-29 Freiburg builds a low-carbon future - Nov-05 East and west German differences remain - Nov-03 None of the decisions facing the new government, still within its first 100 days, is easy. The German economy suffered a sharp 5 per cent contraction in gross domestic product last year and the liberal Free Democrats, the junior partners in government, are determined to push through €20bn in tax cuts for 2011, as agreed in the coalition programme last year. Ms Merkel’s Christian Democrats are more cautious. They agree on tax reform, but Wolfgang Schäuble, finance minister, insists that the budget deficit cannot be allowed to balloon out of control. On present forecasts it will rise to 6 per cent of GDP in 2010, after a relatively restrained 3.2 per cent last year. To hold the line, tax cuts will have to be financed in part with unpopular spending cuts. This is not the time for excessive fiscal caution. Berlin’s policy cannot and should not be decided in isolation from the rest of the eurozone. That is the reality of a single currency. The German economy is the vital motor of that zone, and a return to growth is essential to the recovery of those harder hit by the downturn, such as Greece, Spain, Ireland and Italy. The cost of bailing them out would be far greater than the cost of temporary fiscal stimulus from Berlin. European recovery from the global recession depends on Germany. European leadership depends on Ms Merkel. She should not allow the political debate in Berlin to become too provincial. That is as true of the debate over Afghanistan and global warming as it is of the economy. The chancellor needs to swallow her doubts, and give a stronger lead to her coalition and to the rest of Europe. http://www.ft.com/cms/s/0/82644eec-038b-11df-a601-00144feabdc0.html

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Greece May Need to Do More on Debt, EU Ministers Say (Update1) By Simone Meier and Lorenzo Totaro

Jan. 19 (Bloomberg) -- European finance chiefs said Greece may have to step up its efforts to tackle a fiscal crisis that threatens to spread to other countries across the region. “The Greek government is aware of the magnitude of the problems facing the country,” Luxembourg’s Jean-Claude Juncker told reporters in Brussels late yesterday after leading a meeting of euro-area finance ministers that discussed Greece’s budget-cutting proposals. “The measures are a step in the right direction. We’ll have to see whether they’re enough.” Greece last week presented its plan to push down a budget deficit that is still more than four times the European Union limit of 3 percent of gross domestic product. European Central Bank President Jean-Claude Trichet on Jan. 14 turned up the pressure on Greece, saying no nation can expect any “special treatment” after rating downgrades sparked a rout in Greece’s bonds in December and fueled concerns about default. The Greek government’s latest proposals call for about 10 billion euros ($14.4 billion) of spending cuts and revenue increases this year to bring the budget shortfall from 12.7 percent of output to 8.7 percent by year end. The plan includes 2.5 billion euros in state asset sales this year. The program “leans heavily on one-time measures,” said Dutch Finance Minister Wouter Bos. “It needs to be more substantial.” Greece’s Proposals Greece’s proposals “obviously didn’t entirely convince” the finance ministers, said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Markets have still doubts to what extent the program can be taken seriously.” Greek bond yields have surged more than 120 basis points in the past three months, pushing the yield on the 10-year security to 5.9 percent. The premium investors demand to hold Greek bonds instead of German bunds has widened to almost 270 basis points from 30 points two years ago. The government in Athens presented a “credible” and “serious” budget-cutting program, Greek Finance Minister George Papaconstantinou told reporters today in Brussels. Greek

343 officials also pledged to provide more-reliable statistics after the EU said earlier this month that the country’s data contained “severe irregularities.” While the Greek government still has “difficult work to do,” German Finance Minister Wolfgang Schaeuble said the “serious reforms made to their statistics will help detect and avoid more problems like this in the future.” Bos said a “strong exercise” is required to make Greek data “reliable again.” Lisbon Treaty Juncker, who serves as Luxembourg’s premier and treasury minister, won a new term as head of the so-called eurogroup at yesterday’s meeting. He was unanimously appointed to a fresh term of two and half years under the Lisbon Treaty, which came into force in December. The euro-area ministers will be joined today by their counterparts from the rest of the 27 EU countries. http://www.bloomberg.com/apps/news?pid=20601085&sid=aVNDxs5Jaw3Y#

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18 gennaio 2010 Monito del direttore del Fondo monetario Strauss-Kahn (Fmi): stimoli ancora indispensabili "I paesi sviluppati potrebbero ricadere nella recessione se abbandonassero troppo presto le strategie di stimolo messe in atto per combattere la crisi finanziaria globale. Dobbiamo essere cauti perché la ripresa è fragile".

Il direttore Fmi Dominique Strauss-Kahn TOKYO - I paesi sviluppati potrebbero ricadere nella recessione se abbandonassero troppo presto le strategie di stimolo messe in atto per combattere la crisi finanziaria globale. Lo ha detto stamane il numero uno del Fondo monetario internazionale Dominique Strauss-Kahn. La ripresa della domanda privata e quella dell'occupazione sono condizioni necessarie perché i governi possano iniziare a ritirare le politiche a sostegno delle loro economie, anche se la tempistica giusta dipende da condizioni specifiche in ogni paese, ha detto Strauss-kahn. "La ripresa nelle economie avanzate è stata lenta" ha detto; "Dobbiamo essere cauti perché la ripresa è fragile". Marek Belka, a capo del dipartimento europeo del Fmi, ha fatto eco ai commenti di Strauss- Kahn, dicendo che l'economia del continente non poggia ancora su basi solide. Secondo il direttore del Fondo un ritiro prima del tempo degli stimoli sarebbe estremamente costoso dal momento che potrebbe provocare un nuovo calo della crescita, lasciando, però, i paesi a corto di strumenti per sostenere l'economia. "Sarebbe difficile trovare nuovi strumenti", ha concluso Strauss-Kahn. "Il miglior indicatore (per le strategie di uscita) sono la domanda privata e l'occupazione... nella maggior parte dei paesi, la crescita è ancora sostenuta dalle politiche del governo. Fino a quando non ci sarà una domanda privata abbastanza forte per controbilanciare la necessità di misure di sostegno, non bisognerebbe uscire". Il Fondo prevedeva in ottobre una ripresa della crescita mondiale nel 2010 con un'espansione di 3,1%. Strauss-Kahn (Fmi): stimoli ancora indispensabili18 gennaio 2010 http://www.repubblica.it/economia/2010/01/18/news/belka_fmi_stimoli_ancora_in dispensabili-1992028/

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Anchalee Worrachate Europe Hits Bonds With Sales Above Pre-Lehman Levels Until 2017 By Anchalee Worrachate

Jan. 19 (Bloomberg) -- The European government debt deluge that left investors with the lowest relative returns since 1995 will continue for another seven years, say the officials in charge of bond sales from Frankfurt to Dublin to Helsinki. A Bloomberg News survey of 11 euro-area finance officials showed that eight forecast it will take at least until 2015 to bring the region’s debt sales down to the levels before the collapse of Lehman Brothers Holdings Inc. in September 2008. Four said it may require as much as a decade. The average prediction was that bond sales won’t return to those levels until 2017. “Bond issuance in the region might start to come down from 2011, but to drop to pre-crisis levels may take a while,” said Carl Heinz Daube, head of Germany’s Federal Finance Agency in Frankfurt. “There might be some risks of economic dips down the road. Revenue is probably not going to rise substantially, but expenditures will stay high as some governments feel the need to raise spending to cover all risks.” The forecasts suggest European bonds may continue to lag behind corporate securities for at least another year as public debt swells to 85 percent of gross domestic product this year, from 65 percent before the financial crisis began in 2007, according to Citigroup Inc. estimates. Bonds returned less than 2 percent in 2009 as sales increased 36 percent to 870 billion euros ($1.3 trillion). They’ll jump another 15 percent to a record 1 trillion euros this year, according to HSBC Holdings Plc, Europe’s biggest bank by market value. The average in the five years before the crisis was 577 billion euros, HSBC said. Four-Year Minimum Debt officials from Austria, Belgium, Finland, Germany, Greece, Ireland, the Netherlands, Portugal, Spain, Slovakia and Slovenia participated in the survey compiled Dec. 14-18. The executives, who spoke on condition that their responses weren’t attributed individually, account for almost 60 percent of the 3.8 trillion-euro government-bond market, according to Standard & Poor’s. France and Italy declined to take part. Some debt offices gave ranges for how long it will take for bond issuance to return to pre-crisis levels. The average of the longest times given was seven years. The average of the shortest times was four years.

346 German government bonds, Europe’s benchmark debt securities, returned 1.96 percent last year, while company fixed-income securities handed investors a 14.9 percent gain, according to Bank of America Merrill Lynch indexes. The difference was the widest since the firm’s EMU Corporate Index was introduced almost 15 years ago. ‘Heavy Borrowing’ “I wouldn’t rule out further underperformance in the next few years,” said John Stopford, head of fixed income at Investec Asset Management Ltd. in London, who has increased corporate bond holdings at the expense of government debt since December for the $24 billion the company oversees. “The cyclical environment is becoming more and more problematic for government bonds. Their borrowing needs are extraordinarily heavy. There will be a tough competition for funds.” Governments are selling unprecedented amounts of debt to finance economic-stimulus measures following the worst global recession since World War II. Public debt will average more than 118 percent of gross domestic product in the Group of 20 advanced economies by 2014, up 40 percentage points from 2007, the International Monetary Fund said in a Nov. 3 report. The sales come at a time when the region’s economy is showing signs of a recovery, raising the likelihood that the European Central Bank will increase borrowing costs from record lows. Europe’s services and manufacturing industries expanded at the fastest pace in more than two years in December, London- based Markit Economics said on Jan. 6. Rates on Hold “You’ll find that yields are not particularly driven by supply, but much more by the interest- rate environment,” said Anthony Linehan, the deputy director of funding and debt management at Ireland’s National Treasury Management Agency in Dublin. “The biggest risk would be the market over-anticipating monetary tightening.” The ECB set its main refinancing rate at 1 percent for a ninth month on Jan. 14. Policy makers probably won’t raise the benchmark until the fourth quarter, lifting it to 1.50 percent, according to the median of 39 forecasts in a Bloomberg survey. The yield on the benchmark 10-year German bund will end 2010 at 3.85 percent, according to the median of 12 analyst forecasts compiled by Bloomberg. It was 3.25 percent on Jan. 18. An investor buying 1 million euros of German bunds would lose 14,642 euros by year-end, should the forecast prove correct. Crowding Out “Yields will probably rise in the context of greater supply and the early seeds of growth, but I expect the low interest-rate environment to prevail,” said Ari-Pekka Latti, head of funding at Finland’s Helsinki-based Treasury. “It’s difficult to envisage a dramatic change.” While governments are using bond markets to help finance economic stimulus, competition from companies raising funds may also push up borrowing costs, according to Anne Leclercq, head of the Belgian debt agency’s treasury and capital-market division in Brussels. Companies with investment-grade ratings raised at least 31 billion euros from bond sales last week, just 8 percent short of the record issuance in the same period a year earlier, according to data compiled by Bloomberg. At the start of last year “the only markets that existed were the sovereign bond market and bank guarantees,” Leclercq said. “We are now seeing others appearing again. The competition could be high.”

347 Ratings Concern This year may prove “difficult” for European sovereign issuers, and the most-indebted countries may find their ratings tested, Moody’s Investors Service said in a report Jan. 13. “A key factor that has prevented complete economic and financial meltdown has been a collapse in interest rates,” Moody’s said. The cost of the crisis will be shown “if markets were to switch their concerns about weak economic activity to fears of inflation and markets rates were to rise significantly,” the New York-based ratings company said. Greece was lowered last month by Moody’s, Fitch Ratings and S&P as the government struggles to cut the European Union’s largest budget deficit. The deterioration in public finances sparked by the recession also cost Spain and Ireland their top ratings last year. ‘Stronger Doubts’ Market expectations of an increase in yields are “too aggressive,” said Andre de Silva, global deputy head of fixed- income strategy at HSBC in London. The firm forecasts German bund yields will fall to 3.10 percent by the end of this year. “The pace of economic recovery will be more of a driving factor for bonds than supply,” he said. “We have stronger doubts than the market on the expectations for economic growth. Yields may not rise as much as currently priced in.” Europe isn’t alone in raising record debt. Bond issuance in the U.S. may rise to as much as $2.5 trillion this year from $2.1 trillion in 2009, according to Barclays Capital. In the U.K., debt sales will total 225.1 billion pounds ($365.7 billion) for fiscal 2010 ending March 31, compared with an average of 55 billion pounds in the five years through 2008. All but one of the 11 government officials said they may consider selling more longer-dated securities to reduce short- term financing risks. Belgium may offer a new 30-year bond this year, the debt agency said on Nov. 13. Agence France Tresor said in Paris a week earlier that it may issue 50-year securities. Germany is increasing the proportion of its funding through longer-dated securities, agency data showed in November. “We are now focusing heavily on sovereign default risk and a prospective debt trap if these economies don’t recover quickly or aren’t able politically to deliver the fiscal consolidation that is required,” said Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management, which oversees about $20 billion. “Supply is part of that. The borrowing costs and affordability can become a real issue if the economic recovery fails to develop enough momentum and real debt-service costs continue to spiral.” To contact the reporter on this story: Anchalee Worrachate in London at [email protected] Last Updated: January 18, 2010 19:00 EST Anchalee Worrachate Europe Hits Bonds With Sales Above Pre-Lehman Levels Until 2017 18, 2010 19:00 EST http://www.bloomberg.com/apps/news?pid=20601087&sid=aehZdmJXSiCw&pos=6#

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Martes, 19 de enero de 2010 (Actualizado a las 17:33) La Xunta, en pie de guerra ante la visita de MAFO a Galicia la próxima semana Eduardo Segovia - 19/01/2010 06:00h Galicia está que arde a cuenta del proyecto de fusión de sus dos cajas de ahorros, Caixa Galicia y Caixanova. Tan caldeado está el ambiente que una visita del gobernador del Banco de España, Miguel Ángel Fernández Ordóñez, a Santiago y Vigo el próximo martes ha causado una enorme polémica porque no tiene en su agenda reunirse con el presidente de la Xunta, el popular Alberto Núñez Feijóo. Esto ha sido visto como un desplante por el Gobierno gallego en un momento tan delicado políticamente. "Allá el gobernador con lo que hace", llegó a decir Feijóo públicamente el viernes pasado. Según fuentes del PP gallego, el malestar deriva de que la Xunta ni siquiera ha sido informada de la primera visita de MAFO a Galicia desde que accedió al cargo en 2006. Desde el Banco de España, sin embargo, se explica que se trata de una visita solicitada por el Club Financiero de Vigo en 2008 y cuya fecha está fijada desde hace meses. Asimismo, el gobernador suele visitar regularmente distintas comunidades autónomas -en los últimos meses, Aragón, Euskadi y Cataluña- y en ningún caso se avisa a los gobiernos regionales ni se mantienen reuniones con los presidentes correspondientes. El problema es que esta visita coincide con una guerra total entre los partidos, las cajas y los medios gallegos. Así, el portavoz del PPdeG, Antonio Rodríguez Miranda, manifestó el sábado su deseo de "no verlo" en la sede socialista de O Pino porque significaría quellega para "dar instrucciones" al PSdeG sobre su postura en el debatesobre el futuro de Caixa Galicia y Caixanova. Rodríguez Miranda advirtió de que "una foto" del gobernador del Banco de España conel líder socialista gallego, Manuel Vázquez, y el alcalde de Vigo, Abel Caballero, sería la "foto" dequienes tienen "mucho interés" en eliminar "el protagonismo" de lacomunidad en el mapa financiero estatal, enviando "a otros territorios"los centros de decisión de sus entidades de ahorro. Este enfrentamiento viene desde que la intervención de Caja Castilla-La Mancha abrió el baile de las fusiones de cajas en España, ya que todas las comunidades autónomas tocaron rápidamente a rebato para evitar las fusiones transfronterizas y crear grandes grupos financieros puramente regionales (una actitud que el Gobierno central consagró al conceder derecho de veto a las comunidades sobre el FROB). Pero esta teoría únicamente ha sido llevada a la práctica con éxito en Cataluña, mientras que en Castilla y León la fusión de las seis cajas se ha quedado en una unión a dos -Caja Duero y Caja España- y que todavía no está nada claro que vaya a salir adelante, y en Galicia el proyecto de la Xunta se ha encontrado con enormes resistencias. Un culebrón a la gallega Inicialmente, estas resistencias se centraban en la caja más pequeña, Caixanova (con sede en Vigo), en una doble vertiente: el PSOE no quería "entregarla" a la Xunta en una fusión con la coruñesa Caixa Galicia, y su presidente, Julio Fernández Gayoso (que lleva tres años en el cargo después de ocupar el de director general durante 41 años), no tenía ninguna intención de abandonar su poltrona. Sin embargo, la amenaza de una fusión a tres bandas de Caixa

349 Galicia con Caja Madrid y CAM, en la que Galicia se quedaría prácticamente sin poder de decisión, logró unificar los criterios de PP y PSOE a favor de la 'solución gallega'. Respecto al problema de Gayoso, Feijóo decidió actuar por las bravas y cambió hace dos semanas la Ley de Cajas autonómica para introducir la obligación de que se renueve el 75% de los órganos de gobierno antes de marzo y, sobre todo, la de que los miembros de dichos órganos deben jubilarse a los 70 años (Gayoso tiene 78). Pero estos avances han vuelto a frenarse con una agresiva campaña de comunicación de Caixanova para demostrar que tiene solvencia y liquidez suficientes para mantenerse independiente, secundada de forma entusiasta por Abel Caballero pese al teórico apoyo del PSOE a la operación. Y este nuevo enfrentamiento ha detonado una explosión de localismos de lo más peregrino: el alcalde de Santiago considera que, dado que la Xunta tiene su sede en esta ciudad, lo lógico es que la caja fusionada también se asiente allí, y además así no habría agravios para Coruña ni para Vigo; y el alcalde de Lugo ha pedido que se instale allí el centro de proceso de datos, para que la nueva caja tenga presencia en toda la comunidad. De momento, ni Orense ni Pontevedra se han pronunciado. Por supuesto, la guerra también ha estallado en el otro gran frente de las fusiones aparte del geográfico: el personal. Así, en teoría el director general de la caja fusionada será José Luis Méndez, que lleva dos décadas en este cargo en Caixa Galicia, a lo que se oponen Caixanova y el PSOE. Ante lo cual han surgido otros posibles candidatos, como el presidente de la Diputación de Coruña, Salvador Fernández Moreda. El enfrentamiento se ha trasladado a los medios de comunicación de la región: mientras La Voz de Galicia es el principal defensor de la fusión de Caixa Galicia y Caixanova, El Faro deVigo se opone furibundamente a la operación.

