Sunday, May 29, 2011

May 29 2011: Honey, I Swapped the Greeks

John Vachon Cut Rate Drugs September 1939
"Liquor store in Gateway District, Minneapolis"

Ilargi: The Greek debt issue becomes more impenetrable by the day; or at least, so it may seem. The European Central Bank is threatening not to take on anymore Greek bonds if its conditions are not met, the IMF says it may not release the next phase of the $110 billion bailout fund agreed on last year if Greece doesn’t meet it austerity promises. Meanwhile, the yield on 2-year bonds has soared to 25%. That alone, or so you would think, should be enough for either a rapid default or a next bailout package. However, talks keep on going on unabated. The IMF now has had a team in place in Athens for over 3 weeks while the Acropolis is burning - in a manner of speaking-.

And of course, analysts and experts can't agree on what is real and what is not, either. Harvard's Martin Feldstein sees a quick and massive default looming:

After the Greek Default
[..] even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.

And a massive default, together with a very large sustained cut in the annual budget deficit, is, in fact, needed to restore Greek fiscal sustainability. More specifically, even if a default brings the country’s debt down to 60% of GDP, Greece would still have to reduce its annual budget deficit from the current 10% of GDP to about 3% if it is to prevent the debt ratio from rising again. In that case, Greece should be able to finance its future annual government deficit.

Ilargi: Felix Salmon, though, has a very different view. Here's his direct reaction to Feldstein:

Are Greek Bonds Pricing In a Massive Default?
I don’t think this is true. The Greek yield curve is odd: Three-month T-bills yield about 6%, the 30-year bond yields about 10.8%, and the big spike is at two years out where the yield is about 25%. Clearly the market isn’t pricing in any kind of massive default over the next three months. But let’s look at that benchmark two-year bond, since if any instrument is pricing in a massive default, it’s that one. The bond carries a coupon of 4.6% and is trading at 71 cents on the dollar.

Now what would happen to that bond if there was a massive default? Let’s be conservative and say that Greece’s debt-to-GDP ratio will be about 150%, and let’s take Feldstein’s target ratio of 60% as where the country is going to end up. In that event, the face value of Greece’s debt would have to fall by at least 60%, and probably more, given the hit to GDP which normally accompanies a big default.

Clearly, traders pricing the two-year note at 71 cents on the dollar are not pricing in any kind of event in which Greece will swap that note out for an instrument worth only 40 cents on the dollar.

In fact, any priced-in default looks decidedly modest to me. Let’s say that Greece defaults before the next coupon payment, which is due on May 20, 2012. And let’s say that traders in this risky asset want a return of at least 10% if there’s a default. Then someone buying the bond at 71 cents now is betting that it’s going to be worth at least 78 cents post-default. Which implies a pretty modest haircut of just 22% — something which would bring Greece’s debt-to-GDP ratio from 150% to a still-unsustainable 117%.

Ilargi: Just so it's clear once and for all: It is glaringly obvious that Greece can't pay back its debts. Bailouts may bring down interest rates on those debts a little, and for a while, but the principal remains, and unless the country either wins the mother of all lotteries or turns into the next big global manufacturing base, à la China, within the next few months or so, more bailouts will be needed, and then more after that. This is also clear for all parties around the negotiating tables. So why the delay, what's really happening?

The Wall Street Journal ran two pieces in the past few days that may shed some light on that question. First, Mark Brown:

Greek CDS Deals Come Under Scrutiny
The cost of insurance against a Greek sovereign default, as measured in the price of credit-default swaps written on the country's debt, hit a fresh all-time high of close to 15% Tuesday. Bond markets continue to see no alternative to a restructuring of the country's huge debt.

But if Greece does restructure, a determination to keep speculators who bet against the country's creditworthiness from collecting could mean that the protection bought is worthless, some analysts say. Credit-default swaps work like a default-insurance contract, but a buyer doesn't have to own the underlying asset being insured. If a borrower defaults, the seller compensates the buyer for the amount they have lost, or would have lost, as owners of a bond that won't be repaid.

Payouts may also happen if a borrower restructures its debt, by postponing repayment, for example, in a way that is binding on all debt holders. But as J.P. Morgan Securities Ltd.'s European rates strategists point out, an offer to holders of Greek bonds to exchange, voluntarily, their existing bonds for new ones, which might have different terms, wouldn't trigger payouts. A voluntary exchange "does not meet the requirement that it be binding on all holders," they say.

This might help explain why the official talk of restructuring that surfaced last week, in comments from the likes of European Commissioner Olli Rehn and Jean-Claude Juncker, chairman of the euro-zone's group of finance ministers, included language like "re-profiling" or "soft restructuring." Those terms are understood to mean a voluntary process.

Why should the Greek or other euro-zone authorities care whether swaps payments are triggered? After all, according to the Depository Trust and Clearing Corporation, at the end of last week, the net notional value of credit-default swaps written on Greece was $5.4 billion, which is far smaller than the €266 billion ($374 billion) Greek bond market.

However, the euro zone's antipathy towards credit-default swaps is well known. With the advent of the euro-zone debt crisis, some politicians from the currency bloc have identified the market as a venue for speculative bets against sovereign issuers. Last year, Germany restricted purchases of credit-default swaps by investors who didn't own the relevant bonds, and the European Commission has proposed similar restrictions.

Trying to find a way out for Greece that doesn't trigger swaps payouts may be "another part of the attempt to stop 'evil speculators'," said Gary Jenkins, head of fixed-income research at Evolution Securities in London.

Ilargi: And then, Matt Phillips:

New Greek Debt Risk: Word Games
Euro-zone governments are undecided over what to call any possible Greek debt workout, offering alternatives like a "soft restructuring," or a "reprofiling" of the nation's debt load. For buyers and sellers of billions of dollars of credit-default swaps on the Hellenic Republic, it's more than mere semantics.

Such terminology will play a part in whether sellers of these insurance-like contracts will have to cough up payouts. And with few precedents in the relatively recent history of the sovereign credit-default swap, or CDS, market, how Greece plays out will be a major milestone. "I think it's going to be a critical test, frankly, because there are all these questions raging," said Pavan Wadhwa, global head of interest-rates strategy at J.P. Morgan Chase & Co. "No one really seemed to have much of a handle on what, if anything, would trigger a CDS [payout]."

The CDS market has been a lightning rod for criticism, especially from lawmakers who in part blamed credit default swaps for escalating the global financial crisis and nearly toppling insurance giant American International Group Inc. But three years on from the crisis, the market for these instruments remains murky. Credit default swaps are financial products that work like insurance against a bond default. In theory, if a borrower defaults, the seller of CDS pays the holder. That protection gets more valuable as anxiety grows about the country or company's ability to pay debts.

In practice, it's less straightforward. "There are many ways that Greece can avoid triggering CDS [payouts] in the event that it does do a restructuring," said Mr. Wadhwa. For example, Greece could twist bondholders' arms until they accept a "voluntary" debt exchange. Such "voluntary" exchanges wouldn't likely be a trigger for payments, he said.

On the whole, investors have been paring back their bets on Greek defaults. In the week ended May 20, the net notional value of outstanding CDS contracts on Greece was about $5.34 billion. That's down from about $7.17 billion a year earlier, according to Depository Trust & Clearing Corp. data. The number of contracts outstanding increased, however, from roughly 4,000 one year ago to around 4,600.

To be sure, the size of the Greek CDS market pales in comparison the Greek central government's outstanding debt. That was around $454.69 billion in 2010, according to the Organization for Economic Cooperation and Development.

Ilargi: That changes the view a tad, doesn't it? At the very least, it brings additional questions to the fore.

Why do IMF and ECB, plus Athens, keep reacting so angrily whenever the term default -or restructuring, reprofiling- is used? Is it because a Greek default carries the risk of default contagion for other, -almost- equally "challenged" European periphery brethren? Or is "contagion in the CDS market" the true reason?

AIG wasn't so much taking on excessive risk, as is often claimed, before it was bailed out to the tune of hundreds of billions; it simply operated on the presumption that being a counterparty in CDS contracts would never mean it had to pay up. And rest assured: it didn't. The US taxpayer did. To a whole slew of foreign banks.

Whether Blythe Masters and her team at JPMorgan designed CDS in the mid '90s to be risk insurance is debatable. What is not is that that is not how they came to be used, and grew into a $60 trillion or thereabouts "industry". Credit default swaps, like many of their siblings, became a way to hide debt, more than one to hedge risk.

Once regulators accepted the idea that when you buy CDS to hedge against the risk of default of pretty much any paper you hold, loss reserves were no longer required, and you were free to take on more risk, buy CDS on that, rinse and repeat, until the cows come home, your hands and your books were clean. Now you see the debt, now you don't. It doesn't just allow for the debt to be hidden, mind you, it also allows for it to grow, rapidly. Even when the debt grows riskier, when the underlying assets lose value.

CDS, like other derivatives, were hailed as a genius instrument to bring down systemic risk: they would spread the risk among many investors. When AIG went down, this notion turned out to be false. What it came down to, in admittedly simplified terms, is that if you and I both have $1 million in debt, all we need to do is sign 2 contracts: one that says you’ll pay me a fee to guarantee (insure) your debt, and one that says I'll pay you to guarantee mine. We then both are free to buy any subsequent additional asset, with any risk, we choose. And enter in additional insurance contracts just like the first two.

Simplified as that example may be, it still describes the essence of what was agreed upon by those charged with maintaining a fair and balanced marketplace. It doesn’t lessen systemic risk; indeed, it greatly enhances it, since it allows parties to take on vastly more risk, without taking any of the underlying assets, or their values, into account.

Here's another little reminder of how Greece managed to fool the EU into letting it join, from Bloomberg's Elisa Martinuzzi a few weeks ago:

Greece Had 13 Currency Swaps With Goldman
Greece had 13 off-market derivative contracts with Goldman Sachs Group Inc., most of which swapped Japanese yen into euros in a 2001 transaction aimed at concealing the true size of the nation’s debt, according to the European Union’s statistics office.

The amount borrowed through the swaps was due to be repaid with an interest-rate swap that would have spread payments through 2019, Eurostat said in a report on its website today. In 2005, the maturity was extended to 2037, the report said. Restructuring the swaps spread the cost over a longer period, leading to an increase in liabilities and debt, Eurostat said.

Repeated revisions of Greece’s figures, beginning in 2009, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis. The use of off-market swaps, which Greece hadn’t previously disclosed as debt, let the country increase borrowings by 5.3 billion euros ($7.5 billion), Eurostat said in November.

Ilargi: These were currency swaps. not CDS, but the principle stands. Don't get me wrong, I don't mean to imply that the EU didn't know about these arrangements. For all intents and purposes, they may have been perfectly common among all applicants, as well as established EU members. It's just too tempting, isn't it?

What a Greek default now threatens to do is to trigger a "credit event", i.e. an event that would force CDS sellers (counterparties) to pay up. Something that was never meant to happen, and for which there are no provisions -and certainly no money-. It was all just a trick, a sleight of hand. Sure, it would be pretty bad if holders of Greek debt were forced to take crewcut-like haircuts; it would drive investors away from EU periphery sovereign debt even more. Still, that's not the main concern here.

What is, is the fact that a Greek default risks defining what it would take to trigger a credit event, something that until now is just about entirely up in the air. Whether the definitions concocted at the Athens tables (soft restructuring, reprofiling, voluntary maturity extension etc.) would be enough to prevent such an event is in the end up to the discretion of the International Swaps and Derivatives Association and its European Determinations Committee. Which probably use tough language as we speak, but which don't want to trigger it anymore than the IMF or ECB do.

