World Economic Woes

International Herald Tribune Editorial: Trillions that the world could use
Copyright by The International Herald Tribune
Published: March 16, 2009
http://www.iht.com/articles/2009/03/16/opinion/edevasion.php


Senate investigators estimate that Americans who hide assets in offshore bank accounts are failing to pay about $100 billion a year in taxes. In good times, that’s grossly unfair and bad for the country. In times like these, it should be intolerable. The government not only needs the money, but closing down such tax scams is essential for President Obama’s rescue effort to retain public support and credibility.

Some of the banks at the center of the global financial meltdown are prominent purveyors of evasion services. UBS of Switzerland has acknowledged that as of Sept. 30, it held about 47,000 secret accounts for Americans. It has refused to disclose the names of all but a tiny number of the account holders, arguing that it would be a breach of Swiss law.

But last month — after UBS got caught soliciting business in the United States — it admitted to breaking federal law by helping Americans hide assets, and the bank agreed to pay $780 million in fines and restitution.

The U.S. Treasury isn’t the only one being shorted. The Tax Justice Network, a research and advocacy organization, estimates $11.5 trillion in assets from around the world are hidden in offshore havens.

The United States also isn’t the only country running out of patience. In February, European leaders forged an unusually tough and united call to put the problem of ‘‘uncooperative jurisdictions’’ near the top of the agenda for the April summit of leading economies in London.

Bankers and their host countries are feeling the heat. In recent days, a rash of governments, including Andorra, Liechtenstein, Singapore and Hong Kong have said they would increase the transparency of their offshore banking business and share more information with tax authorities in depositors’ home countries.

Even the Swiss government has caved — somewhat. On Friday, it announced that it would exchange information with tax authorities in other countries on the basis of ‘‘specific and justified’’ requests, though it resolutely rejected ‘‘any form of automatic exchange of information.’’ Meanwhile, UBS promised to close its secret American accounts and not open any more. The United States is taking UBS to court to try to get the bank to reveal the identities of thousands of accounts.

The government needs more tools to crack down on such international tax evasion. The IRS relies on taxpayers to disclose any foreign bank accounts, and it has no means to routinely get that information from banks in jurisdictions that protect secrecy.

Senator Max Baucus, chairman of the U.S. Senate Finance Committee, is considering legislation that would require banks to inform the IRS when their clients wire money abroad. Senator Carl Levin has introduced a bill that, among other provisions, would allow the United States to bar banks in this country from doing business with foreign banks that refused to cooperate with U.S. tax authorities.

This problem can’t be fixed solely by American law. At the London summit, U.S. officials should work with other governments to come up with a common set of rules to pry information from tax havens.

There are a variety of ideas worth serious consideration.

Governments could revoke tax treaties with countries that refuse to cooperate with tax queries — making it much more cumbersome for their companies to do international business. They could restrict their own banks from doing business with banks in uncooperative countries or subject any business with these countries to higher standards of disclosure.

They could start now by publishing blacklists of countries and banks that refuse to cooperate with requests for information from fiscal authorities. A few years ago, most banks and tax havens would have shrugged off such an effort. But in the current environment, they seem to be more sensitive to public shaming.








Paul Krugman: A continent adrift
By Paul Krugman
Copyright by The International Herald Tribune
Published: March 16, 2009
http://www.iht.com/articles/2009/03/16/opinion/edkrugman.php


MADRID: I'm concerned about Europe. Actually, I'm concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.

Just to be clear, I'm not about to rehash the standard American complaint that Europe's taxes are too high and its benefits too generous. Big welfare states aren't the cause of Europe's current crisis. In fact, as I'll explain shortly, they're actually a mitigating factor.

The clear and present danger to Europe right now comes from a different direction — the Continent's failure to respond effectively to the financial crisis.

Europe has fallen short in terms of both fiscal and monetary policy: it's facing at least as severe a slump as the United States, yet it's doing far less to combat the downturn.