MAFO mete el dedo en el ojo Y en medio de este ambiente tan caldeado, El Confidencial reveló hace un mes que MAFO le había comunicado a Rajoy que el supervisor no ve con buenos ojos el proyecto de fusión entre Caixa Galicia y Caixanova porque no advierte en la misma sinergias de ninguna clase y sí todo tipo de duplicidades en costes, oficinas y empleados. Además, al gobernador le gustaría ensayar la primera fusión de verdad (no virtual) de cajas de distintas comunidades con Caixanova. Con lo cual no son de extrañar las reticencias de la Xunta a su visita en estos momentos. Así pues, el gobernador tendrá que andarse con pies de plomo cuando el día 26 visite por la mañana la Confederación de Empresarios de Galicia en Santiago (reunión a puerta cerrada) y al mediodía el Club Financiero de Vigo (almuerzo coloquio). Y no sólo por lo que dice, sino también por con quién se hace fotos. http://www.cotizalia.com/en-exclusiva/xunta-feijoo-mafo-galicia-caixanova-20100119.html# Entradas Anteriores La banca pide a MAFO que impulse el interbancario para sustituir la financiación del BCE, 24/12/2009 Caixa Catalunya pidió 2.000 millones al FROB pero sólo le dieron 1.300, 16/12/2009 El Banco de España quiere poner a las cajas pequeñas al borde de la quiebra para que se fusionen, en:30/11/2009 MAFO echa una mano a la banca y permite provisionar sólo el 25% de la deuda de Martinsa 27/11/2009 Botín ficha al jefe de los inspectores del Banco de España que vigilan al Santander,24/11/2009

350 COLUMNISTS Why America and China will clash By Gideon Rachman Published: January 18 2010 19:54 | Last updated: January 18 2010 19:54

Google’s clash with China is about much more than the fate of a single, powerful firm. The company’s decision to pull out of China, unless the government there changes its policies on censorship, is a harbinger of increasingly stormy relations between the US and China. The reason that the Google case is so significant is because it suggests that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong. The US has accepted – even welcomed – China’s emergence as a giant economic power because American policymakers convinced themselves that economic opening would lead to political liberalisation in China. If that assumption changes, American policy towards China could change with it. Welcoming the rise of a giant Asian economy that is also turning into a liberal democracy is one thing. Sponsoring the rise of a Leninist one-party state, that is America’s only plausible geopolitical rival, is a different proposition. Combine this political disillusionment with double-digit unemployment in the US that is widely blamed on Chinese currency manipulation, and you have the formula for an anti-China backlash. Both Bill Clinton and George W. Bush firmly believed that free trade and, in particular, the information age would make political change in China irresistible. On a visit to China in 1998, Mr Clinton proclaimed: “In this global information age, when economic success is built on ideas, personal freedom is essential to the greatness of any nation.” A year later, Mr Bush made a similar point: “Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy ... Trade freely with the Chinese and time is on our side.” The two presidents were reflecting the conventional wisdom among America’s most influential pundits. Tom Friedman, New York Times columnist and author of best-selling books on globalisation, once proclaimed bluntly: “China’s going to have a free press.

351 Globalisation will drive it.” Robert Wright, one of Mr Clinton’s favourite thinkers, argued that if China chose to block free access to the internet, “the price would be dismal economic failure”. So far, the facts are refusing to conform to the theory. China has continued to censor new and old media, but this has hardly condemned it to “dismal economic failure”. On the contrary, China is now the world’s second largest economy and its largest exporter, with foreign reserves above $2,000bn. But all this economic growth shows little sign of provoking the political changes anticipated by Bush and Clinton. If anything, the Chinese government seems to be getting more repressive. Liu Xiaobo, a leading Chinese dissident, was recently sentenced to 11 years in prison for his involvement in the Charter 08 movement that advocates democratic reforms. Google’s decision to confront the Chinese government is an early sign that the Americans are getting fed up with dealing with Chinese authoritarianism. But the biggest pressures are likely to come from politicians rather than businessmen. Google is an unusual company in an unusually politicised industry. If the Googlers do indeed head for the exits in China, they are unlikely to be crushed by a stampede of other multinationals rushing to follow them. To most big companies the country’s market is too large and tempting to ignore. Despite Google, US business is likely to remain the lobby that argues hardest for continuing engagement with China. The pressures for disengagement will come from labour activists, security hawks and politicians – particularly in Congress. To date, the Obama administration has based its policy firmly on the assumptions that have governed America’s approach to China for a generation. The president’s recent set-piece speech on Asia was a classic statement of the case for US engagement with China – complete with the ritualistic assertion that America welcomes China’s rise. But, after being censored by Chinese television in Shanghai and harangued by a junior Chinese official at the Copenhagen climate talks, Barack Obama may be feeling less warm towards Beijing. An early sign that the White House is hardening its policy could come in the next few months, with an official decision to label China a “currency manipulator”. Even if the administration itself does not move, the voices calling for tougher policies against China are likely to get louder in Congress. Google’s decision to highlight the dangers of cyberattack from China will play to growing American security fears about China. The development of Chinese missile systems that threaten US naval dominance in the Pacific are also causing concern in Washington. Impending US arms sales to Taiwan are already provoking a dispute. Meanwhile, protectionism seems to be becoming intellectually respectable in the US in ways that should worry China. A trade war between America and China is hardly to be welcomed. It could tip the world back into recession and inject dangerous new tensions into international politics. If it happens, both sides will share the blame. The US has been almost wilfully naive about the connections between free trade and democracy. The Chinese have been provocative over currency and human rights. If they want to head off a damaging clash with America, changes in policy would be well advised. http://www.ft.com/cms/s/0/e9306da0-0461-11df-8603-00144feabdc0.html

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Henry Ford Raising Wage May Give China Tip on Worker Prosperity By Bloomberg News

Jan. 19 (Bloomberg) -- “Little” Xie says he wants to own one of the autos he helps build at Ford Motor Co.’s assembly plant in the Yangtze River city of Chongqing. With his mortgage payment taking about 60 percent of his 2,000 yuan monthly pay, that won’t happen soon. “It isn’t even worth talking about company incentives to help buy a car, since I can’t afford one in the first place,” said Xie, 28, a six-year Ford employee, as he approached the factory gates for his night shift. Xie, whose nickname comes from his youthful age, asked that his full name not be used. Higher wages for people like Xie would help resolve China’s biggest economic challenge: shifting away from growth fueled by exports and investment and moving toward an economy driven more by domestic consumers. China’s communist leaders might learn a lesson about how to create a more prosperous working class from American industrialist Henry Ford. The founder of the auto manufacturer that bears his name generated headlines around the world in January 1914 by doubling the average autoworker’s pay to $5 a day. The move made Ford’s Model T more affordable, created a more stable workforce and helped stoke the growth of the U.S. middle class, according to Bob Kreipke, the historian for the Dearborn, Michigan-based company. “This allowed people to increase their buying power and, at the same time, they produced a better product,” Kreipke said. Consumer Culture Low wages in the world’s third-largest economy are slowing the rise of a consumer culture that Premier Wen Jiabao and President Hu Jintao have said China needs to maintain expansion at the 8 percent a year that will generate jobs for its 1.3 billion people. The current growth pattern is “unsustainable,” Wen said Dec. 27. That hasn’t stopped China’s auto industry from booming, with sales last year of 13.6 million vehicles, eclipsing the U.S. as the world’s top market for the first time, according to figures from the China Association of Automobile Manufacturers in Beijing. The surge in purchases

353 was spurred partly by government subsidies to help farmers buy autos. Encouraging higher pay might help sustain the boom and boost consumption, which currently accounts for about 35 percent of China’s gross domestic product, compared with 70 percent in the U.S. It would also help ease income gaps between the rich and poor, which are higher than those in South Korea and Taiwan at similar stages of development and have led to riots and other labor unrest. Buying Power Ford’s $5 daily pay allowed an employee to buy a Model T that cost $440 with the equivalent of about four months’ wages. Chinese factory workers averaged 24,192 yuan ($3,544) a year in 2008, according to figures from the National Bureau of Statistics in Beijing, so it would take more than three years worth of wages for them to afford the cheapest car advertised on the company’s Chinese-language Web site: a four-door hatchback with a 1.3 liter engine listed for 78,900 yuan. While the auto company declined to comment on worker pay, Ellen Hughes-Cromwick, Ford’s chief economist, said Ford projects growth 10 years into the future for the countries where it operates, and it sees China’s economy in a period of expansion characterized by rapid rises in employee compensation similar to South Korea’s economy starting in the 1960s. “We are at a situation where wages are moving up and doubling in a very short period of time,” Hughes-Cromwick said in a telephone interview from Dearborn. “We do expect takeoff to generate pretty substantial wage gains.” Boost Pay One way China’s government might help boost pay would be to raise the value of the yuan, said Nicholas Lardy, who studies the Chinese economy as a senior fellow at the Peterson Institute for International Economics in Washington. U.S. and European officials have said China keeps the yuan artificially low to boost sales in foreign markets. An undervalued currency encourages manufactured exports at the expense of developing the more labor-intensive service sector, depressing job growth and keeping wages low, Lardy said. “Appreciation would lead to more rapid growth in the demand for labor and thus to more employment growth and more wage growth,” he said. China should also spend more on education for peasants and migrants to raise their skill levels and employment prospects, said Xiao Geng, director of the Brookings-Tsinghua Center for Public Policy in Beijing. Rural Migrants Henry Ford employed some of the millions of eastern European immigrants who poured into the U.S. a century ago, as well as migrants from the South and Midwest lured by high wages. China’s leaders must deal with hundreds of millions of rural laborers coming to cities, who put downward pressure on salaries. “Unskilled workers are condemned for generations to low wages,” Xiao said. Even a skilled worker like Gong -- who also asked that his full name not be used -- said he makes only 6 yuan ($0.88) an hour as a welder at Ford’s Chongqing plant, 9 yuan an hour for overtime. “I have a dream of someday buying a car,” said Gong, 29, as he walked home in the rain after

354 a 10-hour shift. “I guess it will take six years of saving.” For Related News and Information: China economic-data watch indexes: ESNP CH News about China: NI CHINA Stories on Ford in China: F TCNI CHINA News about the auto industry: NI AUT Average wages in China: CHAWAVGE GP Last Updated: January 18, 2010 13:22 EST http://www.bloomberg.com/apps/news?pid=20601109&sid=au7tdjzgHks8&pos=10#

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France and Germany raise growth forecasts By Ben Hall in Paris and Ralph Atkins in Frankfurt Published: January 18 2010 20:14 | Last updated: January 18 2010 20:14 The French and German governments on Monday raised their growth forecasts for 2010 in a further sign that the eurozone’s two largest economies are set for a steady if unspectacular recovery. Christine Lagarde, France’s finance minister, said she expected the French economy to expand by 1.4 per cent, almost double the government’s previous forecast of 0.75 per cent. Sarkozy says currency disorder ‘unacceptable’ - Jan-07 French drinkers toast cheap champagne - Dec-30 French most downbeat on economic outlook - Dec-29 France aims to meet EU target by 2013 - Dec-01 France rues fiscal hit from VAT cut on meals - Nov-26 Editorial: Sarkozy’s reforms - Nov-10 The German finance ministry upgraded its growth projection from 1.2 to 1.5 per cent. “The situation of the French economy improved at the end of 2009. Our forecasts for the beginning of 2010 have also improved, the international environment and demand directed at France improved,” Ms Lagarde said. The improved forecasts reflect growing confidence among policymakers that the French and German economies will not suffer a relapse this year despite a deceleration in industrial output growth in the final quarter of 2009 after a particularly buoyant summer. The Bundesbank said on Monday that Germany’s economic recovery remained on track – but lost significant momentum late last year. Its monthly bulletin attributed the “noticeably weaker dynamism” largely to the ending of government subsidies for car purchases. The prospects for exports and sectors not dependent on the automotive industry suggested the rebound remained “intact”, it said. Last week, Germany’s statistical office said it thought growth had stagnated in the fourth quarter. But the Bundesbank’s commentary suggested that – as in France – Germany’s economy was still seeing a steady, but not spectacular, recovery from continental Europe’s worst recession since the second world war. In a further sign of economic conditions returning closer to normal, the European Central Bank said it would stop providing Swiss franc liquidity from the end of this month because of declining demand. Ben Hall in Paris and Ralph Atkins France and Germany raise growth forecasts http://www.ft.com/cms/s/0/18c03cb2-0453-11df-8603-00144feabdc0.html

356 COMMENT A bank levy will not stop the doomsday cycle By Peter Boone and Simon Johnson Published: January 18 2010 19:59 | Last updated: January 18 2010 19:59 The last few weeks of political developments around the American-European financial system make us feel like we are back in the USSR. During the final years of communism’s decline, Soviet bureaucrats argued for futile tweaks to laws that would crack down on speculators and close “loopholes” – all in the vain hope they could keep the unproductive system of incentives intact. The US, UK and key European countries are now making the same errors. Rather than recognising the dangerous systemic failures in our financial system, their leaders are proposing bandages that can – at best – only postpone another, possibly much larger, meltdown. There is growing recognition that our financial system is running a doomsday cycle. Whenever it fails, we rely on lax money and fiscal policies to bail it out. This response teaches the financial sector a simple lesson: take large gambles to get paid handsomely, and don’t worry about the costs – they will be paid by taxpayers (through fiscal bail-outs), savers (through interest rates cut to zero), and many workers (through lost jobs). Our financial system is thus resurrected to gamble again – and to fail again. Such cycles have been manifest at least since the 1970s and they are getting larger. This danger has even been recognised at the Bank of England, where Andrew Haldane (Andrew G Haldane: “Banking on the state”: ), responsible for financial stability, recently published an eloquent critique of what he calls our “doom loop”. Not surprisingly, Ben Bernanke, chairman of the Federal Reserve, does not agree that blame rests squarely with our monetary authorities. In a speech in Atlanta, he (incredibly) argued that extremely low interest rates on his watch – and decades of similar bail-outs of the financial sector – did not play a role in the recent collapse. Like an old-time Soviet bureaucrat, he put the blame on bad regulators and argued that more complex rules are needed to make regulation “better and smarter”. When the Soviet Union fell apart, there were two competing views on what needed to be done: total change or tinkering. The establishment wanted tinkering – it felt much less threatening. This elite believed that if they could just get the rules right, the system would work well. But they completely missed the larger point – egregious loopholes in the rules were inherent to the system failing. In the Soviet Union then and in the US today, powerful lobbies profit from avoiding the rules, and a complex regulatory system actually serves them well as top lawyers and accountants seek out new flaws, or ensure they are represented in reform discussions. It is no surprise that Basel bank capital rules are discredited – the proposed Basel revision, with complex additional liquidity and risk- measuring systems, will fail just as surely. This week, the US Treasury pulled its latest rabbit out of the hat: a tax on the liabilities of large banks. The Obama administration argues that, by penalising large institutions with such taxes, we can limit their future risk-taking. This logic is deeply flawed. Why would higher

