By Ralph Atkins, FT.com
Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.
Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a "deep crisis," he also warned over the weekend.
His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week's US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through "quantitative easing".
On Friday, Mr Schäuble described US policy as "clueless". In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed "increase the insecurity in the world economy".
" They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking."
Mr Schäuble added: "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."
Germany's export success, he argued, was not based on "exchange rate tricks" but on increased competitiveness. "In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems -- German export surpluses are not part of them."
There was also "considerable doubt" as to whether pumping endless money into markets made sense, Mr Schäuble argued. "The US economy is not lacking liquidity."
On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said.
Germany's proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe's 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union "was not founded to enrich financial investors".
Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.
Source: CNN
www.cnn.com
Monday, November 08, 2010
Zoellick seeks gold standard debate
By Alan Beattie, FT.com
(FT) -- Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank.
Writing in the Financial Times, Robert Zoellick, the bank's president since 2007, says a successor is needed to what he calls the "Bretton Woods II" system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.
Mr Zoellick, a former US Treasury official, calls for a system that "is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account". He adds: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."
His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.
This week's meeting of government heads in South Korea is likely to see yet more exchange rate conflict. A US plan for countries to sign up to current account targets has run into widespread opposition.
Wolfgang Schäuble, Germany's finance minister, has raised the temperature by describing the US economic model as being in "deep crisis" and criticising the US Federal Reserve's decision to pump an extra $600bn into financial markets. "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."
Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.
The original Bretton Woods system, instituted in 1945 and administered by the International Monetary Fund, the World Bank's sister institution, comprised fixed but adjustable exchange rates linked to the value of gold. Controls to restrict destabilising shifts of capital from one economy to another buttressed it.
"The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II," Mr Zoellick writes. "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."
Source: FT.com
(FT) -- Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank.
Writing in the Financial Times, Robert Zoellick, the bank's president since 2007, says a successor is needed to what he calls the "Bretton Woods II" system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.
Mr Zoellick, a former US Treasury official, calls for a system that "is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account". He adds: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."
His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.
This week's meeting of government heads in South Korea is likely to see yet more exchange rate conflict. A US plan for countries to sign up to current account targets has run into widespread opposition.
Wolfgang Schäuble, Germany's finance minister, has raised the temperature by describing the US economic model as being in "deep crisis" and criticising the US Federal Reserve's decision to pump an extra $600bn into financial markets. "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."
Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.
The original Bretton Woods system, instituted in 1945 and administered by the International Monetary Fund, the World Bank's sister institution, comprised fixed but adjustable exchange rates linked to the value of gold. Controls to restrict destabilising shifts of capital from one economy to another buttressed it.
"The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II," Mr Zoellick writes. "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."
Source: FT.com
Friday, November 05, 2010
China, Germany and South Africa criticise US stimulus
Germany, China, Brazil and South Africa have criticised US plans to pump $600bn (£373bn) into the US economy.
German Finance Minister Wolfgang Schaeuble said the US policy was "clueless" and would create "extra problems for the world".
The US Federal Reserve could weaken the US dollar and hurt exports to America.
China's Central Bank head Zhou Xiaochuan urged global currency reforms, while South Africa said developing countries would suffer most.
He did not elaborate how the system should be changed.
'Undermining the G20'
South Africa's finance minister Pravin Gordhan warned that "developing countries, including South Africa, would bear the brunt of the US decision to open its flood gates without due consideration of the consequences for other nations."
The US policy "undermines the spirit of multilateral co-operation that G20 leaders have fought so hard to maintain during the current crisis," he said.
The heads of state and government of the G20 group of the world's leading nations is due to meet in a week in South Korea, with currencies and trade imbalances high on the agenda.
The US central bank announced on Wednesday that it would spend $600bn to buy government bonds, in the hope that the cash injection can kickstart the country's economy.
However, this weakens the dollar, making imports from around the world more expensive for US consumers.
'Clueless'
"If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for the world, it may bring a lot of negative impact to the world," said Mr Zhou.
"There is a spill over."
China's Vice Foreign Minister Cui Tiankai said the Federal Reserve had the right to take steps without consulting other countries beforehand, but added: "They owe us some explanation."
Germany's finance minister Wolfgang Schaeuble said on German television that "with all due respect, US policy is clueless."
"It is not that the Americans have not pumped enough liquidity into the market and now to say let's pump more into the market is not going to solve their problems."
He added that the German government was going to hold bilateral talks with US officials and also discuss the topic at the G20 summit in Seoul next week.
On Thursday, Brazil's finance minister Guido Mantega had warned that the Fed's move would hurt Brazil and other exporters.
The latest move by the Fed has been dubbed QE2 as it follows the central bank's decision to pump $1.75tn into the economy during the downturn in its first round of quantitative easing.
Source:BBC
www.bbc.com
German Finance Minister Wolfgang Schaeuble said the US policy was "clueless" and would create "extra problems for the world".
