IMF aid to Europeans stirrings of resentment

Members feel Eurozone countries aren’t willing to swallow the necessary tough medicine


BT 20121010 IMF 204330
Critical role: Last month, European Central Bank president Mario Draghi (right) gave the International Monetary Fund, headed by Christine Lagarde (left), an important new task: requesting that the Fund keep an eye on the behaviour of countries like Spain if the bank took measures to contain their borrowing costs. – PHOTO: REUTERS

IT IS one of the ironies of the eurozone crisis: the Europeans who have long dominated the International Monetary Fund (IMF) are now the ones borrowing its money and swallowing its advice.

The IMF, traditionally a lender to poor countries, now devotes more than half of its financial resources to the eurozone. Moreover, the fund and its managing director, Christine Lagarde, have emerged as the taskmasters that European leaders seem to need to flog them towards a solution to the crisis.

The Fund’s critical role in Europe has revitalised the organisation’s claim to relevance in world affairs. Last month, Mario Draghi, president of the European Central Bank (ECB), gave the Fund an important new task: requesting that it keep an eye on the behaviour of countries like Spain if the bank took measures to contain their borrowing costs.

“The ECB wants an independent observer,” said Manuela Moschella, an assistant professor at the University of Turin who studies the IMF. ”They want someone who can blow the whistle and say what is going on.”

But there is also resentment among some of the 188 countries that belong to the fund and supply its financial firepower. These discontents are likely to surface in Tokyo when the I.M.F. and the World Bank hold their annual meetings, which were to start Tuesday.

The United States and Canada, among others, have objected to the shift of resources to Europe at the same time that European countries have blocked changes that would give emerging countries a greater voice in making I.M.F. decisions.

Tough pill to swallow

Canadian leaders, in particular, have said that countries whose people live on a few dollars a day should not be asked to help maintain the European welfare state.

”The feeling is that the Europeans don’t want to swallow the tough medicine,” said Bessma Momani, a professor of political science at the University of Waterloo in Ontario. There is, she said, ”a more general sense that European society and way of life are passé.

”Before the beginning of the financial crisis in 2008, the fund provided almost no financial assistance to Europe. Now resources committed to the European Union, including Greece and Portugal, account for 56 percent of the I.M.F. total – (EURO)110 billion, or $143 billion.

The first European countries to seek I.M.F. help in recent years were former Soviet Bloc countries, like Latvia and Hungary in 2008, both of which are members of the European Union. The I.M.F. also played a main role in the Vienna Initiative in 2009, in which the European Union and commercial banks cooperated to prevent the collapse of the financial systems in Eastern Europe.

Management of the I.M.F. has long been dominated by Europeans, leading to accusations that the region is now getting preferential treatment. Since its founding in 1946, all of the fund’s managing directors have been European.

”There is at least the suspicion that the European members will get easier terms” for financing, Ms. Moschella said.

”This is really a threat to the credibility of the organization. I think the I.M.F. has behaved correctly, but the suspicion is there.

”European countries continue to contribute more money to I.M.F. coffers than they take back in loans. Germany’s quota, or maximum financial commitment, is $14.6 billion, while France’s is $10.7 billion. The largest contributor is the United States, with a quota of $42.1 billion out of a total for the fund of $238 billion.

Officials at the fund argue that the euro zone crisis has become a threat to the global economy, including poorer countries, and it is in everyone’s interest to fix it. As members of the I.M.F. and financial contributors, European countries have as much right to ask for help as other members.

”When there are systemic crises that affect other countries in the world, it is natural for the fund to be involved,” said Reza Moghadam, director of the fund’s European department.

”The fund has huge depth of expertise in crisis management,” Mr. Moghadam added. ”We have dealt with a lot of crises in the past, and there is huge institutional knowledge.

”Many analysts agree that there is no other organization with the clout, money or expertise to serve as outside arbiter to quarreling euro zone members.

”Expertise and impartiality – that’s what they bring to the table,” said Carl B. Weinberg, chief economist at the research firm High Frequency Economics in Valhalla, New York. ”They know how to walk into a government treasury and look at the books and know what they’re seeing.” Mr. Weinberg, as a banker earlier in his career, worked with the I.M.F. on debt restructuring programs in Mexico and other countries.

Ms. Lagarde has helped Mr. Draghi and U.S. leaders put pressure on European officials to move more aggressively to fight the crisis.

European firewall

During a speech in Washington late last month, Ms. Lagarde beseeched European leaders to ”implement the European firewall – notably the European Stability Mechanism; implement the agreed plan for fiscal union; and, at the country level, implement the programs that are essential for growth, jobs and competitiveness.

”If, as expected, Spanish leaders ask for help from the European Central Bank, the I.M.F. would monitor whether the country kept promises to overhaul the economy and contain government spending. The E.C.B. does not want to take the risk of buying Spanish bonds, a way of lowering the country’s borrowing costs, without such conditions.

The euro zone crisis has also presented the I.M.F. with unprecedented organizational challenges. Instead of dealing with one country, it must deal with the 17 members of the European Union that use the euro. They frequently do not agree, and decision-making is slow. In overseeing lending and restructuring programs in Greece, Ireland and Portugal, the fund has shared authority with the E.C.B. and the European Commission, with the three having come to be known as the troika.

”The fund’s relationship with Europe is more complicated than anything it has ever been involved in,” said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics in Washington.

While he said the fund had done a ”reasonable job” in Europe, Mr. Truman also called the I.M.F.’s involvement on the Continent a ”political subterfuge” because the euro zone countries were effectively outsourcing responsibilities they should be taking on themselves.Some observers say that European countries made the fund’s task more difficult because they hesitated too long to ask for help, for reasons of pride.

”We should have let the I.M.F. in earlier in Greece,” said Erik Berglof, chief economist at the European Bank for Reconstruction and Development. ”We could have maybe had an earlier solution to the Greek problem and not allow it to grow in magnitude before it was addressed.