357 funding costs mean you gamble less? If you know Tim Geithner is waiting to bail you out, you may gamble more heavily in order to pay the tax. The UK “reforms” look equally unpromising. In this regard, America’s top bankers appear much more honest, and focused on clear goals, than our policymakers. In his testimony to the Financial Crisis Inquiry Commission last week, Jamie Dimon, head of JPMorgan Chase, argued that regulatory failure was a major reason for our latest financial collapse. He did not try to argue that we could make it work – he just made the obvious point that, if there is potential failure to exploit, banks will naturally press any advantage to make profits. For our top bankers, the fact that the system will only change marginally is fine. Phil Angelides, chair of the Commission, nailed Lloyd Blankfein, head of Goldman Sachs, with a metaphor for the age: Wall Street is in effect selling cars with faulty brakes, and then taking out insurance on the buyers. Blankfein naturally retorted: “I do not think the behaviour is improper.” Here we go again. To end the doomsday cycle and prevent even greater damage to the real economy, we need dramatic reforms. First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital. Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller. When the Soviet Union disintegrated, it took tough leaders and clear thinkers, such as Boris Yeltsin and Yegor Gaidar, to pick up the pieces and push for reform. It would have been easier and less messy if genuine reform had started before the collapse. In the past few months it has become clear the US and UK don’t have sufficiently strong political leaders. There are good tough people around: Paul Volcker stands out in the US, as so does Thomas Hoenig, head of the Kansas City Fed, and Mr Angelides. In the UK, Lord Turner, Mr Haldane, and even Mervyn King are showing at least intellectual inclination towards more serious reform. Let’s bring more such clear thinking into top policy circles now, rather than wait for another collapse. Mr Boone is a research associate at the London School of Economics and a principal in Salute Capital Management. Mr Johnson is a professor at MIT’s Sloan School, a senior fellow at the Peterson Institute for International Economics, and co-author of the forthcoming 13 Bankers Peter Boone and Simon Johnson A bank levy will not stop the doomsday cycle January 18 2010 19:59 http://www.ft.com/cms/s/0/e118fcc2-0461-11df-8603-00144feabdc0.html

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German Investor Confidence May Fall for Fourth Month in January By Gabi Thesing Jan. 19 (Bloomberg) -- German investor confidence probably declined for a fourth month in January on signs the economic recovery is running out of steam. The ZEW Center for European Economic Research will today say its index of investor and analyst expectations slipped to 50 from 50.4 in December, according to the median of 37 forecasts in a Bloomberg News survey. ZEW releases the report, which aims to predict developments six months ahead, at 11 a.m. in Mannheim. Europe’s largest economy probably stagnated in the three months through December after growing in the previous two quarters, the Federal Statistics office said last week. Domestic demand may wane as some of Chancellor Angela Merkel’s 85 billion euros ($122 billion) of stimulus measures expire. Still, the Bundesbank said yesterday that an improving export outlook will keep Germany’s recovery “fundamentally intact.” “We won’t have the same dynamic we had when we came out of the recession,” Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt, said in a telephone interview. “This year will just be a long, hard slog with low growth rates.” The economy shrank 5 percent last year, its worst performance since World War II. Metro AG, Germany’s largest retailer, said Jan. 12 that it expects economic conditions to “remain challenging” this year. The Dusseldorf-based company reported a 3.4 percent decline in fourth-quarter revenue. Rising Exports Foreign sales may benefit from the strengthening global economy. The Washington-based International Monetary Fund may raise its 3.1 percent forecast for 2010 global growth later this month, Deputy Managing Director John Lipsky said on Jan. 6. German exports rose more than economists forecast in November and the country’s manufacturing industry expanded for a third month in December. The euro has also lost 5 percent against the dollar since peaking at $1.51 on Nov. 25, relieving some pressure on exports. The government will raise its forecast for growth this year to 1.5 percent from 1.2 percent, Finance Ministry spokesman Michael Offer said yesterday. At the same time, European Central Bank President Jean- Claude Trichet said last week that the euro-area economy, Germany’s principal export market, faces “a bumpy road” amid a “great level of uncertainty.” He signaled policy makers will wait for more signs of economic recovery before further reducing emergency measures as rising unemployment and Greece’s fiscal woes hurt confidence. Concern about the Greek government’s worsening finances has prompted Fitch Ratings,

359 Moody’s Investors Service and Standard & Poor’s to cut the country’s credit rating. While “Greece is certainly still on investors’ agenda, the overall situation has calmed a bit since last month,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London, who predicts the ZEW index will rise to 51. “The mega recovery may be over, but we will still have growth in 2010.” To contact the reporter on this story: Gabi Thesing in London at gthesing

Gabi Thesing German Investor Confidence May Fall for Fourth Month in January http://www.bloomberg.com/apps/news?pid=20601085&sid=aAtpw3lQR8sM#

360 Business

January 19, 2010 Swiss Banker Blows Whistle on Tax Evasion By LYNNLEY BROWNING From his home in the quiet village of Rorbas, outside Zurich, Rudolf M. Elmer is chipping away at the centuries-old traditions of Swiss banking secrecy. Mr. Elmer, who ran the Caribbean operations of the Swiss bank Julius Baer for eight years until he was dismissed in 2002, moved to Mauritius in the Indian Ocean and began parceling out to global tax authorities what he said were the secrets of his former employer. Now back in his native country, he continues to disclose the inner workings of Julius Baer — one of many Swiss institutions that investigators say help clients evade billions of dollars in taxes by routing money through offshore havens in the Caribbean and Switzerland. “It is a global problem, and I am only the messenger who provides the bad news, or even better, the truth,” Mr. Elmer, 54, wrote in a recent e-mail message. “Offshore tax evasion is the biggest theft among societies and neighbor states in this world.” He said that he would fly on Tuesday to Düsseldorf, Germany, where the tax authorities are putting him up in a five-star hotel as he prepares to divulge client secrets. Mr. Elmer joins a group of whistle-blowers that includes Bradley Birkenfeld, the former UBS private banker who disclosed the bank’s secrets, pushing it toward a settlement with the United States government, and Heinrich Kieber, a former data clerk at the LGT Group, the Liechtenstein royal bank, who stole client data and funneled it to American and European authorities. Mr. Elmer’s disclosures are attracting particular interest as the Internal Revenue Service and the Justice Department embark upon a strategy of “it takes a rogue to catch a thief” to encourage insiders who engaged in wrongdoing to reveal the secrets of their employers. Lawyers and Congressional investigators who have begun to review Mr. Elmer’s claims say that his internal bank and client documents provide fresh ammunition for American authorities as they take their crackdown on offshore tax evasion beyond UBS to clients of other banks. Mr. Elmer has given documents to the I.R.S., a Senate subcommittee investigating tax evasion and investigators for Robert M. Morgenthau, then the Manhattan district attorney, his lawyer Jack Blum said. They cover more than 100 trusts, dozens of companies and hedge funds and more than 1,300 individuals, from 1997 through 2002, Mr. Blum said. Mr. Elmer contends that his documents detail the undisclosed role of American investment management companies in funneling American, European and South American clients who wished to avoid taxes to Julius Baer; the backdating of documents to establish trusts and foundations used to evade taxes; and the funneling of trades for hedge funds and private equity firms from high-tax jurisdictions through Baer entities in the Cayman Islands. “What he has is the confirmation of something very important: that a number of other banks in the voluntary disclosure process are turning up,” Mr. Blum said, referring to 14,700 wealthy Americans, many of them UBS clients, who came forward to disclose their secret accounts last

361 year. The I.R.S. declined to comment on Mr. Elmer’s case but said in a statement that it was “investigating other banks that have enabled Americans to evade taxes.” Nothing indicates that Julius Baer, a 120-year-old private bank, is under I.R.S. investigation. The bank is known for intense privacy. Its board chairman, Raymond J. Baer, told shareholders last April that “the fiction of citizens being fully transparent must never become reality.” Julius Baer, based in Zurich, had profits of more than $245 million in the first half of 2009 on more than $200 billion in client assets. In 2004, it sold its American wealth management business to UBS, whose offshore private banking operations for Americans came under federal scrutiny and led the bank to pay a $780 million fine in 2009 and admit to criminal wrongdoing. The acquired business was folded into a group led by Raoul Weil, the top UBS private banker who fled to Switzerland in 2009, after being indicted in the UBS case touched off by Mr. Birkenfeld. Mr. Elmer worked for Julius Baer nearly two decades, the first 15 years in Switzerland and then as chief operating officer of Julius Baer Bank and Trust in Grand Cayman, beginning in 1994. As far as his own role in helping clients evade taxes, he said, “I didn’t realize what was going on.” Mr. Elmer said he discovered the tax evasion in 2002 and decided to expose Julius Baer’s operations. Julius Baer denies that version of events. It contends that Mr. Elmer stole internal documents and client data around 2002, the year he was dismissed after raising concerns about the bank in the wake of being passed over for a promotion. He moved to Mauritius a year later. “Shortly after leaving the employment of the Julius Baer Group in 2002, Cayman-based Elmer, clearly annoyed at having been dismissed and unable to secure a financial settlement to his satisfaction, engaged in a campaign to seek to discredit the Julius Baer group and certain of its clients,” the bank wrote by e-mail in December. “This campaign has included threats against individuals and the use of documents inappropriately obtained and/or retained by Elmer following the termination of his employment, many of which were altered to create a distorted fact pattern or supplemented by forged documents, the creation of which Elmer has since admitted,” the bank wrote. Swiss authorities, who briefly held Mr. Elmer in jail in 2005 on charges of breaching Swiss bank secrecy laws, are investigating whether he stole the documents. In 2008, Mr. Elmer posted some of his documents on Wikileaks, a Web site that publishes whistle-blower information about government and corporate activity. In court papers the bank filed in February of that year, seeking unsuccessfully to prevent the disclosure of the records, the bank revealed the names of certain clients that Mr. Elmer had accused of tax evasion. They include Jonathan Lampitt, the president and chief executive of the Jupiter Investment Group, in Rancho Santa Fe, Calif.; Winston B. Layne, a wealthy resident of New York; and Anna Kanellakis, an owner of a shipping company, Alpha Tankers and Freighters, based in Athens. A spokesman for Mr. Lampitt did not respond to requests for comment. Messages left at Mr. Layne’s Upper East Side home were not answered. A spokesman for Alpha Tankers said that it knew nothing about accounts at Julius Baer. Elements of the dispute between Mr. Elmer and Julius Baer resemble a spy thriller. He said that Julius Baer had him followed by private investigators in Zurich and that superiors told him “it might be a good idea to go for a deep dive in the sea” — assertions that the bank denies.

362 The bank said it suspected Mr. Elmer of having mailed a suspicious white powder to its offices, which he denies. It also said that he forged a 2007 document on Julius Baer letterhead notifying Chancellor Angela Merkel of Germany that the bank was closing her accounts because they “hid funds in offshore accounts.” Mr. Elmer says the letter, which he has posted on Wikileaks, is authentic. His actions are “symptomatic of a generalized breakdown of bank secrecy,” said Christopher S. Rizek, a tax lawyer at Caplin & Drysdale in Washington who has represented scores of wealthy American clients of Swiss banks. http://www.nytimes.com/2010/01/19/business/19whistle.html?th&emc=th

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Nouriel Roubini's EconoMonitor The Risky Rich Nouriel Roubini Jan 18, 2010 3:20PM Today’s swollen fiscal deficits and public debt are fueling concerns about sovereign risk in many advanced economies. Traditionally, sovereign risk has been concentrated in emerging- market economies. After all, in the last decade or so, Russia, Argentina, and Ecuador defaulted on their public debts, while Pakistan, Ukraine, and Uruguay coercively restructured their public debt under the threat of default. But, in large part – and with a few exceptions in Central and Eastern Europe – emerging- market economies improved their fiscal performance by reducing overall deficits, running large primary surpluses, lowering their stock of public debt-to-GDP ratios, and reducing the currency and maturity mismatches in their public debt. As a result, sovereign risk today is a greater problem in advanced economies than in most emerging-market economies. Indeed, rating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. The severe recession, combined with the financial crisis during 2008-2009, worsened developed countries’ fiscal positions, owing to stimulus spending, lower tax revenues, and backstopping and ring-fencing of their financial sectors. The impact was greater in countries that had a history of structural fiscal problems, maintained loose fiscal policies, and ignored fiscal reforms during the boom years. In the future, a weak economic recovery and an aging population are likely to increase the debt burden of many advanced economies, including the United States, the UK, Japan, and several euro-zone countries. More ominously, monetization of these fiscal deficits is becoming a pattern in many advanced economies, as central banks have started to swell the monetary base via massive purchases of short- and long-term government paper. Eventually, large monetized fiscal deficits will lead to a fiscal train wreck and/or a rise in inflation expectations that could sharply increase long- term government bond yields and crowd out a tentative and so far fragile economic recovery. Fiscal stimulus is a tricky business. Policymakers are damned if they do and damned if they don’t. If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation. But if monetized fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold on growth. Countries with weaker initial fiscal positions – such as Greece, the UK, Ireland, Spain, and Iceland – have been forced by the market to implement early fiscal consolidation. While that could be contractionary, the gain in fiscal-policy credibility might prevent a damaging spike in long-term government-bond yields. So early fiscal consolidation can be expansionary on balance.

364 For the Club Med members of the euro zone – Italy, Spain, Greece, and Portugal – public- debt problems come on top of a loss of international competitiveness. These countries had already lost export-market shares to China and other low value-added and labor-intensive Asian economies. Then a decade of nominal-wage growth that out-paced productivity gains led to a rise in unit labor costs, real exchange-rate appreciation, and large current-account deficits. The euro’s recent sharp rise has made this competitiveness problem even more severe, reducing growth further and making fiscal imbalances even larger. So the question is whether these euro-zone members will be willing to undergo painful fiscal consolidation and internal real depreciation through deflation and structural reforms in order to increase productivity growth and prevent an Argentine-style outcome: exit from the monetary union, devaluation, and default. Countries like Latvia and Hungary have shown a willingness to do so. Whether Greece, Spain, and other euro-zone members will accept such wrenching adjustments remains to be seen. The US and Japan might be among the last to face the wrath of the bond-market vigilantes: the dollar is the main global reserve currency, and foreign-reserve accumulation – mostly US government bills and bonds – continues at a rapid pace. Japan is a net creditor and largely finances its debt domestically. But investors will become increasingly cautious even about these countries if the necessary fiscal consolidation is delayed. The US is a net debtor with an aging population, unfunded entitlement spending on social security and health care, an anemic economic recovery, and risks of continued monetization of the fiscal deficit. Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200% of GDP. The US also faces political constraints to fiscal consolidation: Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates, as under President Ronald Reagan. At least European voters are willing to pay higher taxes for their public services. If America’s Democrats lose in the mid-term elections this November, there is a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts. Monetizing the fiscal deficits would then become the path of least resistance: running the printing presses is much easier than politically painful deficit reduction. But if the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly. America’s foreign creditors would not accept a sharp reduction in their dollar assets’ real value that debasement of the dollar via inflation and devaluation would entail. A disorderly rush to the exit could lead to a dollar collapse, a spike in long-term interest rates, and a severe double dip recession. This piece was originally written for Project Syndicate. Copyright: Project Syndicate, 2010. http://www.roubini.com/roubini-monitor/258282/the_risky_rich

365 Economy

January 17, 2010 ECONOMIC VIEW Bernanke and the Beast By N. GREGORY MANKIW IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple. Let’s start with first principles. One basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods. A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall. Those two lessons go a long way toward explaining history’s hyperinflations, like those experienced by Germany in the 1920s or by Zimbabwe recently. Is the United States about to go down this route? To be sure, we have large budget deficits and ample money growth. The federal government’s budget deficit was $390 billion in the first quarter of fiscal 2010, or about 11 percent of gross domestic product. Such a large deficit was unimaginable just a few years ago. The Federal Reserve has also been rapidly creating money. The monetary base — meaning currency plus bank reserves — is the money-supply measure that the Fed controls most directly. That figure has more than doubled over the last two years. Yet, despite having the two classic ingredients for high inflation, the United States has experienced only benign price increases. Over the last year, the core Consumer Price Index, excluding food and energy, has risen by less than 2 percent. And long-term interest rates remain relatively low, suggesting that the bond market isn’t terribly worried about inflation. What gives? Part of the answer is that while we have large budget deficits and rapid money growth, one isn’t causing the other. Ben S. Bernanke, the Fed chairman, has been printing money not to finance President Obama’s spending but to rescue the financial system and prop up a weak economy. Moreover, banks have been happy to hold much of that new money as excess reserves. In normal times when the Fed expands the monetary base, banks lend that money, and other money-supply measures grow in parallel. But these are not normal times. With banks content holding idle cash, the broad measure called M2 (including currency and deposits in checking and savings accounts) has grown in the last two years at an annual rate of only 6 percent. As the economy recovers, banks may start lending out some of their hoards of reserves. That could lead to faster growth in broader money-supply measures and, eventually, to substantial inflation. But the Fed has the tools it needs to prevent that outcome.