The US Federal Reserve could weaken the US dollar and hurt exports to America.
China's Central Bank head Zhou Xiaochuan urged global currency reforms, while South Africa said developing countries would suffer most.
He did not elaborate how the system should be changed.
'Undermining the G20'
South Africa's finance minister Pravin Gordhan warned that "developing countries, including South Africa, would bear the brunt of the US decision to open its flood gates without due consideration of the consequences for other nations."
The US policy "undermines the spirit of multilateral co-operation that G20 leaders have fought so hard to maintain during the current crisis," he said.
The heads of state and government of the G20 group of the world's leading nations is due to meet in a week in South Korea, with currencies and trade imbalances high on the agenda.
The US central bank announced on Wednesday that it would spend $600bn to buy government bonds, in the hope that the cash injection can kickstart the country's economy.
However, this weakens the dollar, making imports from around the world more expensive for US consumers.
'Clueless'
"If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for the world, it may bring a lot of negative impact to the world," said Mr Zhou.
"There is a spill over."
China's Vice Foreign Minister Cui Tiankai said the Federal Reserve had the right to take steps without consulting other countries beforehand, but added: "They owe us some explanation."
Germany's finance minister Wolfgang Schaeuble said on German television that "with all due respect, US policy is clueless."
"It is not that the Americans have not pumped enough liquidity into the market and now to say let's pump more into the market is not going to solve their problems."
He added that the German government was going to hold bilateral talks with US officials and also discuss the topic at the G20 summit in Seoul next week.
On Thursday, Brazil's finance minister Guido Mantega had warned that the Fed's move would hurt Brazil and other exporters.
The latest move by the Fed has been dubbed QE2 as it follows the central bank's decision to pump $1.75tn into the economy during the downturn in its first round of quantitative easing.
Source:BBC
www.bbc.com
Thursday, November 04, 2010
The Evolving Nature of Corporate Mergers and Acquisitions in the Wake of the Global Economic Crisis
WASHINGTON (Marketwire) - In an article in Global Finance Magazine Dr. Alexander Mirtchev, economics expert and president of Washington-based Krull Corp., a consultancy with a focus on new economic trends and emerging policy challenges expounds on the signs of revitalization in the international mergers and acquisitions market. He assesses the implications of the resurgence of investment activity and the potential repercussions of the growing trend of investors' "clubbing together" for major acquisition and investment deals.
After the international M&A activities "cratered" in the midst of a global recession, there are finally indications that corporate tie-ups and "teaming-ups" are once again becoming an attractive form of prioritizing investment activity. According to Alexander Mirtchev, "looking towards recovery, joining forces allows investors to achieve better terms and access 'tailor-made' financing tools. This has led to intensifying interest in mergers and acquisitions of a size that until recently appeared unviable due to the impact of the global economic crisis." Despite the fact that global economic recovery is "moderately-paced and uneven," he added, "M&A activity has picked up noticeably, perhaps even beyond the level that is perceived to correspond to the actual state of the global economy."
The rationale for the recent resurgence can be seen not only in efforts to tackle the effects of the crisis, but represent also the "long view" of recovery in the post-crisis period. From Mirtchev's perspective, mergers and acquisitions are not simply driven by the growing perception that asset prices have dropped to a level that makes them attractive. "Rather, a number of major corporate alliances and acquisitions reflect the drive to develop synergies beyond the immediate," he indicates. "Merger and acquisition activity is being driven not just by the growing perception of attractive asset values in the wake of the crisis. Stronger investment interest is also due to the momentum of private equity firms, investment companies and sovereign wealth funds "teaming up" in order to achieve shortcuts to improved market knowledge, better trading terms and increased opportunities for investment with a realistic medium to long-term significance."
According to Mirtchev, "there is, in addition, a view among major investors that combining forces brings new resources to bear to a particular project, as well as enhancing the level of expertise brought to the table. The primary advantage of forming clubs is to spread the risk while increasing potential profits. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking." Skeptics would suggest that, given uncertain demand, M&A recovery reflects the desire by CEOs to use cash to eliminate their weakened competitors rather that invest in organic growth and innovation. From Mirtchev's vantage point, this is a sign of maturity by investment companies and funds, which are now interested not only in short-term gains or in "glamour investments", but are more focused on the results in the long-run.
Moreover, a number of investors are showing greater willingness to join forces, in order to pool their exposure to risk, generate additional opportunities and multiply the effect of their resources. "The increased willingness of investors to share the benefits from an acquisition in order to introduce elements of comparatively independent supplementary financing mechanisms in their transactions is another sign of their growing acumen," posits Dr. Mirtchev. "These signs of maturity reinforce the legitimacy of mergers and acquisitions, and provide an added level of liquidity to a system that is still struggling to cope with the effects of the global financial and economic crisis."