”There is a risk that European leaders will repeat the same mistake in Spain, waiting to call in the I.M.F. until the crisis is acute. No national leader likes to take orders from an outside institution, especially in Europe, where countries are not used to being charity cases. The stigma and loss of sovereignty are likely reasons that Prime Minister Mariano Rajoy of Spain has delayed asking for help.The fund has learned from its own mistakes in places like Asia that too much austerity can be counterproductive, but was not always able to apply that experience. In Greece, for example, Germany and other northern countries insisted on a strict austerity program.”The I.M.F. has learned a lot how to design programs and structural reform measures and how to embed them in the local political system,” Mr. Berglof said. ”That experience the European institutions didn’t have from the beginning.

”Though the I.M.F.’s presence in Europe may not please everyone, it is likely to continue growing. No other institution, even the E.C.B., has the political independence or expertise needed to oversee restructuring programs in a country like Spain. Canada and other countries that resent paying for a European bailout are not likely to block one altogether.

Said Mr. Berglof of the E.B.R.D., ”There is a broader constituency that has a very strong stake in the resolution of the economic problems in Europe.

Political uncertainty

”The International Monetary Fund is cutting its global economic forecast yet again, calling the risks of a slowdown ”alarmingly high,” primarily because of policy uncertainty in the United States and Europe, Annie Lowrey reported from Washington.

It foresees global growth of 3.3 percent in 2012 and 3.6 percent in 2013, down from 3.5 percent this year and 3.9 percent next year when it made its previous report in July. New estimates suggest a 15 percent chance of recession in the United States next year, 25 percent in Japan and more than 80 percent in the euro area.

Financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty continue to hamper growth in high-income countries, the fund said. At the same time, the emerging-market countries that fueled much of the recovery from the global recession, like China and India, have continued to cool off, with global trade slowing.

By Jack Ewing, The International Herald Tribune

34,000 more out of work in Eurozone

BRUSSELS: Unemployment in the eurozone remained at record highs in August and the number of people out of work climbed again, highlighting the human cost of the bloc’s three-year debt crisis.

Joblessness in the 17 countries sharing the euro was 11.4% of the working population in August, which was stable compared with July on a statistical basis, but another 34,000 people were out of work in the month, the EU’s statistics office Eurostat said yesterday.

That left 18.2 million people unemployed in the eurozone, the highest level since the euro’s inception in 1999, while 25.5 million people were out of a job in the wider 27-nation European Union, Eurostat said.

The debt crisis that began in Greece in 2010 and has spread across the eurozone to engulf Ireland, Portugal, Cyprus and the much bigger economy of Spain has devastated business confidence and sapped companies’ abilities to create jobs.

A European-wide drive to cut debts and deficits to try to win back that lost confidence has led governments to cut back spending and lay off staff, while stubbornly high inflation and limited bank credit are adding to household’s problems.

Joblessness could go beyond 19 million by early 2014, or about 12% of the eurozone’s workforce, according to a new study by consultancy Ernst & Young, predicting that rate to rise to 27% in indebted Greece. That compares with 24.4% in the country in June, the latest data available.

“In this difficult environment, companies are likely to reduce employment further in order to preserve productivity and profitability,” the report said.

Eurozone manufacturing put in its worst performance in the three months to September since the depths of the 2008/2009 financial crisis, with factories hit by falling demand despite cutting prices, a survey showed yesterday.

The International Monetary Fund expects the eurozone’s economy to shrink 0.3% this year and only a weak recovery to emerge next year that will generate 0.7% growth.

But the joblessness picture also obscures wide regional variations. In Austria, unemployment is the eurozone’s lowest at 4.5% in August, a slight fall from July, while Spain has the highest rate at 25.1% in the month.

While a bursting of a real estate bubble in Spain and the end of a decade of credit-fuelled expansion in Greece account for difficulties in the Mediterranean, policymakers still face the challenge of trying to revive growth across the bloc.

The recession in the eurozone is due to the tough consolidation course in the peripheral countries, weaker global demand and the high uncertainty coming from the sovereign debt crisis,” Commerzbank economist Christoph Weil wrote in a recent research note.

Eurozone and UK central bankers will likely leave policy unchanged at their meetings this week, but both will announce additional measures to help their moribund economies before the year’s end, according to a poll. – Reuters

Moody’s downgrades 15 major banks: Citigroup, HSBC …

 Citigroup and HSBC were among the banks downgraded

The credit ratings agency Moody’s has downgraded 15 banks and financial institutions.

UK banks downgraded include Royal Bank of Scotland, Barclays and HSBC.

In the US, Bank of America, Citigroup, Goldman Sachs and JP Morgan are among those marked down.

BBC business editor Robert Peston reported on Tuesday that the downgrades were coming and said that banks were concerned as it may make it harder for them to borrow money commercially.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” Moody’s global banking managing director Greg Bauer said in the agency’s statement.

The other institutions that have been downgraded are Credit Suisse, UBS, BNP Paribas, Credit Agricole, Societe Generale, Deutsche Bank, Royal Bank of Canada and Morgan Stanley.

Moody’s said it recognised, “the clear intent of governments around the world to reduce support for creditors”, but added that they had not yet put the frameworks in place that would allow them to let banks fail.

Some of the banks were put on negative outlook, which is a warning that they could be downgraded again later, on the basis that governments may eventually manage to withdraw their support.

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The most interesting thing about the Moody’s analysis is that it, in effect, creates three new categories of global banks, the banking equivalent of the Premier League, the Championship and League One”

image of Robert Peston Robert Peston Business editor

In a statement, RBS responded to its downgrade saying: “The group disagrees with Moody’s ratings change which the group feels is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile.”

The BBC’s Scotland business editor Douglas Fraser tweeted: “Cost of RBS downgrade by Moody’s: having to post an estimated extra £9bn in collateral for its debts.”