On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration's stimulus plan is too small, given the depth of the crisis. But America's actions dwarf anything the Europeans are doing.

The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.

The only thing working in Europe's favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.

This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn't as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.

But such "automatic stabilizers" are no substitute for positive action.

Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany's finance minister you have to listen to, well, Republicans.

But there's a deeper problem: Europe's economic and monetary integration has run too far ahead of its political institutions. The economies of Europe's many nations are almost as tightly linked as the economies of America's many states — and most of Europe shares a common currency.

But unlike America, Europe doesn't have the kind of continent-wide institutions needed to deal with a continent-wide crisis.

This is a major reason for the lack of fiscal action: There's no government in a position to take responsibility for the European economy as a whole.

What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.

You might expect monetary policy to be more forceful. After all, while there isn't a European government, there is a European Central Bank.

But the E.C.B. isn't like the Fed, which can afford to be adventurous because it's backed by a unitary national government — a government that has already moved to share the risks of the Fed's boldness, and will surely cover the Fed's losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can't count on the same level of support.

Europe, in other words, is turning out to be structurally weak in a time of crisis.

The biggest question is what will happen to those European economies that boomed in the easy-money environment of a few years ago, Spain in particular.

For much of the past decade Spain was Europe's Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction.

In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it's on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.

Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.

But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?



Eurozone recession to deepen, says IMF
By Krishna Guha in Washington, Bertrand Benoit in Berlin and Chris Giles and Daniel Pimlott in London
Copyright The Financial Times Limited 2009
Published: March 17 2009 21:23 | Last updated: March 17 2009 21:23
http://www.ft.com/cms/s/0/22984b88-1338-11de-a170-0000779fd2ac.html


The International Monetary Fund will on Wednesday tear up forecasts it made for the world economy at the start of this year and predict a deeper recession with a heavier slump in the eurozone.

Fund economists have responded to the pace and severity of the downturn, in light of the severe contraction in the world economy in the last three months of 2008, to cut further gloomy forecasts for growth in 2009 that it made in January.

Teresa Ter-Minassian, an adviser to Dominique Strauss-Kahn, the IMF managing director, dropped a strong hint on Tuesday of what to expect.

Citing internal draft forecasts drawn up in late February, she said the IMF expected the world economy to shrink by 0.6 per cent this year, instead of growing 0.5 per cent as it had predicted.

“The scenario will be worse but the managing director has already said this,” she said in Lisbon. “This is a true global crisis, impacting all parts of the world and countries at different levels of development.”

The eurozone economy was forecast to contract by 3.2 per cent in 2009, she said, against the earlier forecast of a 2 per cent decline. The US would shrink by 2.6 per cent (1.6 per cent), and Japan 5 per cent (2.6 per cent), making it the worst-hit big economy. The IMF in Washington said the figures cited by Ms Ter-Minassian were “unofficial” and “out of date”.

The imminent revisions come amid differences between Europe and the US over how to tackle the recession. Christoph Schmidt, an economic adviser to Angela Merkel, Germany’s chancellor, said mounting public debt and excessive liquidity could tip the US into an inflationary spiral.

Professor Schmidt’s comments are unlikely to be welcomed by the Obama administration, which is advocating looser fiscal and monetary policies worldwide.

“I see an inflationary risk in the US in the medium term because of the development of money supply there,” he said. “There is a danger that [governments] could start considering inflation as a way to reduce the burden of public debt.”

Mervyn King, Bank of England governor, called on big economies to take collective action to boost growth and for governments to “be prepared to hold whatever proportion of equity capital turns out to be necessary” in vulnerable banks.

The Bank of Japan unveiled a draft plan to provide up to Y1,000bn (€7.7bn) in subordinated loans to large commercial banks, in its latest effort to stem the global economic crisis.

The BoJ move follows the Bank of England’s decision to buy UK government debt and the Swiss National Bank’s announcement of its plan to intervene in currency markets to drive down the Swiss franc.