About Krull Corporation
Washington, D.C.-based Krull Corp. was founded in 1992 with a mission to address new economic trends, relevant business strategies, and economic and political risk mitigation.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Krull Corp.
+1 202 416 1646
+1 202 833 3843
mail@krullcorp.com
After the international M&A activities "cratered" in the midst of a global recession, there are finally indications that corporate tie-ups and "teaming-ups" are once again becoming an attractive form of prioritizing investment activity. According to Alexander Mirtchev, "looking towards recovery, joining forces allows investors to achieve better terms and access 'tailor-made' financing tools. This has led to intensifying interest in mergers and acquisitions of a size that until recently appeared unviable due to the impact of the global economic crisis." Despite the fact that global economic recovery is "moderately-paced and uneven," he added, "M&A activity has picked up noticeably, perhaps even beyond the level that is perceived to correspond to the actual state of the global economy."
The rationale for the recent resurgence can be seen not only in efforts to tackle the effects of the crisis, but represent also the "long view" of recovery in the post-crisis period. From Mirtchev's perspective, mergers and acquisitions are not simply driven by the growing perception that asset prices have dropped to a level that makes them attractive. "Rather, a number of major corporate alliances and acquisitions reflect the drive to develop synergies beyond the immediate," he indicates. "Merger and acquisition activity is being driven not just by the growing perception of attractive asset values in the wake of the crisis. Stronger investment interest is also due to the momentum of private equity firms, investment companies and sovereign wealth funds "teaming up" in order to achieve shortcuts to improved market knowledge, better trading terms and increased opportunities for investment with a realistic medium to long-term significance."
According to Mirtchev, "there is, in addition, a view among major investors that combining forces brings new resources to bear to a particular project, as well as enhancing the level of expertise brought to the table. The primary advantage of forming clubs is to spread the risk while increasing potential profits. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking." Skeptics would suggest that, given uncertain demand, M&A recovery reflects the desire by CEOs to use cash to eliminate their weakened competitors rather that invest in organic growth and innovation. From Mirtchev's vantage point, this is a sign of maturity by investment companies and funds, which are now interested not only in short-term gains or in "glamour investments", but are more focused on the results in the long-run.
Moreover, a number of investors are showing greater willingness to join forces, in order to pool their exposure to risk, generate additional opportunities and multiply the effect of their resources. "The increased willingness of investors to share the benefits from an acquisition in order to introduce elements of comparatively independent supplementary financing mechanisms in their transactions is another sign of their growing acumen," posits Dr. Mirtchev. "These signs of maturity reinforce the legitimacy of mergers and acquisitions, and provide an added level of liquidity to a system that is still struggling to cope with the effects of the global financial and economic crisis."
About Krull Corporation
Washington, D.C.-based Krull Corp. was founded in 1992 with a mission to address new economic trends, relevant business strategies, and economic and political risk mitigation.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Krull Corp.
+1 202 416 1646
+1 202 833 3843
mail@krullcorp.com
Shares hit two-year highs after US Fed move
US and UK shares hit two-year highs as global stock markets reacted positively to the decision by the Federal Reserve to pump $600bn (£373bn) into the US economy to try to boost its recovery.
Both the FTSE and Dow Jones indexes closed up 2%, while leading indexes in France and Germany rose sharply.
The price of oil also jumped, while the dollar fell against major currencies.
Although the Fed's move was widely expected, most analysts had predicted a lower figure of $500bn to be injected.
Weakening dollar
The FTSE 100 closed up 114 points at 5863, while the Dow gained 220 points to close at 11435.
In Paris, the Cac 40 climbed 74 points to 3,917, while Germany's Dax was up 117 points at 6,735.
Earlier, Asian shares closed higher, with Japan's Nikkei index gaining 199 points to finish at 9,359 and Hong Kong's Hang Seng rising 391 points to close at 24,536.
The price of oil also rose to its highest level since early April, with US light crude gaining $2 a barrel to $86.71. London Brent rose by $1.80 to $88.19 a barrel.
With more dollar cash in circulation and with the US government's policy of buying bonds with the $600bn putting downward pressure on interest rates, as expected the dollar weakened against major currencies.
The euro rose 2 cents against the dollar to $1.4239, while the pound also rose 2 cents to $1.6273. The dollar slipped to 80.66 yen, from 81.29 yen.
European reaction
European Central Bank president Jean-Claude Trichet refused to comment on the Fed's action at the ECB's monthly press conference.
However, he did say that he was confident the Fed still supported a strong dollar, despite reports that the second round of quantitative easing was designed to weaken the US currency, in order to make its exports more competitive.
"I have no indication that would change my trust in the fact that [Fed policymakers]... are not playing the strategy of the weak dollar," he said.
"It is in the interest of the US to have a strong dollar vis-a-vis the other floating currencies."