Of the banks downgraded, four were cut by one notch on Moody’s ranking scale, 10 by two notches and one, Credit Suisse, by three notches.

“The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for,” said Mark Grant, managing director of Southwest Securities.

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FDIC: Failed Bank List

Big Banking

Debt crisis in Europe will affect rest of the world

The economic crisis in Europe is deepening and may get worse, with worrisome effects on the rest of the world.Jose Manuel Barroso, David Cameron

Eurozone crisis: high-stakes gamble as David Cameron warns Greek voters.David Cameron and European Commission president José Manuel Barroso talk before a session at the Nato summit in Chicago. Photograph: Pablo Martinez Monsivais/AP

THE economic situation in Europe has worsened considerably in the past week, giving rise to a very worrisome situation.

The ramifications of a full-blown crisis are serious not only for Europe but also the rest of the world.

The recent Greek elections saw the citizens proclaiming their anger towards the austerity policies tied to the European-IMF bail-out package, by repudiating the two major parties and giving the small anti-austerity Syriza party second place.

The elections came in the midst of a greatly deteriorating condition. Greece has 22% unemployment, 50% youth unemployment, GNP is falling steeply, and public debt will remain high at 160% of GDP next year despite the recent bailout and debt-restructuring measures.

The leader of Syriza, Alexis Tsipras, who swept to the forefront of Greek politics on the wind of protest against the austerity measures imposed by creditors, wants to re-negotiate the terms of the bailout.

He thinks his insistence on this will eventually force the creditors to change the terms, with Greece remaining in the Eurozone.

But many analysts think that the response to this demand from the EU and IMF would be to stop further loans and force Greece to exit the Euro. In a second election in mid-June, Syriza is expected to do even better and a messy Greek loan default and Euro exit are now seen as more than just possible.

In a Eurozone exit, Greece would re-introduce a local currency, and after Greeks change from their Euros, a depreciation of the new currency is expected to happen.

News report indicate that some capital flight from Greece is already taking place, as Greeks fear that their present Euro-denominated assets would lose value after conversion to the local currency.

Meanwhile, Spain was last week desperately trying to avoid a run on banks after the government was forced to partly nationalise Bankia, the second largest bank, followed by rumours of such a run.

The value of bad loans held by the banking sector rose one third in the past year to 148 billion Euro and Moody’s downgraded the credit rating of many Spanish banks.

The Spanish finance minister Luis de Guindos said the battle for the Euro is going to be waged in Spain, implying his country is now in front in trying to prevent the Greek crisis from infecting other European countries and bringing down the Euro.

The spreading crisis throws into doubt the policies in most European countries that have in recent years focused on drastically cutting government spending to reduce the budget deficit in an attempt to pacify investors and enable a continued flow of loans.

This reversed the coordinated policy of fiscal reflation that the G20 leaders agreed on in 2009 to counter the global crisis. It contributed to the rapid recovery.

Since then economists and politicians alike have been debating the merits of Keynesian reflationary policies versus a resumption of IMF-type fiscal austerity.

The movement towards recession in Europe as a whole and deep falls in GNP in bail-out countries like Greece has boosted the arguments of the Keynesians.

But key leaders such as Angela Merkel of Germany and David Cameron of Britain are still convinced of the need to stick to austerity.

The victory of the new French President Francois Hollande and the stunning polls performance of the Syriza party in Greece indicate that the public wind has shifted radically against austerity, and that a change may be on the cards.

The stopping of loans to Greece would lead to an economic collapse, with government debt default, bank runs, re-denomination of local contracts to local currency and default on external contracts denominated in euro, in a scenario painted by Wolf.

A Greek exit could trigger bank runs and capital flight in Portugal, Ireland, Italy and Spain and beyond, causing collapse in asset prices and large GNP falls.

A decisive European response is needed, such as the European Central Bank providing unlimited loans to replace money taken out in bank runs, capping of interest rates on sovereign debt, Eurobonds and abandoning austerity-centred policies.

But if these policies are not taken, the Eurozone may disintegrate, with one study suggesting GNP falls on 7% to 13% in various countries, and if a full Eurozone break up takes place there could be a freeze in the financial system, a collapse in spending and trade, many lawsuits and Europe facing a situation of political limbo.

The impact on the world would be worse than the Lehman collapse. Though the implication is that this should not be allowed, a Greek exit would greatly increase the likelihood of these dangers.

If Greece leaves, the Eurozone will have to change fundamentally but if that is impossible, large crises will be repeated in a nightmare.

There would have to be a choice between a stronger union of European countries (which many do not like) or endless crises in future, or a break up now. No good choices exist, concludes Wolf.

The scenarios and predictions detailed above in the Wolf article are pessimistic, but may also be realistic not only because of the current economic situation, but also the apparent lack of conditions for a political solution.

Watching from the sidelines, with no ability to influence developments, many in the developing countries are disturbed by the turn of events. It will likely lead to a weakening of the global economy at best and a full blown crisis at worst, with the developing countries at the receiving end in terms of trade downturn, financial reverberations, and declining incomes and jobs.

It is apparent, once again, that a global forum should exist where all countries can discuss developments in the global economy and contribute their views on what needs to be done.

In the inter-connected world, policies and events in one part (especially in the core countries) affect all others.

Global Trends By MARTIN KHOR

Related posts:

UK bank governor warns of eurozone crisis ‘storm’ 

The euro crisis just got a whole lot worse 

Unemployment Fuels Debt Crisis

UK bank governor warns of eurozone debt crisis ‘storm’; Eurozone ‘very close to collapse’!

The Bank of England has cut its growth forecast for this year to 0.8% from 1.2%, saying the eurozone “storm” is still the main threat to UKrecovery.

The eurozone was “tearing itself apart” and the UK would not be “unscathed”, said its governor Sir Mervyn King.

He also confirmed that the Bank has been making contingency plans for the break-up of the euro.