Then again, the principle of CDS needs to be kept alive at all cost: financial institutions across the globe are buried so deeply in the stuff that they would all die instant deaths if they were taken away, or even their value or worth just doubted. CDS serve to hide debt, and the world's financials can't afford for their debts to be exposed. Nor can central banks or governments, for that matter.

And so the game remains the same: keep the bankrupt existing system alive at the cost of the people, until the people carry all the risk and all the debt. Looks like a good enough reason for all of us to become indignados. But then, we've said that for years now, and nothing has truly changed yet. Guess the game must be played until the bitter end.

New Greek Debt Risk: Word Games
by Matt Phillips - Wall Street Journal

Euro-zone governments are undecided over what to call any possible Greek debt workout, offering alternatives like a "soft restructuring," or a "reprofiling" of the nation's debt load. For buyers and sellers of billions of dollars of credit-default swaps on the Hellenic Republic, it's more than mere semantics.

Such terminology will play a part in whether sellers of these insurance-like contracts will have to cough up payouts. And with few precedents in the relatively recent history of the sovereign credit-default swap, or CDS, market, how Greece plays out will be a major milestone. "I think it's going to be a critical test, frankly, because there are all these questions raging," said Pavan Wadhwa, global head of interest-rates strategy at J.P. Morgan Chase & Co. "No one really seemed to have much of a handle on what, if anything, would trigger a CDS [payout]."

The CDS market has been a lightning rod for criticism, especially from lawmakers who in part blamed credit default swaps for escalating the global financial crisis and nearly toppling insurance giant American International Group Inc. But three years on from the crisis, the market for these instruments remains murky. Credit default swaps are financial products that work like insurance against a bond default. In theory, if a borrower defaults, the seller of CDS pays the holder. That protection gets more valuable as anxiety grows about the country or company's ability to pay debts.

In practice, it's less straightforward. "There are many ways that Greece can avoid triggering CDS [payouts] in the event that it does do a restructuring," said Mr. Wadhwa. For example, Greece could twist bondholders' arms until they accept a "voluntary" debt exchange. Such "voluntary" exchanges wouldn't likely be a trigger for payments, he said.

On the whole, investors have been paring back their bets on Greek defaults. In the week ended May 20, the net notional value of outstanding CDS contracts on Greece was about $5.34 billion. That's down from about $7.17 billion a year earlier, according to Depository Trust & Clearing Corp. data. The number of contracts outstanding increased, however, from roughly 4,000 one year ago to around 4,600.

To be sure, the size of the Greek CDS market pales in comparison the Greek central government's outstanding debt. That was around $454.69 billion in 2010, according to the Organization for Economic Cooperation and Development.

But there are indications European policy makers are paying attention to credit default swaps as they cobble together another approach to stopping the crisis. In a research note dated May 26, RBC Capital Markets analysts wrote that the usage of language such as "re-profiling," "soft-restructuring," and "voluntary" restructuring from European officials indicates they're trying to craft a solution that wouldn't trigger CDS payouts.

That would likely be a boon to the European domestic banking sector, say J.P. Morgan analysts who cite "anecdotal" evidence that European banks would be on the hook for payouts. But it's less than clear what it will mean for the sovereign CDS market as a whole.

After all, if a debt restructuring on the scale of Greece isn't covered by current CDS contracts, "you can rightly ask yourself, 'What do I want with the product in the first place?," said Peter Schaffrik, head of European rates strategy at RBC. "The way it looks at the moment, I think there might be some serious concerns on whether you actually get paid at the end of the day."

Greek Leaders Fail to Reach Consensus on Austerity
by Niki Kitsantonis - New York Times

At an emergency meeting on Friday, the country’s political leaders failed to agree on new austerity measures proposed by the government, but Prime Minister George Papandreou said there was still hope that an agreement would be reached.

"Essentially, there are many points on which we can agree," he said, speaking to the nation in a televised speech. "But there is a need for political will from all sides." "Over the next few days we will continue efforts to reach a consensus," he continued, adding that "the government has assumed the responsibility to extract the country from the crisis and will do this with or without consensus."

But leaders of the opposition parties have refused to fall in behind the president, Karolos Papoulias, who had called the meeting. The measures have been proposed by Mr. Papandreou’s Socialist government.

The aim of Friday’s meeting was to convince officials of the European Union and International Monetary Fund that Greece is serious about repairing its finances, and has the political will to impose more tax increases and spending cuts on a public already weary after a year of belt-tightening. The effort came amid mounting speculation about the Greek government’s ability to avert a default, which would very likely lead to a new financial crisis across the euro zone.

Olli Rehn, Europe’s commissioner for economic and monetary affairs, said in a statement that the commission "regrets the failure of Greek party leaders to reach consensus on economic adjustment to overcome the current debt crisis." "An agreement has to be found soon," Mr. Rehn said. "Time is running out."

Earlier in the day, Antonis Samaras, the leader of the country’s main conservative opposition party, New Democracy, said he would not back a program that would "raze Greece’s economy and destroy its society." He called for the renegotiation of the terms of an agreement with the union and the I.M.F., which last May pledged 110 billion euros in loans to Greece in exchange for the country’s getting its fiscal house in order. Mr. Samaras also reiterated calls for an alternative approach to Greece’s finances, one that favored the lowering of taxes and faster privatization of state assets.

Other leaders also criticized the Socialists’ plan. Among them was the leader of the Communist Party, Aleka Papariga, who said Greeks were being subjected to "ideological terrorism" and should not give in to "coercive dilemmas."

On Thursday, the head of the group of euro zone finance ministers, Jean-Claude Juncker, said again that the European Union would be unlikely to step in if the I.M.F. withheld its portion of a fifth installment of emergency funding to Greece — 12 billion euros ($17 billion) scheduled to be disbursed next month.

Greece’s lenders are demanding additional measures after the country missed its deficit-reduction target for 2010, putting the goals for this year and beyond further out of reach. A mission from the European Commission, the I.M.F. and the European Central Bank is currently compiling a much-anticipated report on the Greek government’s progress, after which European ministers will have to decide how to react.

The situation is difficult because public opinion in creditor countries is hardening and some euro zone governments, including that of the Netherlands, have made it clear that they will not step in and fill the funding gap if the I.M.F. does not believe that it can justify releasing its portion. That has increased pressure on the Greek government to agree to revenue-raising measures, including privatization, that will be sufficient to win over the I.M.F.

At the Group of 8 meeting in Deauville, France, on Friday, the United States expressed support for European efforts to prevent a renewed debt crisis in Greece from mushrooming into a larger problem for the euro monetary union, said two European diplomats who were present during the discussions but did not want to be named. The Americans said that Europe’s ability to manage these problems was important to the United States, but that President Obama did not specify what kind of help the United States would be willing to extend, other than statements of support, the diplomats said.

The European leaders said during the discussions that Europe’s problems were limited to Greece and that they did not believe Greece risked infecting the rest of the euro zone, which covers 17 countries. They pointed to the continued strength of the euro vis-à-vis the dollar as proof that the situation was still under control. The leaders agreed, however, that Greece needed to be more aggressive in adjusting its own finances, and said they believed that the country would ultimately be able to avoid defaulting on or restructuring its debts.

Greek media has speculated in the last week that the country will hold snap elections or possibly return to the drachma. The European marine affairs commissioner, Maria Damanaki, who is a Greek Socialist, added fuel to the fire when she suggested on Wednesday that talks were already taking place about Greece’s possible exit from the euro zone.

Apart from tax increases and public spending cuts, the Greek government’s proposed austerity program also includes a privatization drive that foresees sales in stakes of state utilities and assets including the state telecommunications company OTE.

On Friday, Deutsche Telekom, which already has a 30 percent stake in OTE, confirmed the receipt of a letter from the Greek finance ministry asking to arrange talks to discuss increasing its stake. But a few dozen employees of the phone company protested a further sell-off by blocking one of Athens’s busiest roads, in front of the company’s headquarters, during the morning rush hour Friday. Larger protests have been held over the last three days as Greeks, facing a deepening recession and mounting unemployment, seek to air their grievances.

Greek default fears mount as Irish bond yields peak
by Donal O'Donovan -

The yield on 10-year Irish government bonds hit a record high last night, as Greece and the ECB failed to convince the market that Greece can avoid a default. Ireland is seen as next in line if Greece fails. Markets punished the euro zone periphery as high profile economists rubbished the idea that austerity measure will see Greece through the crisis.

Fitch Ratings still expects Ireland and Portugal can stabilise their public debt even after bond spreads for the two countries increased. Spreads at current levels imply a "very sharp jump" in the market's expectation of either a default or a restructuring that would impair creditors' interests, Fitch said yesterday. "By contrast, Fitch maintains its view that public debt stabilisation can be achieved given strict adherence to fiscal consolidation targets in these two countries," it said.

Nobel prize winning economist Paul Krugman told a conference in Copenhagen that lenders to Ireland and the other high risk borrowers will lose money on their investments. "It's basically inconceivable that there won't be some significant losses on present value for bondholders" of Greek, Portuguese and Irish debt, said Mr Krugman. "Spain may be able to tough it out," he said, but it's "extremely" unlikely Greece will be able to honour its debts. Mr Krugman said there is a 50pc chance Greece will be forced out of the euro.

At the same event the ECB's own former chief economist Otmar Issing agreed that Greece will probably not be able to repay its debt, because it's "insolvent." As the markets digested that dire assessment, the yield, or cost of borrowing, on Irish government bonds hit 11.07pc. It's the highest since the launch of the euro. The yield on the equivalent Greek bonds was 16.38pc. Portuguese bond yields remain close to their euro era highs.

Investors piled into the German debt after the prime minister of Luxembourg Jean-Claude Juncker said the Greek crisis could worsen next month. Mr Juncker said the IMF could refuse to hand over its portion of aid for Greece next month, if the loan conditions are not met.

Credit analyst Gavan Nolan, of Markit, said Mr Junckers comments appeared to be aimed at scaring Greek opposition politicians into backing further austerity. The immediate effect was to weaken confidence in the country from outside, however. The cost of insuring Greek bonds against default shot up immediately after the comments to just under the all time high.

The IMF downplayed Mr Junckers comments. Its European Director Antonio Borges said a decision on the next tranche of aid for Greece will be made once the review is completed and following the normal procedure.

Greece risks 'return to drachma'
by Emma Rowley - Telegraph

Greece will have to ditch the euro unless it agrees tougher austerity measures, said a senior Greek official, delivering the strongest warning yet from a European insider as to what is at stake.

Maria Damanaki, the European Commissioner for fisheries, and who was appointed by Greece's ruling socialists, said her country faces having to exit the currency unless warring parties can agree to makes the sacrifices needed to resolve its debt crisis.

The Greek government strongly denied previous rumours that Athens was considering leaving the eurozone, but Ms Damanaki said the situation's gravity had forced her to "speak openly" about the dilemma facing her country. "The greatest achievement of post-war Greece, [joining] the euro and the European course of the country, is at risk," Ms Damanaki said. "The scenario of Greece's exit from the euro is now on the table, as are ways to do this.

"Either we agree with our creditors on a programme of tough sacrifices and results ... or we return to the drachma. Everything else is of secondary importance." Her warning came as thousands gathered in Athens to protest against their government's plans to make further savings and politicians denied stories of a planned referendum on tougher austerity efforts, having failed to win opposition support.