'On the hoof'
The latest move by the Fed has been dubbed QE2 as it follows the central bank's decision to pump $1.75tn into the economy during the downturn in its first round of quantitative easing.
Rob Carnell, chief international economist at the banking group ING, said the action was unusual because the economy is in a completely different shape to how it was before.
"[During the first round of QE], you had massive financial market disruptions - really serious problems, mortgage yields and rates were shooting through the roof, no one could borrow. That's clearly not the case right now," he told BBC World Service.
"The justification for it seems to have utterly changed... It's really policy on the hoof, trying to justify it as they go along."
Source: BBC
www.bbc.co.uk
Both the FTSE and Dow Jones indexes closed up 2%, while leading indexes in France and Germany rose sharply.
The price of oil also jumped, while the dollar fell against major currencies.
Although the Fed's move was widely expected, most analysts had predicted a lower figure of $500bn to be injected.
Weakening dollar
The FTSE 100 closed up 114 points at 5863, while the Dow gained 220 points to close at 11435.
In Paris, the Cac 40 climbed 74 points to 3,917, while Germany's Dax was up 117 points at 6,735.
Earlier, Asian shares closed higher, with Japan's Nikkei index gaining 199 points to finish at 9,359 and Hong Kong's Hang Seng rising 391 points to close at 24,536.
The price of oil also rose to its highest level since early April, with US light crude gaining $2 a barrel to $86.71. London Brent rose by $1.80 to $88.19 a barrel.
With more dollar cash in circulation and with the US government's policy of buying bonds with the $600bn putting downward pressure on interest rates, as expected the dollar weakened against major currencies.
The euro rose 2 cents against the dollar to $1.4239, while the pound also rose 2 cents to $1.6273. The dollar slipped to 80.66 yen, from 81.29 yen.
European reaction
European Central Bank president Jean-Claude Trichet refused to comment on the Fed's action at the ECB's monthly press conference.
However, he did say that he was confident the Fed still supported a strong dollar, despite reports that the second round of quantitative easing was designed to weaken the US currency, in order to make its exports more competitive.
"I have no indication that would change my trust in the fact that [Fed policymakers]... are not playing the strategy of the weak dollar," he said.
"It is in the interest of the US to have a strong dollar vis-a-vis the other floating currencies."
'On the hoof'
The latest move by the Fed has been dubbed QE2 as it follows the central bank's decision to pump $1.75tn into the economy during the downturn in its first round of quantitative easing.
Rob Carnell, chief international economist at the banking group ING, said the action was unusual because the economy is in a completely different shape to how it was before.
"[During the first round of QE], you had massive financial market disruptions - really serious problems, mortgage yields and rates were shooting through the roof, no one could borrow. That's clearly not the case right now," he told BBC World Service.
"The justification for it seems to have utterly changed... It's really policy on the hoof, trying to justify it as they go along."
Source: BBC
www.bbc.co.uk
Wednesday, November 03, 2010
Full speed ahead
THE ocean liner Queen Elizabeth 2 was launched in 1967 to throngs of spectators and adulatory press. Expectations are considerably lower for the Federal Reserve’s launch of monetary QE2: a second round of quantitative easing, the purchase of bonds with newly printed money. Experts from Joseph Stiglitz, the Nobel-winning economist, to Bill Gross, head of the bond-management giant, Pimco, have already predicted it will be either ineffectual or dangerous.
Undeterred, the Fed has moved ahead:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The announcement of $600 billion in new purchases is slightly above the $500 billion level many anticipated. In what may be disappointing news to some, the Fed has not changed its language to signal a move toward an official inflation or price-level target. Still, the early evidence suggests that QE2 is already working as advertised. Since Ben Bernanke, the Federal Reserve chairman, hinted in late August that it was on its way, financial markets have responded vigorously.
The 10-year bond yield has fallen to 2.65% from 2.53%. At the same time, expected inflation, as measured by the inflation-indexed bond market, has risen steadily. This means that real yields have fallen even more than nominal yields. Indeed on October 25, the Treasury Department sold five-year inflation-indexed bonds with a negative real yield for the first time.
Lower real yields also raise the value of future profits, and that has helped drive stock prices 13.5% higher. And easier monetary policy has made the dollar and dollar investments less attractive; the dollar has fallen 4.4% against the yen, 9.7% against the euro, and is down 4.1% on a trade-weighted basis. "You can declare QE to be a success already", says one hedge fund economist. "Whether this translates into real activity remains a question mark. But the question of whether the mechanism would work has been answered."
In theory, this should help the economy through three channels. First, lower real yields spur borrowing and investment. This channel, however, is partly blocked: households can’t borrow against the depreciated value of their homes, banks have tightened underwriting standards, and businesses are waiting for sales to pick up. The remaining two channels are not similarly impaired. Higher stock prices have raised household wealth, which should spur spending and offset some of the damage of lower home values. And the lower dollar ought to help trade. Indeed in October, American factory purchasing managers reported a sharp jump in export orders and a drop in imports.