The rate of inflation will remain above the government’s 2% target “for the next year or so”, the Bank said.

Sir Mervyn was presenting the Bank’s quarterly inflation report.

He told a news conference that the euro area posed the greatest threat to the UK recovery, and there was a “risk of a storm heading our way from the continent”.

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

“The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic,” Sir Mervyn said.

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European policymakers, I suspect, will not rush to thank him for his kind and timely advice”

image of Stephanie Flanders Stephanie Flanders Economics editor

A ‘mess’

Andrew Balls, the managing director in London of global investment firm Pimco, said it was reasonable for Sir Mervyn and other policymakers to plan for a Greek exit.

“Yes, maybe they should plan for an exit, but the thing is, speculating about it can make the event more likely, so the Europeans really do have a mess there,” he told the BBC.

“If Greece is to slide out of the euro and collapse, how are they going to protect Ireland, Portugal, Spain and Italy?

Separately, Prime Minister David Cameron also spoke of the financial storm clouds across Europe, warning that eurozone leaders must act swiftly to solve its debt crisis or face the consequences of a potential break up.

He said during Prime Minister’s Questions in the House of Commons: “The eurozone has to make a choice. If the eurozone wants to continue as it is, then it has got to build a proper firewall, it has got to take steps to secure the weakest members of the eurozone, or it’s going to have to work out it has to go in a different direction,

“It either has to make up or it is looking at a potential break up. That is the choice they have to make, and it is a choice they cannot long put off.”

The Bank’s report said, however, that the eurozone crisis was not the only issue weighing on the UK economy, with volatile energy and commodity costs, and the squeeze on household earnings also having an impact.

Andrew Balls, of global investment firm Pimco says, “a disorderly outcome for Greece is going to be bad for the global economy”.

It all meant that the UK economy would not return to pre-financial crisis levels before 2014, Sir Mervyn said.

Nevertheless, he remained optimistic about the longer term. “We don’t know when the storm clouds will move away. But there are good reasons to believe that growth will recover and inflation will fall back,” he said.

On quantitative easing, he said that no decisions had been made whether or not to continue pumping money into the economy. The last stimulus programme was still “working its way through the system”.

‘Outlook is probably better’

Sir Mervyn’s comments came on the day that official unemployment figures showed a fall in the jobless rate, underlining recent surveys that the private sector had become more confident about hiring labour.

He said the fall in joblessness was consistent with the expected gradual recovery in the UK economy.

But Graeme Leach, chief economist at the Institute of Directors, said of the Bank’s report: “Talk about kicking an economy when it’s down.

“On top of the euro crisis and a double-dip recession, the Bank of England is now saying inflation may not fall fast enough to permit more quantitative easing.

“Actually we think the inflation outlook is probably better than the Monetary Policy Committee (MPC) thinks, with the impact of the euro crisis, declining real incomes and weak money supply growth suggesting inflationary pressures may recede later this year and into 2013.

“After many years of underestimating inflationary pressure let’s hope the MPC is now making the opposite mistake by overestimating it”.

Ed Balls, Labour’s shadow chancellor, said: “The Bank of England has once again slashed its growth forecast for Britain, but despite this the government says it will just plough on regardless with policies that are hurting but not working.

“The governor is right to warn of a coming storm from Europe. That is why we warned George Osborne not to rip up the foundations of the house and choke off Britain’s recovery with spending cuts and tax rises that go too far and too fast.

“What happens in the eurozone in the coming weeks and months will have an impact on our weakened economy,” Mr Balls added..-  BBC

Eurozone was ‘very close to collapse’

Eurozone was ‘very close to collapse’

17 May 2012 Last updated

A European Central Bank board member has conceded the ECB may have “saved” the eurozone banking system and eurozone economy in Autumn 2011 by providing one trillion euros of emergency loans to hundreds of European banks at an interest rate of just 1%.

ECB Executive Board member, Benoit Coeure, told Robert Peston: “We were very close to a collapse in the banking system in the euro area, which in itself would have also led to a collapse in the economy and deflation, And this is something that the ECB could not accept.”

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The euro crisis just got a whole lot worse

Jeremy WarnerWith Europe plunging back into recession and unemployment soaring, Francois Hollande, the French president elect, is calling for growth objectives to be reprioritised over the chemotherapy of austerity.

Riot policemen lead away a right-wing protestor holding a placard reading

Riot policemen lead away a protester holding a placard reading ‘Let’s get out of the Euro’ during May Day demonstrations in Neumuenster, Germany Photo: Reuters

Angela Merkel, the German Chancellor, has meanwhile continued to insist that on the contrary, Europe must persist with the hairshirt. What’s needed is political courage and creativity, not more billions thrown away in fiscal stimulus. Stick with the programme, she urges, as the anti-austerity backlash reaches the point of outright political insurrection.

Hollande and Merkel are, of course, both wrong. What Europe really needs is a return to free-floating sovereign currencies. Only then will Europe’s seemingly interminable debt crisis be lastingly resolved. All the rest is just so much prancing around the goalposts, or an attempt to make the fundamentally unworkable somehow work.

The latest eurozone data are truly shocking, much worse in its implications both for us and them than news last week of a double-dip recession in the UK.

Even in Germany, unemployment is now rising, with a lot more to come judging by the sharp deterioration in manufacturing confidence. For Spanish youth, unemployment has become a way of life, with more young people now out of a job (51.1pc) than in one. In contrast to the US, where the unemployment rate is falling, joblessness in the eurozone as a whole has now reached nearly 11pc. Against these eye-popping numbers, Britain might almost reasonably take pride in its still intolerable 8.3pc unemployment rate.

There is only one boom business in Spain these days – teaching English and German. No prizes for guessing where these students are heading.