366 For one, it can sell the large portfolio of mortgage-backed securities and other assets it has accumulated over the last couple of years. When the private purchasers of those assets paid up, they would drain reserves from the banking system. And as a result of legislative changes in October 2008, the Fed has a new tool: it can pay interest on reserves. With short-term interest rates currently near zero, this tool has been largely irrelevant. But as the economy recovers and interest rates rise, the Fed can increase the interest rate it pays banks to hold reserves as well. Higher interest on reserves would discourage bank lending and prevent the huge expansion in the monetary base from becoming inflationary. But will Mr. Bernanke and his colleagues make enough use of these instruments when needed? Most likely they will, but there are still several reasons for doubt. First, a little bit of inflation might not be so bad. Mr. Bernanke and company could decide that letting prices rise and thereby reducing the real cost of borrowing might help stimulate a moribund economy. The trick is getting enough inflation to help the economy recover without losing control of the process. Fine-tuning is hard to do. Second, the Fed could easily overestimate the economy’s potential growth. In light of the large fiscal imbalance over which Mr. Obama is presiding, it’s a good bet he will end up raising taxes for most Americans in coming years. Higher tax rates mean reduced work incentives and lower potential output. If the Fed fails to account for this change, it could try to promote more growth than the economy can sustain, causing inflation to rise. Finally, even if the Fed is committed to low inflation and recognizes the challenges ahead, politics could constrain its policy choices. Raising interest rates to deal with impending inflationary pressures is never popular, and after the recent financial crisis, Mr. Bernanke cannot draw on a boundless reservoir of good will. As the economy recovers, responding quickly and fully to inflation threats may prove hard in the face of public opposition. Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era. N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush. http://www.nytimes.com/2010/01/17/business/economy/17view.html?ref=business

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PERMANENT LINK | JANUARY 15, 2010 Why Such a Deep Recession?

Arnold Kling

Several economists, not just Scott Sumner, have argued that the recession is too deep and too broad to be explained by the Recalculation Story. I think that there are many weaknesses in the Recalculation Story. It is far from a well established scientific thesis. However, I would suggest that explaining the depth of the recession is a challenge for just about any macroeconomist. There is no well-established theory that can explain how we got to 10 percent unemployment. If you are a Yale Keynesian, you would have been able to tell a good story when the S&P 500 stock index was down near 800. But it has gone back up over 1000, which means that Tobin's q is doing ok, which means that investment should be doing ok. It is not. If you are what Greg Mankiw calls a macroeconomic "engineer," meaning that you believe in macroeconometric models, then you have to explain why unemployment today is higher with the stimulus that what the models predicted without the stimulus. The standard macroeconometric models do not explain the depth of the recession. Next, we have the theory that even a little deflation is a horrible thing. Mark Thoma points to an essay by Andy Harless, which takes that argument to its logical conclusion, namely, that the Fed was too tight under Alan Greenspan. The Fed eventually popped the previous bubble - the tech bubble - not because it was a bubble but because the economy was nearing the overheating stage, and the inflation rate risked eventually rising back to levels of a decade earlier. In my opinion, the Fed was wrong to pop that bubble. The Fed should have let the economy overheat, for a while, and let the inflation rate rise. ...Low inflation is what got us into this mess. In the end, Scott Sumner is saying the same thing, although he thinks that as recently as the fall of 2008 the Fed could have generated enough expectations of inflation to save the day. I want to offer a bit of pushback against this evils-of-deflation thesis. How could an otherwise robust, adaptive economy go completely haywire because prices stay flat, or decline for a bit? Yes, I know the Keynesian story--the liquidity trap pulls savings out of productive assets and under the mattress. Did we observe that? No--at least not for long. Again, look at the recovery in the S&P 500. The other part of the Keynesian story is sticky wages. But have we observed a sufficient rise in real wage rates to explain the horrendous job market? I am waiting for someone to spell out that story. The Keynesian story at least has some microfoundations. Scott Sumner's Y = expected MV/P story is just hand-waving. Does he want to default to the sticky-wage story? Some pundits say "credit crunch," but it appears to me that since the beginning of this year the signs point to lower credit demand rather than lack of credit supply--unless you want to blame the banks for their reduced willingness to make stupid, risky loans. In any case, "credit crunch" is not in the macroeconometric models or in the textbooks. If the main story of this recession is going to be "credit crunch," then it is going to require at least as much theoretical and empirical back-filling as Recalculation.

368 I think where we are is this: every economist can tell a story of a sectoral recession in housing. No economist, from any school of macroeconomics, has a really convincing story of how that recession spread so widely. One characteristic of this recession is that employment fell more dramatically than output. I think this requires the Garett Jones explanation, which is that the typical worker today is building organizational capital, not making widgets. This in turn begs the question of why so many organizations decided to cut back on building organizational capital at once. One story you could tell is one of self-fulfilling expectations. Every executive says, "We are in for bad times, I need to cut costs in order to survive." They all behave that way, and you get a deep recession. I can offer a lot of anecdotal evidence in support of this story, and it may be right. But it implies a sort of psychological fragility to the economy that I find a bit hard to credit. It's bad enough to have to believe that our economic decision-makers can't figure out how to handle a little bit of deflation. It's even worse to believe that they are afraid of their own shadow. If I had a convincing explanation for the depth of this recession, I would shout it from the rooftops. Instead, let me toss out a few ideas, in no particular order of importance or plausibility. 1. The huge transfer of wealth to failed banks sucked a lot of energy out of the economy. In other words, the bank bailouts that are credited with keeping things from getting worse are in fact what made things worse. 2. The bloated housing and financial sectors created broader distortions in the economy. If the value of New York City's exports of financial services falls, then that has all sorts of effects. The city's nontraded goods and services sector is adversely affected. Its imports from other parts of the U.S. and the rest of the world fall. And so on. All sorts of trading patterns need to change, and that requires considerable recalculation. 3. Part of the adjustment process in the economy involves physical relocation. The nature of the collapse in the housing market means that relocation costs go up, which reduces the economy's capacity to adjust. 4. Since 2000, the economy has been in an innovation slump. The human genome project yielded less immediate benefits than expected. Progress in computer and communications technology has become evolutionary, not revolutionary. Nanotechnology is far too immature to create major new business opportunities. Only when an innovation reaches the point where its economic impact can be felt, as happened with personal computers and the Internet in the 1990's, will lots of new businesses be created. Remember that in 1987 Robert Solow quipped that "we see computers everywhere but in the productivity statistics." That soon changed. Today, one could argue that we see genome decoding and nanotech research everywhere but in the productivity statistics. The recent innovation slump was disguised by the housing boom. That is, if you take away the housing boom, you would have seen a steady increase in unemployment, due to the lack of new business formation. Instead, the housing boom caused unemployment to fall, and the crash caused unemployment to shoot up. 5. We ran into a "limits-to-growth" problem with energy. Tightness in the oil market means that we have to convert to less oil-intensive patterns of consumption growth and productions. Just as in the 1970's, this creates big adjustment problems. Of course, it is possible to have several of these problems at once. http://econlog.econlib.org/archives/2010/01/why_such_a_deep.html

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A Wall Street pay puzzle By Robert J. Samuelson Monday, January 18, 2010; A17 Why does Wall Street make the big bucks? A nation with 10 percent unemployment is understandably puzzled and outraged when the very people at the center of the financial crisis seem to be the first to recover and are pulling down fabulous pay packages. At Goldman Sachs, the average bonus for 2009 has been estimated at nearly $600,000; at J.P. Morgan Chase's investment bank, it's been reckoned at slightly below $400,000. These averages conceal multimillion-dollar bonuses for top traders and investment bankers; underlings get smaller sums. Are Wall Street's leaders that much smarter and more industrious than everyone else? By their own admission, they're not. Testifying last week to a congressionally created commission, Wall Street chief executives conceded that their errors directly contributed to the crisis. Wall Street money moguls may be bright and diligent, but they're not unique. It's where they work -- not who they are -- that's so enriching. A study of Harvard graduates found that those who went into finance "earned three times the income of other graduates with the same grade point average, demographics and college major," reports Harvard economist Lawrence Katz, the study's co-author. Is it possible that what Wall Street does is three times more valuable to society than other well-paid occupations? That's hard to believe. It's not that Wall Street is just the vast casino of popular imagination. It helps allocate capital, which -- done well -- promotes a vibrant economy. In 2007, Wall Street firms enabled businesses to raise $2.7 trillion from the sale of stocks, bonds and other securities. But Wall Street sometimes misallocates capital, as the 1990s "tech bubble" and today's crisis painfully remind. The huge social costs (high unemployment, lost income) refute the notion that Wall Street consistently creates exceptional economic value that justifies exceptional compensation. The explanation for Wall Street's high pay lies elsewhere. Most of us are paid based on what we produce or, more realistically, what our employers produce. By contrast, Wall Street compensation levels are tied to the nation's overall wealth. Investment banks, hedge funds, private equity firms and many other financial institutions trade stocks, bonds and other securities for their own profit. They also advise mutual funds, pension funds, endowments and wealthy individuals on how to invest and trade. There's a big difference between annual production and national wealth. In 2007, the year before the crisis, annual production (gross domestic product) equaled almost $14 trillion. In the same year, household wealth was $77 trillion (5.5 times production); that covered the value of homes, vehicles, stocks, bonds and the like. Eliminating nonfinancial assets (mainly homes) cut wealth to about $50 trillion (3.5 times). Deducting household debts from financial wealth pushed net worth to $35 trillion (2.5 times income). People who are trying to protect or expand existing wealth are playing for much higher money stakes than even hardworking and highly skilled producers. That's the main reason they're paid more. Similar percentage changes in production and wealth translate into much larger gains or losses in wealth -- up to five times as much based on the crude math above. Many lawyers enjoy the same envious position of being paid on the basis of wealth

370 enhancement or protection. They're involved in high-stakes mergers and acquisitions, estate planning, divorces and tax planning. On average, partners in the top 25 law firms earned $1.3 million to $4 million in 2008, reports the American Lawyer magazine. All this provides context to today's pay controversies. Wall Street may be greedy -- who isn't? -- but the explanation for its high compensation is its economic base (wealth, not production). That's why it's so hard to control or regulate. Since the 1960s, the industry has changed dramatically. Then, revenue came mainly from commissions on buying stocks and bonds for others. In 1966, commissions were 62 percent of revenue. Now, firms mostly make and manage investments for themselves and others. In 2007, commissions provided only 8 percent of revenue. The transformation has made Wall Street a greater source of potential economic instability. Some compensation packages exacerbated the crisis by offering big bonuses if big risks paid off. Because government provided a safety net for the whole system, it's justified in taxing the industry -- as President Obama proposed last week -- to cover the costs, as Douglas Elliott, a former investment banker now at the Brookings Institution, correctly argues. A larger issue is: How much should society concentrate on existing wealth as opposed to creating new wealth? Wall Street's lavish pay packages may attract too many of America's best and brightest. "It's bad for the rest of the economy," says economist Thomas Philippon of New York University, a student of the financial sector. "We also need smart brains outside finance." If that somehow happens, the crisis may yet have a silver lining. http://www.washingtonpost.com/wp- dyn/content/article/2010/01/17/AR2010011701931_pf.html

371 http://www.telegraph.co.uk/ Monday 18 January 2010 ECB prepares legal ground for euro rupture as Greek crisis escalates Fears of a euro break-up have reached the point where the European Central Bank feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union. By Ambrose Evans-Pritchard Published: 5:12PM GMT 17 Jan 2010 “Recent developments have, perhaps, increased the risk of secession (however modestly), as well as the urgency of addressing it as a possible scenario,” said the document, entitled Withdrawal and expulsion from the EU and EMU: some reflections. The author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a “new legal order” that transcends a “largely obsolete concept of sovereignty” and imposes a “permanent limitation” on the states’ rights. Related Articles • Germany contracts 6pc as eurozone bank deposits fall at fastest rate since Depression • International Monetary Fund says EU's Eastern European members should join euro • ECB dithers as eurozone dives • German economy to contract 7pc this year • ECB cuts rates to record 1.5pc, mulls radical action Those who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text. Crucially, he argues that eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt- outs). This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor. ECB chief Jean-Claude Trichet upped the ante, warning that the bank would not bend its collateral rules to support Greek debt. “No state can expect any special treatment,” he said. He might as well daub a death’s cross on the door of Greece’s debt management office. This euro-brinkmanship must be unnerving for the Hellenic Socialists (PASOK). Last week’s €1.6bn (£1.4bn) auction of Greek debt did not go well. The interest rate on six-month notes rose to 1.38pc, compared to 0.59pc a month ago. The yield on 10-year bonds has touched 6pc, the spreads ballooning to 270 basis points above German Bunds. Greece cannot afford such a premium for long. The country must raise €54bn this year – front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from

372 12.7pc of GDP to 3pc of GDP within three years. As Moody’s put it, Greece (and Portugal) faces the risk of “slow death” from rising interest costs. Stephen Jen from BlueGold Capital said the design flaws of monetary union are becoming clearer. “I don’t believe Euroland will break up: too much political capital has been spent in the past half century for Euroland to allow an outright breakage. However, severe 'stress- fractures’ are quite likely in the years ahead.” As Portugal, Italy, Ireland, Greece, and Spain (PIIGS) slide into deflation, their “real” interest rates will rise even higher. “It is tantamount to hiking rates in the already weak PIIGS,” he said. This is the crux. ECB policy will become “pro-cyclical”, too tight for the South, too loose for the North. The City view is that the North-South split may cause trouble, but that there will always be a bail-out to prevent a domino effect. “If a rescue turns out to be necessary, a rescue will be mounted,” said Marco Annunziata from Unicredit. It comes down to a bet that Berlin will do for Club Med what it did for East Germany: subsidise forever. It is a judgement on whether EMU is the binding coin of sacred solidarity, or just a fixed exchange rate system like others before it. Politics will decide, and in Greece it is already proving messy as teams of “inspectors” ruffle feathers. The Orthodox LAOS party is not happy that an EU crew dared to demand an accounting from the colonels. “The Ministry of Defence is sacrosanct,” it said. Greece alone in Western Europe treats the military budget as a state secret. Rating agencies guess it is a ruinous 5pc of GDP. Does the country really need 1,700 battle tanks, 420 combat jets, and eight submarines? To fight NATO ally Turkey? Merely to pose the question is to enter dangerous waters. Who knows what the IMF surveillance team made of their mission in Athens. The Fund’s formula for boom-bust countries that squander their competitiveness is to retrench AND devalue. But devaluation is ruled out. Greece must take the pain, without the cure. The policy is conceptually foolish and arguably cynical. It is to bleed a society in order to uphold the ideology of the European Project. Greece’s national debt will be 120pc of GDP this year. S&P says it will reach 138pc by 2012. A fiscal squeeze – without any offsetting monetary or exchange stimulus – will cause tax revenues to collapse. Debt will rise higher on a shrinking economic base. Even if Greece can cut wages without setting off mass protest, it lacks the open economy and export sector that may yet save Ireland in similar circumstances. Greece is caught in a textbook deflation trap. Labour minister Andreas Loverdos says unemployment would reach a million this year – or 22pc, equal to 30m in the US. He broadcast the fact with a hint of menace, as if he wanted Europe to squirm. Two can play brinkmanship. http://www.telegraph.co.uk/finance/comment/7012297/ECB-prepares-legal-ground-for-euro- rupture-as-Greek-crisis-escalates.html

373 Business

January 17, 2010 For ‘Safe’ Investors, This May Be a Challenging Year By JEFF SOMMER MONEY market funds are paying investors next to nothing. More precisely, the 100 biggest funds are now paying 0.05 percent annually, on average, a yield as low as it has ever been, according to Peter G. Crane, the president of Crane Data of Westborough, Mass. “It’s so low it’s a joke,” Mr. Crane said. “At that yield, it would take more than 1,000 years to double your money.” This microscopic rate of return is part of the continuing fallout of the financial crisis — a consequence of the very loose monetary policy of the Federal Reserve and other central banks. They have held their benchmark short-term rates at rock-bottom levels while using unorthodox methods, known as “quantitative easing,” to restore the health of the global financial system. There are many indications that this herculean intervention has been working. In the bond market, though short-term interest rates are still hovering near zero, longer-term rates have been on an upward trajectory since late November. In part, this may be a healthy sign, suggesting that the economy is recovering. But it has also created a very unusual situation for financial markets, and it poses some tricky problems for savers, investors and home buyers. First, how unusual is the current array of interest rates? William H. Gross, the co-chief investment officer of the Pacific Investment Management Company, or Pimco, the world’s biggest bond manager, says the gap between short- and long- term rates has rarely been greater. Translated into the parlance of the bond market, the “yield curve” has seldom been steeper. “If you go back in history and look not just in the United States but in global fixed-income markets for several centuries,” Mr. Gross said, you will rarely find a greater disparity between short- and long-term rates. For investors, this can create some hard-to-resist temptations. People who have been holding cash in money market funds or in bank certificates of deposit, for example, may be yearning to buy longer-term bonds instead. United States Treasury bonds with 30-year maturities, for example, yield about 4.5 percent; 10-year Treasuries yield about 3.8 percent. These rates are modest by historical standards but are much more attractive than the negligible yields available in the money markets. Watch out, though. Liquidating investments that pay almost nothing in order to shift to long- term bonds that pay substantially more may not make sense right now, said Robert F. Auwaerter, the head of fixed-income investing at the Vanguard Group.