ECB under pressure after Fed move
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2009
Published: March 19 2009 18:09 | Last updated: March 19 2009 18:44
http://www.ft.com/cms/s/0/1aa161c2-14ae-11de-8cd1-0000779fd2ac.html


The Federal Reserve’s bold action this week to boost the US economy with large-scale purchases of government debt created on Thursday fresh headaches for the European Central Bank, which is eschewing such steps in favour of fighting the economic crisis via eurozone banks.

The Fed’s surprise move sent the euro sharply higher; on a trade-weighted basis. Europe’s common currency ended on Thursday at its highest this year. With the Swiss National Bank intervening this week to weaken the Swiss franc, the ECB is in danger of appearing to be standing idle as eurozone exporters suffer and deflationary risks build in the 16-country region.

At the same time, the Fed’s move will increase the pressure on the ECB to defend more aggressively its strategy for combating the economic crisis, which centres on pumping unlimited liquidity into the eurozone banking system and deliberately allowing overnight interest rates to fall well below its official policy rate.

“The ECB is definitely under enormous pressure right now because pretty much every big central bank is starting to engage in traditional ‘quantitative easing’ – it has become the orthodoxy,” said Marco Annunziata, chief economist at Unicredit.

Erik Nielsen, European economist at Goldman Sachs, argued that at its regular press conference this month, the ECB “should have torn up its usual statement and said ‘look we’re in a very different situation. This is what we’re doing’.”

Q&A: Easing explained

What is this “quantitative easing”?
Hey, watch your language. What we are talking about here is a varied set of what we can broadly call “unconventional monetary policy”. Usually, central banks promote (or restrict) the creation and supply of money through lower (or higher) interest rates. That is conventional policy. But when interest rates get very close to zero, they have to come up with something else.

In fact, Jean-Claude Trichet, ECB president, had stepped up the Frankfurt institution’s communication efforts ahead of the Fed decision. In a speech in Paris late on Tuesday he stressed that the eurozone financial landscape was very different to that in the US, with banks taking a more important role than capital markets. That justified the ECB’s policy of “enhanced credit support” in which it is providing banks with as much liquidity as they demand, and has pledged to keep doing so until at least next year.

At the same time, the ECB has allowed the interest rate it pays on its “deposit facility”, used by banks to park funds overnight, to become a benchmark for market rates.

While the main policy rate has been cut to 1.5 per cent – the lowest ever –the deposit facility rate stands at just 0.5 per cent.

Mr Trichet argued that “enhanced credit support” was bringing tangible successes, with some eurozone interest rates, particularly for longer maturities, falling below those in the US.

“The ECB is right that the eurozone consumer can borrow for house purchases at interest rates that are substantially lower than in the US,” said Julian Callow, economist at Barclays Capital.

A crucial assumption behind the ECB’s “enhanced credit support” is that the banking system is still functioning reasonably well in passing on credit to the economy. ECB policymakers are optimistic that improvements are feeding through, helped by government action that have stabilised the eurozone banking system.

Not all economists are convinced, however, and many believe that the ECB will yet be forced to follow the US Fed and Bank of England in embarking on outright asset purchases.

Mr Trichet confirmed on Tuesday that “further measures” were being assessed. “That statement in itself – saying that they are looking at the possibility of implementing other measures – means that there must be some view that there are other solutions,” said Jacques Cailloux, European economist at Royal Bank of Scotland.

The risks of deflation that would be posed by further euro appreciation, “increases the odds that the ECB will embark in some kind of purchase programme even soon than we had anticipated”.

But the Federal Reserve and Bank of England have opted for quantitative easing and the ECB has not, right?
Well, no. The Fed is somewhere between “credit easing” – where they print money to buy private debt assets – and something closer to classic “quantitative easing”, where they print money to buy Treasuries. The Bank is closer to quantitative easing. Meanwhile, the ECB is providing “enhanced credit support”, which some say is just lower interest rates by a different name.