Hollande’s opportunism in calling for a growth strategy he must know cannot be delivered looks like being answered only by intensifying recession. Maybe Mario Draghi, president of the European Central Bank, will surprise us after Thursday’s meeting with a rate cut and a eurozone-wide programme of quantitative easing. But even if he did, it wouldn’t fix the underlying problem, which is one of lost competitiveness manifested in ever more intractable levels of external indebtedness.

To think these problems can be solved either by fiscal austerity or, as advocated by Hollande and others, by its polar opposite of fiscal expansionism is to descend into fantasy.

By reinforcing the cycle, and thereby exacerbating the slump, fiscal austerity is proving self-defeating. Far from easing the problem of excessive indebtedness, it is only making it worse.

But it is equally absurd to believe that countries in the midst of a fiscal crisis can borrow their way back to growth. Who is going to lend with the certainty of a haircut or eurozone break-up to come?

I’ve been looking at the comparative numbers on fiscal consolidation, and they reveal some striking differences. The hairshirt prescribed for others is most assuredly not being donned by austerity’s cheerleader in chief, Germany.

In fact, German government consumption is continuing to rise quite strongly, even in real terms, and the fiscal squeeze pencilled in by Berlin for itself for the next three years is marginal compared with virtually everyone else. Germany is requiring others to adopt policies it has no intention of following itself. What’s so odd about that, you might ask?

Right to spend

Germany has earned the right to spend through years of prior restraint. It’s got no structural deficit to speak of and, in any case, isn’t that the way things are meant to work, with those capable of some fiscal expansionism compensating for the squeeze imposed by others?

All these things are true, but there is something faintly hypocritical about a country prescribing policy for others that it wouldn’t dream of imposing on itself. Germany’s supposed love of self-flagellation is actually something of a myth.

By the way, despite the rhetoric, Britain is hardly an outrider on austerity either. Now admittedly, the Coalition’s plans for fiscal consolidation have been somewhat derailed by economic stagnation. We were meant to be further along than we are. But in terms of what’s left to do, the UK is no more than middle of the pack.

On current plans, by contrast, the fiscal squeeze in the US, land of supposed fiscal expansionism, ratchets up substantially to something quite a bit bigger than what the UK has pencilled in for the next two years. It remains to be seen what effect that’s going to have on the American recovery. Will renewed growth melt away as surely as it did in early 2011, or is it self-sustaining this time?

Back in the eurozone, the stand-off between creditor and debtor nations shows few, if any, signs of meaningful resolution. During the recession of the early 1990s, there was a famous British Property Federation dinner at which the chairman introduced the then chief executive of Barclays Bank, Andrew Buxton, as “a man to whom we owe, er, more than we can ever repay”. It was a good joke, but it also neatly encapsulated what happens in all debt crises.

When the debtor borrows more than he can afford, the creditor will in the end always take a hit. The only thing left to talk about is how the burden is to be shared. The idea that you can force the debtor to repay by depriving him of his means of income is a logical absurdity, yet this is effectively what’s going on in the eurozone.

When such imbalances develop between countries, they are normally settled by devaluation, which provides a natural market mechanism both for restoring competitiveness in the debtor nation and establishing the correct level of burden sharing.

Least tortuous form of default

It’s default in all but name, but it is the least tortuous form of it.  Free-floating sovereign exchange rates also provide a natural check on the build-up of such imbalances in the first place.

The reason things got so out of hand in the eurozone is that investors assumed in lending to the periphery that they were effectively underwritten by the core, mistakenly as it turned out. Interest rates therefore converged on those of the most creditworthy, Germany, allowing an unrestrained credit boom to develop in the deficit nations.

None of this is going to be solved by austerity. For now, there is no majority in any eurozone country for leaving the single currency, but one thing is certain: nation states won’t allow themselves to be locked into permanent recession. Eventually, national solutions will be sought.

The whole thing is held together only by the fear that leaving will induce something even worse than the current austerity. This is not a formula for lasting monetary union.

Moody’s declares Greece in default of debt

Bond credit rating agency says EU member has defaulted on its repayments as it secures biggest debt deal in history.

Moody’s Investors Service has declared Greece in default on its debt after Athens carved out a deal with private creditors for a bond exchange that will write off $140 billion of its debt.

Moody’s pointed out that even as 85.8 per cent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.

Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 per cent of the investment, Moody’s said.

“According to Moody’s definitions, this exchange represents a ‘distressed exchange,’ and therefore a debt default,” the US-based rating firm said.

For one, “The exchange amounts to a diminished financial obligation relative to the original obligation.”

Secondly, it “has the effect of allowing Greece to avoid payment default in the future.”

Ahead of the debt deal, Moody’s had already slashed Greece’s credit grade to its lowest level, “C,” and so there was no impact on the rating.

Moody’s said it will revisit the rating to see how the debt writedown, and the second Eurozone bailout package, would affect its finances.

However, it added, at the beginning of March “Moody’s had said that the risk of a default, even after the debt exchange has been completed, remains high.”


Eurozone unemployment hits new record

The euro sculpture at the European Central Bank in Frankfurt Unemployment is at the highest rate since the euro was launched in 1999

The jobless rate in the 17 countries that use the single currency was 10.4% in December, unchanged from November’s figure which was revised up from 10.3%.

Some 16.5 million people were out of work in the eurozone in December, up 751,000 on the year before.

The highest unemployment rate remains in Spain (22.9%), while the lowest is in Austria (4.1%).

Unemployment has been rising throughout 2011, as the debt crisis in the region has continued. In December 2010, the unemployment rate in the euro area was 10%.

Investment delays

Guillaume Menuet, economist at Citigroup, said he expected the number of people out of work to increase throughout 2012.

“If you think about the direction of employment expectations that you see across various business surveys, the outlook for employment doesn’t look particularly enticing, simply because the uncertainty is very high.