Macroeconomic Advisers, a consulting firm, reckons that if this round of QE eventually adds up to $1.5 trillion that should be enough to raise growth next year to 3.5% from a little over 3%. That’s not exactly overwhelming. Larry Meyer, the firm’s vice-chairman, thinks the Fed would have to buy $5 trillion to achieve the equivalent of a 400 basis point drop in the federal funds rate that today’s economic slack actually demands. The Fed won’t go that far; it worries too much about unintended consequences. It would also invite attack from some of Congress’ newly empowered Republicans. In a Bloomberg poll, 60% of self-identified Tea Party supporters favoured overhauling or abolishing the Fed.
Could QE succeed too well, by driving expected inflation up dramatically? "The odds aren’t zero", says Don Kohn, a former Fed vice-chairman. But he sees that as more likely once credit loosens up and spending accelerates, which would signal that the Fed has succeeded, and can then tighten policy.
Another potential cost is that by driving the dollar down, QE merely shifts the burden of growth to other countries, perhaps fueling asset bubbles in their markets in the process. Some of this is may be unavoidable. Countries with overheating economies need to tighten monetary conditions, either through higher interest rates, a rising currency, or both. The central banks of both India and Australia raised interest rates this week despite sharply higher currencies. China has grudgingly allowed its currency to creep higher recently, and this week central bank officials hinted they will have to tighten monetary policy soon.
By far the most interesting response, however, has been the Bank of Japan’s. It had planned to announce details of its own QE programme at a regular policy meeting on November 15-16. But it abruptly accelerated the date to November 4-5. This seems to reflect a desire to counteract any boost to the yen resulting from the Fed’s announcement. The action risks aggravating tensions over currency levels, but it could have a more benign effect. "This kind of follow the leader response by central banks is part of the solution and not part of the problem". says Barry Eichengreen of the University of California at Berkeley, who has long argued that such competitive reflation is analogous to the expansionary effect of quitting the gold standard in the 1930s. If Mr Bernanke's is the face that launches a thousand ships, the global economy may be the better for it.
Undeterred, the Fed has moved ahead:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The announcement of $600 billion in new purchases is slightly above the $500 billion level many anticipated. In what may be disappointing news to some, the Fed has not changed its language to signal a move toward an official inflation or price-level target. Still, the early evidence suggests that QE2 is already working as advertised. Since Ben Bernanke, the Federal Reserve chairman, hinted in late August that it was on its way, financial markets have responded vigorously.
The 10-year bond yield has fallen to 2.65% from 2.53%. At the same time, expected inflation, as measured by the inflation-indexed bond market, has risen steadily. This means that real yields have fallen even more than nominal yields. Indeed on October 25, the Treasury Department sold five-year inflation-indexed bonds with a negative real yield for the first time.
Lower real yields also raise the value of future profits, and that has helped drive stock prices 13.5% higher. And easier monetary policy has made the dollar and dollar investments less attractive; the dollar has fallen 4.4% against the yen, 9.7% against the euro, and is down 4.1% on a trade-weighted basis. "You can declare QE to be a success already", says one hedge fund economist. "Whether this translates into real activity remains a question mark. But the question of whether the mechanism would work has been answered."
In theory, this should help the economy through three channels. First, lower real yields spur borrowing and investment. This channel, however, is partly blocked: households can’t borrow against the depreciated value of their homes, banks have tightened underwriting standards, and businesses are waiting for sales to pick up. The remaining two channels are not similarly impaired. Higher stock prices have raised household wealth, which should spur spending and offset some of the damage of lower home values. And the lower dollar ought to help trade. Indeed in October, American factory purchasing managers reported a sharp jump in export orders and a drop in imports.
Macroeconomic Advisers, a consulting firm, reckons that if this round of QE eventually adds up to $1.5 trillion that should be enough to raise growth next year to 3.5% from a little over 3%. That’s not exactly overwhelming. Larry Meyer, the firm’s vice-chairman, thinks the Fed would have to buy $5 trillion to achieve the equivalent of a 400 basis point drop in the federal funds rate that today’s economic slack actually demands. The Fed won’t go that far; it worries too much about unintended consequences. It would also invite attack from some of Congress’ newly empowered Republicans. In a Bloomberg poll, 60% of self-identified Tea Party supporters favoured overhauling or abolishing the Fed.
Could QE succeed too well, by driving expected inflation up dramatically? "The odds aren’t zero", says Don Kohn, a former Fed vice-chairman. But he sees that as more likely once credit loosens up and spending accelerates, which would signal that the Fed has succeeded, and can then tighten policy.
