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Federal Reserve Keeps Power On Reserve For Another Day

June 23, 2011

NEW YORK — Another major policymaker has decided to take a more detached stance toward the economic slowdown. Federal Reserve Chairman Ben Bernanke’s Wednesday media briefing resembled an economics lecture more than a press conference, as he dispassionately explained graphs that had been passed out to journalists, indicating slower economic growth than expected. “I’m a little more sympathetic to central bankers than I was 10 years ago,” he said in response to a question from a Japanese journalist about Bernanke’s 2000 and 2002 analyses of Japan’s lost decade, while he still was an economics professor at Princeton University. This seemed to betray a view of himself not as a central banker, but instead as an economics professor who left his secure perch at Princeton in order to serve his country. His stated sympathy for central bankers implies that he still is not a central banker at heart. Continuing his professorial analysis of the economy, Bernanke said that although the Federal Reserve expects the unemployment rate to continue to decline, the rate of decline remains “frustratingly slow.” The apparent message: Like other observers, Bernanke is frustrated by the fact that unemployment still is 9.1 percent. But he does not believe the Federal Reserve has much power left to bring unemployment down without losing its long-term credibility and power. And if the Fed were to lose its credibility as the central institution controlling the American economy’s inflation rate, it could lose its power over economic conditions altogether. “Keeping inflation low and keeping inflation expectations low and stable actually gives the Fed more leeway to respond to more short-term shocks,” Bernanke explained. The inflation rate is the one economic indicator that the Fed has nearly absolute control over, Bernanke said repeatedly. “The longer-run inflation outlook is determined almost entirely by monetary policy,” he emphasized. The implication: If the Fed loses its power over inflation and prices get out of control, or even if investors lose confidence in its commitment to keeping prices down, then the central bank would no longer be able to help rescue the American economy in an increasingly unstable world. With Greece at risk of potentially defaulting on its debt and ratings agencies contemplating a downgrade of U.S. debt as Congress spars over raising the debt ceiling — both of which are possible short-term shocks that could endanger the American economic recovery — it seems that history could vindicate Bernanke for safeguarding the Fed’s power and credibility. But now with Bernanke taking an increasingly detached view of the economic recovery, it seems that the millions of Americans who are unemployed and underemployed could be losing their last major champions on the mountain where policymakers decree economic policy for the masses. Bernanke tried to argue Wednesday that by keeping interest rates near zero and flooding the economy with $600 billion in a bond-buying program, the Federal Reserve has done all that it could do to meet its dual mandate of curbing inflation and promoting maximum employment. He seemed to try to place responsibility for the economic recovery outside the confines of the Federal Reserve. “I don’t think that sharp immediate cuts in the deficit would create more jobs,” Bernanke said in a poker-faced response to a journalist’s question. “I think what people will understand — should understand — is that our budgetary problems are very long-run in nature.” “The most efficient and effective way to address our fiscal problems is to take a longer-run perspective and to focus our cuts not on the near term but by taking a long-run perspective and by making it a credible plan,” he added. Bernanke spoke largely in terms of the economic principles that hold true in classrooms. But these facts have not played a major role in the current debate in Congress, where Republicans are threatening to not raise the debt ceiling unless Democrats agree to immediate, off-setting spending cuts. If Congress does not raise the U.S. borrowing limit, it could cause an economic crisis even worse than the 2008 crisis, warned the Treasury Department . Most economists think that Bernanke has been doing about as good as he can under the constrained circumstances. “I think at this point ‘wait and see’ really is the best thing that the Fed can do,” said Nigel Gault, chief U.S. economist at IHS Global Insight. The central problem, Gault said, is that the only economic policy that really could help the economy — a stimulus enacted by Congress and the White House — has become discredited as a force that would get in the way of an economic recovery, when in fact it could be the best way to revitalize the economy. “Normally you expect the center wings of both parties to be able to come to common ground, but that’s not possible because the center isn’t running things at the moment,” Gault said. “It’s the wings of the parties that are running things.” Gary Burtless, an economist at the Brookings Institution, agreed that a fiscal stimulus targeted at rebuilding infrastructure and encouraging private-sector employment would be the most effective economic policy. Barring that, however, he said that the Federal Reserve should consider raising its inflation target up to 4 percent to boost job growth. Nonetheless, Burtless said he believes it is unlikely for the central bank to change its stance, since the Fed seems to have decided to focus on its mandate to curb inflation at the expense of trying to bring down the unemployment rate. “I believe that the Federal Reserve thinks it has done as much as it can do, while maintaining its credibility as an inflation watchman to spur this particular recovery,” Burtless said. “They may be wrong, but I don’t think they’re wrong by a huge amount.” “I think really the burden of doing something about the current economic situation is for fiscal policy,” he added. “It is not for monetary policy.”

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Corporate Tax Holiday Could Create Infrastructure Bank — But Devil Is In The Details

June 22, 2011

Rahm Emanuel has a proposition. A grand one, for big business, big unions, and Congress: let a corporate income tax holiday pay for a national infrastructure bank. Let multinationals bring their money home — the money that’s parked overseas, dodging Uncle Sam’s corporate income taxes — and the federal government can use some of it to pay for the infrastructure bank, the newly minted mayor of Chicago says. Unions, big corporations, and potentially members of both parties: a virtual rainbow coalition may be assembling in favor of the infrastructure bank. But corporate watchdogs charge there’s no difference between a tax holiday with a bank and a tax holiday without one. Under Emanuel’s plan, which he is developing with Rep. Rosa DeLauro (D-Conn.), the bank would build the bridges, roads and mass transit that America has been neglecting for decades. As these structures rust and fall apart, oftentimes nothing new is being built in their place. Yet money to improve infrastructure money will not be easy to come by in the midst of a protracted deficit debate; by including the tax holiday, Emanuel’s proposition aims to win over Republicans leery of adding to the deficit. The idea for the bank is not new — former Service Employees International Union President Andy Stern mooted it in an op-ed piece months ago — but it seems to be gaining renewed attention. Reed Hundt and Thomas Mann wrote about it in the Washington Post last week, Emanuel treated it as his own in a speech to the U.S. Conference of Mayors on Saturday, and now Sen. Chuck Schumer (D-N.Y.) is feeling out the Senate . For proponents, the hope is that the proposition could unite Democrats in the Senate and Republicans in the House. Emanuel said he thinks his grand compromise “brings the parties together.” The specific terms of the tax holiday, however, would be critical. Some Democrats don’t want to give multinationals a free pass, and Republicans don’t want to be too hard on corporate America. Without some sort of deal, it’s possible that money could continue to linger offshore — parked in anticipation of a better deal from a different Congress. That has been the situation since 2005, when another tax holiday was declared, premised on the idea that it would create jobs; it didn’t . Critics of any sort of tax holiday say that the infrastructure bank is just the latest twist on corporate blackmail. “Every one of these amnesties encourage greater holding offshore and Congress is being irresponsible even to say they are thinking about it,” said Calvin Johnson, a professor at the University of Texas School of Law who specializes in tax law. Former SEIU chief Andy Stern disagreed. “The problem is the money hasn’t come back, there’s no reason to believe it will ever come back,” said Stern, now a senior fellow at Georgetown University Public Policy Institute. “Details are appropriate and important — you know, what’s the tax rate? — but we’re now in the right framework,” he argued. In his speech to the mayors, Emanuel said he would like to see the tax rate lowered to 10 or 15 percent, down from its current 35 percent, for the tax holiday. The money the government raises from those taxes would then be directed only to the infrastructure bank, ensuring, in his view, that it would actually be used to create jobs. Such a cut on the corporate income tax rate, however, might not sit well with small businesses , who can’t use creative accounting to hide their profits overseas like the multinational corporations. And a cut to 10% might not be steep enough to win over Republicans in the House, who have been talking about taxing repatriated income at a rate in the low single digits. In the Senate, Schumer has reportedly suggested a 5% rate. Rep. DeLauro told HuffPost that she’s working with Emanuel to find a balance, and she is hopeful that Republicans can be convinced to sign on to their plan. DeLauro said she has been working on plans for an infrastructure bank for 14 years, and found the recent discussion of the idea “very encouraging.” “The concept of an infrastructure bank has wide support — from the U.S. Chamber, from labor unions, from a whole bunch of people in between,” she said. Robert McIntyre, director of Citizens for Tax Justice, isn’t one of those people. He said there was “no substantive difference” between a straight tax holiday and one that was combined with an infrastructure bank. “It’s just somebody’s wacky idea that the problem the world faces today is a lack of capital. Our problem is there’s not enough consumer demand. The government should be out there shoving money out the door and stimulating the economy.” “This bank is going to be just another bank — they could have given the money to SunTrust, you know?” he said. DeLauro said capitalizing the bank via a tax holiday was not her first choice, but she thought that it would be a good approach in the GOP-controlled House. “If we are going to have another repatriation holiday, the federal government should use the incoming revenue to capitalize a national infrastructure bank, and we do know that such an entity creates jobs, long-term economic growth,” DeLauro said. Tying the repatriation to a larger reform of corporate income taxes is also critical in her mind. “Any repatriation effort has got to be a bridge to broader corporate tax reform. We have to close tax loopholes,” she said. Her infrastructure bank plan would leverage money from corporations and the federal government to create projects that include public-private partnerships. Because of the federal backing, loans for the projects could be issued at low rates. Such arrangements are common overseas; some have pointed to the European Investment Bank as a model for what could be created here. The United States has relatively fewer infrastructure projects that are operated as public-private partnerships, and any ventures that smacked of privatization might prove controversial . A privately owned toll road created with lending from the infrastructure bank, for instance, might charge a high rate to pay off its government loan. Criticism might also arise if the arrangement’s big winners are the same multinationals benefiting from the tax holiday, as opposed to small businesses.

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Despite New Health Law, Americans To Keep Job-Based Coverage

June 21, 2011

Even though the number of Americans with health insurance through employers has declined, most will continue to get coverage through their jobs after the new healthcare law takes full effect, studies released on Tuesday said. About 61 percent of non-elderly Americans got their healthcare coverage through employers in 2009, down from 69 percent in 2000, according to a study sponsored by the non-partisan Robert Wood Johnson Foundation. Low and moderate-income families employed by small firms were the most likely to be affected by a loss of employer-sponsored coverage. Julie Sonier, a senior researcher at the University of Minnesota who helped write the report, said the erosion in employer-sponsored insurance in the decade before the healthcare law was enacted underscored the need for action. “When people don’t have access to employer coverage, they might get public coverage, they might be uninsured, there might be a higher uncompensated care burden at their local hospital. The costs are in the system somewhere,” she said in a telephone interview. A second study by the centrist Urban Institute said it expects the healthcare overhaul signed into law last year by President Barack Obama to help small businesses provide medical coverage to employees. “Our results show significant health care cost savings (under the law) to firms with fewer than 50 workers, as well as a small increase in the number of people covered by their employer-sponsored plans,” the Urban Institute study said. The law includes some tax incentives for small employers to provide coverage and penalties for large employers with employees who receive subsidized medical coverage on state-based exchanges that will go into operation in 2014. “The evidence suggests the Affordable Care Act may have a stabilizing influence on small firm coverage,” the study said. The studies counter a recent report by Chicago consulting firm McKinsey that said about 30 percent of employers will “definitely” or “probably” stop offering health coverage once the state insurance exchanges begin operation, which are to provide a place for small businesses and individuals to shop for health insurance coverage. That report sparked a fresh round of criticism of Obama’s healthcare law by Republicans who are pushing to repeal it. Democrats demanded an explanation of the methodology, since other reports, including the Congressional Budget Office, said the law would have a small impact on employer coverage. On Monday, McKinsey clarified that its report was a survey of employer attitudes and “was not intended to be a predictive economic analysis” of the impact of the new healthcare law. The two studies sponsored by the Robert Wood Johnson Foundation that were released on Tuesday said most of the erosion in employer sponsored healthcare since 2000 was by small businesses. Four states, Mississippi, Indiana, Michigan and Minnesota saw a loss in employer-sponsored coverage that was twice as large a the national average, according to the studies. Copyright 2011 Thomson Reuters. Click for Restrictions .