374 “Right now, investors need to be thinking about interest-rate risk,” he said. The problem is that interest rates — at both the short and the long ends of the yield curve — are likely to rise this year if the economy keeps expanding. When bond yields rise, their prices fall. The effect is magnified for longer-term securities, so a 30-year Treasury bond would fall in value much more sharply than, say, a six-month Treasury bill. A money market fund would benefit as interest rates rise. “In this environment, I’d be very careful about buying long-maturity bonds,” Mr. Auwaerter said. On the other hand, homeowners and people looking to refinance mortgages might be advised to move now, rather than wait for the markets to settle further. An increase in mortgage rates, which are closely linked to bond yields, is widely expected this year. Furthermore, the mortgage market has been actively supported by the Fed’s $1.25 trillion dollar program to buy asset-backed securities. The Fed has said that it intends to end that program at the end of March, though an extension is possible. Vanguard estimates that 30-year fixed mortgage rates could rise by a quarter to a half percentage point simply as a result of the end of the Fed program, Mr. Auwaerter said. An additional increase could be expected if bond yields rise further. Mr. Auwaerter and other analysts say long-term yields are expected to keep rising modestly, and for several reasons: inflation expectations are rising, Treasury sales of long-term bonds to finance the deficit are projected to be greater than ever, and Fed purchases of Treasury securities are expected to decline. The average rate for a 30-year fixed mortgage was 5.18 percent last week, according to Bankrate.com. It is likely to rise above 6 percent by year-end, Mr. Auwaerter said. Of course, projecting the direction of interest rates requires a judgment about the economy. At the moment, housing “is a real wild card,” said Steven C. Huber, manager of the Strategic Income fund at T. Rowe Price. To prevent the housing market from weakening further, he said, the Fed is likely to unwind its mortgage support program gradually. And he said the Fed was unlikely to raise short-term interest rates until the unemployment rate, now 10 percent, was back in the 9 percent range. STILL, many analysts project that the Fed will raise its benchmark Fed funds rate, bringing it to perhaps 1 percent by year-end. In the same period, the yield on the 10-year Treasury note may rise well above 4 percent, Mr. Gross said. And because of long-term structural deficits in the United States, he said, Treasuries may underperform the sovereign debt of some other countries, like Germany. For individuals focused on keeping their investments very safe, it’s likely to be a challenging year. “Basically, savers are going to have to suck it up,” said Mr. Crane at Crane Data. “Yields are so low that they’re getting almost nothing in return, but this is not a time to play offense. Remember, if you’re holding a money market fund or a C.D., you’re there because you don’t want to lose money. This is not the time to take a lot of risks.” http://www.nytimes.com/2010/01/17/business/17mark.html?ref=business

375 PERSONAL FINANCE Merryn Somerset Webb: China’s going the way of Spain, Ireland and Japan By Merryn Somerset Webb Published: January 15 2010 17:23 | Last updated: January 15 2010 17:23 It is the fastest-growing consumer of luxury goods in the world. It will have an economy bigger than the US by 2027 (or maybe 2030, depending on who you listen to). It has 70 big cities, all crammed with new-build apartment blocks. It is home to the world’s largest dam. It buys more cars than America and produces half the world’s steel. It has grown somewhere between 8 and 10 per cent every year for decades and can keep doing so. It is the world’s second-largest consumer of energy. It produces 60 per cent of the world’s buttons in just one of its towns. It has a huge population with a growing middle class poised to gobble up every consumer good in sight. Yes, it’s China – the world’s current miracle economy, the country that will dominate the decade, and the best possible home for your savings during that decade. That, at least, is the hype. But how much of it stands up to scrutiny? At the end of last year, I wrote here that while I agreed with much of the China story, I wouldn’t touch its markets because they were far too expensive. But having looked at things in more depth, I’m beginning to doubt the status of the economic miracle itself. Why? Because, right now, it rests on about the most unstable of foundations there is: rampant credit growth. China has been growing fast – at around 10 per cent a year – for about 30 years. That, says a note from Pivot Asset Management, combined with the fact that the growth has mostly been investment led, means that, “both in its duration and intensity”, China’s capital spending boom has now outstripped all other “previous great transformation periods”, such as those of postwar Japan and Germany. The point? That China’s growth cycle is more mature than emerging: it has most of the infrastructure it needs already, and so should be slowing rather than accelerating its capital spending. When you look at where capital spending is now going, that makes sense. On YouTube, you will find an amazing film of the city of Ordos. It is newly built and could be home to 1m people. Instead, it’s empty. With prices rising 50-60 per cent a year in some areas, its houses have been bought by investors expecting to make a turn without having to bother with pesky tenants. Think Manchester 2006. And it isn’t just residential cities that are empty. China now has more ports, offices, airports and steel factories than it will know what to do with for many years to come. Commercial property vacancy rates in central Shanghai are said to be as high as 50 per cent.

376 Yet far from pulling back on building, the Chinese are pushing on at speed. In the first three quarters of 2009, China’s industrial capacity expanded at more than 25 per cent. So what’s going on? It’s all about the global credit bubble. Its collapse was nasty for China. Much of China’s expansion was based on exporting goods to westerners buying them on credit, so vanishing credit quickly meant vanishing exports. China’s response has been to try to keep its famous growth rate going (and head off social unrest and so on in the process) by replacing export demand with state-sponsored demand – $586bn worth of it in direct spending and many billions more in unfettered bank lending. The result? Its very own credit bubble. Today, far from being the miracle economy of the popular imagination, China looks to be caught in a nasty trap of artificial and unsustainable growth driven by rapid credit growth and bubble psychology (everyone thinks the authorities can and will stop asset prices falling). In the first five working days of January alone, China’s commercial banks are said to have lent out the equivalent of more than $50bn. Not good. Dylan Grice of Société Générale points to a recent study from the National Bureau of Economic Research that looked at 60 financial crises going back 140 years and asked if there was one good indicator of a coming crisis. There was: rapid credit growth. Look at it like that, and the Chinese miracle begins to look like it might end in rather the same way as the Irish, Spanish and Japanese miracles. Still, the state of an economy is rarely the best predictor of stock market returns. The price you pay is. I’ve just been reading John Cassidy’s latest book How Markets Fail, The Logic of Economic Calamities. In it, he reminds us that researchers have shown again and again that value stocks (those with a low price/ earnings ratio or low price- to-book ratio, or dividend ratio) “systematically outperform” so-called growth stocks. But look at the Chinese market now and there is, I think, one thing you can be pretty sure of: overall, you are not getting much value. As Peter Tasker pointed out in the FT earlier this week, the Shanghai market trades on a Graham and Dodd price/earnings ratio (which uses the 10-year average) of around 50 times. Hard to see how it could systematically outperform from that kind of starting point, isn’t it? Merryn Somerset Webb is editor-in-chief of Money Week and previously worked as a stockbroker. The views expressed are personal. [email protected] Merryn Somerset Webb: China’s going the way of Spain, Ireland and Japan January 15 2010 http://www.ft.com/cms/s/2/a84f9554-01fa-11df-8b56-00144feabdc0.html

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GE ANALYSTS' ECONOMONITOR China’s Reserves: The Challenges of US$2.4 Trillion Rachel Ziemba Jan 15, 2010 4:33PM China reserves rose to just under US$2.4 trillion at the end of last year (US$2,399 billion to be exact), US$127 billion higher than at the end of September and about US$ 450 billion higher than at the end of 2008, highlighting the cost of maintaining the RMB’s dollar peg in the face of capital inflows. In fact, despite all the talk of the reserve requirement rate increase this week, which continues the policy of gradually removing liquidity, the exchange rate is at the heart of any real policy normalization. The pace of reserves growth is yet one more indication (along with lending and inflation data) that shows that monetary conditions in China remain loose as the cost of sterilizing the capital inflows is rising. (We address China's monetary stance in more detail in another analysis next week and in RGE's forthcoming global economic outlook but the trajectory of steps is similar to that outlined here.) Adjusting for valuation changes on the non-dollar assets of the portfolio, the increase was a bit higher, closer to US$150 billion, or about US$50 billion per month – a lot of funds. It also suggests that “hot money” inflows are still strong. FDI and the trade surplus account for about US$30 billion per month in Q4. Adding in investment income, remittances and other flows, still suggest that China may have received around US$40-50 billion in “hot money” inflows.

Source: Chinese Customs Bureau, National Bureau of Statistics, RGE estimates These estimates assume that China’s reserves managers have found it difficult to diversify the asset allocation of its reserves and that around 65% of reserves are in US assets. Some ardent reserves watchers have been puzzled in recent months by the fact that China's reserves growth have far outpaced the accumulation of China's visible US assets, however, with the peg in place diversification is limited. This suggests that reserve managers may be moving from US assets that are visible, those held directly, and those held through intermediaries, a

378 further unwind of the safe haven flows that saw China's reported holdings of T-bills skyrocket about a year ago (when reserve growth slowed sharply). China’s recent reserve growth is part of a global trend as investors seek out high yielding assets, especially in emerging markets, and local central banks intervene heavily to reduce exchange rate volatility and maintain price competitiveness. Despite a slowdown in inflows and reserve growth in December as the dollar strengthened, global reserve growth is on track to reach US$250 billion in Q4, similar to the levels of Q2 and Q3 2009. (See more details in forthcoming RGE Analysis.) But the improvement in China’s exports and growth suggests that capital inflows will continue and the politics of continuing to grow a stock of U.S. treasuries is politically unpalatable. How the Chinese government allocates its estimated US$2.7 trillion in foreign assets (including the foreign assets of the central bank, the CIC and the state banks) will be key for global markets. Already the actual and purported investments of the Chinese government move markets. After all, China now accounts for well over 30% of global foreign exchange reserves, more than that of the next five largest stockpiles combined (Japan, Russia, Taiwan, South Korea, India and Hong Kong). With the exchange rate pegged though, there are limitations on the diversification of China’s national asset allocation. The outward investments of other government owned companies picked up in 2009, as first the China Development Bank and resource companies issued loans and made foreign investment, followed by the purchases of the China Investment Corporation (CIC) which has now reportedly spent about US$40 billion in the second half. CIC, whose reports suggest might receive another transfer, seems to have allocated well over half of its US$100 billion in its foreign investment portfolio in H2 2009. Investments include at least US$8 billion in resource related sectors (metals, oil, coal – and cleantech), as well as allocating new funds to asset managers. These investments are quite significant but still pale in comparison to the fast pace of China’s reserve growth and large stock. The US$430 billion in reserve growth in 2009 is actually roughly similar to the record pace of 2007-2008. Expect diversification attempts to pick up in 2010, as they already did in the second half of 2009. But at the end of the day, it comes down to exchange rate policy. Should the peg remain, or if only gradual appreciation is allowed, China will find it hard not to buy US assets. No wonder CIC managers are talking up the dollar… Rachel Ziemba China’s Reserves: The Challenges of US$2.4 Trillion Jan 15, 2010 4:33PM http://www.roubini.com/analyst- monitor/258280/china___s_reserves__the_challenges_of_us_2_4_trillion

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Double-Dip Worries In Japan and Germany Edward Hugh Jan 14, 2010 1:50PM Whoever said economists are people who don't ever get anything right? "Economic growth in Germany probably stagnated in the fourth quarter from the previous three months, the Federal Statistics office said. Still, the figure is “surrounded by uncertainty,” Norbert Raeth, an economist at the office, said in a press conference in Wiesbaden today." So German GDP was probably more or less flat quarter on quarter between October and December. The figure is surrounded by uncertainty, as I pointed out in this post (Is There A Double Dip Risk In Germany? ), quite simply because German growth numbers at the moment are all about net trade and inventories, with domestic consumption in an entirely secondary role. In fact quarterly movements in private consumption have been slight for some long time now, and it fell 0.9% in the third quarter (making a 0.5 negative impact on growth - see below, the large movement which can be seen between Q4 2006 and Q1 2007 is a distortion produced by the reaction to the 3% VAT increase which came into effect on 1 January 2007).

Imports rebounded in the third quarter, meaning the net trade impact was rather negative, but inventories were built up again (after various quarters of destocking) making a large 1.5 percentage points contribution to a final 0.7 percentage points quarterly growth. Things probably inverted in the fourth quarter, with export levels dropping back in both October and November, while inventories if not actually being run down, most likely were more or less neutral (this is what the IFO survey for the quarter shows) and thus won't count as a massive plus for growth. Eventually the whole inventory story is about second derivatives: when destocking slows down, the second derivative effect, mutatis mutandis, pushes GDP up, and and when restocking slows, this pushes GDP down. So with nothing substantial to push it up, GDP stagnates. As I started to point out back in mid November: The question in hand is the Eurozone third quarter growth one, and the story is all about differences (between countries) and these differences in the key cases (France and Germany) are in many ways all about inventories……Now if you

380 look at the chart below, you will see that German growth was in the second quarter was, more than anything, a statistical quirk which resulted from a balancing act between strong swings in inventories and in net trade. In the third quarter, as far as we can see (since we don’t have that ever so important detailed breakdown), this position has quite literally been inverted, as the earlier trade bonus has been eaten away by growth in imports....

That was before we got the detailed breakdown of Q3 growth. On November 28, following the publication of this data, I went on to argue that: While a positive contribution to growth was made by goods exports, which were up 4.9% on the previous quarter, imports also rose , and by more than exports (up by 6.5%), and the resulting trade balance had a negative effect on growth of –0.5 percentage points. This was more or less the same as the contribution from household consumption (which was also negative by 0.5 percentage points). But what really, really mattered here - see the chart below - was the inventory build-up which added a staggering 1.5 percentage points to growth., while government final consumption expenditure only increased slightly (+0.1%) over the period and effectively had zero impact on the growth number. So, as I said, it is all about inventories in Q3.

Which lead me to conclude that: In Q4 it is all going to be about trade. Since if German exports hold up, then the run down in inventories need not be that strong, but if exports don’t sustain

381 momentum in December - and what just happened in Dubai is making me very nervous on that front - then German GDP will almost certainly fall back into negative territory in the fourth quarter. On the other hand, if I am jumping the gun slightly here, and German economic activity does manage to eke out some small increase at the end of the year, then I think a return to negative growth in the first quarter of 2010 is almost guaranteed. That is to say, we have a double dip on the horizon. At least, that is my call. Now it is over to you. Japan's Recovery Also Fails To Convince Well, my instincts seem to have been more or less good ones, and just to show that my forecast was not simply a fluke (ie that it is backed by some sort of coherent analysis, one that is testable), I would also draw attention to my "twin" post on Japan - Double Dip Alert In Japan, dated 7 December - where I said: "Despite recent optimism about the apparent renaisance of growth in the Japanese economy, and the heightened sense of enthusiasm which surrounds the surge in economic activity right across the Asian continent there are considerable grounds for caution about the sustainability of the Japanese recovery itself". Just two days laters Japan's third quarter results were revised down, sharply (and for most analysts unexpectedly sharply). JAPAN'S economy grew much less in the third quarter than initially reported, revised government data showed today, as a strong yen and deflation weighed on economic activity by prompting firms to hold off on new investments. The new data revealed that July-September's real gross domestic product grew 0.3 per cent compared with the previous quarter, much slower than the 1.2 per cent expansion reported last month, and worse than analysts' consensus forecast of a 0.6 per cent rise. Japan may have contracted in the fourth quarter, at this point I'm not sure, given the sharp downward revision in Q3. Certainly Japan’s reliance on exports is simply further underlined by the sharp fall in machinery orders from service companies in November. In fact orders from non-manufacturing companies dropped 10.6 percent (from October) to 380.7 billion yen ($4.15 billion), their lowest level since May 1987. In addition core orders from all industries, an indicator of business investment in three to six months, also fell to a record low. And the Japan composite Purchasing Managers Index (PMI) shows contraction over the whole October to December period. And the drop was lead by Japanese services. The headline seasonally adjusted PMI posted 42.7 in December, up slightly from 42.3 in the previous month, but still pointing to a marked reduction in business activity amongst Japanese service providers. For Q4 as a whole, the headline index averaged a lower reading than in Q3. So, despite manufacturing data pointing to a faster expansion of output, the Composite Output Index (which mirrors GDP) was stuck at a level suggesting a solid reduction in private sector activity. The index, which posted 46.5, has remained below the neutral 50.0 threshold for four successive months. Where Is The Demand? So what's the point of all this? Well certainly not to say simply "aren't I clever now". The issue is that (for demographic reasons) the German and Japanese economies are totally export dependent (retail sales in Germany have now peaked, and are in long term historic decline, see chart below), and thus it is unrealistic to expect the global recovery to be lead by an

382 expansion in these economies. The recovery will have to come elsewhere (in France, for a start, but with France alone there is not enough) and the export dependent economies can then "couple" to that dynamic. It is difficult to say whether or not the Japanese economy will show some marginal growth in the fourth quarter, since the Q3 revisions make for a much lower base, industrial output has risen considerably on the quarter, but the important services sector has been contracting.