Another potential cost is that by driving the dollar down, QE merely shifts the burden of growth to other countries, perhaps fueling asset bubbles in their markets in the process. Some of this is may be unavoidable. Countries with overheating economies need to tighten monetary conditions, either through higher interest rates, a rising currency, or both. The central banks of both India and Australia raised interest rates this week despite sharply higher currencies. China has grudgingly allowed its currency to creep higher recently, and this week central bank officials hinted they will have to tighten monetary policy soon.
By far the most interesting response, however, has been the Bank of Japan’s. It had planned to announce details of its own QE programme at a regular policy meeting on November 15-16. But it abruptly accelerated the date to November 4-5. This seems to reflect a desire to counteract any boost to the yen resulting from the Fed’s announcement. The action risks aggravating tensions over currency levels, but it could have a more benign effect. "This kind of follow the leader response by central banks is part of the solution and not part of the problem". says Barry Eichengreen of the University of California at Berkeley, who has long argued that such competitive reflation is analogous to the expansionary effect of quitting the gold standard in the 1930s. If Mr Bernanke's is the face that launches a thousand ships, the global economy may be the better for it.
Thursday, October 21, 2010
EU austerity drive country by country
A new austerity drive has been sweeping across Europe, as governments struggle to trim huge budget deficits and the 16-nation eurozone races to reassure sceptical markets.
Some of the biggest protests have been seen in France but industrial action is making headlines elsewhere too.
EU finance ministers have agreed rules that will automatically punish member-states which break budgetary rules.
With the EU expecting all member-states to have achieved a maximum budget deficit of 3% of GDP by the financial year 2014-15, what belt-tightening measures are the countries taking?
UK
The Conservative-Liberal Democrat coalition government has announced the biggest cuts in state spending since World War II.
Savings believed to amount to about £83bn (95bn euros, $131bn) are due to be made over four years.
The Chancellor, George Osborne, told parliament that 490,000 public sector jobs would be cut over four years because the country had "run out of money". Experts predict a similar number of job losses in the private sector.
Most Whitehall departments face budget cuts of 19% on average while the defence budget will be cut by 8%. The retirement age is to rise from 65 to 66 by 2020.
Some incapacity benefits will be time-limited and other money will be clawed back through changes to tax credits and housing benefit. A new bank levy will also be brought in.
While there was no widespread industrial unrest ahead of the cuts' announcement, the general secretary of trade union Unison, Dave Prentis, accused the government of "taking a chainsaw" to public services for ideological reasons. The opposition Labour Party accused the government of a "slash and burn" policy.
FRANCE
France has announced plans to cut spending by 45bn euros (£39bn; $62bn) over the next three years in order to meet the budget deficit target.
Some of this money is expected to be saved through closing tax loopholes and withdrawing temporary economic stimulus measures.
President Nicolas Sarkozy has insisted he will press ahead with plans to raise the retirement age from 60 to 62 and the full state pension age from 65 to 67. The highest earners will also be required to pay an extra 1% income tax.
Trade unions have been organising nationwide strikes since September, with days of action in which more than a million people have regularly taken part.
French riot police have been used to re-open fuel depots blocked by protesters, though the demonstrations have been largely peaceful.
REPUBLIC OF IRELAND
The cost of bailing out the Republic of Ireland's stricken banks has risen to 45bn euros (£39bn; $62bn), opening a huge hole in the Irish government's finances.
The increased cost will see the government run a budget deficit equivalent to 32% of GDP this year.
It aims to reduce this in stages, to reach 2.9% by 2014, with savings of 7.5bn euros over that period. But a figure of 10bn euros may be more realistic, according to the parliamentary opposition.
Government spending has been slashed by 4bn euros, with all public servants' pay cut by at least 5% and social welfare reduced.
Child benefit was cut by 16 euros a month, bringing the lower rate to 150 euros a month and the higher rate to 187 euros a month.
A carbon tax has been brought in, set at 15 euros per tonne of CO2.
Bad news came in September when figures showed the economy had shrunk in the second quarter from the previous three months.
NETHERLANDS
The centre-right coalition formed after months of negotiation on 8 October said it wanted to cut the budget by 18bn euros ($24bn; £15bn) by 2015.
But the new government will have to rely on the radical Freedom Party to enact legislation and there are doubts about its long-term viability.
SPAIN
The Spanish government has approved an austerity budget for 2011 which includes a tax rise for the rich and 8% spending cuts.
Madrid has promised European counterparts to cut its deficit to 6% of its gross domestic product (GDP) next year, from 11.1% last year.
Government workers face a pay cut of 5%, starting in June, and salaries will then be frozen for 2011.
A tax rise of 1% will be applied to personal income above 120,000 euros.
Smaller savings include an end to a 2,500-euro cash payout for new mothers, known as "baby cheques".
Unemployment has more than doubled - to about 20% - since 2007.
GREECE
The Greek government has pledged to end its economic woes to make drastic spending cuts and boost tax revenue in return for a 110bn-euro (£95bn) bail-out from the EU and International Monetary Fund.