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WATCH: Mayor Fasting In Hopes Of Solving City’s Financial Crisis

June 21, 2011

NEW YORK (Edith Honan) – Pennsylvania’s debt-ridden capital of Harrisburg has tried every form of fiscal belt-tightening, from layoffs to furloughs to filing for bankruptcy. Now, it is turning to God. Mayor Linda Thompson said on Friday she will join religious leaders in three days of fasting and prayer to encourage “a cooperative spirit among government leaders, the business community and citizens.” “I am open about my faith and will be participating in the voluntary prayer and fast,” Thompson said in a statement. The city is now weighing a financial rescue plan presented by the state. The fast and prayers, which will be facilitated by about a dozen Christian, Jewish, and Muslim religious leaders, will begin at midnight on June 21 and end on June 24. On Monday, a team of state-appointed advisors recommended the city sell a deeply indebted incinerator at the root of its fiscal problems, renegotiate its labor agreements, cut jobs, sell other assets and assume $26 million in new borrowing. The city council has until July 23 to adopt the plan. (Editing by Greg McCune) Copyright 2011 Thomson Reuters. Click for Restrictions . Watch video from WHTM ABC27 here:

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Sheldon Filger: Greek Debt Crisis Worsens: Prime Minister George Papandreou Admits Another €110 Billion Needed To Prevent Default

June 21, 2011

I was not alone in being skeptical as the first European/IMF bailout package was cobbled together last year when the Greek sovereign debt crisis first exploded. At that time, the European politicians assured their constituents that the 110 billion euro bailout for Greece would absolutely stabilize the situation for Athens, and prevent a sovereign debt contagion metastasizing throughout the rest of Europe, especially to the so-called PIIGS on the southern periphery of Europe (Italy, Spain and Portugal as well as Greece) and Ireland. Now, after Portugal and Ireland have joined Greece in begging for a bailout from European taxpayers and the IMF, Greece is back with its cup in hand. After a year of crippling austerity measures that have thrown the Greek economy into recession, Prime Minister Papandreou has told the Greek parliament that even more severe stringent cutbacks and tax increases are required . The reason; last year’s bailout was insufficient to enable Greece to continue to pay creditors for her massive (and until the crisis surfaced, largely hidden) public debt. The news from Papandreou is dire; another massive injection of European and IMF loans are needed, equaling the already staggering previous bailout package of 110 billion euros (approximately $150 billion in U.S. currency), or else Athens will default on its sovereign debt. It must be pointed out that the second bailout package, as with the first, will necessitate other European nations themselves going further into debt to provide Greece with the bailout, including countries such as Spain and Italy, which are considered only slightly less vulnerable to a sovereign debt implosion than Greece, Ireland and Portugal. Anyone who though that the global economic and financial crisis that began in 2008 ended due to the “brilliant” expansion of public debt engineered by the policymakers is now getting their wake up call. As I predicted in my book, Global Economic Forecast 2010-2015: Recession Into Depression , a global sovereign debt crisis will precipitate a worsening of the global economic crisis. Furthermore, solving a debt crisis with more debt, tied to fiscal policies that retard economic growth, is not a solution but rather an exhibition of economic and financial insanity. With policymaking of this “quality,” it bewilders the human intellect that anyone still thinks an economic recovery is just around the corner. There is in fact something just ahead for the global economy, but it won’t be pretty.

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Greece Faces Power Outages Due To Austerity Strike

June 20, 2011

ATHENS, Greece — Greece faced power outages on Monday as employees at the main power utility began 48-hour rolling strikes to protest the company’s privatization, part of austerity plans needed to avoid a national debt default. The sell-off of state assets in the power company is a major step in a euro50 billion ($71 billion) privatization drive that must be completed by 2015. It is part of highly unpopular austerity plans, including more tax hikes and spending cuts, that must be passed by Parliament by the end of the month if Greece is to get the next euro12 billion installment of its euro110 billion bailout next month. Without the funds, Greece will be unable to pay its debts as of the middle of July, triggering a default that would rock financial markets in Europe and abroad. The power company, known by its acronym DEH, said nine small and large thermoelectric units were already offline as of Monday morning due to the strike, and appealed to consumers to limit their use of electricity, particularly during the midday heat, when air conditioning use is at its peak. It said it was preparing hour-long power cuts in several areas if that became necessary. Greece has seen near-daily protests against the belt-tightening that has slashed salaries and pensions in an attempt to stem a ballooning national debt. “We are on strike because, believe it or not, I feel that they – the government and its measures – have taken my smile away, have robbed me of my life as well as my children’s future,” said electrician Giorgos Maleskos. “My only income comes from this job. After 33 years of work, we have got to the point of wondering if we will be able to survive.” The start of the strike came as Greece’s new finance minister, Evangelos Venizelos, was meeting his colleagues from the eurozone in Luxembourg for a second day. Talks overnight did not produce a final agreement on the next installment of rescue loans or on a broader, second bailout expected in cooperation with the International Monetary Fund. The country’s embattled prime minister, George Papandreou, was also heading to Brussels for meetings with EU President Herman Van Rompuy and European Commission President Jose Manuel Barroso later Monday. On Tuesday, Papandreou faces a vital confidence vote in the new government he announced on Friday, when he reshuffled his cabinet amid a major political crisis. Talks between Papandreou and the head of the conservative opposition party, Antonis Samaras, on forming a coalition government had collapsed two days earlier while an anti-austerity rally and demonstration degenerated into riots on the streets of Athens. Facing a mountain of debt coupled with a massive budget deficit, Greece was granted the euro110 billion package of rescue loans in May 2010 to prevent it from defaulting on its debts. In return, it has been passing strict budget cuts and tax hikes in an effort to reform its economy. But the cuts have led to a recession, and the country is now in negotiations for a second bailout – which Papandreou said Sunday would be roughly the same size as the first. European officials fear a default by Greece could set off a chain reaction that would shake Europe’s banking system and economy, and drag down other financially troubled eurozone countries such as Portugal, Ireland and Spain. Both Portugal and Ireland have also taken bailouts since Greece did. While European officials concede another bailout is needed, they have not agreed on the conditions.

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Al Norman: Rahm Emanuel’s 40 Days in the Desert

June 20, 2011

CHICAGO — Like some modern-day Moses, Chicago’s new Mayor Rahm Emanuel has been wandering in the “food desert” of southside Chicago, looking for giant chain stores to feed his people. But just as Moses never reached Canaan, Mayor Emanuel may never emerge from the food desert if he keeps having visions of Wal-Mart as the promised land. On June 15th, Hizzoner held a “Food Desert Summit” at a community center in the Windy City. Invited to the Summit were representatives from Wal-Mart and other grocery chains. According to a Chicago Sun Times reporter who was at the command performance, the Mayor “didn’t pound on the table, or even let loose a cuss word. He showed up with a detailed analysis of potential sites that included the type of information the stores require when making decisions about locations.” This Chicago Moses even invoked the name of his divine inspiration, Barack Obama. “The White House knows I am doing this conference today,” Emanuel reportedly said . “We are going to report on our progress and lay out a comprehensive plan for the next four years.” In early March, two months before he was sworn into office, Rahm Emanuel put the large chain stores on notice: he wanted low-income neighborhoods in his city to have easy access to fresh fruits and vegetables within a one mile walk. “You can’t have a major city with 600,000 out of a population of 2.8 million people not have access to fresh fruits and vegetables,” the Mayor-Elect told a crowd at the annual International Home + Housewares Show . “It’s bad and it’s wrong.” The Mayor said companies like Wal-Mart could be part of the solution, which would result in new jobs, fresh foods, and healthier outcomes for his constituents. This line of argument makes Emanuel a direct disciple of his predecessor, former Mayor Richard M. Daley, who embraced Wal-Mart expansion in his city. One week after Emanuel’s speech at the Housewares breakfast, outgoing Mayor Daley made a joint appearance with Wal-Mart officials to announce that the retailer would build six new stores in Chicago over the next two years. Daley, to the chagrin of organized labor in Chicago, had nothing but good to say about Wal-Mart: “I applaud their leadership in creating jobs and providing retail and grocery services in areas of the city that need it most.” Wal-Mart returned the favor, lavishing praise on the departing Mayor. “Mayor Daley has been a champion of economic development in the city and his support of Wal-Mart through the years has allowed us the opportunity to do what we do best: open stores that create jobs and offer a broad assortment of products at every day low prices,” said a Senior Vice President for the Arkansas-based corporation. Wal-Mart claimed that its half dozen stores would “create more than 1,000 new retail jobs” in the city. But is Wal-Mart the promised land at the end of the food desert — or just an economic mirage? The economic evidence suggests that Wal-Mart’s claim of “1,000 jobs” is nothing but sand. In 2003, a study by Retail Forward predicted that “for every Wal-Mart supercenter that opens in the next five years, two supermarkets will close their doors. As a result, the supermarket industry is projected to lose 2,000 more stores over the next five years.” The ‘new jobs’ promised by Mayors Daley and Emanuel are really old jobs in new aprons. Last year, a study from Loyola University and the University of Illinois at Chicago concluded that the one existing Wal-Mart store in Chicago had not produced any new jobs in the local economy. The loss of jobs in the trade areas near Wal-Mart just about balanced out any ‘new’ jobs attributable to the giant retailer. “These estimates support the contention that urban Wal-Mart stores absorb retail sales from other city stores without significantly expanding the market,” the researchers found. According to food desert studies in Chicago, the city has made some progress in bringing affordable, nutritious food to underserved neighborhoods. A study from the Mari Gallagher Research and Consulting Group found that the number of people living in food deserts in Chicago in 2010 had fallen by nearly 60,000 compared to a year earlier. But at the time, a total of nearly 600,000 Chicagoans were still in these retail deserts. But grocery store analyst David J. Livingston, of DJL Research, based in Waukesha, Wisconsin, tells me there “really is no such thing as food deserts. There are stores, just no chain stores. Politicians don’t like to include ethnic-owned operations. The chains closed up because the people stopped shopping their stores. They were replaced by ethnic stores and the McDonalds dollar menu.” Livingston says we don’t see supermarkets in the inner city because “historically they have performed below average in sales per square foot. Most low income inner city areas are littered with the skeletal remains of former supermarkets.” He notes that declining sales are due to a combination of factors: smaller trade areas (often no further than walking distance); declines in population; an inability to draw in customers from outside the trade area; low per capita expenditures; real and perceived high crime rates; and difficulty recruiting qualified employees and managers. Livingston says that “supermarkets don’t like to close stores or get a bad reputation for closing stores. The best way to avoid this is not to open a store where there is a higher probability of closing.” He adds: “No supermarket wants to endure accusations about racial discrimination. One of the best ways to avoid this is to avoid minority areas.” There are operational challenges as well, Livingston explains. “Even if a store is profitable it often will require district managers to spend a disproportional amount of time at an inner city store relative to other stores in their district. Ethnic areas require special merchandising skills that most supermarket operators do not have.” Prices must be raised, Livingston says, “to make up for items shoplifted, higher security expenses, insurance liability, and higher wages.” From the grocery industry’s point of view, Livingston says, there are political problems as well in food deserts: “Planning departments want too much input on how the store is constructed, local non-profit groups demand input on wage and hiring practices, there are often costly environmental and historical preservation issues which delay construction. Bureaucrats will often dictate wage and hiring practices of the general contractor.” On this last point, Mayor Daley was a major disappointment to organized labor when he vetoed in September of 2006, a city ordinance that would have required big box retailers like Wal-Mart to pay their workers a “living wage.” Forty years ago, the black community might have looked inward for its own entrepreneurs,and insisted on local ownership. But now political leaders turn to Wal-Mart Express stores. If Mayor Rahm Emanuel believes that national retailers will bring decent jobs and economic growth to the southside of Chicago, he might as well keep roaming the desert — because he will never enter Canaan through the aisles of a Wal-Mart. Al Norman is the founder of Sprawl-Busters . His is the author of Slam-Dunking Wal-Mart, and the case against Wal-Mart. He has helped local communities fight big box sprawl since 1993.

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Bevis Longstreth: Greek Debt, And Coming To Terms With Reality

June 20, 2011

The crisis over Greece’s sovereign debt deepens daily as the reality gap grows between the politically driven views of EU leadership and the market-place views reflected in such things as interest yields on 2-year Greek notes and premiums payable on CDS covering Greek debt, both of which have soared in recent weeks to astronomical heights. Market professionals the world around know Greece suffers from a condition of bankruptcy rather than a crisis of liquidity, and therefore cannot survive without very significant debt relief and restructuring combined with a complete overhaul of civil society, particularly the deeply conflicted and corrupt ways in which its Government collects and expends tax proceeds and regulates economic affairs. Despite heroic efforts by the ECB and IMF, it remains highly unlikely that Greece can achieve the necessary reforms without the Greek people becoming convinced that those reforms will work and, therefore, be worth the pain that individuals and families would have to endure to achieve them. There is no reason, now, to suppose that Greek’s own leaders are capable of either inspiring the necessary confidence in their people or actually achieving the necessary reforms. Therefore, to undertake this project with any prospect for success, the EU should offer a receivership to manage all matters affected by the public interest in Greece until a turnaround is achieved. The receivership would consist of a committee of highly respected Europeans whose professional qualifications and experience make them demonstrably well suited to the task. Obviously, such a move would run large political risks. However, the market-place is broadcasting through financial instruments the levels of risk it sees in the status quo and those levels are so frightening and unsustainable as to warrant taking on the political risks. Short of action along these lines, which proved successful in the handling of New York City’s financial crisis of the early 1980s, the EU should invite Greece out of the union, where it can try through the use of a deflated currency and other reforms to achieve solvency. Doing so in orderly fashion would contribute importantly to the avoidance of a very disorderly default down the road and the danger of contagion.