Greece's international rescuers, the International Monetary Fund and its European partners, will not commit to new aid on top of Greece's €110bn (£95bn) bail-out unless it delivers fresh reforms and shows that they have broad support.

ECB Rules Leave More Room for Greek Restructuring Than Rhetoric Suggests
by Jana Randow and Jeff Black - Bloomberg

European Central Bank officials may have more scope to cope with a Greek restructuring than they are letting on even as policy makers warn that such a move could trigger the beginning of a "horror story."

While German and French officials say the ECB would no longer accept Greek debt as collateral in its money-market operations should the country be forced to default, the ECB’s rules are less clear and only say that such a step "may be warranted" if officials deem it necessary. The ECB’s rhetoric may be as much about forcing Greece to step up budget cuts as it is about drawing a line in the sand, say Citigroup Inc. and Deutsche Bank AG economists.

"Without these ECB warnings, the Greeks wouldn’t have come up with the announcement of additional measures," said Juergen Michels, chief euro-area economist at Citigroup in London. "The ECB showed early with the eligibility requirements on collateral rules that they can stretch the whole thing pretty far."

European policy makers are seeking ways to restore investor confidence on increasing concern that Greece won’t be able to repay its debts after last year’s 110 billion euro ($155 billion) bailout. While finance ministers are mulling options such as extending maturities, ECB policy makers have argued that such steps could destroy Greece’s banking system and destabilize other nations in the 17-member euro region.

'Devastating' Impact
"Restructuring is not a solution, it’s a horror story," ECB council member Christian Noyer said on May 24. His Spanish colleague Jose Manuel Gonzalez-Paramo said last month such a move would "very probably" have systemic consequences "quite likely more devastating than" the collapse of Lehman Brothers Holdings Inc. in September 2008.

While restructuring is "one option" to reduce the country’s debt load, "it is better to keep up pressure on Greece" to implement reforms, Dutch Finance Minister Jan Kees de Jager told Germany’s Financial Times Deutschland. Greece may need more time to meet its targets, German Finance Minister Wolfgang Schaeuble said in an interview with the Handelsblatt newspaper published today.

Nouriel Roubini, the economist who predicted the global financial crisis, said in Bucharest today that ECB council members’ remarks on the impact of a Greek default were "utter nonsense" and could "trigger a bank run in Greece."

Greek Deficit
The ECB is for now sticking to its line that tougher austerity programs are the only way out of a quagmire that will see the country’s debt jump to almost 158 percent of gross domestic product this year. Greece’s budget shortfall may average 9.5 percent of GDP this year, the European Commission says. That’s the second-largest gap after Ireland.

The Greek government this week endorsed an accelerated asset-sale plan and a package of budget cuts in an effort to meet requirements for a fifth tranche under its bailout agreements with the European Union, the Washington-based International Monetary Fund and the ECB. Without it, Prime Minister George Papandreou’s government would be forced into a restructuring. Credit-default swaps on Greece fell 29 basis points today to 1,388 basis points, according to CMA. That’s down from a record 1,473 basis points on May 24.

ECB Rules
The ECB may still find room for maneuver as the Greek bond- market sell-off intensifies on concern that tougher austerity measures won’t be enough to ward off a default. The Frankfurt-based central bank’s own rules say that "a suspension, limitation or exclusion of counterparties may be warranted in some of the cases which fall within the notion of the ‘default’ of a counterparty."

One option for the ECB may be to embrace a so-called Vienna Initiative proposal floated by Economic and Monetary Affairs Commissioner Olli Rehn, which aims to persuade creditors to buy new bonds from the Greek government when existing ones mature. Just under half of the ECB’s 23-member Governing Council is currently in favor of the idea, according to a person familiar with the matter, who declined to be identified because the discussions are private. "Given all the options on the table, this is probably the one that the ECB could live with," Citigroup’s Michels said.

The Vienna Initiative was a key plank in the IMF-sponsored rescues of Hungary, Romania, Latvia and Serbia in 2009. Under the plan, banks including UniCredit SpA, Raiffeisen Bank International AG, and Societe Generale SA, then the biggest lenders in eastern Europe, publicly pledged to keep their units in those countries afloat by rolling over funding and providing fresh capital if needed.

'Genuinely Voluntary'
The risk for the ECB is that such a proposal would fail to garner enough support to prevent ratings companies classifying the move as a default. It would have to be "genuinely voluntary," said Alastair Wilson, chief credit officer for Europe at Moody’s Investors Service. "If we concluded that there was an element of compulsion, we would very likely class this as a default."

That would render Greek bonds ineligible as collateral in ECB refinancing operations, according to council members such as France’s Noyer, Germany’s Jens Weidmann and Juergen Stark of the Executive Board. Banks have been reliant on the ECB for funding after being shut off financial markets.

'Complete Havoc'
The threat of that happening may force the ECB into a compromise, say Deutsche Bank economists Gilles Moec and Mark Wall. In May 2010, the ECB suspended its minimum credit-rating threshold for Greece, just four months after President Jean- Claude Trichet said that he wouldn’t change central bank rules for just one member state.

"There is probably a limit to the ECB’s mantra on ‘no restructuring,’" they said in a note on May 20. Otherwise it "would have to bear the responsibility of the subsequent crisis for the Greek banking sector. Would the ECB take the responsibility to ‘make things even worse’? We seriously doubt it." Nor would the damage be restricted to Greek banks. Citigroup estimates that about a third of the county’s debt, or 109 billion euros, is held by so-called foreign non-banks including mutual, pension or sovereign-wealth funds as well as insurers. Greek financial institutions own about 29 percent.

The ECB and the 17 national central banks have about 130 billion euros of risk from Greek debt, Andrew Bosomworth, a fund manager at Pacific Investment Management Co., told reporters in Paris yesterday. Germany, France and other euro nations may need to recapitalize their central banks in the case of a default, which might be "inevitable," he said. "If you write those down by half, you wipe out the entire capital stock of the Greek banking system," said Klaus Baader, an economist at Societe Generale in London. "Complete havoc would be wreaked with the ECB’s ability to conduct monetary policy."

Greece could be disqualified from IMF cash injection
by Louise Armitstead - Telegraph

Greece could be disqualified from claiming part of its next cash injection from the International Monetary Fund (IMF), the chairman of European Finance Ministers has warned.

Jean-Claude Juncker said the stricken country was unlikely to be able to guarantee its funding over the next 12 months, preventing the IMF from releasing funds under its own rules. "The IMF can only be active when there is a refinancing guarantee for 12 months," Mr Juncker told a conference in Luxembourg. He added he did not believe that the European Union, European Central Bank and the IMF would decide this condition had been met. He said: "I don't think that the troika will come to this result."

The fresh doubts over Greece's financial aid package caused investors to flee to the safe haven of German bonds. The euro also gave away earlier gains, hitting a two-and-half month low against sterling.

Greece is due to receive a €12bn (£10.4bn) injection from Europe and the IMF on June 29 as part of the country's €110bn bail-out programme. Inspectors from the EU, ECB and IMF are carrying out an audit of Greece's finances ahead of the decision on whether to deliver the next instalment. Although the country has announced a radical programme of asset sales, it has fallen behind its targets for overhauling its finances.

Mr Juncker said: "If the Europeans have to acknowledge that the disbursement from the IMF on June 29 cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF's portion of the financing." However, he warned: "That won't work, because in certain parliaments – Germany, Finland and the Netherlands and others too – there is no preparedness to do so."

Dutch prime minister Mark Rutte said in a web-based video: ""We are looking very carefully at what the IMF does ... and if they don't say a new tranche in loans should go the Greeks, then we won't either."

Meanwhile Peter Bofinger, one of Germany's key economists who sits on a five-person advisory panel known as "The Wise Men", warned that Greece needed to ask its creditors to take a 40pc haircut in a radical restructuring. His comments fly in the face of German ministers – including Chancellor Angela Merkel – who have dismissed restructuring ideas.

Wolfgang Schaeuble, the German finance minister, yesterday told a newspaper: "A debt restructuring scenario bears high risks. It could result in an immediate maturing of all loans, with the corresponding consequences for Greek solvency."

Greece will not default if it gets IMF aid, says central bank governor George Provopoulos
by Louise Armitstead - Telegraph

The boss of Greece's central bank has insisted that the embattled country can handle its debts on its existing aid programme. George Provopoulos, who is also a member on the European Central Bank (ECB) led a raft of politicians and regulators who moved to calm market fears over Greece's financial stability.

"Greece will be able to pay back the full amount of its debt without any kind of re-profiling if it fully implements the adjustment programme," said Mr Provopoulos. He added that the ECB would "do whatever is necessary to ensure that there are no second-round price and wage effects from the recent rise in headline inflation".

Admitting that any restructuring would "damage the credibility of the Greek sovereign [debt] and the euro itself," Mr Provopoulos said the ECB was determined to maintain a "flexible approach" towards interest rates on the international aid package. John Lipsky, the acting chief of the International Monetary Fund (IMF), said he was not anticipating any debt restructuring. "We have a programme under way with the Greek authorities, supported by ourselves and with our European partners, and that programme does not contemplate any debt restructuring or re-profiling or anything," he said.

Jean-Claude Trichet, the President of the ECB, echoed Mr Provopoulos in arguing that the bail-out package would be adequate if Greece sticks to it. He said: "Greece must implement the programme fully and rigorously; this is very important to correct the errors of the past and pave the way for sustainable job creation."

On Thursday, European markets were rattled when Jean-Claude Juncker, who chairs the eurzone finance ministers, said Greece could be disqualified from claiming part of its next cash injection. Luxembourg's prime minister said Greece would be unlikely to guarantee its funding over the next 12 months, preventing the IMF from releasing funds under its own rules.

Greece is due to receive a €12bn (£10.4bn) injection from Europe and the IMF on June 29 as part of the country's €110bn bail-out programme. Delivery of the cash is subject to a progress report on asset sales and spending cuts by the international authorities.

Why are the Irish not more like Spain’s Indignados?
by Laura Slattery - Irish TImes

The "Spanish revolution" saw thousands of young Spaniards embark on a week-long series of anti-establishment demonstrations, with tactics including Twitter calls-to-action and the setting up of a "tent city" in Madrid’s central square, Puerta del Sol. Spanish protesters, dubbed "los indignados" (the indignant), want jobs (Spain’s youth unemployment rate is around 45 per cent), better living standards, fairer political processes and changes to their government’s austerity programme.

This sounds familiar.

And yet despite the parallels in the economic plights of both countries (overheated property market, youth-concentrated unemployment), sustained and co-ordinated protests, youth-led or otherwise, have yet to take place on the same kind of scale in Ireland. This is much to the dismay of Irish activists, who wish their compatriots were more visibly angry about the extent to which external, unelected bodies have assumed the power to dictate social and economic policy here (via the usual method of debt enslavement).

Independent TD Richard Boyd-Barrett, doing the loudspeaker thing at a Spanish solidarity protest in Dublin last Saturday, declared that Irish activists "want to see the Spanish revolution imported into this country". But why do we have to import it? Why can’t the Irish be more like the Spanish? Without degrees in psychology, sociology, economics and European history - and a field study in both countries – that is not a question I am going to attempt to answer in a mere blog post. Oh no. But here are some possibilities.

1. The answer lies in the numbers: Some 27 per cent of workers aged 20-24 in Ireland are unemployed (as of the end of last year), while almost half of 18-25-year-olds in Spain can’t find work. Could it be that somewhere in between lies the tipping point between tolerable and intolerable?