It has started drawing on the bail-out money because a sharp downgrade of its sovereign debt rating made its borrowing costs soar.
The aim is to slash the budget deficit from 13.6% of GDP.
The country has started cracking down on tax evasion, and on corruption within the tax and customs service. It will also curb its widespread early retirement schemes. The average retirement age is set to rise from 61.4 to 63.5.
Under the plan to slash the budget by 30bn euros (£26bn; $37bn) over three years Greece aims to: scrap bonus payments for public sector workers; freeze public sector salaries and pensions for at least three years; increase sales tax (VAT) from 19% to 23%; raise taxes on fuel, alcohol and tobacco by 10%.
The harsh measures have triggered public sector strikes and violence on the streets of Athens.
ROMANIA
The government proposed wage cuts of 25% and pension cuts of 15% in July in order to reduce the country's budget deficit.
Romania's economy shrunk more than 7% in 2009 and it needed an IMF bail-out in order to meet its wage bill.
It says it needs to implement new austerity measures to qualify for the next instalment of the 20bn-euro ($25bn; £17bn) IMF loan.
Angry protests have greeted the cuts and Interior Minister Vasile Blaga resigned after thousands of police officers went on strike over the 25% pay cut.
ITALY
The Italian government has approved austerity measures worth 24bn euros for the years 2011-2012. The cuts amount to about 1.6% of Italian GDP
Italy aims to cut public sector pay and freeze new recruitment. Public sector pensions and local government spending are also being targeted, and there are plans to crack down on tax evasion.
Funding to city and regional authorities is expected to be cut by more than 13bn euros.
For the next three years there will be a freeze on public sector pay rises and cuts in public sector hiring, replacing only one employee for every five who leave.
Progressive pay cuts of up to 10% are planned for high earners in the public sector, including ministers and parliamentarians.
Retirement will be delayed by up to six months for those who reach retirement age in 2011.
Provincial governments serving fewer than 220,000 inhabitants will be scrapped, as will several publicly funded think-tanks.
GERMANY
The German government has proposed plans to cut the budget deficit by a record 80bn euros ($96bn; £66bn), or 3% of GDP, by 2014.
The total deficit in 2009 was 3.1%, but is projected to grow to more than 5% this year.
"Germany has an outstanding chance to set a good example," said German Chancellor Angela Merkel.
The plans include a cut in subsidies to parents, 10,000 government job cuts over four years, and higher taxes on nuclear power. The rebuilding of the baroque Stadtschloss palace in the heart of Berlin will also be postponed.
PORTUGAL
The Socialist government of Jose Socrates has announced a range of austerity measures aimed at cutting the deficit to 7.3% this year and 4.6% in 2011.
Top earners in the public sector, including politicians, will see a 5% pay cut.
VAT will rise by 1% and there will be income tax hikes for those earning more than 150,000 euros. By 2013 they will face a 45% tax rate.
By 2013 military spending will have been cut by 40% and the government is delaying the launch of two high-speed rail links - the Lisbon-Porto and Porto-Vigo routes.
Some of the biggest protests have been seen in France but industrial action is making headlines elsewhere too.
EU finance ministers have agreed rules that will automatically punish member-states which break budgetary rules.
With the EU expecting all member-states to have achieved a maximum budget deficit of 3% of GDP by the financial year 2014-15, what belt-tightening measures are the countries taking?
UK
The Conservative-Liberal Democrat coalition government has announced the biggest cuts in state spending since World War II.
Savings believed to amount to about £83bn (95bn euros, $131bn) are due to be made over four years.
The Chancellor, George Osborne, told parliament that 490,000 public sector jobs would be cut over four years because the country had "run out of money". Experts predict a similar number of job losses in the private sector.
Most Whitehall departments face budget cuts of 19% on average while the defence budget will be cut by 8%. The retirement age is to rise from 65 to 66 by 2020.
Some incapacity benefits will be time-limited and other money will be clawed back through changes to tax credits and housing benefit. A new bank levy will also be brought in.
While there was no widespread industrial unrest ahead of the cuts' announcement, the general secretary of trade union Unison, Dave Prentis, accused the government of "taking a chainsaw" to public services for ideological reasons. The opposition Labour Party accused the government of a "slash and burn" policy.
FRANCE
France has announced plans to cut spending by 45bn euros (£39bn; $62bn) over the next three years in order to meet the budget deficit target.
Some of this money is expected to be saved through closing tax loopholes and withdrawing temporary economic stimulus measures.
President Nicolas Sarkozy has insisted he will press ahead with plans to raise the retirement age from 60 to 62 and the full state pension age from 65 to 67. The highest earners will also be required to pay an extra 1% income tax.
Trade unions have been organising nationwide strikes since September, with days of action in which more than a million people have regularly taken part.
French riot police have been used to re-open fuel depots blocked by protesters, though the demonstrations have been largely peaceful.