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Diane Francis: Americans and Greeks Are Tax Deadbeats

June 19, 2011

Nobody likes taxes, but the historical opposition to them in two nations could be ruinous for everyone. In Greece, the Ottomans made taxes and subjugation synonymous. Turks required Greeks to let Ottoman tax collectors slap their faces and grab their hair if they did not bow. They imposed the “tribute of children” requiring one in five male children to serve in the Sultan’s army. After liberation in 1821, Greece was governed by a string of illegitimate monarchs and dictatorships until it formed a Republic which is unwilling or unable to collect taxes. The result is rioting and rigamortis. Fresh private-sector pockets must be found to loot. The Europeans are on the hook for the eurozone’s poorly devised architecture which allowed Greece to cook its books and get too deeply in debt. But the United States is similar. The same anachronistic, taxation-as-subjugation mentality exists among many and may lead to default on its debts in August. After all, America is the country that threw the tea in the harbor and launched a bloody war of liberation over taxation. Seemingly heroic, the dirty little historical secret is that after the War of Independence the new country, and its 13 state governments, were unable to get anyone to pay taxes so they began swiping land from Indians and selling it to new arrivals. Then when they weren’t collecting payment for much of those lands, they had to steal some more, go to war or buy it. Until the last century, the US was anarchical, violent and unjust. Communities had to band together to provide police, road, education and other services of any kind. Anachronism So it’s symbolic that the anti-tax Tea Party Movement in the US, with its Revolutionary garb, three-cornered hats and muskets, aims to move the country forward by going back in time. Their electoral success and influence is wreaking havoc in Congress and impeding the needed compromise to control the deficit through spending cuts and tax hikes. This is not posturing but anarchy. Republican Tim Pawlenty states that public spending should total 18% of GDP, which would barely cover the Pentagon, Homeland Security, prisons and debt repayments, and all entitlements should be unconstitutional. On August 2 at 4 PM, the federal government must sign off on a deficit reduction plan in order to exceed debt ceilings or default. “There are 3 possibilities: a serious down payment solution in return for deferring issues; a last minute compromise to postpone the deadline or no deal which is unchartered territory,” said Jonathan Spector at the Conference of Montreal last week. That’s when the end of the economic world as we know it happens unless there is a deal. It is, without hyperbole, being dubbed the “Lehman” moment or the day the financial system worldwide seized up. “Nobody knows what would happen, but why in the world would you want to try to find out?” said David Walker, former US comptroller general now heading the fiscal watchdog group Comeback America Initiative told a newspaper. “At least we experimented with nuclear bombs before we dropped one.” By the way, the Americans are loopy about taxation: If Americans paid the same taxes on incomes, gasoline, alcohol and cigarettes as Canadians pay they would have zero deficit problem. American and Greek spoiled brats Essentially, the two are frighteningly similar. The Greeks, with their tear gas and Molotov cocktails, refuse to give up entitlements or pay for them through taxation and are simply a violent version of the havoc that the US Congress is wreaking. But the US anti-taxers do “violence” against people by allowing those making $250,000 a year or more to pay less tax, through Bush loopholes, than does a single parent mother in Baltimore or a soldier in Afghanistan. Without a doubt, the president and Congress will pull something out of the bag (this deficit deadline has been lifted 49 times in 20 years) and Germany’s Angela Merkel will make rich banks and bondholders take a haircut. But the damage is already done. The United States sputters in large measure because its politicians have lousy credit ratings which impedes job creation and activity and helps explain the lack of investment, credit or the inability to finance the building of infrastructure through private-public partnerships. American governments are lousy bets because they don’t or cannot collect enough taxes to pay their bills. The ability to reduce spending and tax its citizenry — providing they are informed and benefit from the measures — represents a competitive disadvantage for a nation. It is the mark of a country that cannot keep its fiscal house in order, does not care about repaying its debts and may be heading for collapse. Originally published at the Financial Post

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Robert Lenzner: The Contagion of Write-Offs in Europe

June 19, 2011

There must be a contagion of write-offs, sooner or later. Take Greece for example; its 2 year notes are yielding over 29%, but the institutions holding that debt are still valuing the paper at 100 cents on the dollar. And that’s just Greece, a small nation on the eastern border of Europe. What about the debt of Ireland, Portugal and Spain, not to mention Italy, whose impeccable AA credit rating was just lowered a notch? We are talking about a contagion that Tyler Durden of Zero Hedge suggests is part of narrative in the new financial crisis drama entitled ” The Countdown to Sovereign Debt Write-offs Has Started .” Who, pray tell, has the exposure to the debt issued by the most troubled European nations? On December 14, 2010, Streettalk (that’s me), using a Bank of International Settlements report, discovered the humungous $1.5 trillion Greece, Ireland, Portugal and Spain owed to all European banks. Those 4 nations also owed $353 billion to US banks. Total owed: $1.853 trillion. Of this $1.853 trillion, some $668 billion was somehow related to derivative exposures (exactly how was not made clear enough for me in the BIS report.) Luckily for me, a Columbia University economist, Charles Calomiris, got in touch with some incredibly worrisome breakdown of the relationship of these loans to the GDPs of the nations extending the credit. French banks had lent 9% of France’s GDP to Spain; Dutch banks fully 16.4% of Holland’s GDP to Spain; and Portugal’s banks: 13% of Portugal’s GDP to Spain. German banks had lent 12% of the German GDP to Ireland and Spain British banking giants Barclays and HSBC had lent 9.4% of the UK GDP to Ireland and another 5.7% to Spain. The Greek contagion has already made insolvent the Greek banks, while 3 French banks may have their credit ratings reduced. As the securities of Portugal and Ireland decline in price and rise in apparent yield, it raises significantly the issue of marking to market the holders of Portuguese and Irish loans, which are also being carried at par. Contage another step to the sovereign debt of Spain and Italy, where yields are rising, and the premium cost for insuring against default gets higher every day. What happens if there is further weakness in Spanish real estate or trouble at the Italian banks, suggests Edward Harrison of the Credit Writedowns blog. You can see how the chain could continue from nation to nation, from bank system to bank system, from central bank to central bank. It makes me think of the rolling financial crisis that began with the meltdown of subprime mortgage backed bonds, moved to Alternative A mortgages, then to prime, and onto LBO loans, and money market funds — culminating in the end of Bear Stearns, Lehman Brothers and causing shotgun marriages of Wachovia, Merrill Lynch and the massive bailout of AIG. What then happens to the fragile US banks that either own $350 billion European sovereign debt, or purchased credit default swaps to protect themselves. How will all this transatlantic web of relationships be resolved, unwound, stabilized? I’m exhausted just writing

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In Greece, American Economic Recovery Is At Stake

June 18, 2011

Once again, the global economy seems vulnerable to a crisis brewing in a single country, as the turmoil in Greece and the risk of a government default raise the prospect of losses rippling out across Europe and to the United States. In recent months, Americans have been buffeted by a series of unseen challenges that have repeatedly dashed hopes for a sustained economic recovery and the resumption of hiring, from the tsunami in Japan to rising oil prices. Now, with unemployment high and anxieties growing, a new economic threat has taken shape, raising fears of potentially enormous financial losses. Though those fears eased somewhat on Friday as European bankers and the International Monetary Fund inched closer to an agreement that would avert a Greek default , grim calculations occupied financial capitals around the globe, as investors estimated the consequences of an effective bankruptcy. They considered a scenario much like the one that followed the collapse of major financial institutions in the fall of 2008, with the crisis potentially spreading throughout Europe, causing banks and governments to fail and freezing lending in major economies. Most suggested that such an event remained unlikely, but the risks were nonetheless significant — and maddeningly difficult to quantify, given the complexities of an interconnected and global financial system. For large American banks, immediate exposure to Greece appeared to pose only modest dangers. Some $41.5 billion in large American bank assets were vulnerable in the event of a default, according to a recent accounting by the Bank of International Settlements , with another $32.7 billion on the line in the form of insurance . That amounts to $74 billion, much less than the nearly $1 trillion in mortgage-backed securities that were at the center of the financial crisis that nearly brought down the American economy in 2008. But even as economists expressed confidence that American banks would remain solvent in the face of a Greek default, they said financial institutions could seize with fear and slow their lending, removing fuel from the American economy just as concerns mount that the recovery is slowing. “If Greece is just unable to pay its debts, we are going to see finance suddenly freeze up,” said Gus Faucher, an economist at Moody’s Analytics, a research firm. “We are going to see huge drops in stock prices. Firms are going to get very cautious, very anxious again. They’re going to lay people off. It’s going to be very similar to what we saw in late 2008, early 2009, on top of what we already had. So it would be really disastrous for the American economy.” A Greek default threatens the prospect of European bank failures, which would crimp international trade by depriving exporters of a source of credit to finance their transactions, said Brookings Institution economist Gary Burtless. If Europeans lose spending power, that would limit their demand for imported goods, further slowing trade. “If major European banks fail, there would almost definitely be a repetition of what we saw in 2008 and early 2009, when there was an immense drop in international trade,” Burtless said. “You need to have credit to pay for the cost of this, and those arrangements quickly got disrupted, and trade fell right away, and it was very, very quick.” Scott MacDonald, head of research at Aladdin Capital LLC in Stamford, Conn., compared credit — or lending and borrowing — to oil enabling the engine of the American economy to run smoothly. “Once you’ve pulled the oil out of the engine, eventually you end up with friction,” he said, “and eventually, the engine comes to a halt.” A default big enough to trigger large European banking failures could significantly exacerbate unemployment in the United States, lifting it perhaps as high as 14 percent, up from its current level of 9.1 percent, and almost certainly causing a double-dip recession, said Jay Bryson, an economist at Wells Fargo. The dynamic is now so fraught that the mere fear of a Greek default risks becoming a self-fulfilling prophecy, Bryson added, as investors demand higher interest rates on loans to Greece, tightening the pressure. And as pressure builds in Greece, that feeds anxiety in other parts of the global economy. As the risks mount, investors raise the cost of borrowing money, effectively increasing the debt burdens of troubled governments. This dynamic now menaces Portugal, Spain, Italy, and Ireland — all heavily indebted and grappling with concerns that they, too, will not be able to repay their loans. If Greece defaults, lifting interest rates for all, that increases the likelihood that these countries also could default. The mere increase in the perceived risk of such an outcome feeds on itself and amplifies the actual risk. As concerns about these countries grow, alarm would almost certainly spread to still other European countries holding their debts. Investments by French banks have left 30 percent of the French national output exposed to Greece, Portugal, Ireland, Spain and Italy, Bryson said. As the interconnected nature of the risks emerge, raising the possibility of bank failures, investors could pull their funds out of any institutions deemed to be on the edge, unleashing another self-fulfilling prophecy, as other banks fail in turn. Stock prices would plunge as people sell their shares in a panicked effort to gain cash to cover their losses. European companies that rely on borrowing from banks would start to run out of the cash they need to run daily operations. European businesses would abandon plans to grow and start to lay off workers, who would then have less money to spend on goods and services, perpetuating the cycle of layoffs and lower spending. Such a disastrous scenario appeared unlikely late Friday, yet still possible. MacDonald put the odds at between 10 and 20 percent. A catastrophic recession in Europe would likely scare American banks and make them reluctant to lend, grinding the economic recovery to a halt. Among economists, these dire concerns underscored what they portrayed as the necessity for some form of agreement that would put off a day of reckoning in Greece, lest the consequences spread and another global contagion take hold. “It’s in everyone’s interest to at least kick the can down the road,” said Faucher, the Moody’s Analytics economist. “Whether that’s going to happen or not is still up in the air because it’s going to require concessions from everybody.”

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Chinese Foreign Minister: European Recovery Of ‘Crucial Importance For China’

June 17, 2011

BEIJING — China registered new concern Friday over the fate of its top trading partner, the embattled eurozone, saying the ability of stricken countries to overcome their financial woes is of “crucial importance.” China’s support in terms of buying European debt and promoting imports is beneficial to both sides, Vice Foreign Minister Fu Ying told reporters at a briefing ahead of Premier Wen Jiabao’s visit next week to Hungary, Britain and Germany. But she expressed some anxiety over the fate of the eurozone. Greece is at risk of defaulting on its debt even after a massive bailout, and European leaders fear the country’s problems could hurt other struggling economies that use the euro, including bailed-out Ireland and Portugal. “Whether some European countries can overcome their difficulties and recover from the crisis is of crucial importance for China,” Fu said. “Therefore since the advent of the financial crisis, China has on one hand been trying to stimulate our economy and overcome the impact of the crisis, while on the other hand provided support to European countries in their efforts to overcome the financial crisis,” she said. China has supported highly indebted European countries, offering last year to buy Greece’s debt and reportedly pledging to buy $4 billion in Portuguese government debt. While China has been quiet on how much money it will actually invest, the pledges from Beijing have temporarily taken some pressure off European debt markets. No agenda has been announced for Wen’s visit, although the European debt crisis is expected to be a major topic of discussion. Top on the list could be Greece, where rioters have clashed with police in Athens over proposed austerity measures and coalition talks between Greece’s government and opposition parties have collapsed, renewing fears of a government debt default.