So they are working together on this, then. What are the differences?
It comes down to where they are sending the money, and how – or even whether – they are measuring the money they are creating.

So what do they do if this does not work?
Are you sitting down? The answer is no one knows. These waters are so uncharted we cannot even be sure that we are even sailing anymore.








Unemployment soars above 2m
By Andrew Taylor, Employment Correspondent
Copyright The Financial Times Limited 2009
Published: March 18 2009 09:57 | Last updated: March 18 2009 19:30
http://www.ft.com/cms/s/0/6d85ea4c-13a1-11de-9e32-0000779fd2ac.html


The private sector has borne the brunt of the downturn as total unemployment rose above 2m for the first time since just after Labour came to power in 1997, according to official figures.

The number of people employed by the public sector rose 30,000 last year to 5.78m while private sector employment fell 105,000 to 23.6m, according to the Office for National Statistics.

Increases in public sector earnings have also outpaced private sector pay after a reduction in bonuses, particularly in financial services.

Year-on-year earnings for private sector workers fell 1.1 per cent in January after the drop in bonuses was taken into account. Public sector earnings over the same period rose 3.7 per cent, according to the ONS.

The rise in unemployment was described as the “most doleful set of jobs figures since the start of the recession” by John Philpott, chief economist of the Chartered Institute of Personnel and Development.

“Not only is unemployment back to where it was in 1997 but it now looks as though we are heading towards the worst outlook for jobs in the UK’s postwar history. Full employment is not just slipping away, it is sinking without trace,” he said.

The number of people claiming unemployment benefit rose 138,400 to 1.39m in February. This was the largest monthly increase since comparable records began in 1971, surpassing rises reported during the recessions of the early 1980s and 1990s.

NHS shows biggest increase

The biggest rise in public-sector employment has been in the NHS, where the number employed rose 59,000 last year to 1.56m.

Jobs in education were boosted by 5,000 to 1.41m as the government continued to pump money into public services to offset the impact of the recession.

Local government and the civil service continued to shed jobs, however.

The number of civil servants fell 8,000 to 521,000 last year. Local government employment fell 12,000 to 2.9m according to the Office for National Statistics.

Dave Prentis, general secretary of Unison, the largest public sector union, said: “Every job loss has a devastating impact on workers and their families.

“This is not a question of public versus private, or a race to the bottom to see who sheds the most jobs. Making cuts to public spending and jobs will only make the recession longer, deeper and harsher.”

The total number of unemployed, including those not on benefits, rose 165,000 to 2.03m during the three months to the end of January. This figure is forecast to top 3m by this time next year, according to economists.

The unemployment rate during the past three months also climbed to 6.5 per cent, the highest level for more than 11 years.

The biggest regional increase was in Wales, where the proportion of the working population without a job has risen 2.7 percentage points to 7.6 per cent over the past year. The jobless rate in the north-east of England increased 2.6 percentage points – rising to 8.6 per cent, the highest level in any region.

There was little in any of Wednesday’s numbers to comfort the government. Redundancies during the three months to the end of January rose to 266,000 – the highest figure since comparable records begin in 1995. Job losses in the manufacturing, construction and finance and business sectors have been particularly heavy.

Job vacancies fell 74,000 to 482,000 – the lowest figures since 2001, when these statistics began to be collected. Vacancies in manufacturing have fallen more than 50 per cent in the past 12 months.

Unemployment has risen among all age groups, though workers over the age of 50 have suffered the biggest increase, rising almost 35 per cent over the past year. But young people have the highest unemployment rates – ranging from 14.6 per cent to 28.6 per cent according to age bracket.