Essentially, until those heavily indebted economies (the US, the UK, Spain, Ireland, Eastern Europe, etc) who formerly ran current account deficits can find a way back to sustainable growth without the aid of large government stimulus programmes, any general recovery will remain extremely weak. And the German result has, of course, implications for four quarter Eurozone growth. As I said in this earlier summary of the Q3 eurozone performance: So, going back to my original question, is this a whimper recovery, or are we on the verge of a double dip? I think, basically, it is all down to Germany, and those inventories. If external demand weakens in key customer countries then Germany will fall back into negative growth, and with it the whole "eurozone sixteen economy". Since demand in the South and the East of Europe is hardly going to be strong, given the new found need of countries in those regions to run trade surpluses, my inkling is that just this outcome is now a clear possibilty. So while the consensus at the moment seems to be that France disappoints, my view is that it is the German economy we really should be worrying about. As Gabriel Stein of Lombard Street Research puts it: The lack of December data obviously adds an element of uncertainty to current estimates, but it does seem fairly clear that German private consumption continued to fall in Q4 2010. Given a deteriorating global environment – monetary tightening now under way in China, an end to the effects of fiscal stimuli and slower inventory drawdown/modest inventory build-up in the US and the UK – the outlook for German exports is unlikely to be that good, particularly with the euro still strong. This is bad news for Germany and for the entire euro area. A weaker euro could ease some of the pain, but that is all it can do. So, in closing, lets just remember that German GDP fell by 5% in 2009, we are now back round the same level we were at in mid 2006 (see chart below), and we are not exactly springing back up to the old levels. That is the measure of the task we have in front of us.

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Edward Hugh Double-Dip Worries In Japan and Germany Jan 14, 2010 http://www.roubini.com/euro-monitor/258274/double-dip_worries_in_japan_and_germany

Mr. Bean Meets the Three Wise Men

Edward Hugh Jan 11, 2010 5:53PM Last Wednesday was Epiphany. In Spain it is also a public holiday - Los Reyes Magos - a festival which celebrates the visit of the three wise men who came from the East to find the infant Jesus. Coincidentally on the eve of Epiphany this year the Moncloa did receive a visit from three wise men, although it is not clear whether they came (as tradition would have it) bearing gifts, or whether they brought with them a list of demands from further East in Europe about what Spain's government ought to be doing to stop its economy falling apart. Unfortunately, due to a technical fault (some say the website was hacked) there to meet them as they entered the gateway and fired up the browsers on their xmas-new I-Phones was not the Spanish Prime Minister, but a strange interloper, otherwise known as Mr Bean. As the Financial Times put it in an editorial: By any standards, it was an unfortunate beginning. Spain’s six-month presidency of the European Union, which got underway this week, appears to have been subject to an attack by computer-hackers. On its first day, web- surfers navigating to the special presidency website found themselves staring at photos of Mr Bean, the hapless British comedy character who (some claim), bears a resemblance to José Luis Rodríguez Zapatero, the Spanish prime minister. But the FT also makes a rather more serious point: "Mr Bean is famous for his stumbles and mishaps – and Spain is also looking accident-prone at the moment." This certainly rings true

384 to me. And as if to confirm the point, Spain's Secretary of State for European Affairs Diego Lopez Garrido stepped forward from behind the curtain yesterday - apparently representing the EU - to warn the Greek government that while coordinatinion within the EU was necessary "there is a limit, which is no bailout." A point which various European officials had spent the best part of the week trying to deny (or at least strongly qualify) following Juergen Stark's unfortunate Italian interview. Evidently news reaches Madrid slowly. The only fortunate thing in all this, is that most people don't know who the hell Diego Lopez Garrido is, and probably it's better that way, although the prospect of a six month Spanish presidency may make this situation hard to sustain. And then we have the strange visit of the three wise men. According to reports in the Spanish press José Luis Rodriguez Zapatero, chaired, last Tuesday, a meeting in the Moncloa with a number of former politicians who are apparently - according to the press release - considered to be "Europe's wise men": Jacques Delors (former European Commission president), Felipe Gonzalez (former Spanish prime minister), and Pedro Solbes (former Spanish economy minister). Elena Salgado, current Spanish economy minister also attended the meeting. They ostensibly met to discuss ways out of the crisis and plans for “European economic government”. The discussions, which lasted around three hours, were described as being “very useful” and primarily concerned with “strengthening policies for economic coordination” in Europe. Meanwhile, European Council President Herman Van Rompuy has convened an extraordinary EU summit, on 11 February, to discuss economic recovery, where the proposals which Zapatero was discussing with the three wise men will need to be presented. What could all this mean, I asked myself? For an initiative on this scale, the composition of the meeting was hardly representative. And two of those present - Felipe Gonzalez and Pedro Solbes - while being highly regarded in Brussels, have both been publicly and strongly critical of the economic policy of the present Spanish government, so the conversation would have been far from cordial, to say the least. And what was Delors doing there? It couldn't be, could it, that they were conveying a rather strong message that Spain has to get its act together if it doesn't want to end up where Greece is now. Fortunately some additional light was thrown on the situation by an FT article this morning - the European Union is indeed planning to strengthen policies for economic cordination, but it is planning to do this by giving more power to the EU Council and Commission to apply “corrective measures” against those member states that fail to meet their obligations under a new 10-year plan (yet to be outlined) designed to improve EU competitiveness and bring all that public debt back under control. And the irony of ironies in all this and is that the set of proposals are going to be advanced by non other than José Luis Rodriguez Zapatero. That is, the turkey is actually about to propose the menu for xmas lunch. As the FT puts it: "In a proposal likely to stir controversy among other EU governments, Mr Zapatero said the European Commission should be granted powers to police compliance with the plan, which is expected to be adopted in March and is known as the '2020 strategy'". Obviously Spain is likely to be the next country after Greece to be on the receiving end of just these very corrective measures? No wonder he was looking so grim before the TV cameras after last Tuesday's meeting. What do you bet we don't hear anything more of this "wise men" initiative, at least until not the next Epiphany. Meanwhile The Spanish Economy Continues It Long Path Downwards In the meanwhile signs abound that Spain's economy continues to deteriorate. In the first place Spain's December services PMI is no better than the manufacturing one. And - with a

385 reading of 45 - activity contracted at sharpest pace for five months in December. As (Markit economist) Andrew Harker says: “The Spanish services economy ends 2009 on a low note, reaching the unwelcome milestone of two years of continuous decline...s in activity. December data provide little indication that conditions will improve in the near future, with new business contracting and employment continuing to fall particularly sharply. The fragility of demand meant that companies were unable to pass on higher input costs to clients, further harming profit margins.”

Retail sales also continue to fall regardless. They were down 1.2% from October (seasonally adjusted) in November.

And they are now down nearly 12% from their November 2007 peak. The pace of decline is slow, but the attrition is constant, and there is no end in sight.

386 Unemployment Continues To Rise Of course, I didn't get everything right in 2009. I was right that unemployment would go up and up, but it didn't go up as fast as I had been expecting, and the INEM labour exchange signings came in still just shy of the 4 million mark in December, while I was forecasting back in April that we would hit 4.5 million by the end of the year. What I hadn't anticipated adequately I think was extent to which the stimulus programme would generate labour intensive employment, and the degree to which people could be moved over from unemployment into training courses, etc. Then again, most of the earlier waves of unemployment came from people on temporary contracts that were terminated, and now the people to go will be in permanent forms of employment, and evidently dismissing people with such contracts (unless the company simply goes bankrupt) is a much more laborious and costly process. Still, according to the Labour Force Survey methodology as supplied to Eurostat the 4.5 million milestone has now been passed, and onwards and upwards we go. Certainly the numbers may not have gone up quite as much as I expected, but a rise of 794,640 in the number of unemployed over the last year however (while less than the 2008 increase) is hardly to be sneezed at. In fact unemployment was up 25.4 per cent in 2009.

And more bad news on unemployment again today, since even if Spain provides only quarterly data on the unemployment rate, the European Union statistics agency Eurostat give a monthly, seasonally corrected number, which stood at 19.4 per cent in November, the second highest rate in the whole EU bloc behind Latvia. And youth unemployment is far worse, with Spain now facing the real prospect of having a "lost generation", since unemployment among people aged from 16 to 24 is now 43.8 percent, the highest in Europe, and more than double the overall rate. The increase in unemployment among young people has been especially traumatic, with the rate jumping from 17.5 percent three years ago to the current level. And here again Spain stands out even among other European countries with

387 problematic economies. In Greece, for example, the youth unemployment rate is 25 percent, while Ireland’s is 28.4 percent and Italy’s is 26.9 percent. Month on month the number of people seeking jobless benefits rose by 54,657 in December from November, or by 1.4 per cent. Spain has said it wants to make the fight against unemployment one of the key planks of it EU presidency, but the Spanish government are the only ones who still foresee a return to falling jobless rates in Spain before the end of 2010. Both the EU Commission and the IMF don't see any easing in current levels even in 2011. The simple reason for this is that even the most favourable forecasts for economic growth in the Spanish economy over this period will be weak, and then if you allow for productivity improvements, then the rise in output simply won't be sufficient to generate employment. And if you accept a more downside estimate like mine, then the unemployment level won't even stagnate, it will continue to rise. Maybe we won't see 25% in the first half of 2010, but we certainly could in the second half. No Deflation In 2009 Unemployment wasn't the only thing I didn't get quite right last year. I don't know how many of you remember the price list from my local bar I posted last January (see below), well I have to report it is exactly the same this January. The price of a coffee and croissant hasn't gone up, but it also hasn't come down, as I was suggesting it might. In fact Spanish 12-month inflation was 0.9 per cent on the year, suggesting that prices are rising (in general) rather than falling.

So you could say, whatever happened to your "deflation scare"? Well basically, it has been put on ice. But it will come back. If we look at what the EU are proposing in Greece, it is not only a reduction in the current fiscal deficit, it is a restoration of competitiveness. This correction of the external balances and restoration of competitiveness will also be a core part of the 2020 plan. What this means effectively means is internal devaluation. And using the same logic it is clear that it is just this policy which the new "co-ercive" economic coordination introduce in Spain under the "2020 (vision) strategy" - using those very powers which José Luis Zapatero is himself now proposing. Basically, the fact prices rose in 2009 is not good news, it is simply a symptom of the inability of Spain's economy and society to correct itself unaided. Fortunately, it looks as if Spain may now be about to receive exactly the kind of help it is so badly in need of. Socorro, Socorro..... http://www.roubini.com/euro-monitor/258254/mr__bean_meets_the_three_wise_men

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Wednesday, January 6, 2010 Stark Raving Mad? Not necessarily, but he is causing one hell of a fuss today. The Stark in question here is, of course, ECB Executive Board member Juergen Stark, who stated in an interview with the Italian Newspaper Il Sole 24 Ore that, in his opionion, the European Union would not help bail out Greece if the need were to arise. Certainly the initial reports of his statements sent shock waves round the globe. The euro dropped as much as 0.5 percent to $1.4282 after the remarks before laterrecouping its losses, and the yield on Greece’s 10-year government bond rose 4 basis points to 5.672 percent. Essentially it is hardly surprising that this should be the case, since following what happened in Dubai, two questions seem to have been in the forefront of investors' minds: i) who is going to pay for all that surplus second residence property that has been built all along Europe's periphery (from Ireland, to the Baltics, to Hungary, to Bulgaria, to Greece, to Sovenia, to Spain, and to Portugal); and ii) are the core European states really going to prop up the peripheral ones (in extremis) or will they follow the example of Abu Dhabi, and pick and chose what they will support and what they won't. More than anything else it is uncertainty on these two points which lies behind all the earth tremors currently shaking the monetary union. In the interests of clarity, and before commenting further, I am reproducing the relevant extract in its entirely below, first in Italian, and then as a rough and ready English translation. Il Sole 24 Ore: Il caso Grecia continua a tenere banco, nonostante le assicurazioni di Atene su una rapida riduzione del deficit. Non crede che un salvataggio debba considerarsi necessario o forse anche inevitabile?

Juergen Stark: La Grecia è in una situazione molto difficile: non solo il deficit è a livelli molto elevati, ma il paese ha anche sofferto una grave perdita di competitività. Questi problemi non sono legati alla crisi globale, ma sono stati creati in casa. E devono essere affrontati con le dovute misure economiche nell'interesse dei cittadini greci e nel rispetto delle responsabilità che il governo ha nei confronti della moneta unica e dei paesi partner. Le regole, ribadite in una dichiarazione dell'Ecofin a Cardiff nel 1998, sono chiare: la partecipazione all'Unione monetaria non consente alcun diritto a rivendicare sostegno finanziario da parte di uno Stato membro.

Il Sole 24 Ore: Ma appartenere all'Unione monetaria non significa anche solidarietà, oltre che responsabilità? Gli stessi Trattati permettono «un'assistenza finanziaria» nel caso di «gravi difficoltà» e in «circostanze

389 eccezionali».

Juergen Stark: È vero, ma i Trattati dicono anche che queste circostanze devono «sfuggire al controllo» del paese in questione. Non è il nostro caso. Come ho appena detto, i problemi della Grecia sono prettamente greci, come ha ammesso lo stesso premier George Papandreou. In questi anni, il paese non ha tenuto sotto controllo i conti pubblici, né ha lavorato per migliorare la competitività. I Trattati prevedono la clausola di non salvataggio e le regole vanno rispettate. È un aspetto cruciale per garantire il futuro di un'Unione monetaria tra paesi sovrani con bilanci nazionali. I mercati si illudono quando pensano che a un certo punto gli altri Stati membri metteranno mano al portafoglio per salvare la Grecia. Il Sole 24 Ore: The Greece situation continues to be a focus of attention, despite assurances from Athens on a rapid reduction in the deficit. Do you not believe that a rescue might be considered necessary or perhaps even inevitable? Juergen Stark: Greece is a very difficult situation: not only is the deficit very high, but the country has also suffered a serious loss of competitiveness. These problems are not related to the global crisis, but were created in-house. And they must be addressed with appropriate economic measures in the interests of both Greek citizens, and with respect to the responsibilities that the Greek government has with both the euro and its EU partners. The rules, as set out in an Econfin statement in Cardiff in 1998, are clear: the monetary union does not allow any right of any Member State to claim financial support.