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Greece Wracked By Political Turmoil In Debt Crisis

June 16, 2011

ATHENS, Greece — Greece was wracked by political turmoil Thursday as the embattled prime minister faced down a party revolt over new austerity measures – a bitter dispute that forced the EU to hint at new loans so Greece can fend off a summer default. Prime Minister George Papandreou has struggled to garner support for a new package of euro28 billion ($39.5 billion) in spending cuts and tax hikes demanded by the European Union and the International Monetary Fund, which last year granted his debt-ridden nation euro110 billion ($155 billion) in bailout loans. But the measures have sparked riots on the streets of Athens and open criticism from his own Socialist lawmakers. Papandreou’s desperate efforts to form a coalition government with the opposition conservatives collapsed Wednesday, and the political crisis deepened Thursday when two of Papandreou’s lawmakers resigned. A planned Cabinet reshuffle was delayed till Friday, after Papandreou chaired a seven-hour emergency meeting with Socialist lawmakers to try and ease the crisis. The party feud heightened worldwide concern that a Greek financial collapse could trigger panic elsewhere in the 17-nation eurozone – a fear that saw borrowing costs in vulnerable EU countries surge and stock markets come under pressure. “We will prevail and we will hold on. We have as a country in the past successfully faced major crises. As hard at this struggle is, we cannot run away from our fight,” Papandreou told party lawmakers. “We will fight and we will win, for Greece, its people and the future of the new generations.” Fearing further chaos, the EU’s top financial official, Olli Rehn, indicated in Brussels that Greece will likely get its next financial lifeline in July, despite the EU finance ministers’ failure to agree on a new bailout package for the country. Rich EU countries like Germany and the Netherlands want private creditors to share a big part of the burden of helping Greece, while the European Central Bank fears those demands could trigger a partial default that would spark panic on financial markets and pummel banks in Greece and across Europe. Rehn, the EU’s monetary affairs commissioner, said eurozone ministers would likely agree Sunday to give Greece the next euro12 billion ($17 billion) loan from last year’s euro110 billion package. However, the aid will only be paid if Papandreou’s government, which faces a vote of confidence within days, can get new budget cuts and privatizations through parliament before the end of the month. The loan would keep Greece afloat until September and give finance ministers and the ECB until their next get-together in July to resolve their differences, Rehn said. His comments raised hopes that Greece would avoid a quick default, alleviating the selling pressure on the euro, which had earlier fallen below $1.41 for the first time in three weeks. But fears of a second Greek bailout drove the yield on Greece’s two-year bonds above 30 percent for the first time ever Thursday and kept the 10-year equivalent near all-time highs around 18 percent. Even if a second bailout is granted to Greece, many analysts think the road will still end in default, and some even wonder if Greece will stay in the 17-nation eurozone. “While an additional bailout package may stave off near-term disaster, a major debt restructuring seems inevitable at some point and Greece’s future in the currency union is looking ever more doubtful,” said Jonathan Loynes, chief international economist at Capital Economics. Some economists fear that a Greek default would trigger financial chaos like the Sept. 2008 collapse of the U.S. investment bank Lehman Brothers. “The risk of a ‘Lehman moment’ for the eurozone is increasing,” says Neil MacKinnon, analyst at VTB Capital. Nout Wellink, a member of the ECB’s rate-setting council, said the situation means that European governments need to be ready to double the size of their bailout fund to euro1.5 billion – a prospect sure to irritate German Chancellor Angela Merkel, who faces unrest at home over Germany’s role as the leading funder of bailouts. In Athens, Papandreou said he would keep seeking a consensus with the opposition over the financial reforms that creditors have demanded. “I will serve and continue to serve the effort for broader consensus and we hope that this effort ultimately is successful,” he said. He admitted his government had displayed “mistakes and weaknesses,” but promised a new, stronger Cabinet in a reshuffle. His strong words failed to reassure, and prominent Socialist lawmaker Vasso Papandreou was stinging in her criticism. “The measures we are implementing are only cuts in salaries and pensions,” she said during the emergency meeting. “We voted for other measures but we have not implemented them.” The lawmaker – who is not related to the prime minister – said Greece was in a worse condition now than when it first passed austerity measures last year. “We have managed to mobilize nearly all of Greece’s society against us,” she noted. ____ Derek Gatopoulos and Elena Becatoros in Athens, Gabriele Steinhauser in Brussels, Pan Pylas in London and David McHugh in Frankfurt contributed.

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Raging Greeks Stage Biggest Anti-Austerity Protest

June 5, 2011

By George Georgiopoulos ATHENS, June 5 (Reuters) – Tens of thousands Greeks rallied in central Athens on Sunday to denounce politicians, bankers and tax dodgers, as the government prepared to inflict another bout of austerity demanded by its international lenders. “Thieves – hustlers – bankers,” read one banner as more than 50,000 people packed the main Syntagma square outside parliament to vent their frustration over rising joblessness as austerity bites, blaming the crisis on political corruption. Turnout was the biggest so far in a series of 12 nightly rallies on the square inspired by Spain’s protest movement. Amidst a sea of splayed hands waved at the parliament building — an offensive gesture for Greeks — one demonstrator raised a placard reading “Bravo Yemen”, whose president underwent surgery in Saudi Arabia for injuries suffered in a rocket attack on his palace. Police put the crowd at 50,000 by mid-evening, but numbers continued to grow as dusk fell over the Greek capital. Another banner drew comparisons with rallies early this year in central Cairo which ousted Egyptian President Hosni Mubarak. “From Tahrir Square to Syntagma Square, we support you!” it said. The cabinet of Prime Minister George Papandreou is due to discuss on Monday an economic plan, which a senior government official said would impose 6.4 billion euros of budget measures this year alone, on top of austerity already imposed under Greece’s original international bailout agreed last year. The medium-term plan includes tax increases while the international lenders are pushing for a crackdown on widespread tax evasion. The black economy is thought to be around 20-30 percent of gross domestic product. TAX CHEATS “Instead of going after tax cheats, they are raising taxes and cutting working people’s pay,” said Yannis Mylonakos, 34, who lost his job at an advertising agency. As Greece battles to avoid defaulting on its debt, which totals about 340 billion euros, unemployment has soared to almost 16 percent. The extra austerity is the price for a new bailout agreed with the European Union and International Monetary Fund to replace the old one, which has proved overoptimistic in assuming Greece could resume borrowing commercially early next year. The Syntagma Square rallies, organised through Facebook, so far have been peaceful, more festive and less politically motivated than traditional labour union protest rallies. Protesters from all over Greece on the square rejected the austerity policies to cut the budget deficit that lead to layoffs, wage and pension cuts and a heavier tax burden. “You got the disease, we got the solution — revolution,” read one banner. “We are not commodities in the hands of bankers and politicians.” Protesters also gathered in Greece’s second city of Thessaloniki. Organisers say they are determined to continue indefinitely as the number of people joining the Facebook group “angry at Syntagma” is growing. Some are camping on the spot, with about 30 tents on the square. “We don’t owe, we don’t sell, we don’t pay,” read a banner hung on the square’s lamp posts. Students, pensioners, young couples with their children and immigrants, were among those gathered on the square over the past week. Copyright 2011 Thomson Reuters. Click for Restrictions .

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European Troika Finishes Review of Greece

June 3, 2011

European Troika Finishes Review of Greece

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U.S. Dollar Index Under Pressure, Euro Benefits From Talks Of New Bailout For Greece

June 3, 2011

U.S. Dollar Index Under Pressure, Euro Benefits From Talks Of New Bailout For Greece

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Georges Ugeux: Is Madame Lagarde the Ideal IMF Leader?

June 2, 2011

The extraordinary push and unusual consensus of the European Union on the candidacy of Madame Lagarde deserves some attention and maybe scrutiny. Being a lawyer and politician who ran a U.S. law firm in Chicago, Madame Lagarde is undoubtedly a very serious candidate. France considers the IMF top job as “theirs,” and has provided a succession of quite remarkable leaders of the IMF. Whether that means the next one should be French was “beyond reasonable doubt” for the Elysée Palace where Président Sarkozy rules. The fact that he or she should be European is part of a “deal” between the United States and Europe, whereby, at Bretton Woods in 1944, the World Bank goes to an American and the IMF to a European. That deal reflects the fact that, at Bretton Woods, the U.S. and Europe were alone to split the jobs. More than ever, this position is no longer defendable. The IMF, under the leadership of Dominique Strauss-Kahn, embarked in a co-financing process, together with the Eurozone, of the bail-out of Greece ($150 billion), Ireland ($130 billion) and Portugal ($120 billion). The Eurozone was indeed unable or unwilling to put on the table the full amount and is now in the unenviable position to have to call on the International Monetary Fund. The new Director General will have to represent the interests of all the members of the Fund in these negotiations. Is a European the best candidate to have the necessary objectivity and dispassionate view of the situation? One could also argue that Madame Lagarde is a crucial part of the negotiations that are taking place which could lead to a further $60 billion loan to Greece, which has not fulfilled its commitments. She supported the European Central Bank view that the Greek debt should be restructured, thereby protecting the ECB’s substantial portfolio of Greek bonds, as well as the European bank’s exposure to Greece. The IMF has always insisted on loans associated with strict application of its conditionality to pay the additional tranches. In this case, it departed from its sound and historical practice. Last but not least, with 43% of the capital of the IMF, the emerging countries are asking for more say and would be perfectly legitimate in requesting that seat for one of them. Agustin Carstens, the Mexican Finance Minister, is campaigning in their name. It seems that the United States, which stayed silent on the matter, will not support Madame Lagarde unless she gets some support from the key emerging countries. They are right. She was in Brazil starting a campaign. The G8 talked about it but, as he often does, Président Sarkozy pretended that it was not the place for such discussions. His Minister of Foreign Affairs, Alain Juppé, pretended that the candidacy of Madame Lagarde was agreed upon, contradicting the statement by Russian President Medvedev that there was a “near-accord” on the fact that an emerging market candidate would be considered. Prime Minister Manmohan Singh of India indicated to German Chancellor Merkel in Delhi that it was not the nationality that should define the right candidate. The reality is that the European attitude has literally infuriated the other countries who saw in it a sign of colonialism and arrogance. In France, Madame Lagarde is under investigation by the Court Supérieure de Justice for allegedly abusing her power in bypassing the procedure to grant $300 million for a former French Minister and businessman Bernard Tapie. The Court was established by President Mitterrand to investigate irregularities committed by Cabinet Members, in the exercise of their function. Those elements should at least require a serious look, for a candidacy that cannot be treated as ideal, without further consideration. This being said, as Patrick Stewart of the Council on Foreign Relations wrote today: “The apparent lesson of this episode is that while emerging powers are quite content to criticize existing global institutional arrangements, they do not yet constitute an effective bloc that can unite behind an agreed program of action.”

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Robert Zevin: The Consequences of the Slow-Moving European Debt Crisis

June 2, 2011

In Europe, the policies of retrenchment that have been imposed upon Greece and Ireland have begun to produce their inevitable consequences: contracting economies, rising unemployment and social turmoil, falling tax revenues, rising deficits and rapidly rising ratios of debt to national income, the exact opposite of the purported aims of precisely these same policies. Equally predictably, this combination of events has led the Greek government to seek, behind the thinnest veil of “secrecy,” a restructuring of its debt obligations, presumably to delay the substantial maturities of the next few years into the more distant future. Academic economists, newspaper columnists and these commentaries have pointed out that a prompt restructuring would be the least painful alternative. However, banks throughout Europe, which own substantial amounts of sovereign debt from Greece and other troubled countries, along with the European Central Bank (ECB), which now also owns a very large amount of these bonds, have argued strongly against contemplating any kind of restructuring or default, at least for another year or two. Worse yet, the European Central Bank has threatened to turn a restructuring into a cataclysm by immediately refusing to recognize any Greek debt, or the debt of any other country that restructures, as collateral for loans to banks from the ECB. The effect of such a collision would be to make nearly every bank in Greece immediately insolvent, to make many other major banks in Europe drastically undercapitalized, and, as is often the case in head-on collisions, to destroy more than half of the capital of the ECB itself, along with the Greek banks. The governments of Germany, France and the UK continue to be paralyzed when it comes to any effective or coordinated responses to these problems. The banks are fighting their usual good fight to be bailed out. They want the ECB and economically strongest European governments to support the markets for weak sovereign debts, to extend new loans and guarantees to weak peripheral country governments and to protect the bonds the banks already own against any consequences of a default, should one occur. Over the past fourteen months, Europeans have been more skeptical than their American counterparts of the various wishful solutions and glittering grand agreements that have been paraded before them. Perhaps in the next few weeks, certainly in the next few years, we will see some combination of debt defaults or restructurings in Greece and probably Ireland and Portugal; a widespread banking crisis in much of Europe; and a gradual dissolution of the Euro zone, one country at a time. Some aspects of a unified Europe will survive, but the curtain will have fallen on the world’s longest-running and most inspiring vision of a world beyond industrial expansion and beyond war.