Investors cheer Barclays iShares talks
By Adam Jones, Lina Saigol and Peter Thal Larsen
Copyright The Financial Times Limited 2009
Published: March 15 2009 17:06 | Last updated: March 16 2009 16:23
http://www.ft.com/cms/s/0/24604b68-1181-11de-87b1-0000779fd2ac.html


Shares in Barclays rose sharply on Monday after the bank declared that it had made “a strong start to 2009” and confirmed holding discussions over the possible sale of part of its fund management division.

The bank said that its businesses continued to perform well, following the upbeat trend it reported at its annual results on February 9, when it announced a “good start to the year”.

By mid-afternoon Barclays shares had risen 14p, or 19 per cent, to 88.1p.

Barclays is the latest of several big banks, including Citigroup and Bank of America, that have seen their share prices strengthen after issuing reassurances on current performance.

The brief trading update came as Barclays confirmed it was in talks with a number of interested parties about the sale of iShares, a provider of exchange-traded funds.

Although it stressed that it had made no decision about the unit’s future, a sale could help Barclays avoid joining the UK government’s insurance scheme for bank assets.

However, press reports suggesting that a sale of iShares could raise as much as £5bn for Barclays were met with scepticism in some quarters of the market.

Sandy Chen, an analyst at Panmure Gordon, said a £5bn price tag seemed “quite steep”. Alex Potter at Collins Stewart said a valuation of £3bn-£5bn appeared “highly unlikely”, claiming that a figure of £2bn would be demanding.

Exchange-traded funds are listed investment vehicles that track a benchmark, an asset or a basket of shares.

iShares accounts for about a quarter of Barclays Global Investors, the bank’s global asset management division that has £1,000bn under management. Potential bidders could include US asset managers.

Barclays also confirmed on Monday that it was in talks with the Treasury and the Financial Services Authority about the bank’s participation in the government’s asset protection scheme.

John Varley, chief executive of Barclays, has so far resisted accepting government capital, on the grounds that a state shareholding would restrict room for manoeuvre, and has turned to Middle East investors in a rights issue instead.

Barclays has fewer bad mortgages and commercial loans than rival banks such as Royal Bank of Scotland and the Lloyds Banking Group, both of which have chosen to participate in the government’s insurance scheme.

However, with a core tier one capital ratio of 6.7 per cent – a key measure of balance sheet strength – Barclays looks less well capitalised than its rivals.

After insuring their balance sheets through the government scheme, Lloyds and RBS will soon have core tier one capital of 14.5 per cent and 12.4 per cent respectively.

Barclays has until March 31 to decide whether to apply formally to join the scheme.

The bank offered the first signal that it may yet participate in February when it submitted three loan portfolios with a combined value of less than £10bn to the Treasury for an initial assessment. These included a portfolio of mortgages, some unsecured consumer loans and a package of commercial loans.

The Treasury, which has retained Citigroup to help in negotiations, has not yet given Barclays a formal response.

However, officials have made clear that, if Barclays chooses to participate, they would expect to subject the bank’s entire balance sheet to scrutiny.

Barclays would also have to work out how it would pay for the scheme.

If the government offered the same terms to Barclays as it did to RBS and Lloyds, it would have to accept non-voting ’B’ shares that convert to ordinary shares at about 200p.





Kremlin refuses to bail out Russian oligarchs
By Catherine Belton and Stefan Wagstyl in Moscow
Copyright The Financial Times Limited 2009
Published: March 21 2009 00:57 | Last updated: March 21 2009 00:57
http://www.ft.com/cms/s/0/242ed6ae-15a6-11de-b9a9-0000779fd2ac.html


The Kremlin will not bail out Russia’s oligarchs or their foreign creditors, said Igor Shuvalov, the first deputy prime minister, on Friday, putting pressure on both sides to renegotiate the $130bn (€96bn, £90bn) in foreign debt owed by the largest companies.

Mr Shuvalov said Russia was open to foreign creditors converting their loans to indebted Russian industrial groups into equity.

But he acknowledged that the creditors would not necessarily be keen to take on the shares and called on them to agree to deals that would extend payments and allow companies to pay off debts even at times of low commodity prices.