2. The Irish media are innately conservative, promoting political consensus and a heads-down attitude to life… On the other hand, there’s nothing a home news editor enjoys more than a mass protest, what with its reliable capacity for producing a bumper crop of page-filling pictures of crowds bearing strong, witty placards – some of which manage not to be Father Ted references.

3. Irish people are lazy.

4. Irish people are not lazy; they just don’t feel very much like marching for an hour, then waiting at the bus stop for the same length of time.

5. Irish people are not lazy, just waiting for the summer. Boyd-Barrett has named July 16th as the date on which "the spirit of Spain" will be brought to Ireland by way of demonstration, which gives Ireland’s Indignados plenty of time to figure out how to erect their tents.

6. Irish people are righteously indignant, but it’s much easier to RT an online petition than it is to mobilize.

7. Irish people are more cynical than the Spanish about the effectiveness of political protest when it comes to changing law and government policy, and are less likely to value benefits such as the fuzzy feeling of solidarity, post-chanting catharsis and the opportunity to flirt self-deprecatingly with fellow protestors.

8. The Spanish protesters were mostly objecting to Spanish government austerity measures and its all-round handling of the economy, while Irish people are resigned to the idea that the Irish government has already ceded control of both of those things to the European Union and the International Monetary Fund.

9. The Spanish political establishment isn’t as good at divide-and-conquer as its Irish counterpart.

10. There aren’t any encampment-friendly open spaces in Dublin city centre that are equivalent to the Puerta del Sol… on the plus side, for "boutique" demonstrations, the Spire is a foolproof meeting point.

11. Media coverage of protests focuses disproportionately on incidences of violence by protesters, putting people off attending.

12. Media coverage of protests focuses disproportionately on incidences of violence by Gardaí, putting people off attending.

13. Media coverage of demonstrations makes protests look boring and protesters look cold.

14. Media coverage of demonstrations is all about logistics such as road closures that might possibly crimp the extremely important day of people who are not actually marching and have no intention of ever marching, while giving comparatively little attention to the "ishoos".

15. Television news coverage of protests patronises protestors by constantly congratulating them for being "peaceful": You know, it’s almost as if they’re disappointed when there isn’t a massive rumble followed by an all-day kettling.

16. Irish people don’t know any good protest songs. "This is what democracy sounds like", indeed.

17. Young Irish people would prefer to rant about the state of the nation from the comfortable distance of Scruffy Murphy’s pub. Which, last time I checked, was in Sydney.

18. There have been plenty of decent-sized protests in Ireland, including the snowy outpouring of November 27th, 2010. Where have you been?

19. A combination of the above.

20. All of the above.

21. None of the above.

22. Other _________________

This Spanish Spring is the Real Thing
by Giles Dexter - 21st Century Wire

It was perhaps inevitable given its long associations with, and geographical proximity to the Maghreb, that Spain should be the first European country to be swept up by the wave known as the "Arab Spring". Protests have been raging across the country since May 15th, and like previous rumblings in Greece, this Spanish Spring will likely send a new shockwave through the EU.

Indeed, a wave of discontent has arrived this month in Spain. People tend to forget that Spain had its own oppressive dictator, the 30′s Fascist survivor who steered clear of Hitler’s madness and instead ground down and impoverished his people with years of economic stagnation until the late 1970′s – El Caudillo himself, the Generalissimo Franco.

When Franco’s "democracy" finally came to Spain, it was a third world country in all but name; largely agrarian, with poor infrastructure and little manufacturing. Visiting in the early 1980′s, one was struck by the high levels of subsistence and unproductive employment – there were rows of men waiting to shine shoes, the disabled stood on street corners with lottery tickets pinned to their lapels, while street vendors peddled second-hand toys.

The Real Deal: This ‘Spanish Spring’ is no minor affair.

Helped by generous EU grants and loans, Spain modernised rapidly and the sheer process of liberalisation opened doors. Media, creativity and the arts flourished in the 80′s and 90′s and Spain felt good about itself –politically and sexually liberated from the past at last. But still, their manufacturing sector never produced anything significant enough to prove a balance of trade. The explosion of tourism meant that shops and bars were busy, but barring booze, provisions and tourist paraphernalia, little of any scale or substance purchased bore the mark "Made in Spain."

Economic Mouse Trap
An entirely false sense of prosperity engendered by their own infamous construction bubble is at the root of Spain’s subsequent economic collapse, with the by-product that the Spanish coastline has been completely and permanently ruined by the plethora of "Urbanisations" and "Apartamentos" that litter the once scenic Corniche. While thousands were temporarily employed as builders, surveyors, plumbers, estate agents and the like, their prosperity was only intermittent. But it had to end sooner or later. The market became completely saturated with identical apartments, few with any sense of place or purpose, bar enabling northern Europeans to soak up sun and sangria. Now the buyers have all gone away, thousands of flats and villas lie empty, unfinished building projects litter the edges of town centres and what have they got? Very little.

Franco’s failure to build a technological base in the mid 20th century, exacerbated by his democratic successors squandering of the opportunities afforded by EU membership, mean that Spain has very little to fall back on. Unemployment among the young now stands at a staggering 45% – that’s millions of people with little or no chance of finding serious work. Needless to say, even basic social security for that many people is expensive, the few with employment subsidizing the masses without. The property speculation bubble has also meant that chronic inflation has also set in over the last decade, challenging the affordability of many basic goods and services. It’s a recipe for political and social and unrest, with the added catalyst that dozens of Spain’s elected officials are being indicted for charges of corruption.

The Flash Mob Moves North
Thousands are now camped out in central Madrid along with 60 other sites nationwide, creating temporary cities of the dispossessed. The mainstream media in Britain and the West have chosen to largely ignore this phenomenon, perhaps because they fear that "it could happen here".

This century, Spaniards have moved to the forefront of alternative culture, the shackles of convention and Catholicism that governed their parents and grandparents lives permanently binned. They seem to realise more than any other western nation that the dog and pony show of replacing the "left" party with the ‘right" endlessly is little more than a hypnotic charade. They have taken the "Arab Spring" a step further by rejecting the periodic plebiscites that the West clings to as its claim to democracy, instead starting to demand real change – to economic structures, to political representation and even to the way we treat each other.

At the camp in the "Puerta del Sol" in Madrid, free food is handed out. What’s being demanded is a new society, not just papering over the cracks of the old one. The movement itself has no single leader or figurehead; all decisions are made by consensus at general assemblies, held twice daily. Hundreds, sometimes thousands, attend the meetings, with no decision taken until every single person is in agreement. This is real synarchy in action, the genus of genuine political change and it should be applauded. It represents a major challenge to the old order of "representative democracy" focused on personality and privilege and is arguably the most significant grass-roots political development since Paris in 1968. There is a sense of optimism, and let’s hope it lasts.

Remember, Spain was at the forefront of western thought in the early 20th century and it nearly transformed, albeit temporarily, into anarchist state, before Franco turned it backwards into a textbook fascist state.

At one point last week, an electoral committee assembled by the government declared the protest camp “illegal”. But even though there were strong rumours of an impending police “clean-up” operation, and seven riot vans gathered at one side of the square, protesters have remained at all times in a defiant spirit.

“If they take us from the square tomorrow, the only thing that they will get is that they will make us stronger and we will come back stronger,” says 22-year-old Juan Martín. “We want a new society. This one doesn’t work anymore.”

Celente: Spain's protests to 'go global'
by UPI

Growing unrest in Spain will spread throughout Europe this summer and "go global" by winter, a U.S. trends forecaster said in an interview posted Friday. "Young people have wised up. They know the score," Trends Research Institute Director Gerald Celente told King World News. "Those are the people that are ahead of all of these revolutions."

Inspired by the revolutionary wave of demonstrations and protests taking place in the Middle East and North Africa, tens of thousands of young Spaniards, expressing distress over 45 percent youth unemployment and severe government-imposed austerity measures, have taken over central squares in 60 cities -- including Madrid's busy Puerta del Sol -- seeking to overhaul Spain's socioeconomic and political systems, which they allege favor special interests, especially financial institutions.

Like the so-called Arab Spring, the growing Spanish movements are spread via social media networks and led in the streets by the young. And "they're not leaving the streets," Celente told King World News, because "when you lose everything and have nothing left to lose, you lose it." "These revolutions are going to spread through the summer in Europe, and by the winter it's going to go global," he said.

A French youth-led group plans a large demonstration in Paris this weekend in solidarity with Spain's protesters, known as "los indignados," or "the outraged." The French protest would follow Friday's close of the Group of Eight summit of world leaders, including U.S. President Barack Obama, in the French seaside resort town of Deauville.

Another Spanish-style uprising could emerge in neighboring Portugal next week, ahead of a June 5 snap election, The New York Times said. Celente said Europe's Internet-savvy youth are "getting everyone out to join them because they know now that if they don't fight against the machine, the machine is going to grind them up."

Spain May Be Too Big To Fail, But Worries Grow
by Min Zeng - Dow Jones Newswires

Many global bond fund managers have so far hung onto their holdings of Spanish debt, hoping that the world's 12th-largest economy will escape the trauma of some of its neighbors. But questions over politics and hidden debt lead some to fear that the worst is yet to come in the euro zone.

One major risk lies in another downturn in Spain's housing market, which would add to the piles of bad debt on banks' balance sheets, raise the amount of capital injections and add to the woes of public finances. "The banks have major problems and the amount of capital needed is much worse than the government wants to admit," said David Scammell, a money manager in London at Schroders Investment Management Ltd., which manages about GBP160 billion in assets. "People are not confident about how bad the debt problem is."

The Spanish government estimated in March that the new capital needed by banks stood at EUR15.15 billion, but Moody's said at the time that it was closer to EUR50 billion and other commentators put the amount above EUR100 billion. In recent weeks, concerns have also risen that debt owed by governments at local levels could be underestimated, a potential misstatement that could add to the central government's growing public debt load.

Additionally, social unrest could grow in response to the fiscal cuts that are necessary to get that debt under control while any setback in future elections could equally derail those austerity measures, said Greg McGreevey, president at Hartford Investment Management, which has about $160 billion global assets under management. If Spaniards resist austerity measures and Spain needs a bailout, German and French voters are likely to resist supporting further financial bailouts. Such deals are politically "very difficult" for people in those countries, said McGreevy.

Spanish government bonds have already fallen following the defeat of the ruling Socialist Party in regional elections over the weekend, news that put Spain's bonds under pressure. For now, though, Spanish bonds look nothing like the beaten-up debt of Greece, where talk of a restructuring has prompted a rush for the exits. On Thursday, the yield on 10-year Spanish government debt traded around 5.35%, while the equivalent in Greece was about 15%.

Many investors believe European Union officials won't allow Spain to fall because that would spark a full-blown crisis in the monetary union, crush the value of the euro and derail the global economic recovery. But any bailout of Spain would be expensive.

Meanwhile, contagion from Greece's problems is growing and that could create a vicious circle of tighter borrowing conditions for Spain. The worst-case contagion scenario for Spain would be that EU officials continue to deny the need for a debt restructuring in Greece, leading investors to lose confidence, said Bill Cunningham, global head of fixed-income research and co-head of global active fixed income at State Street, one of the world's biggest asset management firms. "Markets could force their hand," he said.