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European Session Starts with Optimism on News of Nearing Aid for Greece

May 31, 2011

European Session Starts with Optimism on News of Nearing Aid for Greece

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U.S. stocks extend gains by midday, as commodities rally on Greece aid speculation…

May 31, 2011

U.S. stocks extend gains by midday, as commodities rally on Greece aid speculation…

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No More Bailouts For Ireland, Though

May 30, 2011

DUBLIN (Carmel Crimmins) – Ireland’s government moved on Monday to quash speculation it would be forced to seek a second EU-IMF bailout and said it would make a tentative return to international debt markets in the final quarter of next year. Dublin is trying to distance itself from the woes of euro zone struggler Greece, which is trying to avoid a potentially devastating default and seems certain to require a second bailout to plug a looming funding gap. Finance Minister Michael Noonan categorically ruled out Dublin requiring a top-up to its 85 billion-euro rescue package, seeking to limit the fallout from a cabinet colleague’s warning over the weekend that another bailout may be needed. “There is no question of a bailout package having to be brought in next year,” Noonan told state broadcaster RTE. “We have sufficient money from the IMF and European institutions to carry the country forward in all eventualities and the program runs until the end of 2013.” “A second bailout doesn’t arise because of that.” Noonan said Dublin would test market sentiment for Irish debt in the final quarter of 2012 after a two-year hiatus. “We won’t be fully back in the markets but we hope that the NTMA (debt management agency) will be able to raise some private funds in the market in the last quarter of next year.” Many economists have come round to the view that some sort of further aid and restructuring of its debt is likely to be inevitable to allow Greece to deal with a debt burden of more than 150 percent of its annual national output. Ireland’s debt is expected to peak lower than that but still top 120 percent of GDP in 2013 and Irish bond yields have sky-rocketed as Greece’s debt crisis deepened, reflecting market concerns it may face a similar fate. The Irish central bank said investors needed further reassurance that its EU-IMF program was on track. “Market spreads on Irish government paper have moved in the wrong direction since the program started… markets probably need more time to see persistent adherence of the program,” Governor Patrick Honohan told national broadcaster RTE. “Continued adherence to the path is the way to get back to the markets,” he said. ‘A BIG ASK’ Analysts said even with a clean EU-IMF report card, Dublin faced an uphill challenge. “We currently have 5 year paper trading at 12 percent, 10 year paper trading at 11. Clearly if this is where we are next year Ireland is not going to capital markets. I think yields have to get into single digits and heading south,” said Padhraic Garvey, rate strategist at ING. “It’s a big ask. It’s not impossible, but it’s a big ask.” The average interest rate Ireland is paying on its EU and IMF loans is estimated at 5.8 percent. Of the 85 billion euros bailout, some 17.5 billion euros is from existing state borrowing and cash balances and 35 billion euros is earmarked to shore up the banks. Ireland and its creditors are hoping that only 19 billion euros of that 35 billion will have to be channeled into the banks and the IMF has said that whatever is left over could be used by the state if there is a delay in returning to markets. Dublin is currently forecasting a deficit in 2013 of 12 billion euros. Brian Devine, economist with NCB Stockbrokers, said he still believed Ireland would have to tap the ESM, the EU’s permanent rescue fund, in 2013. “I don’t see how things are going to clear sufficiently for it to be otherwise,” he said. “The government will dip their toes first by issuing treasury bills but that will be to provide some short-term liquidity and gradually work our way back into the market.” Tapping the ESM might require some restructuring of privately held sovereign debt. Reflecting that medium-term risk, Ireland’s two-year and five-year paper are yielding around 12 percent, more than its 10-year bonds on the secondary market. Irish officials have insisted that their economy is on a growth trajectory, unlike Greece, but Honohan said there was no guarantee that Ireland would recover this year. “Nobody can be absolutely sure that there will be growth this year — our forecast is that there will be some growth in GDP this year but the margin of error is sufficiently small that nobody can be sure that it will actually be positive,” he told RTE. “It’s only in 2012 that we can forecast the return to what we would like to see as solid growth.” (Additional reporting by Padraic Halpin and Conor Humphries; editing by Patrick Graham) Copyright 2011 Thomson Reuters. Click for Restrictions .

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EU Rushing To Complete Greece’s Second Bailout Package

May 30, 2011

BRUSSELS/ATHENS (Jan Strupczewzki and Harry Papachristou) – The European Union is working on a second bailout package for Greece in a race to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday. Greece’s conservative opposition meanwhile demanded lower taxes as a condition for reaching a political consensus with the Socialist government on further austerity measures, which Brussels says is needed to secure any further assistance. Moves to plug a looming funding gap for 2012 and 2013 were accelerated after the International Monetary Fund said last week it would withhold the next tranche of aid due on June 29 unless the EU guarantees to meet Athens’ funding needs for next year. Senior EU officials held unannounced emergency talks with the Greek government over the weekend, an EU source said. Greece took a 110 billion euros ($158 billion) rescue package from the EU and IMF last May but has since fallen short of its deficit reduction commitments, raising the risk of a default on its 327 billion euro debt — equivalent to 150 percent of its economic output. The tax cuts sought by conservative New Democracy leader Antonis Samaras could aggravate the revenue shortfall, but he argues they are essential to revive economic growth. EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece’s privatisation program. “It would require collateral for new loans and EU technical assistance — EU involvement in the privatisation process,” one senior EU official said, speaking on condition of anonymity. Extra funding for Greece faces fierce political resistance from fiscal conservatives and nationalists in key north European creditor countries — Germany, the Netherlands and Finland — complicating EU governments’ task. Greek daily Kathimerini said finance ministers of the 17-nation single currency area may hold a special meeting next Monday on a new package. European Commission spokesman Amadeu Altafaj dismissed the report as “unfounded rumours, once again.” The next scheduled meeting of euro zone finance ministers is on June 20 in Luxembourg, having been pushed back a week from its original date. It will be followed three days later by a summit of EU leaders to assess the 18-month-long debt crisis. MARKETS RATTLED Mass unemployment and wage and benefit cuts due to the EU/IMF austerity plan have triggered spontaneous youth protests in Greece as well as a series of one-day strikes by powerful trade unions. Weekend comments by an Irish minister that Dublin too may need a second rescue package may also fuel opposition to further bailouts among lawmakers in Berlin, the Hague and Helsinki. Transport Minister Leo Varadkar told The Sunday Times newspaper that Ireland was unlikely to be able to return to capital markets next year as foreseen in its EU/IMF program. “It would mean a second program (of emergency loans),” he was quoted as saying. Irish central bank governor Patrick Honohan acknowledged at a news conference on Monday that debt market conditions were worse now than when Ireland took an 85 billion euro bailout last November but said they would improve. Uncertainty over whether Greece will receive the next 12 billion euro aid tranche required to meet 13.4 billion euros in funding needs in July continued to rattle financial markets. The Greek 10-year bond spread over safe haven German Bunds rose by 20 basis points to 1,387. Two-year yields were up 58 bps to 26.23 percent. The European Central Bank maintained a drumbeat of pressure against any attempt by EU politicians to restructure Greece’s debt mountain, even by asking investors to accept a voluntary extension of bond maturities. ECB board member Lorenzo Bini Smaghi said in an interview published on Monday the idea that debt restructuring could be carried out in an orderly way was a “fairytale,” saying it was the equivalent of the death penalty. “If you look at financial markets, every time there is mention of a word like ‘restructuring’ or ‘soft restructuring’ they go crazy — which proves that this could not happen in an orderly way, in this environment at least,” Bini Smaghi told the Financial Times. He also warned against a debt ‘reprofiling’, or voluntary extension of Greek bond maturities, saying it would be hard to get investors to agree to such a deal without the use of force. Euro zone governments are actively studying options for changing the maturities on Greek debt, officials say, although German Finance Minister Wolfgang Schaeuble acknowledged in an interview last week that it was very high risk. “The Eurogroup is doing research for reprofiling — what can you do on reprofiling? Is it possible without a credit event?” Dutch Finance Minister Jan Kees De Jager told reporters on Saturday in Cyprus. “It’s an investigation, and we have to wait for the outcome of it. EU officials contend that Greece could do much more to help itself by selling off a treasure trove of state assets. ECB executive board member Juergen Stark told Welt am Sonntag newspaper that Athens could raise as much as 300 billion euros from privatising state property. Greece currently aims to raise 50 billion euros from privatisations by 2015 to help stave off a fiscal meltdown, but the country lacks a proper land registry and ownership of many potentially lucrative assets is legally uncertain. Athens is setting up a sovereign wealth fund to pool real estate assets and state stakes in companies such as telecom company OTE, Post Savings Bank and ports. Top EU officials have asked Greece to step up privatisations urgently and suggested creating a trustee institution to help the process similar to the body that privatised East German firms after the fall of communism. (Additional reporting by Angeliki Koutantou and Ingrid Melander in Athens, Marius Zaharia in London, Luke Baker in Brussels; writing by Paul Taylor, editing by Mike Peacock) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Greece Missed Fiscal Targets Under Bailout

May 29, 2011

(Reuters) – Greece has missed all fiscal targets agreed under its bailout plan, a mission from an international inspection team found, putting further funding for Athens at risk, according to a German magazine. “The troika asserts in its report to be presented next week that Greece had missed all its agreed fiscal targets,” weekly Spiegel magazine reported in a prerelease. The International Monetary Fund, the European Commission and the European Central Bank — known as the troika — currently have a team in Greece assessing how sustainable the country’s debts are. The mission will be holding meetings next week before an expected finalization of the report. “The deficit in the public budget was higher than expected,” the magazine said, referring to the report’s findings. “The reason is that the Greek government still spends more than agreed in the aid programme. On top of that tax income is still lower than demanded.” The IMF has already said it cannot release its part of a 12 billion euro aid tranche to Greece next month if fiscal conditions underpinning the bailout are not met and the European Commission’s top economic official was quoted as saying the EU was setting the same conditions. “We Europeans have the same conditions as the IMF,” EU Economic Affairs Commissioner Olli Rehn was quoted as saying in the same prerelease for Monday’s Spiegel magazine. “We will decide on the next tranche after the troika’s report. The situation is very serious,” Rehn added. At roughly 330 billion euros, or 150 percent of gross domestic product (GDP), Greece’s debt is so high that many economists believe the country will inevitably have to restructure eventually. The ailing euro zone state, which triggered the sovereign debt crisis in 2009, also needs to garner support from opposition parties for fiscal reforms before the European Union and International Monetary Fund free up more payments. EU officials have asked Athens to step up privatizations urgently and suggested setting up a trustee institution to help oversee the process, similar to the body that privatized East German companies after the fall of communism. Spiegel magazine also said the troika’s experts estimated Greece had assets worth 300 billion euros, which it could sell off to meet its targets. (Reporting by Annika Breidthardt; Editing by John Stonestreet) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Video: RBC’s Trinh Says Yen May Weaken to 83 Against Dollar

May 27, 2011

May 27 (Bloomberg) — Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, talks about the outlook for global currencies. Trinh also discusses central banks’ monetary policies and Greece’s debt problems. She speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

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Crude Oil Positioned to Rise on US GDP Revision, Gold May Drop as Greece Fears Fade

May 26, 2011

Crude Oil Positioned to Rise on US GDP Revision, Gold May Drop as Greece Fears Fade

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FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for Greece

May 25, 2011

FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for Greece

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Nancy Birdsall: IMF Leader Selection: It’s the Process, Stupid

May 24, 2011

A Bretton Woods project statement issued on April 6 was prescient indeed: The MD must be, and must be seen to be wholly independent of any national or regional interest. This is particularly important when the home state is a powerful member of the IMF. In practical terms therefore, recent or sitting ministers should be ruled out. Who’s that? The candidate now supported by France and the UK: Christine Lagarde is, of course, a sitting minister of a powerful member country. Well at least she is a woman — widely discussed now as a good idea for the male-dominated IMF (compared to the World Bank and in culture as well as numbers) — and is said to be independent-minded. But would she be able to eschew “representing” France or the powerful France/Germany/UK triad in the tense discussions that seem to pit Greece (and other peripheral countries of the euro zone) against the banks in Germany? Would she not seem to be biased even if she wasn’t — beholden to Sarkozy and Merkel generating immoral hazard for the IMF (or the euro or Greece… )? Won’t she represent, whether she wants to or not, the stench of colonialism wafting around the IMF? The Bretton Woods project statement also emphasizes the logic of locking in a process including: a short and open list of candidates made public; no need for a candidate to have his/her own country’s support (Arminio Fraga headed the Brazilian Central Bank under the party now out of power; that is also Gordon Brown’s problem of course); an open voting process based on formal voting (as proposed by the Indian ED Arvind Virmani — go here; the need for any candidate to have a majority of country members not just a majority of weighted votes (the “double majority” idea ). (Our IMF leader survey includes creation of an eminent persons group to propose a short list of candidates (adding to country members’ nominees) that could include nominees their own country might not nominate, and also refers to double majority voting. I hope survey takers who favor “open, transparent and merit-based” agree strongly with those proposals too.) These changes are less likely to happen between now and end of June (by when IMF Board promises it will have selected a new leader) but pumping for them now could help improve the process in the next round. By the way, any of these changes in process would be a step in the direction of legitimacy for the new leader. None would take away the ability of the United States and of Europe to block candidates. For all practical purposes the large and powerful economies have effective vetoes (Europe if its triad of France/Germany/UK collaborates). With double majority voting other country groups in a coalition would also have veto power… and with an open list there would be more time for the public scrutiny that helps provide a new leader legitimacy. Related Content: About IMF Survey and Candidate Bios Take the Survey and View Results More IMF Blog Posts

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EU Crisis Could Infect U.S., Fed Official Warns