“Creditors most of all want to get their money,” he said. “No one needs assets at the moment because they are worth nothing.”

His words are a warning to oligarchs not to look to the state for more funds, in a further hardening of the government’s position since last autumn when the state bailed out tycoons such as Oleg Deripaska and Roman Abramovich to prevent their stakes in strategic metals companies from falling into foreign banks’ hands.

“Some Russian entrepreneurs have taken on such high debt levels that they have suffered injuries not compatible with life,” he said.

Mr Shuvalov said the government was willing to defend only a limited number of companies from stake-building by foreign creditors, while applications for stakes in Russian companies would be reviewed rapidly and in “friendly” fashion.

“The list of [strategic] enterprises for which we are ready to fight is extremely limited. We are talking about only a few, not dozens ... If you want to convert the debt convert it,” he said. “There should be no difference between the major Russian creditors and the foreign ones.”

Mr Shuvalov said the move to suspend government bail-outs, first announced in February, came as Russia was entering a new stage of crisis management following the market’s precipitous fall at the end of last year and the rouble devaluation.

“We have ended the stage where people were in a state of shock and nervous about everything that is happening ... We are now in a condition where we ... are close to the bottom. In certain sectors we see a revival and a good mood,” he said.








BoJ ramps up purchase of government bonds
By Mure Dickie in Tokyo
Copyright The Financial Times Limited 2009
Published: March 18 2009 12:52 | Last updated: March 18 2009 12:52
http://www.ft.com/cms/s/0/007aeb38-13b9-11de-9e32-0000779fd2ac.html


The Bank of Japan is to increase its purchases of Japanese government bonds by nearly a third, the latest in a series of increasingly assertive measures by the central bank to respond to the pressures created by the global financial crisis and a fierce domestic recession.

The BoJ said its decision to raise buying of JGBs from Y1,400bn a month to Y1,800bn was intended to ensure there was enough liquidity in the financial system to ensure its stability.

However, the move will also help to hold down bond yields and smooth financing for Japan’s government just as it prepares to start drawing up a new package of fiscal measures to stimulate the world’s second largest economy.

The BoJ has been widely criticised by Japanese politicians and officials for what they see as its overly-conservative response to the current downturn, the country’s sharpest in decades.

Masaaki Shirakawa, BoJ governor, is deeply reluctant to return to the policy of “quantitative easing” that the bank used to try to boost growth from 2001 to 2006 and the bank’s policy board unanimously voted to maintain its current 0.1 policy interest rate.

However, the BoJ has become gradually more bold in its efforts to boost financial system liquidity and support financial institutions, this week unveiling a draft plan that would see it provide up to Y1,000bn in subordinated loans to large commercial banks.

The loan scheme is intended as a safeguard to be used if conditions worsen for local lenders that have so far been much less affected by the global financial turmoil that US or European counterparts but have seen their capital bases hit by falls in the value of their equity holdings.

By supporting banks, the BoJ hopes to encourage lending to the country’s corporate sector.

The bank, which is already buying corporate debt itself to help ensure companies can access credit, said on Wednesday that fundraising for the crucial financial year-end period through this month had “mostly been completed”.

However, the bank added markets could remain under stress, with economic conditions “likely to continue deteriorating for the time being”.

By increasing its JGB purchases and buying corporate debt, the BoJ is mirroring in a more cautious way the balance sheet expansions being undertaken by counterparts in the US and UK.

However, the BoJ has avoided describing its actions as marking a return to quantitative easing, which it defines as providing excess liquidity to the financial system by targeting the level of reserves held by banks along with a commitment to long-term low or zero interest rates.

Some analysts say the distinction is increasingly irrelevant. “The Bank’s actions are boosting the monetary base and ramping up its balance sheet, which is QE in all but name,” wrote Julian Jessop chief international economist at Capital Economics in a research note.