Il Sole 24 Ore: But doesn't belonging to a monetary union also imply solidarity, as well as responsibility? The very same treaties allow "financial assistance" in case of 'serious difficulties' and 'exceptional circumstances'. Juergen Stark: True, but the treaties also say that these circumstances must be "out of control" of the country in question. Is not the present case. As I just said, the problems in Greece are purely Greek, as was admitted by the Prime Minister George Papandreou. In recent years, the country has not kept public accounts under control, nor has it worked to improve competitiveness. The treaties provide for a "no bail out clause" and these rules must be respected. This is crucial to ensure the future of a monetary union between sovereign countries with separate national budgets. The markets are deluded if they think that at some point the other States will put their hand in their wallets to save Greece Well, a lot of points arise here. In the first place the ECB simply is not the competent authority to take decisions on whether or not to bail out a country. Decisions of this order would need to be taken by the EU Council (which essentially means the collectivity of individual States) and would involve financial intermediation in which the ECB may or may not participate. Secondly, Juergen Stark is an elected politician, and his view do NOT necessarily represent those of the present German government As Laurent Bilke, economist with Nomura International says: "ECB officials tend to consider themselves as the guardian of the temple of fiscal discipline, but Juergen Stark pushed maybe the argument a bit far this time. The ECB is just not in the business of bailing out countries. It is not

390 competent to dispose (or not) of EU states, European Commission or IMF funds. Juergen Stark also sounded more alarmist than his fellow ECB colleagues have recently and this may not be very opportune in the current context. That is hitting where it hurts. The ECB President, in contrast, stressed that he was confident that the Greek government would do what is required, a more positive message." But there is another detail which most of the press corps who jumped on the story seem to have missed, and that is that a bail out is not in question at the present time, and even if it was, EU institutions would find solutions to go round the problem, like a joint Eurobond issuance or some appropriate funding from the European Commission. Further, it is very important to note that Juergen Stark does not rule out common support in a country where the situation had gotten "out of control". This may, or may not, happen at some point with Greece, the only real reading you can put on Stark's statement is that we haven't gotten there yet. He could also be seen as giving a warning shot to the Greek authorities in the current situation - "sort the problems out yourselves". Certainly Greek Finance Minister George Papaconstantinou seems to have got that part of the message, since he was very quick to jump in and point out that his government doesn’t need outside help to cut its budget deficit. “Frankly we don’t need that clarification,” Papaconstantinou told Bloomberg Television. “We don’t expect to be bailed out by anybody as, I think, is perfectly clear we’re doing what needs to be done to bring the deficit down and control the public debt.” But doubts still remain, since while Papaconstantinou talks about correcting the budget deficit, everyone else is talking about deep structural reform and restoring competitiveness, and it isn't clear that the Greek government is single-handedly able to assume responsibility for this inside the country. As Jonathan Tepper of Variant Perception puts it: The problems Greece faces are not problems the ECB can solve. Greece's problems are problems relating to competitiveness, real effective exchange rates, and fiscal budgets. The Greeks must address these structural problems themselves. If they were to seek outside help, the IMF would be the logical organization charged with helping countries in fiscal binds that are making structural adjustments. The ECB simply doesn't have the power or ability to do that. I'm afraid we'll likely see more internal civil unrest, as the necessary adjustments for Greece will be painful. Mark Pittaway, Senior Lecturer in European Studies at the UK Open University goes even further, by adding a CEE dimension: "If the zone does lock weaker economies into 'competitive disinflation' vis-a- vis an export-oriented Germany, why is it in the interests of 'peripheral countries' to say in the Eurozone at all? Why is it in the interests of CEE countries to attempt to join in the first place, since if Martin Woolf is right, it would mean Hungary and other states abandoning their long-term goal of having living standards like those in western Europe?" "Given that political legitimacy in many European states is all about welfare, and 'European' legitimacy is about the alleged social superiority of a 'European model' over its Anglo-Saxon equivalents (whether this is actually true is irrelevant, the point is that many European believe it to be true), then the potential size of this crisis is quite big. And one thing is clear, that Brussels

391 and others will have to do some fairly serious re-thinking if they want to go forward." Basically, personally, I haven't that much to add at this stage to what I said yesterday, the big difficulty we have right now is making it clear who is authorised to do what, and then doing it. Basically, what seems to be going on here is a huge poker-style game of brinksmanship, with none of the various parties (the Greek government, the EU Commission, the IMF, and the Credit Ratings Agencies - to name but a few - really absolutely clear about what the others are up to, or what they really want. You could even add-in more “stakeholders” (in terms of parties who will have to assume ownership of any final agreement) if you want, the French and German governments, for example, the EU Finance Ministers, the Greek Socialist Party, the Greek Trade Unions, the list, in fact, is well nigh endless. This is really far from a desireable state of affairs for a team of people who collectively are going to have to try and solve one of the most complex problems to have emerged from the recent economic and financial crisis, and do it quickly, since there is a clock ticking away in the background. Evidently the Greek government should be having to negotiate with everyone else, but the others should have one common voice, and this is far from being the case, which is what leads to all the confusion, and is why Belka says the EU needs to put a mechanism in place to handle this kind of situation - a uniform mechanism which treats all EU members - whether inside or outside the Eurozone - fairly, and where the rules and procedures are clear to all. This mechanism, should, as I have suggested, include powers for the EU Commission to intervene over the heads of national parliaments (a need which is already evident in the Latvian case), and implement hard and unpopular solutions when they are in the interest of the entire community of Europeans. We cannot have one minority interest after another playing themselves off against the rest, it makes the Union harder to manage than a “hung” parliament. Actually the FT's Ralph Atkins turns this amibguity into a virtue: "Mr Stark’s comments fit with Europe’s policy of “constructive ambiguity” towards Athens - by which policymakers are deliberately being vague about what would actually happen if the worst came to pass. Pressure is thus being maintained on Greece to make good its pledges of fiscal discipline." I am not convinced, I think all this ambiguity is more disconcerting than it is constructive, it isn't like keeping markets guessing before a rate-setting meeting. I think what everyone needs is some assurance that EU authorities are aware of the depth of the problem, have solutions ready, and are hell bent on implementing them. That is the message the financial markets need to hear, and they need to know who is going to be leading this operation. Finally, I want to emphasise that my argument here shouldn't be read as saying that I don’t wish the EU was equipped to do the necessary and start to shoulder responsibility for Greece. My view is a more practical one: I simply think the EU is not yet sufficiently prepared to go in and tell Greece what to do, in part because Greece are one of the old EU15 and this makes everything more difficult. I simply think it is more practical to get the IMF go in and do the job. You don’t want “good boys” here, you need “nasty people”, with smoothly

392 polished teeth, and indirectly this could give a weak Greek government the strength it needs to sell the changes to a reluctant citizenry. It’s like taking a child to the dentist. Maybe they scream when the drill comes out, but ultimately they need the filling. But I also accept that the IMF has no magic bullet. I do however hope that the IMF is capable of learning from its recent experiences in the East. One of the key issues which clinches it for me is the collateral rating issue. Do the ECB say no Greek bonds after the next downgrade (this certainly will cause some chaos, since half Greek bonds are held out of Greece)? It would be chaos, but it would be manageable. Or should the ECB keep the lower level criteria - then what happens to Italy, since this rule was made for Italy, and never forget, Italy is also slippin-and-a-slidin steadily into the default danger zone? The thing is, my view is that the problem of not having the ECB take your bonds does become a serious one, since it will make it much more difficult to sell debt, interest rates rise, GDP falls, nominal GDP falls further, and debt to GDP keeps rising, as a result of which interest rates rise further, and eventually there is no alternative to default. On the other hand, if the ECB say don’t worry, we will take the bonds anyway, then there is little incentive to do anything, as we have seen over the last decade. In essence, were the IMF managing a programme in Greece, then the ECB could make an exception, and then say to Italy - “you want to be an exception, then go to the IMF first, or better, put your house in order before you are forced to do so". http://greekeconomy.blogspot.com/2010/01/stark-raving-mad.html

393

Joseph Stiglitz Stiglitz’s 5 Lessons from 2009 Thursday, 12/31/2009 - 12:01 pm by Joseph Stiglitz Roosevelt Institute Braintruster and Nobel laureate Joe Stiglitz identifies five lessons we can take away from the financial crisis. The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity — costs that were unnecessarily high given that we should already have learned them. The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith’s invisible hand often appeared invisible: it is not there. The bankers’ pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks. Under the threat of a collapse of the entire system, the safety net — intended to help unfortunate individuals meet the exigencies of life — was generously extended to commercial banks, then to investment banks, insurance firms, auto companies, even car-loan companies. Never has so much money been transferred from so many to so few. We are accustomed to thinking of government transferring money from the well off to the poor. Here it was the poor and average transferring money to the rich. Already heavily burdened taxpayers saw their money — intended to help banks lend so that the economy could be revived - go to pay outsized bonuses and dividends. Dividends are supposed to be a share of profits; here it was simply a share of government largesse. The justification was that bailing out the banks, however messily, would enable a resumption of lending. That has not happened. All that happened was that average taxpayers gave money to the very institutions that had been gouging them for years — through predatory lending, usurious credit-card interest rates, and non-transparent fees. The bailout exposed deep hypocrisy all around. Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world’s largest welfare program. Those who had argued for free market’s virtue of “transparency” ended up creating financial systems so opaque that banks could not make sense of their own balance sheets. And then the government, too, was induced to engage in decreasingly transparent forms of bailout to cover up its largesse to the banks. Those who had argued for “accountability” and “responsibility” now sought debt forgiveness for the financial sector. The second important lesson involves understanding why markets often do not work the way they are meant to. There are many reasons for market failures. In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off

394 with the profits; if they lost, the taxpayer would pay. Moreover, when information is imperfect, markets often do not work well — and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed costs on others, and failures in the financial system imposed costs on taxpayers and workers all over the world. The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place. Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit — raise taxes or cut expenditures — to “restore confidence.” But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence - most recently when the International Monetary Fund insisted on them in East Asia in the 1990’s. The fourth lesson is that there is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked. The fifth lesson is that not all innovation leads to a more efficient and productive economy — let alone a better society. Private incentives matter, and if they are not well aligned with social returns, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation. For example, while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them - both economic and social - are apparent and enormous. Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership — with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly. We will soon find out whether we have learned the lessons of this crisis any better than we should have learned the same lessons from previous crises. Regrettably, unless the United States and other advanced industrial countries make much greater progress on financial-sector reforms in 2010 we may find ourselves faced with another opportunity to learn them. *This piece originally appeared on the China Daily website. Roosevelt Institute Braintruster Joe Stiglitz is an Economics Nobel laureate and university professor at Columbia University. He has written many books, including Globalization and Its Discontents and The Roaring Nineties. His latest book, Freefall, will be published in January. http://www.newdeal20.org/?p=7221

395 www.telegraph.co.uk How Markets Fail: the Logic of Economic Calamities by John Cassidy: review

How Markets Fail by John Cassidy is an excellent analysis of the economic crisis, finds Jeff Randall By Jeff Randall Published: 6:00AM GMT 07 Dec 2009

How Markets Fail by John Cassidy Time can be a cruel judge. It was only just over two years ago that I interviewed Alan Greenspan before a gathering of business people at Chatham House. Although serious cracks had already begun to emerge in the global financial system, the former chairman of the Federal Reserve was remarkably phlegmatic about their likely outcome and his role in creating them. When I pressed him on the way in which, fuelled by a glut of cheap money, household borrowings had been allowed to proliferate, he argued that, although personal debts had gone up, so had the value of assets underpinning them. There was a problem with subprime mortgages, he said, but not with the overall structure of housing finance. In the ensuing 12 months, Greenspan’s stolidity was crushed by an avalanche of bad news, culminating in the collapse of Lehman Brothers and the subsequent state bail-out of banks in the United States, Britain and elsewhere.

396 Related Articles • Gordon Brown's settlement leaves us with no influence where it counts • Analysis: Ayatollah Khamenei ends hopes of a compromise • No amount of reshuffling will solve the mess Labour has made • This is no time for Tory jokes - we're galloping into a mega-crisis • Budget 2009: Now we are all up to our ears in it The extent to which his stewardship has come to represent the reverse alchemy of the go-go years is a central theme of John Cassidy’s ambitious book, How Markets Fail. Cassidy concludes: “When historians come to write about the ‘Greenspan Bubbles’, they will do so with good cause: more than any other individual, the former Fed chairman was responsible for letting the hogs run wild.” Cassidy is blessed with a rare combination of writing skills and intellectual hinterland, and has produced a fresh and engaging explanation of the calamity that wrecked financial markets and drove economies into recession. His book combines thorough research with scholarly insights and the classy prose that has become his hallmark in The New Yorker. How Markets Fail is, mercifully, not a geeky analysis of flaws in the technical structures of transactions. It’s about human shortcomings – the conceit and negligence of those who buy and sell in markets, and the woeful performance of politicians and regulators who failed to identify a juggernaut of a disaster, even though its headlights were on and the horn was blaring. As Cassidy makes clear, the credit crunch was not the creation of venal bankers alone. There is plenty of blame to be shared, not least by “home buyers [who] took out loans they knew they weren’t qualified for, fibbing about their ability to repay them”. Cassidy’s recommendation is that “the government should outlaw stated-income loans and enforce the existing fraud laws for mortgage applicants, which make it a crime to misrepresent your personal finances”. Lord Mandelson, are you reading this? As for economists, they, too, get Cassidy’s big stick. Obsessed with mathematical theories, they have become over-reliant on computer programmes, producing miles of spreadsheets, but with little understanding of our old friends, greed and fear, the twin terrors of market volatility. When crisis struck, the economics profession was caught largely unprepared. In May 2006, I wrote a column for The Daily Telegraph under the headline, “Ten reasons why it’s all going to go horribly wrong”. An economics professor accused me of hyping bad news to sell papers; an outraged reader complained that my job was not to make the value of his investments go down. As Cassidy observes: “When the price of an asset is going up by 20 or 30 per cent a year, nobody who owns it, or trades it, likes to be told their new-found wealth is illusory.” In that sentence, the author sums up how markets fail. Presented with what looks like money for nothing, the crowd goes mad. How Markets Fail: the Logic of Economic Calamities by John Cassidy , 400pp, Allen Lane, £25 http://www.telegraph.co.uk/culture/books/bookreviews/6719474/How-Markets-Fail-the- Logic-of-Economic-Calamities-by-John-Cassidy-review.html

397 vox Research-based policy analysis and commentary from leading economists Debating the global roots of the current crisis

Brad Setser 28 January 2009

While national policy considerations dominate debates on macroeconomic policies, this column argues that these debates need to take into account the global consequences of their policy choices. The sum of individual macroeconomic policy choices will determine whether large imbalances remain a defining feature of the global economy – and thus the risk of future trouble.

There is a broad consensus that regulatory weaknesses, distorted incentives and excessive leverage in the US (and European) financial sector contributed to the current, severe global financial crisis. The investment banks themselves presumably no longer think that doubling their leverage from 2004 to 2007 was a good idea. The Western financial sector made two big bets. The first bet was that US home prices wouldn’t fall on a nationwide basis, and the second one was that macroeconomic volatility would remain low even as macroeconomic imbalances built. Both bets were made on a stupendous scale, as large financial institutions sought to maintain profits even as the yield curve inverted. Taxpayers in the US and Europe – and anyone who relied on the international banking system for financing – are now paying a severe price for this failure of risk management. No comparable consensus exists on the role that the macroeconomic policies that contributed to large imbalances in the global economy played in the build-up of vulnerabilities that led to the current crisis. The losses US and European financial institutions incurred financing the American households triggered the current crisis, rather than the withdrawal of foreign financing for the US current account deficit. That has led many to argue that global imbalances – large external deficits in some countries, large surpluses in others – were not central to the current crisis. At the same time it is difficult to see how the US could have sustained large household deficits for as long as it did if the build-up of dollar reserves in the emerging world hadn’t supplied the US with so much financing. The expansion of the US current account deficit associated first with the rise in the US fiscal deficit and then with the rise in the household sector’s borrowing need came even as returns on US financial assets lagged returns elsewhere. Unlike the expansion of the deficit in the early 80s or the late 90s, the expansion wasn’t accompanied by a rise in (net) private demand for US financial assets. Yes, private capital inflows rose for a time, but so did private capital outflows.1 Net private demand for US assets actually fell from its dot-com era peak even as the US deficit rose. The resulting financing gap was made up by a surge in central bank demand for US debt, as the pace of global reserve growth soared (see Figure 1).

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This reflected policy choices by many countries that opted to continue to manage their currencies against the dollar even as the dollar fell and their own current account surpluses rose. Had the dollar fallen against Asian not just European currencies in 2003 and 2004, the US recovery might have been driven more by exports and less by housing. Without the surge in reserve growth, the expansion of the US fiscal deficit might have put upward pressure on interest rates, and thus inhibited a rise in home prices. Absent a further surge in reserve growth – counting China’s hidden reserves and the Saudis non-reserve foreign assets, global reserve growth peaked at over $1.5 trillion in mid-2008 – after the US started to slow in 2006, the US would have been forced to adjust more quickly. The bottom line is that private investors abroad did not want to finance the large external deficits created by excesses in the US’ private sector. Vulnerabilities could not have grown so large without assists from both the US government – which didn’t believe that the housing bubble posed much of a risk and showed no interest in reigning in the financial sector – and those governments who financed the US through the increase in their reserves. In one sense this debate no longer matters. The crisis has changed the world economy. The US trade deficit is poised to shrink substantially. The per barrel price of US oil imports averaged $100 in 2008. If oil averages $50 a barrel in 2009, that fall alone would knock around $250 billion (almost 2% of US GDP) off the current account deficit. This analysis works from a savings and investment point of view as well. The fall in oil prices will lead to a dramatic fall in savings in the oil exporting economies – and US consumers look likely to pocket the windfall rather than spend more on other goods. This small deficit also will be financed predominantly by private flows – or perhaps the reversal of private flows – for the first time in a long time. In the fourth quarter of 2008, the US government almost certainly lent more to the rest of the world – through the Fed’s swap lines – than it received from the world. Global reserve growth effectively stopped in the fourth quarter (see Figure 2). The pre- crisis world – one where expanding dollar reserves of key emerging market central banks provided much of the financing needed to sustain the US growing external deficit – ended

399 when Lehman failed.