May 24, 2011

FARMINGTON, Missouri (By Mark Felsenthal) – Turmoil over sovereign debt problems in Europe could weigh on the U.S. economic recovery, St. Louis Federal Reserve President James Bullard said on Monday. “I am concerned about the situation in Europe,” Bullard told reporters after a speech. “Prolonged financial market turmoil could be a negative for the U.S.” Financial markets piled pressure on heavily indebted euro zone countries on Monday and global stock markets fell as investors worried about heightened risks in Spain and Greece and ratings agencies stoked new concerns over Italy and Belgium. Italy, which has the euro zone’s biggest debt pile in absolute terms, was hit by credit ratings agency Standard & Poor’s decision on Saturday to cut its outlook to “negative” from “stable”. Uncertainty in Europe is one reason why U.S. longer-term bond yields have dropped, Bullard said, as investors move into less risky assets. Discussing monetary policy, Bullard said not to expect action for a while after the Federal Reserve ends its $600 billion bond buying program in June. “Past behavior of the (Fed) indicates that the committee sometimes puts policy on hold,” he told the Mineral Area College Foundation. “A pause allows more time to assess the strength of the economy.” While waiting to see how the economy evolves, the Fed would hold interest rates near zero, said Bullard, who is not a voter on the central bank’s policy-setting panel this year. Being on hold also signals no change to the Fed’s pledge to keep rates extremely low for an extended period, he said. In addition, it means reinvesting securities to keep the Fed’s much-expanded balance sheet at whatever level it reaches after the bond-buying initiative comes to a close, likely above $2.7 trillion, he added. He said that if the economic recovery gains pace in the second half of the year, it would be reasonable to expect the Fed’s next move would be to tighten financial conditions. However, he said that U.S. growth in the first half of 2011 has been slower than anticipated. U.S. home sales and factory activity data released last week showed the economy was stuck in low gear, although a drop in claims for jobless aid offered hope the labor market’s recovery was on track. Bullard also cautioned that stripping energy and food costs from inflation measurements may understate inflation. Fed officials have argued that despite recent jumps in the prices of commodities and food, inflation is in check because underlying measures have climbed only modestly from historic lows. Commodity prices have logged “dramatic” increases in recent months, he said. “Ignoring energy prices in a price index may systematically understate inflation for many years,” he added. Many Fed officials believe the best way to measure whether their efforts to keep inflation at bay are working is to look at measures of underlying inflation, because that is a better gauge of where inflation is headed. Bullard further renewed his call for the Fed to adopt an explicit numerical inflation target. Fed Chairman Ben Bernanke signaled after the Fed’s last meeting at the end of April that the U.S. central bank is in no hurry to reverse its massive support for the modest U.S. economic recovery in which unemployment remains above what Fed officials believe is the norm. That support includes rock-bottom benchmark interest rates and will amount to $2.3 trillion in purchases of longer-term assets when the current program winds up. Many economists and some Fed officials are concerned that inflation risks are rising. Even though oil prices have moderated recently, there is concern that the Fed is ignoring overall inflation because prices for gas and many food items are noticeably higher to many consumers. Fed officials such as Bernanke have argued that higher energy prices reflect increased global demand from emerging markets such as China, India, and Brazil, rather than too-easy monetary policy in the United States. The chairman and others also say that there is no indication consumers or businesses expect inflation in the future. However, Bullard said recent events show so-called core inflation that strips out volatile food and energy prices is no longer an accurate gauge of trends and raises doubts in the public’s mind about the Fed’s effectiveness. Still, Bullard told reporters he believes the Fed would still be in no rush to tighten policy if it focused on overall inflation rather than underlying inflation. The main problem with an emphasis on core inflation is it makes the Fed look out of touch with the prices most consumers are encountering, he said. “This is hurting Fed credibility to be talking about core inflation when everyone sees headline inflation,” Bullard said. (Reporting by Mark Felsenthal; Editing by Gary Hill & Kim Coghill) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Rising Dollar Could Mean Trouble For Stocks

May 23, 2011

NEW YORK (Walter Brandimarte) – Signs of a Wall Street sell-off are all over the place, but U.S. stocks might well survive another week relatively unscathed if investors keep betting on sectors less vulnerable to an economic downturn. Pressure for a correction in the stock market has been building up in the past few weeks as the euro and oil prices fell in tandem, knocking down shares of energy companies and dollar-sensitive multinationals. Still, investors have averted a broad sell-off by diving into shares of companies that are less vulnerable to the economic cycle, including well-known defensive sectors such as utilities and household products, but also large-cap companies with steady earnings performance. That strategy may hold the market afloat for a little longer. But with the end of the Federal Reserve’s easy money policies just around the corner, investors are becoming more sensitive to risk in general. “There is good reason for a pause, there is good reason to be conservative in here, and there is good reason to raise some cash ahead of a summer correction and a better buying opportunity,” said Richard Ross, global technical strategist with Auerbach Grayson in New York. The sharp sell-off in commodities markets earlier this month was seen by many as the first warning sign of a coming market correction. The U.S. dollar has been strengthening since then, in another sign that appetite for risk is dwindling. Next month’s end of the Fed’s massive bond-buying program, also known as quantitative easing, is expected to knock down the value of stocks, commodities and the euro, a recent Reuters poll of 64 analysts and fund managers found. CONSUMER STAPLES BACK IN STYLE Ross, who believes that a correction could come at any moment, warned that Wall Street remains close to multi-year highs as investors head into a traditional period of weak seasonality that stretches from May to November. The Standard & Poor’s 500 index .SPX has kept its year-to-date gain of 6 percent for the past two weeks, as defensive sectors such as utilities advanced while more volatile technology shares posted losses. Despite the rotation between sectors, the S&P 500 has been trading in a narrow range between 1,330 and 1,340, indicating Wall Street’s lack of direction. Most technical analysts agree that the market is poised to break out of that range soon — either with a sell-off or a rally. Robert Sluymer, an analyst with RBC Capital Markets, said there is no technical evidence that the current market cycle has peaked. He recommended investors keep building exposure to defensive themes, while getting out of cyclical stocks. Among the defensive sectors favored in the current environment, Standard & Poor’s Equity Strategy recommended the stocks in the S&P 500 Consumer Staples Index . For the week, this index was up 0.6 percent. With the earnings season coming to a close, Wall Street will have just a sprinkling of marquee names set to release quarterly results in the coming week. On tap are earnings from Campbell Soup, Costco Wholesale Corp and HJ Heinz Co, whose stocks are in the S&P 500 Consumer Staples Index. Preppies, take note: Polo Ralph Lauren Corp and Tiffany & Co are also set to release their results. These companies’ outlooks could shed light on the consumer’s mindset and headwinds facing the retail sector. As far as economic indicators are concerned, there’s no data with overwhelming star power. The calendar includes new home sales for April, a second look at first-quarter gross domestic product, personal income and consumption for April and the final reading for May on consumer sentiment from the Thomson Reuters/University of Michigan Surveys of Consumers. So investors could very well be at the mercy of the headlines from Europe, where fears about a possible debt restructuring by Greece are on the rise. With the euro, commodities and stocks trading with extraordinary correlation, investors should look at the euro-dollar trade for direction, said Ross of Auerbach Grayson. “If you continue to see the dollar strengthening,” he said, “it should provide a headwind for commodities and for the S&P.” (Editing by Jan Paschal) Copyright 2011 Thomson Reuters. Click for Restrictions .

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DSK Replacement Should Come From Developing World

May 23, 2011

Nothing against French Finance Minister Christine Lagarde , who by all indications seems qualified to oversee the International Monetary Fund, but here’s a vote for anyone else who is qualified from the developing world. Let’s recap why there is suddenly a vacancy in the highest office of the IMF: Dominique Strauss-Kahn, a man reared in rarefied Parisian suburbs, educated at elite French academies and more recently occupant of an office that entitles him to fly around the globe fraternizing with fellow members of the powerful set, allegedly stepped out of the shower in a $3,000-per-night suite at a deluxe New York hotel. There, he encountered an African immigrant employed as a maid, who was presumably arriving to make the bed and remove the trash. The alleged sexual assault that followed is uncomfortably close to a workable metaphor for how much of the developing world has long viewed its relations with the Washington-based institutions at the center of the global financial order, the IMF and its sister agency the World Bank. Not without some merit, it must be added. Why was DSK the one stepping out of the shower and headed for an elegant lunch in a Manhattan restaurant? By dint of many reasons, to be sure, but surely in part because of his good fortune of being born in the capital of a wealthy nation and being the son of parents able to reinforce their own good fortune by sending him to the most exclusive schools. And why was this woman from Africa here on this day? Every life is complex, but one can assume that her decision to come to the United States, rent an apartment in the Bronx and ride the subway to Manhattan so she could scrub the toilets of the global elite amounts to her calculation that this was the best economic opportunity available to her. This is not a broadside against the World Bank and the IMF, whose histories and world views are far more complex than they are often made out to be by its legions of critics. The two institutions are full of dedicated and well-intentioned people who spend their days trying to build a more equitable economic order and spread the fruits of innovation to more parts of the globe (though the same cannot always be said about the leadership). Rather, it is a recognition that the inequalities that divide nations and the classes within nations are so deep and self-reinforcing that it is going to take some real doing to transform the centers of power into forces for greater good. That, and the recognition that it would be disgusting to fill a vacancy created by an alleged sexual assault of an African immigrant maid by a European master of the universe with another European — yes, even a woman — through the same secret, clubby process that has been used to staff the place since its inception. Over the weekend, the sense took hold that Lagarde’s appointment was gathering unstoppable momentum . But that would be a stay-the-course move. Why not reform from the top down? For far too long, the IMF and the World Bank have been perceived as institutions intent on perpetuating the privileges of wealthy countries while displaying callous disregard for the lives of ordinary people around the globe. Time and again, a fresh financial crisis in Indonesia, Argentina or Greece has prompted the IMF to prescribe its usual regimen of austerity as the condition for an emergency bailout, requiring government budget cuts, the elimination of subsidies for food and fuel and the cessation of other spending. This medicine has been served up as a needed salve for a global financial system lacking confidence, which is really a euphemism for the needs of the enormous banks who play an outsized role in the national affairs of the countries that pay most of the IMF’s bills: Its policies have ensured that lenders based in the United States, Europe and Japan are not forced to absorb losses on loans made recklessly in pursuit of emerging market riches. Better that ordinary people in Indonesia, Argentina or Greece should lose access to luxury items like rice and kerosene than that shareholders of Deutsche Bank or Goldman Sachs should forego dividends. One may be tempted to reject that portrayal as cartoonish, but every now and again a window opens up on the views of the people running the ship. Recall the memo that Larry Summers signed in 1991 , when he was the chief economist of the World Bank, advocating the bank encourage more toxic waste be transferred from wealthy countries to poor countries. Among the reasons? Poor people earn less than rich people, so the lost wages from their deaths are not as great. “The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that,” the memo asserted. Summers later characterized the memo as a sarcastic retort . Hilarious. Whatever the tone, the logic of the infamous memo is the same sort that holds as a natural outcome the fact that African immigrants should serve the needs of European and American potenates inside delightful hotels: Every actor pursues their own economic self-interest, and thereby maximizes the greatest aggregate good. So speaks the text book. That is no justification for an attempted rape — the crime alleged — but it helps explain how these two individuals found themselves standing opposite one another in the same hotel room. We simply need the institutions that govern the world’s money to be representative of the world’s people. Yet the way the DSK episode has been absorbed by the power centers reflects a tendency to accept the sorts of assigned roles the IMF and the World Bank generally view people outside the most powerful countries as: cheap hands to be exploited, miserable wretches to be pitied and perhaps aided or, most of the time, rounding errors on the ledger books of a global economy. The New York Times keeps referring to the alleged rape attempt as a “tawdry” episode, as if implying that DSK was caught consorting with a woman of lower class and ill-repute, brought down by an unclean act — an embarrassment, as opposed to a crime of violation and brutality. In France, to judge from the polls and the press coverage, concern seems to focus on claims that DSK was set up — an exculpatory frame that turns him into the potential victim — and worries that he is being ill-treated as we glimpse him placed on the hardwood benches of a New York City courtroom or paraded in front of cameras on his way to being arraigned. “He’s not like everyone else,” the French intellectual Bernard-Henry Levi reportedly told a German newspaper , expressing his revulsion over seeing his friend DSK led into court in handcuffs. The French reaction speaks to the deep-seated sense of entitlement that governs the powerful class: The maid and her story are not even in the picture. Let us contemplate the injustice of being yanked from the front of the plane to the courtroom! Did DSK even get to finish his pre-takeoff cocktail? This is, frankly, one of the rare times I find myself feeling almost patriotically proud over the workings of the American justice system. The New York Police Department appears to be putting its nose to the ground and investigating the case as a straightforward crime, in which one human being allegedly violated the rights of another. Considerations of class and race and national origin appear to be trumped by a straightforward process of fact-gathering and deliberation. Isn’t this how the global financial system ought to work, too, as the IMF sets about finding a replacement for DSK? The clearest argument for giving prime consideration to someone from the developing world is the name for the process that has governed in the past — the “gentlemen’s agreement” that the World Bank chief must be American, while Europe has claim to the head of the IMF, as if these offices are colonial spoils to be divvied up among empires. The IMF has in recent years made a show of adjusting the byzantine system through which it allocates votes according to the financial contributions of its members, s lightly adjusting upward the shares that accrue to China, Brazil, India and Russia . But that is mere tinkering around the edges. We need something bold, a clear assertion that the gentleman’s agreement is no more. Four years ago, as Wold Bank President Paul Wolfowitz was forced to leave his post under an ethical cloud, prominent academics called for an end to the gentleman’s agreement and the adoption of a transparent process to replace him. But the old system was indulged again. Now, the same calls are being heard again. Over the weekend, the finance ministers of Australia and South Africa released a joint statement urging that DSK’s replacement be selected on the basis of merit, not nationality . “For too long, the IMF’s legitimacy has been undermined by a convention to appoint its senior management on the basis of their nationality,” the statement declared. “In order to maintain trust, credibility and legitimacy in the eyes of its stakeholders, there must be an open and transparent selection process which results in the most competent person being appointed as managing director, regardless of their nationality.” That’s a good start, but better yet, why not urge for the active pursuit of a managing director from the developing world? To which one might respond that the moment at hand is too fraught with peril to allow political correctness to dictate. Greece is in trouble again. Portugal remains a worry. Spain may yet need a bailout, with awful ramifications for the rest of Europe . But part of the clubbiness that prevails inside the IMF and the World Bank, not to mention the American Treasury, includes subscribing to the increasingly ridiculous assumption that the West knows best when it comes to prudent financial management. China, whose banking system is oft-described by the power set as a disaster in waiting, has now skirted two global financial crises in a row (Asia in the late 1990s, and the Grand Disaster of 2008) without a domestic meltdown. The knock on China is that relationships and insider deals determine where money goes. How to put this? France, Germany, the United States and Great Britain also seem to have this problem. That’s how the good taxpayers of the United States wound up giving money to AIG to bail out Goldman Sachs while letting the executives keep rewarding themselves with bonuses. India is a growing economic power that happens to be a democracy. South Africa has emerged from apartheid to assume a seat at the table among responsible nations. Latin America is increasingly integrated into the world economy. Surely, somewhere other than Europe or the United States resides a person capable of overseeing the IMF. Dominique Strauss-Kahn has shined a momentary light on something that was never really hidden to begin with, yet manages to go largely unseen — the degree to which institutional privilege perpetuates itself to the detriment of most citizens of the world. His demise presents us with an opportunity to address that, one that ought not be squandered.