The increased purchase of government bonds will be welcomed within the administration of Taro Aso, Japan’s prime minister, who is currently preparing the ground for a new package of stimulus measures likely to be sent to the Diet early in the fiscal year that begins in April.







BoJ drafts Y1,000bn of bank loan aid
By Lindsay Whipp and Mure Dickie in Tokyo, Krishna Guha in Washington and Daniel Pimlott in London
Copyright The Financial Times Limited 2009
Published: March 17 2009 09:37 | Last updated: March 17 2009 19:29
http://www.ft.com/cms/s/0/0190e230-12d7-11de-9848-0000779fd2ac.html


The Bank of Japan has unveiled a draft plan to provide up to Y1,000bn ($10bn) in subordinated loans to large commercial banks, in the latest radical effort by one of the world’s leading central banks to stem the global economic crisis.

The BoJ move, which it said it was exploring as an “extremely extraordinary measure”, follows the Bank of England’s decision to buy UK government debt and the Swiss National Bank’s announcement of its plan to intervene in currency markets to drive down the Swiss franc.

There is speculation that the US Federal Reserve could move towards buying US government debt at the close of its two-day policy meeting on Wednesday, though most analysts think it is more likely to expand purchases of mortgage-related securities issued by Fannie Mae and Freddie Mac instead.

In other moves on Tuesday, an International Monetary Fund official revealed that the fund has dramatically cut its estimates for global growth this year, with Japan the worst-performing big economy.

Teresa Ter-Minassian, an adviser to IMF managing director Dominique Strauss-Kahn, told reporters that the IMF now expects the world economy will shrink by 0.6 per cent this year, with a 5 per cent contraction in Japan, down from the 2.6 per cent contraction expected in the fund’s last official forecast in January.

The IMF said the figures were “unofficial and already out of date”. They were based on forecasts drawn up in late February.

The IMF is set to unveil more up-to-date predictions for global growth on Thursday, and comprehensive forecasts for international economies towards the end of April.

The BoJ also said it would only make the loans available to banks subject to international capital standards - which include the country’s mega-banks and other larger commercial lenders - thus excluding most of the sector’s weakest members.

The central bank made clear it was seeking to put in place a safeguard that could be used if conditions worsened for local lenders that have so far been much less affected by the global financial turmoil than US or European counterparts.

“If strains in financial markets at home and abroad further intensify and financial institutions become more conscious of capital constraints due to concern over a future decline in stock prices, there is a possibility that the financial intermediation function will not be carried out smoothly,” the BoJ said in a release.

Analysts said that while falling share prices initially eroded tier banks’ two capital, tier one was also affected when net unrealised gains from their shareholdings become net unrealised losses. The BoJ’s subordinated loans would only boost tier two capital.

“Japan’s toxic assets are essentially equities and any pick up in stock markets will be more significant for improving tier one capital,” said Glenn Maguire, chief Asia economist at Societe Generale.

However, the BoJ scheme shows the generally cautious central bank is willing to consider new approaches amid a domestic downturn of stunning speed and severity and could help to ease pressure from politicians and business for it to act more boldly.

While the BoJ has yet to decide crucial details of the terms under which it would make the loans available to banks, it made clear it hopes they will be able to raise the capital they need without its assistance.

Japan’s major banks have already raised preferred shares and securities to bolster core tier one capital, though the markets’ willingness to provide more funding is unclear.

The BoJ said its loans would be made available to leading banks as a backstop should they need help in shoring up capital bases eroded by losses and falls in the value of their investments.

The scheme is the latest in a series of attempts by the Japanese authorities to stabilise Japan’s financial system.

The government has also offered capital-short banks direct infusions of public funds, with the Financial Services Agency announcing on Friday that it would inject a total of Y121bn into regional lenders Sapporo Hokuyo Holdings, Minami-Nippon Bank and Fukuho Bank.

Analysts were sceptical that the new scheme would do much to address worries about Japan’s banks.