The IMF versus the Arab spring
by Austin Mackell - Guardian

In the midst of the media storm surrounding IMF chief Dominique Strauss-Kahn last week, my feelings were perfectly expressed in a tweet by Paul Kingsnorth: "Could someone please arrest the head of the IMF for screwing the poor for 60 years?"

Without diminishing the seriousness of the sexual allegations against Strauss-Kahn, the role of the IMF, over past decades and at present, is a far bigger story. Of particular importance is its role at this crucial moment in the Middle East.

The new loans being negotiated for Egypt and Tunisia will lock both countries into long-term economic strategies even before the first post-revolution elections have been held. Given the IMF's history, we should expect these to have devastating consequences on the Egyptian and Tunisian people. You wouldn't guess it though, from the scant and largely fawning coverage the negotiations have so far received.

The pattern is to depict the IMF like a rich uncle showing up to save the day for some wayward child. This Dickensian scene is completed with the IMF adding the sage words that this time it hopes to see growth on the "streets" not just the "spreadsheets". It's almost as if the problem had been caused by these regimes failing to follow the IMF's teachings.

Such portrayals are credulous to the point of being ahistorical. They do not even mention, for example, the very positive reports the IMF had issued about both Tunisia and Egypt (along with Libya and others) in the months, weeks, and even days before the uprisings.

To some extent, though, the IMF is aware that its policies contributed to the desperation that so many Egyptians and Tunisians currently face, and is keen to distance itself from its past. Indeed, as IMF watchers will know, this is part of a new image that the IMF, along with its sister organisation the World Bank, has been working on for a while. The changes, so far, do not go beyond spin. You can't, as they say, polish a turd – but you can roll it in glitter.

Take, for example, the heartwarming IMF and civil society webpage, which as early as August 2007 was noting that civil society groups, by and large, "believe that global institutions also need to be accountable to a broader definition of stakeholders to be effective and legitimate".

Why then, is the IMF not (as Mohamed Trabelsi, of the International Labour Organisation's North Africa office, suggested when I interviewed him recently in Cairo) meeting the civil society groups and unions in Egypt and Tunisia? It would rather make backroom deals with Mubarak-appointed finance minister, Samir Radwan, and the generals currently running Egypt who are themselves members of an the economic elite that sees its privilege threatened by the approach of democracy.

Beginning in the 1990s, IMF-led structural adjustment programmes saw the privatisation of the bulk of the Egyptian textile industry and the slashing of its workforce from half a million to a quarter-million. What's more, the workers who were left faced – like the rest of Egypt – stagnant wages as the price of living rocketed. Though you wouldn't know it from western coverage, the long and gallant struggle of these workers, particularly the strike of textile workers of Mahalla el-Kubra, is credited by many Egyptian activists as a crucial step on the Egyptian people's path towards revolution.

This failure to appreciate the revolutions as a rebellion not just against local dictators, but against the global neo-liberal programme they were implementing with such gusto in their countries, is largely a product of how we on the western left have been unwitting orientalists, and allowed the racist "clash of civilisations" narrative to define our perceptions of the Middle East. We have failed to see the people of the region as natural allies in a common struggle.

It is this blindness that makes the revolutions appear as instantaneous explosions, like switches suddenly flicked, rather than as events in a continuum. A good place to start the story, if you want it to make sense, would be the Egyptian bread riots of 1977, which came following an initial round of economic liberalisation (which was as much a part of Sadat's change of cold war allegiances as his salute to the Israeli flag in Jerusalem). It should not have surprised us that as people's struggle to survive grew more and more grinding following the IMF-led reforms of the subsequent decades they would rise up once more.

Nor should we surprised at the moneyed fightback, which will no doubt be attempted. During this transition period, forces like the IMF will seek to lock in and enlarge the neoliberal project before there is an accountable government to complain about it.

The example of South Africa, as documented by Naomi Klein, immediately springs to mind. The ANC's famous Freedom Charter, she points out, contained many demands for economic justice including the provision of housing and health care, and the nationalisation of major industries.

However, while Nelson Mandela was negotiating the structure of the new parliament, Thabo Mbeke was busy in economic talks with FW de Klerk's government during which, in Klein's words, he was persuaded "to hand control of those power centres to supposedly impartial experts, economists and officials from the IMF, the World Bank, the General Agreement on Tariffs and Trade (GATT) and the National Party – anyone except the liberation fighters from the ANC".

The team of ANC economists busy drawing up their plan would find themselves unable to implement it once the party was in government. The consequences for South Africans have been disastrous.

These new loans from the IMF threaten to bind the newly democratic Egypt and Tunisia in much the same way. Once more, local elites could collaborate with the institutions at the helm of global capitalism to screw the broader population. If this occurs, these revolutions will be robbed of much of their meaning, and a terrible blow will be dealt to the broader Arab spring.

The Euro Zone's Brittle French Center
by Matthew Curtin - Wall Street Journal

France likes to talk up the importance of economic convergence with Germany. The line would be more convincing if Paris showed more determination to bring public spending in line with that of its neighbors.

France typically outspends Germany by around €163 billion a year relative to the size of its gross domestic product, with little to show for its profligacy. It's a reminder that the euro zone's core has its structural problems, too.

The contrast between German and French economic performance is bothering Paris. Germany grew 3.6% in 2010, compared with growth of just 1.6% in France, according to Eurostat. German unemployment has fallen to a 20-year low of around 7%. France's is nearer 9%, above pre-crisis levels. France's 2012 budget deficit will be 6% of GDP in 2012, whereas Germany's will be just 1.6%, Goldman Sachs estimates.

True, President Nicolas Sarkozy has promised to improve France's competitiveness by aligning the tax code, pension system and university education with Germany's. But he has done little to rein in public spending. Germany's public spending was 43.7% of GDP in pre-crisis 2007, down five percentage points in the previous five years. France's was 52.3%, only marginally below average. Germany cut public-sector staffing by 48% between 1991 and 2008. In France, it rose 36%.

The higher spending might be justified if public-sector outcomes were better in France. They aren't, according to a report by the Institut Thomas More, a think-tank. Take public schooling. Germany spends nearly €1,000 less per pupil but scores better in international education rankings. With fewer, bigger schools, non-teaching staff absorb less than 20% of Germany's education-sector wage bill, compared with nearly 40% in France. Housing and healthcare comparisons also show Germany doing better with less.

Multiple recent reforms have redefined the role of the German state. But reform efforts in France have been half-hearted. As the euro-zone's periphery creaks, French government debt is again underperforming Germany's, a warning for France's aspiring presidential candidates: that without reform, convergence looks farther away than ever.

Distressed Homes in U.S. Sold at 27% Discount in First Quarter
by Dan Levy - Bloomberg

U.S. homes in the process of foreclosure sold at an average 27 percent discount in the first quarter and purchases of distressed properties fell to less than half the peak set two years ago, according to RealtyTrac Inc.

The discount reflects the price of distressed properties relative to normal sales. A total of 158,434 homes that sold in the period received notices of default, auction or repossession, down 16 percent from the fourth quarter and 36 percent from a year earlier, RealtyTrac said in a report today. At that pace, it would take three years to clear the supply of distressed and bank-owned houses, the Irvine, California-based company said. "While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery," Chief Executive Officer James Saccacio said in the statement.

Foreclosures are luring all-cash buyers who demand discounts, pushing down the value of all properties. More than three-fourths of U.S. metropolitan areas showed price declines in the first quarter, with foreclosures and short sales accounting for 40 percent of all transactions, the National Association of Realtors said May 10.

About 1.9 million U.S. homes are in some stage of foreclosure, according to RealtyTrac. In the first quarter, the average sales price of a distressed property was $168,321, down 1.9 percent from the fourth quarter and 1.5 percent from a year earlier. The average discount compared with sales of non-distressed homes was unchanged from the previous quarter and up from 26 percent in the first quarter of 2010.

Biggest Discounts
Ohio had the biggest foreclosure discount, with an average 41 percent, followed by Illinois at more than 40 percent and Kentucky at 39 percent. States where the discount exceeded 35 percent included Maryland, Tennessee, Wisconsin, Delaware, Pennsylvania, Oklahoma and Louisiana, RealtyTrac said.

Bank-owned properties accounted for 107,143 sales in the quarter, down 11 percent from the fourth quarter and almost 30 percent from a year earlier. Sales of homes in default or scheduled for auction totaled 51,291, down almost 26 percent and 45 percent, RealtyTrac said.

The sum was less than half the peak of 348,629 distressed deals in the first quarter of 2009. RealtyTrac sells default data from more than 2,200 counties representing 90 percent of the U.S. population.

Steep Quarterly Drop For US Home Prices
by Alan Zibel- Bloomberg

Here’s some more bad news for the housing market: U.S. home prices posted the sharpest quarterly decline in more than two years in the first three months of this year, according to a government index.

On a quarterly basis, home prices adjusted for seasonal factors were down 2.5% in the first quarter from the fourth quarter of 2010 and were down 5.5% from the same quarter a year ago, according to the Federal Housing Finance Agency’s home price index released Wednesday. It was the steepest quarterly decline since the end of 2008.

"The housing downturn has gone from bad to worse," wrote Paul Dales, senior U.S. economist at Capital Economics. "This time prices are not being driven down by a plunge in confidence and a sudden contraction in credit. Instead, they are being depressed by a chronic lack of demand and the effects of many foreclosed sales."

On a monthly basis, however, there was a bit of a silver lining. Home prices fell 0.3% on a seasonally adjusted basis in March from February, The monthly results were better than expected. Economists surveyed by Dow Jones Newswires had expected a 0.5% monthly decline.

The monthly change suggests "some of the recent weakness in home prices may be abating," wrote Barclays Capital economist Michael Gapen. However, he noted that "house prices will face headwinds as the large inventory of foreclosed properties makes its way through the market." February’s results were revised to a 1.5% decline from an initial estimate of a 1.6% drop. The FHFA’s index is calculated by using the prices of houses purchased with mortgages backed by government-controlled mortgage companies Fannie Mae and Freddie Mac.

US Pending Home Sales Plummet in April
by Alejandro Lazo - Los Angeles Times

The National Assn. of Realtors says its index for pending home sales fell 11.6% from March and 26.5% from a year earlier, a sign of weakness as the spring shopping season starts.

Pending sales of previously owned homes took a tumble in April, according to data from an industry group, a foreboding sign that the key spring shopping season is off to a weak start. The National Assn. of Realtors said Friday that its index for pending home sales, which is based on the number of contracts signed each month, fell 11.6% from March and was down 26.5% from the same month last year. The drop in the index was another indicator that buyers are scarce.

"Really the housing market is still in the doldrums," said Gerd-Ulf Krueger, principal economist at "I think what's really holding it back is an utter lack of confidence that this will turn around soon."

The factors in favor of buying are many: Interest rates recently hit their lowest level all year, prices are so low that it is now more affordable to buy than rent in several markets, there is a steady supply of homes because of the number of foreclosures and other so-called distressed properties in the pipeline, and the government is continuing to fund low-cost loans for buyers that require little down payment.

But none of that appears to be overriding the sense of fear buyers have about prices, said Patrick Newport, chief economist for consulting firm IHS Global Insight. "The key thing that accounts for the weakness is the fact that housing prices are dropping," Newport said. "It creates a lot of uncertainty and it spooks a lot of people from participating in the housing market because people don't want to buy if your home is going to drop in value right off the bat."

A year ago, contracts surged as April 2010 was the last month in which buyers could sign a contract and qualify for a federal tax credit. Home sales and prices have been weak since that credit expired.