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Janet Tavakoli: Wall Street’s Advice to the IMF: Control Your Alleged Rapists!

May 22, 2011

We are outraged at your lack of empathy for your victims! We’re not talking about the targets of your sexual advances, of course. We mean us. You’re supposed to be bailing out trading partners, bankers in weak foreign countries bankrupted by bailouts. Remember, you pigs are supposed to be financially raping the citizens of the PIIGS (Portugal, Italy, Ireland, Greece and Spain). We’ll get back to that shortly, but first we have to address some housekeeping. Jeopardizing Our Health Condoms aren’t foolproof, and the HIV virus doesn’t care how much you paid for a hooker in Thailand. It has come to our attention that you have allegedly been customers of our New York based suppliers of prostitutes , and we’re furious. We need you to stick to the job. Moreover, if you had just listened to our advice to Joran van der Sloot , you wouldn’t be caught allegedly doing anything in the wrong place at the wrong time. Targets Can Shoot Back As for the handling of your internal matters, it was a nice touch to call newly resigned IMF head and alleged sex offender Dominique Strauss-Kahn’s 2008 affair with a subordinate a “serious breach of judgment” and impose no real consequences. It was a great move to reportedly decline investigations and consequences for other managers involved in suspect activities. It’s well known that a permissive atmosphere enables harassment (and more) and dismays the targets who perceive they will get no support. This is exactly the kind of thing we do all the time, but you have to save all this good stuff for your next high profile job in finance or politics. Until now, your internal targets felt so intimidated you were able to sweep all this under the rug. You can’t count on that anymore with all the new publicity you’ve brought on yourselves. Targets have caught on that they have nothing to lose and at least can gain back the self-esteem you’ve tried to destroy. Targets’ careers are already embattled, so it is in their interest to take action, and they’re not going to apologize for standing up for themselves. Moreover, it’s a snap to see through the flaws in the IMF’s new “policy.” You say that when it comes to intimate relationships, you will investigate if there is evidence of harassment. Obviously, the complainer will have to produce the evidence. But how has letting you handle things worked out so far for targets? Targets will never buy that nonsense now. They’ll tell you to stuff it and act independently. Targets have a right to treat this as a matter of personal safety. When it comes to the topic of their personal safety, you have nothing to add. The IMF Can’t Even Negotiate “Consensual Sex” Even when sexual relations between your bosses and subordinates apparently begin as consensual, the IMF inspires targets to rebel. According to the New York Times : “One woman is said to have slept with her supervisor, who then gave her poor performance reviews to pressure her into continuing with the relationship.” We must point out that if you want someone to continue a sexual relationship, tell them their performance was great. In the battle of the sexes, he declared thermonuclear warfare! Remember Who You’re Supposed to Be Screwing This may sound as if we’ve developed a conscience, but don’t worry, we haven’t. The truth is that we need you do as we say and not as we do for a change. We need you to keep bailing out weak countries like Ireland. Many of Ireland’s bankers fled the country, and the people of Ireland are drowning in their debt. We love the way the IMF forced a loan on the Irish to pay off the government debt that was forced on them to pay off the bankers’ debts. To get the bailout loan, the Irish government had to slash spending, lay off tens of thousands of public workers, lower wages, increase taxes, and cut health care budgets. The bankers got away with financial murder, and the citizens are paying for it, just the way we like it. Instead of letting banks fail or restructuring banks, we need you to do the same thing to Greece and possibly other countries, too. The Greeks are already protesting: “We’re not Ireland!” Your recent scandals may encourage them to get even more insistent and come up with an alternative of their own. We do lots of business with these foreign banks and governments. So stop spending so much energy trying to screw each other and spend it screwing the citizens of countries with governments that need bailouts because they bailed out bankers. Clean up your act, so that we don’t have to clean up ours!

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Spain Protests Rock Nation, Tens Of Thousands Fill The Cities Over Joblessness

May 21, 2011

By Tracy Rucinski and Fiona Ortiz MADRID – Tens of thousands of Spaniards angry over joblessness protested for a sixth day on Friday in cities all over the country, and the government looked unlikely to enforce a ban on the demonstrations, fearing clashes. Dubbed “los indignados” (the indignant), tens of thousands of protesters have filled the main squares of Spain’s cities for six days, in a wave of outrage over economic stagnation and government austerity marking a shift after years of patience. The electoral board ruled on Thursday that protests would be illegal on Saturday, the eve of elections when Spaniards will choose 8,116 city councils and 13 out of 17 regional governments. But Prime Minister Jose Luis Rodriguez Zapatero, who has failed to contain the highest unemployment in the European Union, at 21.3 percent, said he may not enforce the ban. “I have a great respect for the people protesting, which they are doing in a peaceful manner, and I understand it is driven by economic crisis and young people’s hopes for employment,” Zapatero said during a radio interview. He said the Justice Ministry was reviewing the electoral board’s ruling to determine whether it should stand. PROTESTERS WILL STAY “We are not going to budge from here,” said a 44-year-old unemployed man who declined to give his name, during an assembly at Puerta del Sol in central Madrid, where protesters reached an informal consensus to stay in the square despite the ban. The man was among hundreds who have camped out all week at Puerta del Sol. His wife and daughter join him every day and the crowd swells to thousands every evening. “Our next move is to spread this to the rest of Europe,” he said. Many protesters told Reuters that they are scared the police will crack down, but analysts said police action against the protesters would be a disaster for the Socialists. The protesters have called on Spaniards not to vote for the two main parties, the Socialists or the center-right opposition Popular Party. Spain has struggled to emerge from a recession, and the collapse of the construction sector and a slump in consumer spending have hit the young particularly hard — 45 percent of 18- to 25-year-olds are unemployed. “They can’t kick us out. The politicians won’t allow it, it’ll make them look bad right before the voting,” said Virginia Braojos, 32, a logistics technician who has come with three friends to the protests every night this week. NOT A GAME CHANGER The protests have drawn huge media attention, but will not change the outcome of Sunday’s elections, when the ruling Socialist party is expected to suffer heavy losses over its handling of the economic crisis, a prominent pollster said. However, the symbolic impact of the protests is huge and will make things even tougher than they already are for the increasingly lame-duck Zapatero, said Jose Juan Toharia, president of Metroscopia pollsters. “There will be an authentic cataclysm for the Socialists, who are going to head into general elections next year without a single stronghold,” Toharia said. The next general election is due in March, though some analysts say a Socialist rout could lead to an early election. The protest movement has captured the mood of many Spaniards who have been out of work for months and face a bleak future as the economy is not yet growing robustly enough to create jobs. While most protesters are young, organizing themselves through Twitter and social media, middle-aged and older people joined the crowds on Friday, frustrated with stagnation. STICKING TO DEFICIT COMMITMENT The risk premium on Spanish debt, as measured by the difference between yields on Spanish and benchmark German bonds, rose on Friday due to concerns that following the elections, new regional leaders will uncover budget shortfalls. Budget trouble in the regions would rekindle concerns about a fiscal crisis in Spain. Spain has been under intense market scrutiny since Greece, Ireland and Portugal were forced to accept EU/IMF bailouts. It is widely accepted that a bailout for Spain, the euro zone’s fourth largest economy, would stretch the European Union’s resources and political will to breaking point. The Spain/Bund spread traded at its widest since mid-January at around 239 basis points. Zapatero, who slashed government spending this year, promised there would not be a new round of spending cutbacks following the elections, but stressed Spain’s obligation to international markets to stick to its plan to cut the deficit. “I can guarantee there will be no more spending cuts after the May 22 elections (but) we are committed to the budget target. I insist we will meet this obligation because, if we don’t, markets and investors won’t finance us, and that would make things worse.” (Additional reporting by Paul Day; editing by Mark Heinrich) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Video: U.S. Stocks Slump on Europe Debt Woes, Gap Forecast

May 20, 2011

May 20 (Bloomberg) — Bloomberg’s Cali Carlin reports on the performance of the U.S. equity market today. U.S. stocks slumped, capping the longest weekly losing streak since August for the Standard & Poor’s 500 Index, amid concern Greece will default on its debt and as Gap Inc.’s profit forecast missed estimates. Bloomberg’s Pimm Fox also speaks. (Source: Bloomberg)

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Video: Grant Says Greece Is Right at Brink of `Going Belly-Up’: Video

May 20, 2011

May 20 (Bloomberg) — Mark Grant, managing director at Southwest Securities Inc., discusses the outlook for Greece’s economy and prospects for debt restructuring. Greece’s credit rating was cut three levels by Fitch Ratings, which said that even a voluntary extension of its bond maturities being studied by European Union policy makers would be considered a default. Grant speaks with Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Video: Fitch Cuts Greece’s Credit Rating Three Levels to B+

May 20, 2011

May 20 (Bloomberg) — Greece’s credit rating was cut three levels by Fitch Ratings to B+, four levels below investment grade, from BB+. David Tweed reports on Bloomberg Television’s “InBusiness With Margaret Brennan.” (Source: Bloomberg)

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Euro Tumbles Against US Dollar as Norway Suspends Greece Aid

May 20, 2011

Euro Tumbles Against US Dollar as Norway Suspends Greece Aid

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E.U closed in red on Greece Debt Concerns…

May 20, 2011

E.U closed in red on Greece Debt Concerns…

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FOREX: Euro Tumbles as Norway Suspends Aid to Greece, Fitch Downgrades Further

May 20, 2011

FOREX: Euro Tumbles as Norway Suspends Aid to Greece, Fitch Downgrades Further

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James Berman: DSK and the Greek Myth of "Reprofiling"

May 18, 2011

With IMF leader Dominique Strauss-Kahn under arrest for sexual assault, many have predicted the Euro’s demise. After all, DSK is a founding father of the common currency and the architect of bailouts that have propped up the euro zone. Whether or not the euro follows his steep downward arc, Greek debt, like the Greek word hubris , comes to mind. The euro authorities claim Greek bonds would be “reprofiled” not “restructured” and the financial world is left to parse the difference. A liquid bond market is like a well-functioning justice system: transparent and fair. But as we all know, markets and trials can both hit the skids. Just as lawyers mangle language to fix the truth, countries resort to euphemism to craft their economic image. Underpinning both louche pursuits is the fear that if you don’t spin the news, the news will spin you. It’s true that a world leader cannot really admit a country is broke. The very words will prompt a “run on the bank” as bondholders sell, causing interest rates to rise and a self-fulfilling death spiral. So too a lawyer must advocate to avoid a conviction in the press. Too often the maneuvers themselves are the only things transparent. When lawyers cobble together sentences like “The evidence, we believe, will not be consistent with a forcible encounter” as Ben Brafman did on DSK’s behalf, it rings less like a declarative statement than a poorly-hedged bon mot crafted by the billable hour. And when Euro-group Chairman Jean-Claude Juncker says that “A large [Greek debt] restructuring is no option” then breathlessly adds “I wouldn’t exclude in a definite way a kind of reprofiling,” we sit and snicker. The not quite artful distinction without a difference hangs in the air. Apparently a “reprofiling” would only lengthen maturity dates, not cause a haircut to debt principal. But as any first year B-school student knows, when you lengthen maturity dates (given the time value of money), you alter terms in a material way. If the present value of the loan changes as it does with the maturity date, then the loan has been “restructured.” If interest rates are adjusted upward to compensate, then a “restructuring” rears its singular head again. Semantics alone can’t change the truth. The evidence or lack thereof of DSK’s alleged assault hasn’t been released, but the finances of Greece are better known. The markets, unlike the jury, have spoken on the latter. We can’t know whether DSK did it or not, but I do know that Greece is broke in any language.