In another sense, though, this debate matters more than ever. There are two plausible courses through the current crisis. In the first course, the expansion of the fiscal deficit in the US offsets the rise in household savings. Once the impact of the fall in oil prices works its way through the balance of payments, the stimulus leads the US current account deficit to rise. Large surplus economies – notably those in Asia – would see their external surpluses rise. If capital outflows from Asia subside, this would put pressure on their currencies to rise. However, the surplus countries would resist this pressure, opting instead to build up their dollar reserves – in part because the world’s pool of shared reserves is far too small to offer effective insurance against the kind of shocks that today’s global economy generates. Korea would resist won appreciation. Japan would resist yen appreciation. And China, which “re-pegged” the renminbi to the dollar (at 6.85 RMB to the dollar) in the summer of 2008, would maintain this peg as its current account surplus grows. The global path out of the current crisis wouldn’t be that different from the path out of the 2000-01 recession. The entire world would end up relying on the rise in the US fiscal deficit for growth – leaving many of the underlying weaknesses in the global economy intact. In the second course, the US fiscal stimulus helps to offset the contraction associated with a fall in household spending and private investment, but it doesn’t drive the global recovery. The US current account deficit continues to improve. The non-oil trade balance continues to improve, as exports bounce back from the current slump offsetting the rise in imports associated with the US own recovery. Such an outcome requires that the large surplus

400 countries take strong steps to stimulate their own economies. Key countries wouldn’t resist renewed pressure on their currencies to appreciate with massive intervention in the currency market. The large surplus countries would in effect pull themselves out on their current tailspin – not rely on the stimulus of the deficit countries. The resulting global economy would have fewer large surpluses and deficits and, in all probability, give rise to fewer problems in the future. The scope of the global response to the current crisis has yet to be defined. National policy debates dominate, as major countries struggle individually to find any way to right their respective economies. Yet the sum of their policy choices will determine whether large imbalances remain a defining feature of the global economy – and thus the risk of future trouble. Footnote 1 Foreign demand for US corporate bonds in particular was exceptionally strong from 2004 to mid-2007. It is now relatively clear, though, that this surge in demand reflected the expansion of the shadow financial system. This system operated offshore, but otherwise supplied little net financing. Various vehicles – some operated by US banks but domiciled offshore and some owned by European banks – borrowed dollars from US investors and used the proceeds to buy longer-term US assets. The best evidence that these flows didn’t drive the financing the deficit is simple. They collapsed after August 2007 without impinging on the US ability to sustain a $700 billion plus external deficit. Editors' note: This column is a Lead Commentary on Vox's Global Crisis Debate page; see further discussion on Vox’s “Global Crisis Debate” page. http://www.voxeu.org/index.php?q=node/2915

401 vox Research-based policy analysis and commentary from leading economists Uncertainty and the credit crisis

Michelle Alexopoulos , Jon Cohen, 23 December 2008 This column claims that uncertainty shocks affect on economic activity with remarkable swiftness, strength, and durability. Capturing expectations of average citizens in Main Street through the use of keywords in main newspapers, it indicates a modest decline of uncertainty since October 2008, suggesting that the worst may be behind us. It’s official. As everyone now knows, the US economy is in recession and has been since December 2007. If the contraction continues for another four months, which at this point seems inevitable, this downturn will match the two longest peak to trough slides in the Post- WWII period, the first from November 1973 to March 1975, the second from July 1981 to November 1982. Whether the current recession achieves the dubious distinction of matching unemployment rates of the earlier ones (9% in May 1975 and 10.2% in November 1982) remains to be seen, but the dramatic rise in unemployment announced on 5 December 2008 is worrisome. As for the stock market, the decline of the Dow Jones Industrial Average from its peak in July 2007 to its low point on 20 November 2008 actually exceeds by a few percentage points the 40% drop between October 1972 and October 1974. And, of course, the catastrophic fall in house prices continues unabated. In short, the economy is in serious trouble and it is likely to get worse before it gets better. Nick Bloom, in a recent Vox column, uses links he has identified in his academic research between uncertainty shocks as measured by changes in expected volatility of the S&P 100 – the so-called investor fear index – and GDP growth to predict the length and depth of the current downturn. He predicts, on the basis of a dramatic jump in expected volatility caused by the credit crunch, a GDP decline of 3 percentage points in 2009 with recovery starting at the very end of year, assuming favourable government policies and a drop in volatility. Fear and uncertainty with all its associated collateral damage – postponed investment, limited structural change, and delayed consumption – indeed would seem to stalk the land. From Wall Street to Main Street Bloom’s argument depends heavily on the reliability of the expected volatility index as an indicator of uncertainty. Although his research results are compelling, it is still reasonable to wonder if his results are sensitive to his uncertainty measure. Or, to put it another way, are the forces that shape expectations among the Wall Street crowd the same as those that affect the folks on Main Street? In short, would the use of a more broad-based indicator of uncertainty alter the observed link between uncertainty shocks, output, and productivity? This is the question we are addressing in our current research. In brief, here’s what our preliminary results tell us. Uncertain times, uncertain measures We base our index of economic uncertainty on the number of articles that appear in the New York Times which use the terms uncertain and/or uncertainty and economic and/or economy. The beauty of the measure is that it is consistent over a very long time span (the New York Times searchable data base extends back into the nineteenth century), it is transparent and unfiltered (as they say, all the news that’s fit to print), and it approximates what the average Main Street resident knew about current events. In Figure 1, we present our monthly

402 uncertainty index (adjusted for the days of each month) with NBER business cycle reference dates in the background, to show it adheres closely to business cycle dates. Moreover, as Figure 2 illustrates, the timing of the uncertainty shocks identified by Bloom’s uncertainty index (based on S&P volatility) and ours are quite similar.

Our statistical results suggest that uncertainty shocks act on economic activity with remarkable swiftness (the shock has an almost immediate negative impact on growth and

403 productivity), strength (they explain over 25% of the variance of output and productivity within two years), and durability (the effects linger for a number of quarters). Moreover, the current uncertainty shock - that effectively dates from the Bear Stearns bailout - is the largest of the twentieth century, greater even than that associated with the October 1929 stock market crash. The dreaded D-word Of course, the obvious question is what does all of this mean for Main Street and its inhabitants? Many are now prepared to put the current crisis in the same league as the dreaded Great Depression. They point out that in both periods there were significant bank failures, sharp declines in equity and housing prices, and a severe credit crunch. However, the current policy responses have been vastly different, in large part because Federal Reserve Chairman Bernanke, an expert on the Great Depression, has used his deep knowledge of that event to avoid the errors of the past. Unlike in the 1930s, the monetary authorities have moved swiftly to increase liquidity, push down interest rates, and bolster the stability of the financial system. As it happens, our regression results suggest that these policy responses make a big difference. That is, when we introduce interest rates (the policy variable) into our regressions, we find that the economic contraction is likely to be closer to the 1% predicted by the OECD than to the 3% predicted by Bloom.1 Could the worst be over soon? In spite of the very real threats to the US (and world) economy, a little perspective is in order. First, we have survived sharp jumps in uncertainty in the past – July 1971, January 1991, September 2001 (see Figures 1) – and will do so again. In this respect, it is also worth noting that the pattern displayed by our uncertainty index for the current crisis resembles more the sharp, short-lived ups and downs of the 1970s and early 2000s than it does the long drawn out rise and sluggish fall of the Depression years. This would seem to suggest that the current crisis, despite its gravity, does not mark the end of the world as we know it. Second, in keeping with the old adage that it is often darkest just before the dawn, the numbers in Table 1 indicate that the light of a new day may just be visible on the horizon. Our uncertainty index, in this case based on data from six major US newspapers, shows a sharp run-up in uncertainty through October 2008 and a modest decline since. Two months do not make a trend but the drop is definitely encouraging. Although the negative economic consequences of the severe shock are likely to dog the economy for some time, we would guess that the worst is, indeed, behind us. Or, to employ Bloom’s horror film metaphor, the credit crisis has us (with good reason) perched on the edge of our seats, white-knuckled and wide-eyed. But, it is well to remember that the heroine while a little worse for wear, usually lives to welcome the dawn of a new day.

Average daily number of articles with keywords Average week-day Newspaper ("uncertainty” or “uncertain” & “economic” or circulation “economy”) 2007 2008a Selected months 30 Sept. 2008 October November Decembera New York Times 1.09 2.33 4.13 3.87 3.11 1,000,665 LA Times 0.65 1.07 2.00 1.27 1.44 739,147 USA Today 0.23 0.47 0.68 0.60 0.75 2,293,310 Wall Street Journal 1.98 3.38 5.29 3.43 2.56 2,011,999 Washington Post 0.76 1.58 3.48 1.90 2.22 622,714

404 Chicago Tribune 0.56 1.07 1.32 1.60 1.67 516,032 Circulation-weighted 0.95 1.75 2.88 2.10 1.85 na average a. Values reported for 2008 are through 9 December 2008. References Alexopoulos, M. and Cohen, J. 2008. Uncertain Times, Uncertain Measures. Manuscript. University of Toronto, 2008. Bloom, N. 2007. The impact of uncertainty shocks. National Bureau of Economic Research, Working Paper W13385. Issued in September 2007. Bloom, N. 2008. The credit crunch may cause another great depression. VoxEU, 8 October 2008. Bloom, N. 2009 will be the Nightmare on Main Street. VoxEU, 18 November 2008. OECD. 2008. Economic Projections for the US, Japan & Euro area. Press Conference 11 November 2008.

1. Our predictions are made from standard Vector Autogression (VAR) forecasts. While our bivariate analysis suggests a decline of approximately 3%, the addition of interest rates into the system cut the forecasted decrease to 1%. http://www.voxeu.org/index.php?q=node/2732

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Research-based policy analysis and commentary from leading economists 2009 will be the nightmare on Main Street

Nicholas Bloom 18 November 2008 Every economist is predicting a macabre 2009, but no one knows for sure how bad things will get or who will survive. This column, by comparing the current crisis to uncertainty shocks of the last 40 years, predicts GDP growth could be reduced by as much as 4.5%. But, if politicians protect free markets, growth should be back in 2010. Every horror movie fan knows the scene before the attack. Creepy electronic music plays. The victim is shown from behind. The camera scans around the bushes, in the dark, to the sound of heavy breathing. You know something evil is going to happen, but not when, where or how. Right now the world economy feels a lot like that. Every economist is predicting a macabre 2009 (Philadelphia Federal Reserve 2008). But nobody quite knows where the blows will fall, how bad things will get or who will survive. In this piece I want to provide one way of predicting the impact of the credit crunch on US and UK growth. This is the methodology behind my claim that output will contract by up to 3% in 2009 which I made in a VoxEU piece on October 8th. Bad omens for growth In my academic research I have been looking at the impact of large uncertainty shocks on the US economy over the last 40 years.1 These events – like the Cuban Missile Crisis, the Assassination of JFK, the Gulf War and 9/11 – typically double stock-market volatility and reduce stock-market levels by 10%. Their average impact is to reduce GDP growth by 1.5% in the following 6 months, with a recovery within 12 months. In comparison, the credit crunch is a monster of a shock. It has generated an incredible six- fold increase in stock-market volatility and a 30% fall in the stock market level – three times the average impact of the previous uncertainty shocks. Based on these numbers my central prediction is that GDP growth will be reduced by 4.5% in 2009 because of the credit crunch. Since the consensus forecast2 before the credit crunch for US and UK growth was +1.5%, this reduction in growth leads me to predict a -3% contraction in 2009. Forecasting 2010 is even less accurate, but my central prediction is a return to about +1.5% growth. The S&P volatility massacre Figure 1 plots the predicted impact of the 30% fall in stock-market levels as a deviation against the prior forecast. The central prediction - denoted by the solid black line - is that this 30% fall in stock-market levels will reduce growth against prior forecasts by almost 4% by late 2009. But growth will recover to trend by mid 2010. The dashed red lines on either side of this prediction are the one standard-deviation confidence bands indicating the degree of forecast reliability.

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Figure 2 plots the predicted impact of the six-fold increase in stock-market volatility since September 2008. The central prediction - denoted by the solid black line - shows a fall of almost 3% against trend by mid-2009, with a rebound by 2010. The reason for this rapid rebound is that uncertainty leads firms to pause investment and hiring. But once uncertainty falls back to normal levels – which I forecast will happen by the mid 2009 (based on the average duration of all previous large uncertainty shocks) – firms will start to invest and hire again to make up for lost time. Hence, the uncertainty impact of the credit crunch will cause a rapid slow-down in the first-half of 2009 and a recovery by late 2009.

407 Finally, Figure 3 shows the combined effect of the drop in stock-market levels and the rise in uncertainty. As can be seen the combined impact of this is to reduce output by 4.5% in mid 2009, which given the prior estimate of +1.5% growth in mid-2009, leads to my new forecast of -3% growth for 2009. By late 2009 this contraction will have eased off, with normal rates of growth returning by 2010.

Hence, I predict growth in 2009 will contract rapidly, falling by an annualised rate of up to 3%. But uncertainty should fall by mid-2009, releasing a backlog of investment and employment that should propel a rapid recovery in 2010, with growth returning to 1% or 2%. The final lunge But as every horror fan knows the monster never dies. Despite being skewered with every sharp object in sight it always manages one final lunge. In the case of the credit-crunch the risk of a final lunge comes from a damaging political response. Politicians around the world are pushing to roll-back free markets, impose greater regulation, restrict trade and provide multi-sector bail-outs. This move away from free-markets towards regulation, protectionism and subsidies risks turning a temporary downturn into protracted recession. The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by US policymakers to block imports in a desperate attempt to protect domestic jobs. But it helped worsen the recession by freezing world trade. At the same time policymakers were encouraging firms to collude and workers to unionise to raise prices and wages. The current backlash against capitalism risks leading to this repeat. This happened after the Great Depression and it happened after the major recession of 1974/75. Although 2009 will be a year of shrinking rapidly, if politicians protect free markets 2010 should see a return to growth.

408 1 “The impact of uncertainty shocks”, The predictions are made from VAR forecasts, which are often used by economists to forecast macroeconomic data. Details of the VAR forecasts is contained in the paper, with the underlying data in http://www.stanford.edu/~nbloom/VAR.zip 2 For the US see the Philadelphia Federal Reserve Board Survey of Professional Forecasters consensus prediction of 1.5% in August 2008. For the UK see CBI’s 1.6% forecast in 2 June 2008 http://www.voxeu.org/index.php?q=node/2570

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Guided by an invisible hand Joseph Stiglitz Published 16 October 2008 Make no mistake: we are witnessing the biggest crisis since the Great Depression. In some ways it is worse than the Great Depression, because the latter did not involve these very complicated instruments - the derivatives that Warren Buffett has referred to as financial weapons of mass destruction; and we did not have anything close to the magnitude of today's cross-border finance. The events of these weeks will be to market fundamentalism what the fall of the Berlin Wall was to communism. Last month in the United States almost 160,000 jobs were shed - making more than three-quarters of a million this year. My guess is that things will get considerably worse. I have been predicting this for some time, and so far, unfortunately, I have been right. There are several reasons for my pessimism. The extreme credit crunch is a result of the banks having lost a lot of capital. And there is still uncertainty about the value of the toxic mortgages and other complex products on their balance sheets. The US economy has been fuelled by a consumption binge. With average savings at zero, many people borrowed to live beyond their means. When you cut off that credit you reduce consumption. This, in turn, will dampen the US economy, which helps keep the global economy growing. The American consumer has not only sustained the US economy, he has sustained the global economy. The richest country in the world has been living beyond its means and telling the rest of the world it should be thankful because America fuelled global economic growth. There are further reasons for my pessimism about short-term economic prospects, in America and Europe. In the second quarter of this year, growth in the US would have been negative were it not for the growth in exports. But with the slowdown in Europe and problems in Asia it is difficult to see how we can maintain net export growth. The strengthening of the dollar - due not to greater confidence in the US but to reduced confidence in Europe - will make matters worse. The fall of energy prices will help a little, but not enough. Treasury Secretary Hank Paulson has now come up with a new bailout scheme. The original plan - buying up the thousands of "troubled assets" (read: bad loans and complex products based on them that Wall Street created) - was badly designed and rife with problems. How would they have been priced? Call in the same Wall Street experts who got us into the mess and mispriced risk before? It is a heads I win, tails you lose situation. The worry is that the taxpayer will be left holding the short end of the stick. The British approach, which Paulson seems to be following, is far better, involving capital injections into banks, with preferred shares to protect against losses and warrants to share in some of the upside potential. This is the approach that I - along with most US economists and people with good street sense, like George Soros - had been saying America should adopt. Ironically, though Paulson wouldn't listen to us, he seems to have listened to Gordon Brown. Many of the problems our economy faces today are the result of the use of misguided models. Unfortunately, too many took the overly simplistic models of courses in the principles of

410 economics (which typically assume perfect information) and assumed they could use them as a basis for economic policy. Many central banks use the notion of inflation targeting - that they should focus exclusively on inflation, raising interest rates when inflation increases. But I would argue that central banks have a broader responsibility; they are supposed to ensure the stability of a country's economy. While monetary authorities in the US and elsewhere focused on price stability, they allowed the financial system to undertake risks that put the whole economy in jeopardy. This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss. No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government. Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner http://www.newstatesman.com/business/2008/10/economy-world-crisis-financial

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