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Much energy and argument has been spent on this agreement. It is questionable, however, whether it will have much influence on the immediate crisis. ”

image of Gavin Hewitt Gavin Hewitt BBC Europe editor

“In many cases you find firms continuing to delay investment projects. For those that are still making profits, hiring is being frozen, and for those which are under pressure to hit results or losing money, job losses are becoming the only solution that they have,” he said.

In the 27 EU countries, the unemployment rate was 9.9% in December, with 23.8 million people out of work. November’s figure was also revised up from 9.8% to 9.9%.

The biggest increases over the past year were seen in Greece, Cyprus and Spain.

The largest falls took place in Estonia, Latvia and Lithuania.

Deteriorating situation

The issue of jobs and economic growth was a key area for discussion at this week’s summit of EU leaders in Brussels.

On Monday, figures showed that the Spanish economy shrank by 0.3% in the last quarter of 2011. It is now widely expected that Spain will enter recession in the first quarter of this year.

Also on Monday, France cut its growth forecast for this year to 0.5% from 1% “to take into account the deterioration of the economic situation”.

At the Brussels summit, 25 of the 27 member states agreed to join a fiscal treaty, aimed at much closer co-ordination of budget policy across the EU to prevent excessive debts accumulating.

The UK and the Czech Republic did not sign up to it. UK Prime Minister David Cameron said he had “legal concerns” about the use of EU institutions in enforcing the treaty, while the Czechs cited “constitutional reasons” for their refusal.

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Europeans migrate south as continent deepens into crisis

Helen Pidd in Berlin

Tens of thousands of Irish, Greek and Portuguese people leave in search of a new life as the eurozone’s woes worsen

Gaelic sportsman Mick Hallows

Gaelic sportsman Mick Hallows of the Roundtowers club in Clondalkin, Dublin who has emigrated to Australia because of a lack of work in Ireland. Photograph: Kim Haughton

Since its conception, the European Union has been a haven for those seeking refuge from war, persecution and poverty in other parts of the world. But as the EU faces what Angela Merkel has called its toughest hour since the second world war, the tables appear to be turning. A new stream of migrants is leaving the continent. It threatens to become a torrent if the debt crisis continues to worsen.

Tens of thousands of Portuguese, Greek and Irish people have left their homelands this year, many heading for the southern hemisphere. Anecdotal evidence points to the same happening in Spain and Italy.

The Guardian has spoken to dozens of Europeans who have left, or are planning to leave. Their stories highlight surprising new migration routes – from Lisbon to Luanda, Dublin to Perth, Barcelona to Buenos Aires – as well as more traditional migration patterns.

This year, 2,500 Greek citizens have moved to Australia and another 40,000 have “expressed interest” in moving south. Ireland‘s central statistics office has projected that 50,000 people will have left the republic by the end of the year, many for Australia and the US.

Portugal‘s foreign ministry reports that at least 10,000 people have left for oil-rich Angola. On 31 October, there were 97,616 Portuguese people registered in the consulates in Luanda and Benguela, almost double the number in 2005.

The Portuguese are also heading to other former colonies, such as Mozambique and Brazil. According to Brazilian government figures, the number of foreigners legally living in Brazil rose to 1.47 million in June, up more than 50% from 961,877 last December. Not all are Europeans, but the number of Portuguese alone has jumped from 276,000 in 2010 to nearly 330,000.

Gonçalo Pires, a graphic designer who has swapped Lisbon for Rio de Janeiro, said: “It’s a pretty depressing environment there [in Portugal].” In Brazil, by contrast, “there are lots of opportunities to find work, to find clients and projects”.

Joy Drosis, who left her Greek homeland for a life in Australia, expressed similar motives. “I had to do something. If I had stayed in Greece, we were all doomed,” she said. “I’m lucky that I can speak the language: many others can’t.”

The key moment in this southerly migration may have come last month, when the Portuguese prime minister, Pedro Passos Coelho, made a humbling visit to Angola, begging for inbound investment. Just 36 years after the end of Portuguese colonial rule in Angola, its president was ready to show mercy.

“We’re aware of the difficulties the Portuguese people have faced recently,” said José Eduardo dos Santos. “Angola is open and available to help Portugal face this crisis.”

But the Portuguese making this move will not have it easy: life expectancy in Angola is still just 39, compared with 79 in Portugal, and crime is rife.

In Ireland, where 14.5% of the population are jobless, emigration has climbed steadily since 2008, when Lehman Brothers collapsed and the bottom fell out of the Irish housing market. In the 12 months to April this year, 40,200 Irish passport-holders left, up from 27,700 the previous year, according to the central statistics office. Irish nationals were by far the largest constituent group among emigrants, at almost 53%.

The Guardian spoke to one Dublin under-19s football and hurling club that had lost eight out of 15 players in the past 18 months. Most of the nascent sports stars had headed to Australia. Experts believe the exodus will increase, given the £1.4bn tax rises and austerity measures just announced. The thinktank the Economic and Social Research Institute (ESRI) forecast this month that 75,000 people would emigrate from Ireland in 2012 .

For departing Greeks the top destinations over the years, according to the World Bank, have been Germany, Australia, Canada, Albania, Turkey, UK, Cyprus, Israel and Belgium.

Skilled Greeks are particularly likely to leave: as an example of what can happen, 4,886 physicians emigrated in the year 2000 (the last year for which the World Bank’s Migration and Remittances Factbook cites data for departing doctors), meaning the country lost 9.4% of its doctors in that single year.

The World Bank gives the number of immigrants living in Greece as about 1.13 million in 2010, around 10% of the population. Most have come, over the years, from poorer countries such as Albania, Bulgaria, Romania and Georgia, it is likely that the majority of new arrivals lack the skills to replace the emigrants.