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Antonio Borges: The Emerging Bright Spot in Europe

May 18, 2011

With all the anxiety generated by the troubles of Portugal, Greece and Ireland, it is easy to forget that a different part of Europe was in the spotlight two years ago, facing equally dire predictions of bank runs, fiscal ruin and devaluation. Today, many economies in emerging Europe are quietly staging a strong comeback. Most impressive is the turnaround in the three Baltic countries, which suffered record deep recessions in the wake of the 2008/09 financial crisis. Take Lithuania, which grew an eye-catching 14.7 percent in the first quarter of 2011. But many other countries in the region are seeing strong growth as well. True, it will take a while before most crisis-hit countries will be able to reclaim the economic output that was lost as a result of the crisis. But things are definitely going in the right direction. Most encouragingly, the growth pattern is very different from that in the years leading up to the crisis. During the boom years, emerging Europe grew rapidly, but growth in many countries was unbalanced — real estate, construction and banking boomed while manufacturing languished. Capital inflows were large, but they boosted demand rather than supply, and led to a surge in imports, extremely high current account deficits — 25 percent of GDP in Latvia and almost 30 percent of GDP in Bulgaria — and overheating. Today, growth is driven by exports and manufacturing. Take Estonia, where exports of goods in the fourth quarter of 2010 were 52 percent higher than a year earlier. The old growth engines are spluttering, but others have kicked into gear. And it is not just exports anymore — the recovery is broadening to include investment and even consumption. In 2011, domestic demand is set to become the main growth engine in emerging Europe. What has caused the shift? The answer is both markets and policies. Markets at work. During the boom years, real estate, construction and finance were very profitable — much more so than manufacturing. But profits were artificially inflated by asset price bubbles and the under-pricing of risk. Now that profits have evaporated, investors are moving into other sectors. The adjustment is underpinned by improving competitiveness — the wage explosion of 2007-08 has given way to a decline in labor costs across the region. Policies have delivered. Painful but determined fiscal adjustment put public finances back on track, which has led to a sharp reduction in risk. For instance, Latvia’s credit default swap spread (which measures the cost of insuring debt against default) is 200 basis points today — down from 1100 basis points in 2009. Given this good news, what more can policymakers do to sustain the recovery — and prevent a new boom-bust cycle? Raising the long-term growth trend is key. Good structural policies can raise growth potential. A big push to remove bottlenecks in energy, transportation and communication would boost productivity. Here, funding from the European Union could be used to overcome the current lack of domestic resources. Efforts to upgrade the skills of the labor force would enable industry to climb the quality ladder. Good macroeconomic policies can prevent boom-bust cycles. When the next boom takes off, policies should be much tighter. This will reduce the risk of overheating that pulls resources away from manufacturing and other traded goods into sectors where there is little competition, such as real estate and banking. When revenues are growing strongly, they should not be used to increase spending and public wages, as was done during the boom years. Instead, savings that can stimulate the economy during a downturn should be built up. This means that large, even very large, surpluses may be needed during boom years. Emerging Europe still has a lot of scope for catching up with advanced Europe. But catching-up is not a law of nature — without the right policies, countries can get stuck, as we have seen all too clearly with Greece, Ireland and Portugal. From iMFdirect blog

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Georges Ugeux: Dominique Strauss Kahn Arraigned: The European and Global Impact

May 16, 2011

The recent events surrounding Dominique Strauss Kahn are a tragedy and will have a major impact at many levels. From my perspective, I see several levels of consequences: For the International Monetary Fund: the loss of the leadership of Dominique Strauss Kahn is heavy. His deputy, John Lipsky, is an American economist, who had indicated his desire to leave the Fund. He does not carry the weight of DSK, who is a politician and a leader of international dimension. Dominique could speak to the heads of states and governments in a strong and credible manner. Whether it was in discussions with Europe, the United States or China, his positions were important and meaningful. Replacing him won’t be easy: it seems doubtful that his successor could necessarily maintain the European (and French) monopoly of this function. For developing countries that rely on assistance from the IMF to get out of hard times and need assistance to get their economies back in shape, sometimes painfully, the impact is devastating. Several countries are the beneficiary of this assistance around the world: the IMF is irreplaceable in this area. It is to help these countries that the IMF has been created. For Europe, the risk is significant. The internal debate that divides the advocates of debt restructuring of the countries in difficulty, to begin with Greece and those who prefer to increase the assistance to Greece (including Greeks and the European Central Bank) they had a referee: the IMF and its Director General. The manner in which the IMF intervenes in similar problems is tough and its method to lend only if the milestones of the needed reforms are implemented is essential. Will this voice be as powerful without DSK? The IMF has a high quality staff but it requires leadership and vision as well. France did not need this kind of scandal to tarnish its image. She loses a key global leader and one of the best candidates for its presidential elections. He represented a chance to finally have a President who can lead the reforms that the country needs with real international experience. This departs from what has sometimes been a hexagonal foreign policy of the French Republic. The most urgent problem is obviously the situation of Greece and other countries in difficulty in the Eurozone. The fragility of the Eurozone did not need such a disturbing event. Investors were already worried, and confidence is fragile. Anything could set fire to the powder and provoke a crisis of global amplitude. Finally, allow me a personal reflection. It is always with great sadness that I see a man falling down. I have known DSK for many years and often admired him for his courageous action in the world of international finance where few leaders had his stature and his authority. His leadership will be missed.

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Officials Agree On Huge Portugal Bailout Package

May 16, 2011

BRUSSELS (AP, By Gabriele Steinhauser) — European finance ministers on Monday signed off on euro 78 billion ($110 billion) in rescue loans to Portugal to give the debt-ridden country time to overhaul its economy. One-third of the package will be financed by other eurozone states, another third will come from a fund backed by the EU budget, and the International Monetary Fund will contribute the final euro26 billion, the ministers said in a statement from Brussels, where they were meeting. The statement also said that the Portuguese authorities agreed to “encourage” private investors to maintain their exposure to the country “on a voluntary basis” and not pull out funds. That was a key demand from Finland, which had a hard time getting approval for the rescue package from its parliament. European officials could not immediately explain how private investors could maintain their exposure in practice, since the bailout program was supposed to keep Portugal out of international debt markets for about two years. It could mean that investors make a commitment to continue buying short-term treasury bills during the bailout period. Greece, for instance, has continued to issue short-term debt over the past year, after being granted euro110 billion in rescue loans. For the Greek bailout, large multinational banks were also asked to support their Greek subsidiaries. Approval from finance ministers was expected, after the Finnish parliament dropped its resistance, and many of the broad details of the program had already been revealed over the past weeks. A European official previously said the average maturity of the rescue loans will be 7 1/2 years — like the bailouts for Ireland and Greece — and come at an interest rate of around 5.7 percent. That’s lower than the rate Ireland has to pay for its bailout.

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Euro area trade and inflation figures discarded as attention falls on Greece

May 16, 2011

Euro area trade and inflation figures discarded as attention falls on Greece

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What Arrest Of IMF’s Head Means For Greece’s Bailout

May 15, 2011

BERLIN — The arrest of IMF chief Dominique Strauss-Kahn complicates a key European meeting on whether to give Greece billions more in aid – but experts insisted one man’s troubles won’t keep the 17 eurozone nations from trying to contain a debt crisis that threatens them all. Eurozone financial leaders are to discuss Greece’s deteriorating economy Monday at a Brussels meeting where experts will brief them on the situation in Athens. Key questions include what conditions to put on more help to the debt-strapped nation, with European leaders unhappy at what they see as limited Greek efforts to raise money by selling government property. Strauss-Kahn was arrested Sunday in New York on suspicion of sexual assault on a hotel maid. Despite the arrest, the International Monetary Fund said in a statement it remains “fully functioning and operational.” The IMF Executive Board convened an informal session Sunday and made Strauss-Kahn’s deputy, John Lipsky, acting managing director while its chief was unavailable. The Washington, D.C.-based lending body also sent Nemat Shafik, a deputy managing director who oversees IMF work in several EU countries, to Monday’s eurozone meeting to replace Strauss-Kahn. Strauss-Kahn had to cancel his Sunday meeting with Chancellor Angela Merkel in Berlin, where the German public is deeply skeptical about putting up any more money for Greece. Germany, as Europe’s largest economy, provided a large chunk of the euro110 billion ($157 billion) bailout for Greece from the European Union and the IMF last year. Greek government spokesman Giorgos Petalotis insisted the arrest would not affect his nation’s efforts to resolve its financial woes. “The Greek government deals with institutions, not individuals, and continues unimpeded to implement the program that will get it out of the crisis,” Petalotis said. German Finance Minister Wolfgang Schaeuble struck a similar tone, saying the eurozone meeting would go ahead as planned. And European politicians had already gotten used to the idea that Strauss-Kahn may leave his post soon to run for president of France next year. Yet others said Strauss-Kahn’s immediate departure from the financial stage adds additional uncertainty to the already difficult situation in Europe. “The leadership vacuum at the IMF comes at a highly inopportune time for Europe, which is teetering on the brink of a full-blown debt crisis,” said Eswar Prasad, a professor of international economics at Cornell University and a former IMF official. Many investors believe that Greece’s financial troubles are so overwhelming that a Greek default or a restructuring that would give creditors less than the full value of their bonds is inevitable. But that would be a serious blow to the euro, and eurozone governments and the European Central Bank appear determined to prevent it. Merkel has stressed that her government will need clear conditions for any new Greek loans before it will back more help. But Schaeuble has conceded that if the experts’ full report in June shows that Greece can’t pay its debts, something more will have to be done. The IMF put up euro30 billion ($43 billion) of that Greek loan and also supplies expertise in assessing whether Greece and other countries that get emergency loans are living up to the conditions attached to them. A euro78 billion ($111 billion) bailout for Portugal was also on the agenda for Monday’s meeting in Brussels, as is Ireland’s progress in dealing with the financial morass that led to its own EU-IMF bailout. With the terms of the Portuguese bailout largely decided, EU finance ministers are expected to signal approval of that deal. Although eurozone ministers were talking about Greece, a new bailout announcement was not planned for Monday. Instead, investors expected a general statement of support, followed by days or weeks of more haggling. Marco Valli, chief eurozone economist at UniCredit, said Greece’s troubles were separate from those of Strauss-Kahn, and he expected a decision on more help for Greece in the near future. “There is no way that just because the IMF’s chief gets into personal trouble that Greece would be left alone,” Valli said. “Maybe it can have some impact on timing, but our view is that this is not going to have a meaningful impact on the bottom line, which is that Greece would get a second bailout package.” Other analysts agreed that the IMF will simply navigate through the upcoming difficulties. “The IMF is not a one-trick pony,” David Buik at BGC Partners in London. “European markets may be damaged by this news for a few hours but there is plenty of depth to the IMF.” ___ AP Business Writer Gabriele Steinhauser contributed from Brussels and Demetris Nellas from Athens, Chris Rugaber in Washington D.C.

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Greek Protesters Riot Over Financial Crisis

May 14, 2011

Already struggling to avoid a debt default that could seal Greece’s fate as a financial pariah, this Mediterranean nation is also scrambling to contain another threat — a breakdown in the rule of law.

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Europe Ahead: Investors scrutinize the Inflation Report and focus on Greece

May 12, 2011

Europe Ahead: Investors scrutinize the Inflation Report and focus on Greece

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European Debt Woes Are Once Again on the Scene after S&P Downgrade to Greece

May 10, 2011

European Debt Woes Are Once Again on the Scene after S&P Downgrade to Greece

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Currencies fluctuate with the lack of data and focus on Greece

May 10, 2011

Currencies fluctuate with the lack of data and focus on Greece

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Euro Edges Higher, However Pressure Still Seen from Greece

May 10, 2011

Euro Edges Higher, However Pressure Still Seen from Greece

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Georges Ugeux: Is Europe About to Collapse? Not if It Restructures Sovereign Debt

May 9, 2011

Recent news from the European side of the Atlantic is not good. With €270 ($400) billion in bailout plans for three relatively small European countries (Greece, Ireland and Portugal), more than half the resources of the European Financial Stability Fund (EFSF), the easy task is done. The rescue of Portugal was announced last week and included severe measures that will put the country in recession for most of the next three years. As a precondition for this action, the IMF and the European Union required an approval by both the majority and the opposition. The Parliament approved it. The Greek situation remains the most worrying . With 2-year yields at 25%, Greek sovereign bonds are worse than junk. Standard & Poor’s just downgraded Greece from BB to B, making the situation even worse. Two main challenges lie ahead. The first one is the relative fragility of Spain. The restructuring of the banking sector is aiming at the second-tier institutions, mostly the Cajas de Ahorros (local savings banks). It should be manageable since Spain did not enter the financial crisis with an excessive sovereign debt level. A meaningful bailout of Spain, if it were to happen, would exhaust the EFSF’s intervention capability and require a substantial increase to its publicly announced €750 ($1,150) billion. While Italy has some fragility within its banking sector (mostly the Cassa Popolare di Milano) it might avoid such a treatment. A bailout of Italy would have to be six times as big as Greece’s. It would purely and simply create a collapse of the European financial system. The second one is the social element: so far, despite demonstrations on the street, the austerity measures have started to be put in place. Surprisingly, the trade unions, after violently expressing their opposition to the austerity measures that were aiming at the workers and pensioners, eventually surrendered to the obvious. That support, however, is fragile. There is a non-insignificant risk of European social unrest that could rise to the level of some of the Middle Eastern unrest. Those two fronts are therefore as essential as they are delicate to handle. The freedom of maneuver is limited. There is, however, something that is not quite right in the European bailout. It is the refusal by the European Governments, the European Central Bank and the countries concerned to even envisage a restructuring of their sovereign debt. Ever since the IMF started helping countries in difficulty to face similar situations, restructuring of the sovereign debt was on top of the agenda. Why would Europe not go through the same exercise? The answer lies in the immense power of European banks on their national Governments. Some of them have balance sheets representing a multiple of their country’s GDP while the largest U.S. bank only reach a fraction. Most financing in Europe goes through the bank balance sheets. Since banks are important holders of European sovereign debt, including those of the countries in crisis, a restructuring of the debt would require them to take a write-off on their core holdings of these bonds. So far, they hold those securities at… their nominal value. This will be accepted by Europe for its “banking stress tests” and therefore, they will be meaningless. Restructuring is also a way to share the pain with the public at large. This is where the social fear, the limits of the EFSF and the structural banking fragility meet. Without an immediate restructuring of sovereign debt of the ailing countries, the European bailouts will only be the burden of their citizens and crush consumers and growth. Without a serious debt restructuring, all Europe is doing is buying time and worsening the problem. It is now at the mercy of any confidence crisis that could erupt in the markets as it did last Friday when the absurd notion of Greece leaving the Euro erupted. Europe is on a tightrope. It can explode at any moment. European Governments and authorities know it. They are consciously running the risk of their own collapse, and a world crisis as a consequence.

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