Foreclosures have continued to make up a big chunk of the market, weighing down prices. The home price gains made after the housing market bottomed in April 2009 have practically vanished, according to a closely watched index that tracks home prices in the U.S.' biggest metropolitan areas.

Many economists expect that index, the Standard & Poor's/Case-Shiller index for 20 major U.S. cities, to push below its previous bottom hit in April 2009 when data for March are released Tuesday. A continued drop in home prices indicates the nation's housing woes continue despite a recovery in the broader economy. "The housing market is still very soft," said Mark Zandi, chief economist at Moody's "Home sales and housing starts are at best flat and home prices are falling again."

The poor showing in pending home sales doesn't bode well for the spring shopping season, typically the most important period for the housing market. The index hit 81.9 last month. An index level of 100 is considered healthy.

In the West, the pending home sales index fell 8.9% from the previous month. The index rose 1.7% in the Northeast, fell 10.4% in the Midwest and dropped 17.2% in the South. Some economists said the sharp dip might be a blip.

Newport of IHS Global Insight, for instance, pointed to a recent uptick in mortgage applications in April as telling a different story from the pending sales numbers. Zandi said the April figures could have been distorted by seasonal factors such as the weather. Lawrence Yun, the chief economist for the real estate group, said in a news release that he was hopeful the April plunge might be temporary.

"The pullback in contract signings is disappointing and implies a slower-than-expected market recovery in upcoming months," Yun said. "The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years and a sudden rise in unemployment claims."

After the crash: the pauperisation of middle-class America
by Richard Wolff - Guardian

With the crisis now in its fifth year, it's plain that the rich and powerful have restructured society toward ever-greater inequality

The current global crisis of capitalism began with the severe contraction in the housing markets in mid 2007. Therefore, welcome to Year Five. This inventory of where things stand may begin with the good news: the major banks, the stock market and corporate profits have largely or completely "recovered" from the lows they reached early in 2009. The US dollar has fallen sharply against many currencies of countries with which the US trades, and that has enabled US exports to rebound from their crisis lows.

However, the bad news is what prevails notwithstanding the political and media hype about "recovery". The most widely cited unemployment rate remains at 9% for workers without jobs but looking. If instead, we use the more indicative U-6 unemployment statistic of the US labour department's bureau of labour statistics, then the rate is 15.9%. The latter rate counts also those who want full-time but can only find part-time work and those who want work but have given up looking. One in six members of the US labour force brings home little or no money, burdening family and friends, using up savings, cutting back on spending, etc.

At the same time, the housing market remains deeply depressed as 1.5-2m home foreclosures are scheduled for 2011, separating more millions from their homes. After a short upturn, housing prices nationally have resumed their fall: one of those feared "double dips" downward is thus already under way in the economically vital housing market.

The combination of high unemployment and high home foreclosures assures a deeply depressed economy. The mass of US citizens cannot work more hours – the US already is No 1 in the world in the average number of hours of paid labour done per year per worker. The mass of US citizens cannot borrow much more because of debt levels already teetering on the edge of unsustainability for most consumers. Real wages are going nowhere because of high unemployment enabling employers everywhere to refuse significant wage increases. Job-related benefits (pensions, medical insurance, holidays, etc) are being pared back.

There is thus no discernible basis for a substantial recovery for the mass of Americans. The US economy, like so many others, is caught in serious stagnation, a situation flowing partly from the economic crisis that began in 2007 and partly from the way in which most governments responded to that crisis. Thus US businesses and investors increasingly look elsewhere to make money.

Rapidly rising consumption is not foreseeable in the US, but it is already happening where production is booming: China, India, Brazil, Russia, parts of Europe (especially Germany). Growth-oriented activity is leaving the US economy, where it used to be so concentrated. The US was already becoming less important as a production centre as profit-driven major US corporations shifted manufacturing jobs to cheaper workers overseas, especially in China.

In recent decades, those corporations' export of jobs expanded to include more and more white-collar and skilled work outsourced to India and elsewhere. Now, US corporations are also spending their money on office, advertising, legal, lobbying and other budgets increasingly where the expanding markets are – and not inside the US.

Republicans are now celebrating "American exceptionalism", the unique greatness of living conditions in the US. Yet again, their politics stress vanishing social conditions whose disappearance frightens Americans who counted on them. In reality, the US is fast becoming more and more like so many countries where a rich, cosmopolitan elite occupies major cities with a vast hinterland of people struggling to make ends meet. The vaunted US "middle class" – so celebrated after the second world war even as it slowly shrank – is now fast evaporating, as the economic crisis and the government's "austerity" response both favour the top 10% of the population at the expense of everyone else.

The US budget for fiscal year 2011 is scheduled to spend $ 3.5tn while taking in $2tn in taxes. It is borrowing the other $1.5tn – the deficit – and thereby adding to the US national debt (already over $14tn, roughly the same as the annual output, or GDP, of the US). Such massive borrowing is what got Greece, Portugal, Spain, Italy and other countries into their current massive crises. The "great budget debate" between Republicans and Democrats over the first few months of 2011 haggled over $60bn in cuts versus $30bn with the final compromise of $38bn. That $38bn cannot and will not make any significant difference to a 2011 deficit of $1,500bn (that is, $1.5tn).

Obviously, both Republicans and Democrats are agreed to do nothing more that quibble over insignificant margins of so huge a deficit. Meanwhile, they perform live political theatre about their "deep concern about deficits and debts" for a bemused, bored and ever-more alienated public.

Neither party can shake off its utter dependence now on corporate and rich citizens' monies for all their financial sustenance. Therefore, neither party imagines, let alone explores, alternatives to massive deficits and debts. After all, government deficits and debts mean: first, the government is not taxing corporations and the rich; and second, the government is, instead, borrowing from them and paying them interest. So, the two parties quibble over how much to cut which government jobs and public services.

Yet, the tax burdens of US corporations and the richest citizens (what they actually pay) are significantly lower than in most other advanced industrial economies. Indeed, they are far lower than they were inside the US a few years ago. In the mid 1940s, the corporate income tax brought Washington 50% more than the individual income tax. Today, the corporate income tax brings the federal government 25% of what is taken from individuals.

In the 1950s and 1960s, the top individual income tax rate in the United States (the rate paid by the richest citizens on all their income over about $100,000) was 91%. Today, that rate is 35%, a staggering cut in the taxes on the richest Americans, far larger than the cuts in anyone else's tax rates. Half or more of today's federal deficits would be gone if we simply taxed the richest US citizens at the rates in effect in the 1950s and 1960s. If we also taxed corporations in relation to individuals as we did in the 1940s, the entire deficit would vanish.

In summary, shifting the burden of federal taxation from corporations to individuals and from the richest individuals to the rest of us contributed to massive deficits and debts. Instead of correcting and reversing that unjust shift, Republicans and Democrats plan, instead, to deal with deficits and debts by cutting Medicaid and Medicare and threatening social security.

A revealing historical incident can introduce our conclusion about the capitalist crisis as it enters Year Five. In May 2011, as gasoline prices rose to between $4 and $5 per gallon, a US Senate committee run by Democrats summoned the heads of major oil companies to testify. The senators asked why the federal government should continue to provide them with special tax loopholes and direct subsidies of $4bn per year when their companies were earning record high profits. The Democrats had offered a meek plan to merely cut those loopholes and subsidies from $4bn to $2bn per year. After the hearings, the US Senate voted not to cut the loopholes and subsidies at all.

The largest corporations and richest citizens long ago learned that if you want to sustain an extremely unequal distribution of wealth and income, you need an equally unequal distribution of political power. Those corporations use their profits to pay huge salaries and bonuses to their executives, to pay big dividends to their major shareholders, and to "contribute" to politics.

The corporations, their top executives and the major shareholders whom they enrich all regularly finance the political campaigns and politicians that perform that sustaining function. An increasingly unequal capitalist economy pays for the increasingly undemocratic politics it needs.

Any serious effort to change the basic situation, functions and direction of government policy must change the answer our society now gives to this basic question: who gets and disposes of the profits of producing goods and services in the US economy? So long as the answer remains corporations' boards of directors and major shareholders (the status quo), current trends will continue until bigger economic collapses bring the system to self-destruction. Then we will have graduated from a crisis with banks "too big to fail" to a crisis that is itself "too big to overcome."

A changed system – perhaps called "economic democracy" – in which the workers themselves collectively operate their enterprises would immediately redirect enterprise profits in different ways, with very different social consequences. For example, according the bureau of labour statistics, during 2010, the pay for average workers rose 2% while the pay for CEOs rose 23%. Workers who collectively directed their own enterprises would distribute pay increases very differently and far less unequally.

Likewise, to take another example, self-directing workers would allocate their enterprises' profits to the government (that is, pay taxes) but demand in return the sorts of mass-focused social programmes that the current CEOs and boards of directors want government to cut. Democratic enterprises would have to work out collaborations and agreements with democratically run residential units (cities, states, etc) where their decisions impact one another.

This short article is hardly the place to work out the details of so changed an economic system. That is, after all, the task of democratic economic and political institutions to do together, once the change has been discussed, adopted and set in motion.

Throughout the cold war decades, and even after the USSR dissolved in 1989, we remained, as a nation, afraid openly to discuss and debate a basic economic issue. Does our economic system, capitalism, serve our needs sufficiently; does it need basic changes; or might a change to another economic system be best? Instead of a debate over alternative answers to such questions, we permitted little beyond self-congratulatory cheerleading for capitalism. Seriously questioning capitalism, let alone challenging it, remained taboo, an activity to keep repressed.

That repression encouraged an unquestioned and unchecked US capitalism to become ever more unequal, delivering more "bads" than "goods" to ever larger majorities of people. This unsustainable situation is being strained to breaking point by the crisis that now enters Year Five.

Default By U.S. Government Seen As Possible, With Debt Ceiling Vote Delayed
by William Alden - Huffington Post

As lawmakers in Washington delay authorizing additional public debt, investors are treating the prospect of a U.S. government default -- while still highly unlikely -- as growing in probability. Even as traditional market indicators suggest the government's debt is as secure as ever, bets that the Treasury will default are becoming more popular.

And foreign investors seem to be displaying skittishness about their holdings of Treasury debt. With Congress showing little progress on a deal to raise the debt ceiling, some economists say the possibility of a default by the Treasury, once unimaginable, has now become a factor in investment decisions. "It's still extremely unlikely, but it is now something that can be talked about. That moves us into a different world," said Mark Vitner, a senior economist at Wells Fargo. "It was unthinkable not too long ago."

In the last couple months, investors have piled into bets that the Treasury will default. The cost of holding one-year credit default swaps on U.S. debt -- insurance that pays out if the government misses a debt payment -- has skyrocketed, more than tripling since the beginning of April, the Wall Street Journal reported this week. Investors have been buying so much insurance on U.S. debt that the gross value of these derivatives is now twice what it was at this time last year, the Financial Times reported Thursday. Investors own $24 billion of these contracts as of last week, compared to last year's $12 billion, the FT noted.

"It's become a little more of a two-way market," said John Richards, head of North American strategy at Royal Bank of Scotland. "People are willing to play around a little bit more."

Nervousness apparently isn't limited to derivatives investors. Treasury securities held in custody at the Federal Reserve for foreign accounts this week experienced their biggest drop in four years, Zero Hedge noted Thursday. While the precise meaning of the drop isn't clear, it could suggest foreign powers are scaling back investment in the U.S. government.