Additional reporting by Henry McDonald in Dublin, Helena Smith in Athens, Tom Phillips in São Paulo, and Alison Rourke in Sydney

This article was amended on 22 December 2011 to delete a sentence reading: “In 2010, 1.21 million people emigrated [from Greece], according to the World Bank, equalling 10.8% of the population.” This was actually the total “stock” of Greeks said by the World Bank to be living overseas as of 2010, not the number who emigrated in that year. Also deleted was a reference stating that “1.3 million people arrived [in Greece] in 2011″. This was the total “stock” of immigrants said by the World Bank to be living in Greece as of 2010, not the number who arrived in that year. A sentence saying that 4,886 physicians emigrated from Greece in 2010 has been corrected; the year was 2000.

The new Euro deal – not the whole bazooka

What Are We To Do by LIN SEE-YAN

 Link between joint liability of debts and good behaviour is missing

AP Photo logo AP Photo  A beggar sits in Via Montenapoleone shopping street in downtown Milan, Italy, Tuesday, Dec.13, 2011. Further signs of stress emerged Tuesday to indicate that Europe’s most recent summit agreement to get the euro countries to bind their economies much closer together has only made limited progress in pulling the continent out of its debt crisis. While figures showed that Europe’s banks parked more money at the European Central Bank than they have at any other time this year, Italy’s borrowing rates in the markets ratcheted even higher and back towards the levels that forced Greece, Ireland and Portugal into seeking financial bailouts.

The euro “Merkozy” deal agreed last weekend targeting deeper euro-integration was a step in the right direction but did not offer the big bazooka that could really ease market tension. It’s only part of the solution Europe badly needed: it’s not even the solution markets are waiting for.

So far, wanting “more Europe” has come slowly, and grudgingly; but crucially, lacked proper leadership to deal with a truly systemic crisis. What’s paralyzing the euro-zone is a flaw buried deep within the monetary union’s structure what one writer identified as “the unresolved conflict between the needs of the euro and the independence of its members.” Put differently, the link between joint liability of debts and good behaviour is missing.

Looking back, all those wasted years of skirting the underlying problems, causing rising budget deficits and building massive debt exploded in late 2009 when Greece first toppled into crisis. The euro-zone tried to stanch the problem with a bailout in May ’10 to no avail because Greece is bankrupt; and did nothing to squelch contagion. By this summer, Ireland and Portugal had collapsed into bailouts as well; with Italy and Spain now at risk of default.

Leaders had pressured countries into gut-wrenching austerity and reform arrangements to stabilise their debt and cut deficits in the hope of rebuilding investor confidence. That strategy failed. Other agreements have also drifted. The 2nd Greece bailout in July came to naught, while the plan to boost the firepower of EFSF (European Financial Stability Facility) has since faltered.

Frustration is building. It culminated in last week’s summit, with high hopes to marshal the might of the entire euro-zone a US$13bil economy to provide an extinguisher powerful enough to put out the debt fire. But all it did was inject more painkillers; not a cure.

The new deal bears the hallmark of yet another in the series of half-measures that doesn’t address increasingly vulnerable banks; or go far enough to instil confidence in the euro-zone’s battered debt markets; and certainly didn’t convince S&P from putting the debt of 15 European economies, including Germany, on negative credit watch, and Moody from cutting the credit ratings on France’s top three banks. Sure, there has been progress but not enough to provide a defining resolution. Leaders are flirting with risk as Europe is going into recession. We have seen this movie before. The deal involves a promise by everyone to be a little more German about their spending and debt. The consensus now is that the 17-nation euro-zone bloc’s GDP growth will contract by up to 1% in 2012, sharply below this year’s already poor growth of 1%.

There was little in the deal to address the drastic loss of investor confidence. Euro-zone borrowing costs have resumed rising this week. Stock markets have retreated after an initial relief rally as optimism faded. The euro had since sunk below US$1.30, some 12% from its peak in May. The new “comprehensive” set of measures making-up the euro-zone’s “fiscal compact” failed to calm markets; it included the following:-

  • Constitutional amendment to balance the fiscal budget. The European Union’s (EU) Court of Justice would verify that each country had a compliant debt brake in its laws, but with no oversight from Brussels.
  • The new “stability union” will adopt a “golden rule” to ensure structural deficits (i.e. adjusted for boom and bust of economic cycles) below 0.5% of GDP. For breaching the 3% of GDP deficit limit, nations will suffer “automatic consequences,” unless member states vote to block them.
  • The 500-billion-euro European Stability Mechanism (ESM) to replace the existing bailout fund (EFSF) will be set up in March ’12 (instead of 2013).
  • A 200-billion-euro contribution to the IMF (International Monetary Fund) for on-lending to enhance the firepower of ESM to help Europe.
  • No more “hair-cuts” for private holders of dodgy euro-zone sovereign debts.
  • New treaty to change EU’s foundational pacts. With UK’s rejection, 17 euro countries and up to 9 of 10 EU nations not using the euro will form a separate pact outside the EU structure.

Prior to the summit, ECB took two decisive steps to shore up the euro-zone: cutting interest rate to a record low of 1% to soften the looming recession, and crucially extending longer-term liquidity to Europe’s cash-starved banks. Reserve ratios were also lowered. But ECB managed to avoid mounting pressure to buy more troubled states’ bonds.

As I see it, on the moral hazard side, there is no multi-trillion bail-out funds and no promise by ECB to become lender of last resort to monetise everyone’s debt, at least for now. However, the use of the European Court of Justice as final arbiter of rectitude is far from persuasive. Much of the new deal is reflective of the failed “stability and growth pact” that was around when the euro was launched, and which both Germany and France breached shortly thereafter.

Such rules will inevitably be broken because when it comes to fundamental rights to tax and spend, governments will always follow the dictates of national electorates rather than Brussels. No court has the political legitimacy to confront Italian or French unions when there is social unrest in the streets over budget cuts; the court won’t have the stomach to enforce its decisions. When German rectitude faces Italian or Spanish politics, we know who will get the upper hand.

Yet, for me, the irony is that EU had already agreed less than three months ago to rules that do much of what the new deal is now seeking to accomplish. They did so without having to endure the ordeal of changing EU treaties. The “six pack” arrangements were approved after nearly a year of tortuous negotiations. In broad strokes, they would have already established the framework of a more integrated EU.