REPUBLIC OF IRELAND
The cost of bailing out the Republic of Ireland's stricken banks has risen to 45bn euros (£39bn; $62bn), opening a huge hole in the Irish government's finances.
The increased cost will see the government run a budget deficit equivalent to 32% of GDP this year.
It aims to reduce this in stages, to reach 2.9% by 2014, with savings of 7.5bn euros over that period. But a figure of 10bn euros may be more realistic, according to the parliamentary opposition.
Government spending has been slashed by 4bn euros, with all public servants' pay cut by at least 5% and social welfare reduced.
Child benefit was cut by 16 euros a month, bringing the lower rate to 150 euros a month and the higher rate to 187 euros a month.
A carbon tax has been brought in, set at 15 euros per tonne of CO2.
Bad news came in September when figures showed the economy had shrunk in the second quarter from the previous three months.
NETHERLANDS
The centre-right coalition formed after months of negotiation on 8 October said it wanted to cut the budget by 18bn euros ($24bn; £15bn) by 2015.
But the new government will have to rely on the radical Freedom Party to enact legislation and there are doubts about its long-term viability.
SPAIN
The Spanish government has approved an austerity budget for 2011 which includes a tax rise for the rich and 8% spending cuts.
Madrid has promised European counterparts to cut its deficit to 6% of its gross domestic product (GDP) next year, from 11.1% last year.
Government workers face a pay cut of 5%, starting in June, and salaries will then be frozen for 2011.
A tax rise of 1% will be applied to personal income above 120,000 euros.
Smaller savings include an end to a 2,500-euro cash payout for new mothers, known as "baby cheques".
Unemployment has more than doubled - to about 20% - since 2007.
GREECE
The Greek government has pledged to end its economic woes to make drastic spending cuts and boost tax revenue in return for a 110bn-euro (£95bn) bail-out from the EU and International Monetary Fund.
It has started drawing on the bail-out money because a sharp downgrade of its sovereign debt rating made its borrowing costs soar.
The aim is to slash the budget deficit from 13.6% of GDP.
The country has started cracking down on tax evasion, and on corruption within the tax and customs service. It will also curb its widespread early retirement schemes. The average retirement age is set to rise from 61.4 to 63.5.
Under the plan to slash the budget by 30bn euros (£26bn; $37bn) over three years Greece aims to: scrap bonus payments for public sector workers; freeze public sector salaries and pensions for at least three years; increase sales tax (VAT) from 19% to 23%; raise taxes on fuel, alcohol and tobacco by 10%.
The harsh measures have triggered public sector strikes and violence on the streets of Athens.
ROMANIA
The government proposed wage cuts of 25% and pension cuts of 15% in July in order to reduce the country's budget deficit.
Romania's economy shrunk more than 7% in 2009 and it needed an IMF bail-out in order to meet its wage bill.
It says it needs to implement new austerity measures to qualify for the next instalment of the 20bn-euro ($25bn; £17bn) IMF loan.
Angry protests have greeted the cuts and Interior Minister Vasile Blaga resigned after thousands of police officers went on strike over the 25% pay cut.
ITALY
The Italian government has approved austerity measures worth 24bn euros for the years 2011-2012. The cuts amount to about 1.6% of Italian GDP
Italy aims to cut public sector pay and freeze new recruitment. Public sector pensions and local government spending are also being targeted, and there are plans to crack down on tax evasion.
Funding to city and regional authorities is expected to be cut by more than 13bn euros.
For the next three years there will be a freeze on public sector pay rises and cuts in public sector hiring, replacing only one employee for every five who leave.
Progressive pay cuts of up to 10% are planned for high earners in the public sector, including ministers and parliamentarians.
Retirement will be delayed by up to six months for those who reach retirement age in 2011.
Provincial governments serving fewer than 220,000 inhabitants will be scrapped, as will several publicly funded think-tanks.
GERMANY
The German government has proposed plans to cut the budget deficit by a record 80bn euros ($96bn; £66bn), or 3% of GDP, by 2014.
The total deficit in 2009 was 3.1%, but is projected to grow to more than 5% this year.
"Germany has an outstanding chance to set a good example," said German Chancellor Angela Merkel.
The plans include a cut in subsidies to parents, 10,000 government job cuts over four years, and higher taxes on nuclear power. The rebuilding of the baroque Stadtschloss palace in the heart of Berlin will also be postponed.
PORTUGAL
The Socialist government of Jose Socrates has announced a range of austerity measures aimed at cutting the deficit to 7.3% this year and 4.6% in 2011.
Top earners in the public sector, including politicians, will see a 5% pay cut.
VAT will rise by 1% and there will be income tax hikes for those earning more than 150,000 euros. By 2013 they will face a 45% tax rate.
By 2013 military spending will have been cut by 40% and the government is delaying the launch of two high-speed rail links - the Lisbon-Porto and Porto-Vigo routes.
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