"There's still a lot of uncertainty going around," said Gregory Daco, senior economist at IHS Global Insight. "The general view is that the government will manage to find a consensus to raise the debt ceiling, but there are always going to be some jitters in the market due to this uncertainty."

The federal government hit its debt ceiling this month, as the Treasury initiated a series of programs designed to keep the public debt below the limit and temporarily preserve the government's ability to borrow. But the Treasury can't tread water in this way forever, and come August 2, it could be forced to miss payments to creditors, Treasury Secretary Tim Geithner wrote in a letter to Congress.

Top economic officials in the Obama administration and independent economists have repeatedly warned that a default could spread panic through credit markets worldwide, causing interest rates to rise and even setting off another financial crisis.

But lawmakers have delayed raising the limit. Republicans have said they will not vote to increase it unless the legislation is tied to measures intended to reduce the federal deficit. This seeming game of chicken, in which lawmakers threaten to push the government toward default just to win political concessions, has provoked consternation among government officials.

"It's a dangerous precedent," economist Jared Bernstein told The Huffington Post. Until he left the government for a think tank two weeks ago, Bernstein was Vice President Joe Biden's chief economist. "What purpose is served by even entertaining the possibility of a default?" he added.

But if some investors are skittish, that isn't reflected in the Treasury bond data. Even as the popularity of one-year credit default swaps has been rising, yields on 10-year Treasury securities have been falling, suggesting this debt is perceived as a solid investment.

As of Thursday's close, the yield on 10-year Treasuries was less than 3.1 percent, compared to nearly 3.6 percent at the April peak and over 3.7 percent at the February peak, data from Bloomberg show. In general, Treasury yields have been falling this year, as the value of those investments has risen.

Economists emphasized that Treasury data is a better indicator of the probability of default than credit default swap data. The volume of activity in the CDS market for U.S. debt, for instance, is far less than in Treasury bond markets.

"I don't think this reflects widespread anxiety about the ability of the U.S. government to pay its debt," said Gus Faucher, director of macroeconomics at Moody's Analytics. "If it gets to another month or so and we haven't seen any progress, that's another issue."

US Consumer Spending Slows
by Jeff Bater and Luca Di Leo - Wall Street Journal

Spending by Americans slowed in April, rising 0.4% from a month earlier, a sign that rising prices for gasoline and groceries squeezed the economic recovery going into spring. Consumer spending increased by 0.4%, less than March's downwardly revised 0.5% gain, the Commerce Department said Friday. And when adjusted for inflation, spending went up only 0.1% for a second month in a row. Incomes rose by 0.4% a third straight month.

Economists surveyed by Dow Jones Newswires had estimated spending would climb by 0.5% and incomes by 0.4% in April. The economy slowed considerably in the first three months of 2011, partly because consumers cut their spending amid higher commodity prices. Spending is a big part of U.S. economic activity. Many economists have said the price increases will prove transitory and indeed commodity prices fell off their late-April peak. But Friday's report indicates consumers weren't spending fiercely at the beginning of the second quarter.

Higher prices for food and gasoline bit into consumers' discretionary spending during April. Retail sales for the month rose less than expected, separate government data showed. This week, Federal Reserve governor Elizabeth Duke said incomes haven't kept pace with rising costs and that many families are facing the decision whether to buy gas or make home payments. Americans have had trouble getting higher pay in the slow economic recovery, and joblessness in the U.S. is high, putting a damper on spending. A payroll tax cut this year has been offset by gasoline prices rising close to $4 a gallon.

Friday's data showed the price index for personal consumption expenditures increased 2.2% on a year-over-year basis, after rising 1.8% in March. Compared to the prior month, the gauge rose 0.3% in April. The report showed underlying inflation, watched closely by the Fed, also sped up in April. The core PCE price index, which excludes food and energy prices because of their volatility, increased 1.0% year over year, after rising 0.9% in March. Compared to the prior month, the core gauge in April rose 0.2%. The report Friday showed the savings rate of Americans held steady in April at 4.9%.

UK economy held back by weak consumer spending
by Reuters

Britain's economy made a sluggish start to the year as an improved trade performance was more than offset by the sharpest fall in household spending since the recession, revised estimates of first-quarter growth showed.

The latest figures from the Office for National Statistics(ONS) confirmed the initial estimate, that Britain's economy grew just 0.5pc in the first quarter, after contracting by the same amount in the last three months of 2010. This means the economy has effectively stagnated over the past six months - a far worse performance than Britain's major trading partners. "The lack of any upward revision leaves the economic recovery earlier this year still looking disappointingly weak," said Vicky Redwood at Capital Economics.

A breakdown of the figures showed growth would have been even weaker had government spending not grown by a robust 1pc over the quarter. Public spending cuts mean this category will be unable to contribute to growth going forward. Neither is the consumer in any position to drive the economy. Household spending contracted by 0.6pc on the quarter, the biggest drop since the recession, and looks set to remain weak as wages fail to keep pace with inflation. "These figures underline the significant weakness in the consumer sector," said Hetal Mehta, economist at Daiwa Capital Markets. "It reinforces our view that the majority of the Monetary Policy Committee will continue to vote for no change in interest rates this year."

Business investment fell by a whopping 7.1pc on the quarter. The only bright spot was trade which made its biggest contribution to quarterly GDP growth in more than 50 years. This pushed Britain's trade deficit down to £5.7bn pounds in the first quarter from £11.5bn at the end of 2010.

Economists were not expecting any upward revision, and reckon the government's 2011 growth assumption of 1.7pc is starting to look optimistic. The Organisation for Economic Cooperation and Development (OECD) also revised down its UK growth forecast in a twice-yearly report on Wednesday, projecting growth of just 1.4pc for the year. It also forecasts an expansion of 1.8pc in 2012, compared to the official forecast of 2.5pc.

UK’s ostrich generation: millions of Britons risk pension poverty
by Paul Farrow - Telegraph

A generation of Britons faces a cash-strapped retirement because they are burying their heads in the sand, a new report from HSBC reveals today.

Members of the so-called ‘Ostrich Generation’ know they will live longer than previous generations and understand that traditional state and company pensions will no longer be so generous. Yet they are doing nothing to counteract this change and the majority are not making any plans about how they’ll fund their retirement, according to a new HSBC report, The Future of Retirement: The power of planning.

Joanne Segars, chief executive of the National Association of Pension Funds, said: "Far too many people are trapped in the headlights when it comes to their own retirement. They know they'll need money in their older age, but they're doing nothing to prepare for it."

For The Future of Retirement report, HSBC questioned 1,000 working age Britons and found that half (49pc) expect to be worse off in retirement than their parents (just 27pc expect to be better off). Nearly one in five (17pc) don’t know what their main source of retirement income will be, with a further 21pc saying they will rely on the state pension. Of those Britons expecting to be worse off than their parents in retirement, three in five say the major reasons are that state and company pensions are not as generous as for previous generations.

As a whole, 68pc of respondents are worried about coping financially and 48pc fear they are not saving enough for their retirement, rising to 57pc among women in their 30s and 40s. But despite all this, slightly fewer than four in ten (39pc) Britons have put a financial plan in place to provide for their futures and 68pc are worried they are not financially prepared.

Tom McPhail at Hargreaves Lansdown, said that the report reiterates previous findings from elsewhere, that the UK is woefully underprepared for retirement and through the decisions they are taking today, far too many people are condemning themselves to a later life of poverty and hardship. "The most significant step to resolve this problem will be the government’s auto-enrolment plan, which will mean that by 2016 the vast majority of employees will be members of a pension," said Mr McPhail.

"This is only half the battle though, the next great challenge will be to persuade adults right across the spectrum of ages and incomes that simply joining a pension isn’t enough; the amount you pay in is also vitally important. Average contribution rates to money purchase pensions are stuck at around 10pc of earnings; the default auto-enrolment contribution rate is just 8pc of earnings. Without increased commitment and engagement millions of people will find themselves living out a brief and disappointing retirement."

UBS Plans to Distance Key Investment Banking Unit
by David Enrich and Gina Chon - Wall Street Journal

Swiss financial giant UBS AG is planning to separate its investment bank and incorporate it outside of Switzerland in an effort to placate regulators there who want to prevent another bailout should the bank fall on hard times as it did in 2008, said people familiar with the matter.

UBS is considering incorporating its investment bank, which lost billions during the financial crisis and was rescued by the Swiss central bank, in London, New York or Singapore, where it would have its own capital and be overseen by local regulators. Regulators around the world are scrambling to reduce the risk of having to use taxpayers' money to rescue financial groups deemed too big to fail. But Switzerland has emerged as one of the toughest jurisdictions. That reflects the country's financial vulnerability to UBS and Credit Suisse Group AG, whose combined assets dwarf Switzerland's annual national economic output.

Under UBS's planned overhaul, the investment bank would be transformed into its own legal entity, according to the people familiar with the matter. Swiss regulators hope that the change would mean that if the investment bank encountered problems, the parent company, which also includes a large wealth management arm, would no longer be liable for the losses. Right now, the bank's units abroad have less capital than they otherwise would need because UBS has agreed to serve as a financial backstop, promising to bail them out if they ran into trouble, these people said.

However, it is unclear whether creating a legally and financially independent investment-banking vehicle will truly insulate the UBS parent company—or the Swiss government—in the event of another disastrous crisis. Local regulators could still demand that the Swiss government step in to cover any future losses at the investment bank, these people said. For UBS, the regulatory pressure to ring-fence the investment bank could force it to raise more capital, according to bankers and outside experts. It also threatens to crimp a recent push to use the parent company's balance sheet more aggressively, by offering loans and financing to win more business with corporate and government clients, bankers say.

Under pressure from Switzerland's Financial Market Supervisory Authority, known as Finma, UBS executives are studying their options, according to people familiar with the matter. They haven't decided where to locate the investment-banking entity or how to structure it. Part of that calculus appears to hinge on where the investment bank would enjoy the greatest latitude to operate, although Swiss regulators want the unit headquartered in a country where the investment bank has major operations.

UBS's investment-banking arm, one of the world's largest and a key profit driver for the rest of the group, doesn't do much business in Switzerland. Its main activities are in the U.S., U.K. and Asia, where it operates through various branches, subsidiaries and other legal structures. Mounting frustrations with Switzerland's tough regulatory response to the crisis have even led some UBS executives to weigh the costs, benefits and feasibility of moving the entire company, not just the investment bank, to another country, according to people familiar with the matter. But these explorations have been preliminary, and these people say any such move is unlikely.

Under its current setup, the Swiss parent company has agreed to serve as a financial backstop for the world-wide operations of UBS's investment bank if they encounter problems. As a result of those guarantees, local regulators in various countries permit the units to operate with thinner capital cushions than they would otherwise need to maintain.

Better insulating UBS's investment bank from other operations could make it difficult, or at least costlier, for its bankers to use the company's vast balance sheet to win deals, according to people familiar with the matter. Currently, the investment bank is able to use the heft of the balance sheet of the entire firm to borrow against to participate in deals. That financing capability would be reduced if the investment bank was isolated from the rest of the company and its balance sheet was smaller.

The problem would be compounded if UBS decides to house the investment bank in a country with high capital requirements, these people added. As a result, some senior bankers have privately argued that moving the investment bank wouldn't be advantageous to the firm and that it would be better to move the entire bank, people familiar with the matter said.

UBS relies on the investment bank to power its results and a legal separation wouldn't change that, with much of its profits likely to flow back to the parent company. In the first quarter, for example, the investment bank generated about 44% of UBS's total revenue of 8.3 billion Swiss francs ($9.4 billion).