How to revive confidence? The big problem lies in economic growth, or the lack of it. Most Europeans still believe in the direct linkage between spending and economic growth. So, the balanced budget requirement will work only with tax increases eternally matching higher spending. This implies a “long-term austerity gap.” As of now, Europe needs major spending cuts and fiscal reform. But politicians outside Germany are hoping ECB will eventually come to the rescue. At present, the ECB stands firm and won’t play ball. So the political pressure mounts.

The new deal simply means continued austerity in the euro-zone’s periphery without any offsetting impact of devaluation or stimulus at the core. Unemployment already at 10.3% will continue to rise, placing pressure on households (and youths in Spain, youth unemployment approaches 50%), governments and banks. Anti-European sentiment will continue to grow, and populist parties will prosper. Violence and social unrest will prevail.

Unfortunately, the new deal has no place for institutional changes to avert such a scenario. I am afraid if such changes are politically not possible, then the euro is doomed. It’s a matter of time. As post ’08 record shows, the biggest deficit in Europe these days is in ideas to spur growth and in the lack of political will to enact them. Already, in France, its Socialist Party presidential candidate is picking up on this undue emphasis on austerity; stressing Europe’s need for growth to get out of the crisis: “if there is no growth, none of the objectives will be reached.” Alas, Europe’s present leadership seems to have no stomach for this option. So I am afraid we are stuck with more summit sequels and the certainty of more uncertainty. Investors’ confidence will not return.

Looks like the euro-zone firewall still looks inadequate. As of now, plans to leverage the EFSF are mired in technical details. The combined size of EFSF and ESM is capped at an insufficient 500 billion euro. An infusion of 200 billion euro through the IMF is not game changing. Even so this measure is controversial.

ECB has indicated that earmarking is illegal. Moreover, IMF’s shareholders aren’t uniformly keen about directing cash to rich Europe. The US has parliamentary problems; so do Germany, Austria, Czech, Poland and Ireland, not to mention Holland and Finland. Pressure by S&P to downgrade and by Moody’s, including denying the likes of France AAA rating, has been priced-in to some markets. Nevertheless, there is still potential to shake prices. Further definite downgrades will take another leg down. Moreover, euro-zone is facing significant risk of a recession next year and a credit crunch. Another shock may be needed to get European politicians to all read from the same page.

Already, euro-zone also faces imminent acute funding problems. Member states need to repay over US$1.2 trillion of debt in 2012, mostly due in first half-year. In addition, European banks, heavily dependent on state largesse, have US$665bil of debt coming due by June ’12.

On Germany’s insistence, ECB won’t be allowed to unleash US-style quantitative easing or heavily buy up bonds or even issue euro-zone bonds which I consider critical. Many believe Germany will eventually relent. Its Chancellor has political problems. So, euro-zone’s big test still lies ahead. One thing is clear. The market is weighing in. So long as Spanish/Italian bonds cost more than 6%, the crisis is not fixed; confidence has not yet returned. The refinancing calendar of Europe’s sovereigns is onerous. Pressure will continue to be daunting as long as ECB is not lender of last resort.

The real problem is Europe’s banks remain locked-out of traditional funding markets, leaving them reliant on ECB which is playing it cool. Faced with funding freeze, banks will shrink their balance sheets and strangle growth by not lending. The situation is serious. Euro-zone banks can’t raise cash and won’t lend to each other because of counter-party risk. On top of it all, last week’s “stress tests” suggested Europe’s banks are short of 115 billion euro (up from 106 billion euro in October). No one knows who is really solvent anymore.

For Asia, the growing uncertainty is killing. The series of sequels following each European summit leaves a trail of deals, but not the cure. Investors are growing more nervous in the face of rising risk of recession. As the economic outlook for Europe worsens, Asia’s exporters will experience and expect continued weakening demand. Most exposed will be trading hubs like South Korea, Hong Kong, Taiwan & Singapore. In 2010, Korea’s exports were equal to 45% of GDP, with Europe as its second largest importer. But regional powerhouses, China, Japan and India, are also taking a hit. China is most exposed. Exports accounted for 36% of GDP in 2010 and Europe is its biggest destination (19%). So far, their huge domestic market has shielded them from Europe’s lack of growth, more than their smaller neighbours.

Export focus also matters. European slowdown is already affecting services exports from Hong Kong and Singapore. More cautious consumers in Europe undermine demand for Korean and Taiwanese consumer electronics. China’s dominance at the lower end of the value chain is largely immune to shifts in the economic cycle. But what’s worrisome is the continuing kick-the-can-down-the-road attitude of Europeans which works to prolong the crisis, and translates into reduced investment and employment in manufacturing capacity. The longer the crisis is left unresolved, the worse the impact on Asia.

Lord Keynes wrote in 1921: “about these matters the prospect of a European War, the price of copper 20 years hence there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” And Keynes is right. While the euro enjoys widespread support, spending more money to save it doesn’t.

Germans resent seeing their hard earned cash diverted to rescue Greeks, perceived to be irresponsible. Recent polls show that more than 50% of Germans reject euro-bonds, and 59% oppose further bailouts. We are now stuck with the classic dilemma with austerity politics bringing no growth and no framework for common financing, continuing political intransigence has left politicians with the option to continue kicking-the-can-down-the-road. Like Keynes, we just don’t know how and how far euro-zone politicians will go towards assuming joint liability for debts (euro bonds). At some point, Europeans have to make the fateful choice between national sovereignty and the euro’s well being. Time is of the essence for a real breakthrough. In his recent book, Harvard’s psychologist Steven Pinker argues that mankind is becoming steadily less warlike and predicted that “today we may be living in the most peaceable era in human history.” For now, Pinker offers comfort that we won’t go to war over it he is right.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email:


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