“It’s not really addressing the issue,” said Jason Rogers, an analyst at Barclays Capital. “This is about supplementary capital, not tier one capital, which is the focus of the markets at the moment.”

”This is a true global crisis, impacting all parts of the world and countries at different levels of development,” Ms Ter-Minassian said.

Japan’s economic growth was revised down sharply from a previously expected 2.6 per cent contraction, leaving it the sick man among the world’s advanced economies in spite of having avoided the extent of the banking problems experienced in countries like the US and the UK. Its export dominated economy has been hit hard by a plunge in global trade, with sales of Japanese goods abroad falling by 45.7 per cent in January. Its economy contracted by 3.3 per cent in the final quarter of last year alone.

By contrast the US will contract by 2.8 per cent this year, against an earlier expectation of a 1.6 per cent decline. The UK is set for a 3.8 per cent contraction in GDP, much worse than forecasts from the European Commission out last month, and far lower than the 2.8 per cent drop originally expected by the IMF.

The eurozone is forecast to decline by 3.2 per cent, compared to the previous forecast of 2 per cent.

CASH INJECTIONS

Dec 2008 Bank of Japan says it will buy commercial paper directly in an effort to ease a possible corporate credit crunch. Government raises limit for public fund injections for financial institutions to Y12,000bn (£86.6bn)
Feb 2009 BoJ offers to buy up to Y1,000bn worth of shares held by banks
March Financial Services Agency announces injection of Y121bn into three regional banks
March BoJ says it is considering providing up to Y1,000bn in subordinated loans to larger Japanese banks





Infrastructure deficit chokes India
By James Lamont in New Delhi
Copyright The Financial Times Limited 2009
Published: March 17 2009 10:55 | Last updated: March 17 2009 16:49
http://www.ft.com/cms/s/0/5f4a0a34-12df-11de-9848-0000779fd2ac.html


India faces a shortfall of as much as $190bn in financing key infrastructure projects as the global crisis chokes off urgently needed capital, according to a study by McKinsey, the management consultants.

Infrastructure development is one of the most important challenges facing New Delhi as it strives to sustain high levels of economic growth. The Indian government has identified the need for $500bn (€385bn, £357bn) in infrastructure spending between 2007 and 2012. But a liquidity squeeze in the local banking system and the draining away of foreign investment has cast doubt on this goal.

Decades of underinvestment in roads, ports, airports and power has left the country crippled by a severe infrastructure deficit.

Roads in the main cities are frequently clogged with heavy traffic and 90 per cent are structurally unsuitable for loaded trucks. Ports are running close to capacity.

Financial constraints threaten to block a transformation to a more modern economy.

“Structural impediments in the financial system coupled with the global credit crisis will constrain capital flows to the sector, perpetuating the deficit in core public goods and persistent inefficiencies in the economy,” the study said.

Some economists claim that if India improved its physical infrastructure the country’s entrepreneurial drive would comfortably propel it to double-digit economic growth to rival China’s. Frequent comparisons are made between China’s focus on infrastructure development and India’s often Victorian-era systems.

According to a government blueprint, a quarter of new investment in core infrastructure is expected to come from the private sector.

New projects include the $50bn Delhi-Mumbai industrial corridor, high-speed rail links between main cities and improved cargo handling at ports. The country also aims to have 500 airports operational in the next decade.

To avert a funding shortfall in infrastructure development “that India can ill afford”, McKinsey called for urgent reform of the financial system to free up capital, attract new investors – such as mutual and pension funds, and overseas infrastructure funds – and new mechanisms to facilitate investment.

Its study was critical of restrictions on insurance, pension and provident funds, a shallow bond market and constraints on external commercial borrowings.

A separate study by the Federation of Indian Chambers of Commerce and Industry and Deloitte, the audit firm, earlier this week highlighted similar concerns. It said the country’s task of mobilising $320bn for infrastructure over the next three years was severely hampered by a lack of policy clarity, cost escalations and limited long-term finance.