Swiss authorities have proposed new rules that would require UBS and Credit Suisse to hold capital representing at least 19% of their risk-weighted assets, including 10% in the form of common equity. Those requirements—known as the "Swiss finish" in banking circles—far exceed the global capital standards international negotiators hammered out last year. UBS executives, including Chief Executive Oswald Grübel, have argued publicly and privately that the new rules will severely inflate UBS's costs of doing business, putting the bank at a disadvantage to its global rivals.

UBS is among a growing group of big European banks considering relocating their headquarters in order to minimize the impact of new regulations. In the U.K., where regulators and the government have imposed a series of new rules and taxes on top banks, HSBC Holdings PLC, Standard Chartered PLC and Barclays PLC have at least considered such moves, according to officials at the banks.

Regulators in many countries, as well as international institutions, are requiring banks to devise "living wills" that are supposed to facilitate the process of shutting them down without endangering the broader financial system. Regulators in the U.K. and elsewhere are pushing big banks to streamline their structures so that they are easier to close in a crisis.

IMF succession: A contested quarry
by Alan Beattie - Financial Times

A candidate from Europe, but not a European candidate. When Christine Lagarde, French finance minister, declared on Wednesday that she would run for the managing directorship of the International Monetary Fund, the distinction she drew between her nationality and her suitability was worthy of Descartes.

While Europeans have held the IMF’s managing directorship since its launch in 1947, Ms Lagarde was quick to reject the idea of a nationality test. "I am not basing my candidacy on the fact that I am European," she said. "My intimate knowledge of the European community, of the eurozone and its leaders, can help a bit but it should not be a plus on which my candidacy should be based."

Indeed, the IMF’s involvement in increasingly controversial crisis lending programmes in Greece and Ireland – and now in Portugal – could prove a disadvantage to Ms Lagarde’s candidacy. Though she is the clear favourite to succeed Dominique Strauss-Kahn following his spectacular exit, the question of European dominance of the fund is a substantive rather than symbolic issue for the first time in living memory.

In recent decades, the European obsession with holding the managing directorship has seemed mildly baffling rather than deeply sinister. Despite some incremental recent reform, Europe remains heavily overrepresented on the IMF executive board relative to its economic influence, its nations separately holding nearly a third of the total votes. Yet Europeans have rarely roused themselves to speak with one voice or promote a particularly continental European view of economics or to organise much more than the promotion of yet another among their number to MD.

Born In Bretton Woods
The International Monetary Fund was born out of international discussions at Bretton Woods, New Hampshire, in 1944, and opened for business in 1947. Its original aim was to lend to governments to smooth balance of payments problems arising under the pegged exchange rates system named after the 1944 conference. With the breakdown of that regime in the early 1970s, the IMF shifted into more general lending to governments, increasingly in emerging markets. It was heavily involved in the Latin American debt crises of the 1980s and the Asian and Russian crises of 1997-98. But its focus has swung back to Europe, where it has assisted governments that have built up huge fiscal deficits or been forced to rescue their troubled banking systems.

Europe’s main contribution appears to be its influence on the IMF’s managerial style. "Essentially the fund is a Eurocracy," says Ken Rogoff, a Harvard academic who served for two years as its chief economist. Ousmène Mandeng, a former senior IMF official now at Ashmore Investment in London, concurs. "The management style of the institution is largely European – hierarchical and bureaucratic," he says. "The traditional pattern is to recruit PhDs at 30 and then employ them for life."

Michel Camdessus, a French career bureaucrat, served as IMF managing director between 1987 and 2000. Yet much of the fund’s intellectual direction during the defining crises of the 1990s was set by Stan Fischer, Mr Camdessus’s American first deputy managing director (now governor of the Bank of Israel), and by US Treasury secretaries Robert Rubin and Larry Summers. "As the biggest single shareholder, the US has exercised a great deal of influence," Mr Mandeng says. "The power held by the EU has not been translated into the dominant view of the institution."

Europeans have frequently complained that the US Treasury on Washington’s 15th Street – just four blocks from the fund’s 19th Street headquarters – exercises undue influence over IMF policies. Although the US holds only 17 per cent of votes on the board, its greater determination and intellectual confidence has usually prevailed.

During the 1990s, the IMF developed a standard operating procedure of issuing large rescue loans contingent on extensive "conditionality" – generally including tight fiscal policy, widespread privatisation and other structural reform. The approach contrasted with the instincts of Germany, for example, which pushed for stricter limits on lending to prevent "moral hazard" in borrower countries. Facing the first of a series of capital market crises, the IMF and US put together a rescue package of almost $50bn for Mexico in 1995. The fund’s part of the lending was pushed through over the objections of Germany and other European governments, which abstained on the vote.

The dominance of economists, especially those educated in the US, has helped to shape the in-house view. Prof Rogoff says that issues are extensively debated but "fundamentally most people in the fund believe in markets and market-based solutions to problems". It is, he says, an approach quite different from the interventionist instincts of many Asian and European politicians.

IMF and eurozone rescues
An occasionally conciliatory counterweight to ECB ‘hardliners’

International Monetary Fund involvement in eurozone bail-outs was initially opposed by some European Union policymakers, and greeted with trepidation in Athens, writes Dimitris Kontogiannis. But, observers say, it has also acted as a counter to an uncompromising European Central Bank.

Last May, as details of Greece’s €110bn ($156bn) international bail-out were being negotiated, local television played images of riots in countries where the IMF had gone before. Newspapers reported on the harsh economic conditions in countries applying fund-sponsored policies.

The Greeks continued to see the fund more negatively than the European Commission and the ECB, even as government officials noted Poul Thomsen – IMF member of the "troika" (with the ECB and the European Commission) overseeing the rescue plan – was taking a more understanding and flexible stance. According to one senior EU official, a pattern developed in Greece – followed in Ireland and Portugal, now also subject to bail-outs – for the ECB to play the "hardliner", especially on fiscal policy. The IMF was more conciliatory; the Commission, somewhere between.

The Greek package comprised €80bn in bilateral loans from eurozone countries and €30bn from the IMF, which also contributed its experience of implementing bail-outs elsewhere. Before the deal, Jean-Claude Trichet, ECB president, voiced concern about bringing in the Washington-based IMF. Eurozone governments should take the lead in resolving the problems erupting in Europe’s monetary union, he argued, and the Greek bail-out should fit within an EU framework.

Separately, Wolfgang Schäuble, German finance minister, called for the establishment of an alternative European Monetary Fund that would provide finance in a crisis – subject to very stern conditions.
Both objections were overruled by Angela Merkel, German chancellor, who needed the IMF’s involvement to deflect domestic opposition to helping Greece.

The IMF and the ECB have since become accustomed to working together with little sign of public friction, at least on the ground in Athens, Lisbon and Dublin. The ECB teams have concentrated largely on banking, liquidity and financial stability issues, leaving the Commission and the IMF to focus more on fiscal issues.

Greek officials have not stated any preference publicly on the IMF’s next head, but are generally thought to prefer a European, with Christine Lagarde, French finance minister, probably their first choice.

Yet the economic philosophy that shapes its lending programmes has owed a great deal more to the US. In the 1970s, when the IMF transmogrified from underpinning the Bretton Woods fixed exchange rate system to a more general purpose crisis lender, its dominant model became what some Europeans disparagingly call "Anglo-Saxon" economics. The fund instinctively favoured securitised financial markets over the long-term banking model of Rhineland capitalism and pushed an all-encompassing view of globalisation, encouraging financial sector deregulation and the liberalisation of capital accounts.

The application of this philosophy in the Asian financial crisis of 1997-98 caused lingering resentment among some emerging market borrowers forced to undertake extensive medium-term restructuring of their economies in return for short-term crisis loans. In 1997 David Lipton – now a White House official frequently touted as the IMF’s next first deputy managing director – was installed by the US Treasury at the same Hilton hotel in Seoul as the fund mission negotiating a rescue loan for South Korea during the Asian crisis, to ensure a tough deal.

Since then, the IMF has partially retreated from its coercive approach and softened some of its ideology. Having seen the effects of IMF micromanagement first-hand as a German envoy to Indonesia during the Asian financial crisis, Horst Köhler, managing director from 2000 to 2004, led a drive against excessive conditionality. The IMF’s strong aversion to controls on capital flows has also been moderated.

However, little of this reflected an organised European campaign. The shift away from capital account liberalisation following fears about volatile and destabilising flows of hot money may have chimed with European instincts, but it reflected a broader shift in the economics profession. The arguments most often cited within the fund came from Americans such as Prof Rogoff and Carmen Reinhart, a former IMF official.

Similarly, Germany and other European governments concerned about moral hazard had long called for private investors to be "bailed in", and made to take writedowns or "haircuts" in the value of their holdings of sovereign debt, as part of IMF rescue programmes. The Bank of England under Mervyn King, its governor, argued for a formal means of restructuring sovereign debts during a crisis. But the idea did not really gain traction until a restructuring mechanism was proposed by Anne Krueger, Mr Fischer’s American successor as first deputy managing director, in 2001.

These days, however, the Europeans have a much better reason to organise and throw their weight around – but not in line with their traditional views and, critics would say, not in the fund’s own interests.
With sovereign debt fears spreading to western Europe in 2010, the IMF has become a minority partner in two of the largest rescue packages on record, for Greece and Ireland. Many investors and economists consider those programmes increasingly unsustainable without forcing private bondholders to take losses on their holdings of Greek sovereign debt and the senior bonds of Irish banks.

With European banks holding much of that debt, however, the traditional European predilection for asking private-sector investors to take a haircut has conveniently been dropped. The European Central Bank and leading continental politicians – especially in France and Germany – have opposed a rapid and substantial restructuring. Mr Strauss-Kahn did manage to get the IMF involved in the Greek and Irish programmes, against the initial wishes of the ECB, but whether it has made any real difference to policy remains unclear. Accounts differ of how strongly IMF officials have pushed for debt writedowns in private discussions with the Greek and Irish governments and the ECB and eurozone authorities, but in any case that view has not prevailed.

"Excessive forbearance has been practised with the periphery countries in Europe, and the IMF has supported that," Prof Rogoff says.

As French finance minister, Ms Lagarde has opposed serious debt restructuring in the near future. Some involved in the negotiations say she seems to take a more nuanced line in internal discussions, but the dominant approach so far has been driven by the ECB. Whether Ms Lagarde would be able, or willing, to turn around and confront the no-writedown camp as an IMF managing director remains to be seen.

Ms Lagarde, who used to run the law firm Baker & McKenzie in Chicago, has the trust of many in the financial services industry, including in the US. At the height of the crisis in October 2008, weeks after the collapse of Lehman Brothers, she spoke at a gathering of the Institute of International Finance, a grouping of banks and other financial institutions, during the annual meeting of the IMF in Washington.

At a packed and hushed dinner in Washington’s National Portrait Gallery, she pledged that the world’s leading governments would do whatever it took to prevent financial meltdown, and received an ovation. "The IMF needs a leader who understands the intersection of finance, economics and politics, and Christine Lagarde certainly fits that mould," says Charles Dallara, managing director of the IIF and formerly a US executive director on the IMF board.

Others question whether a leader close to Europe’s banks and politicians is what the IMF needs at this point. Long accused of being in the pockets of Wall Street, the fund is now coming under fire for pursuing the interests of French and German banks above that of the workers and taxpayers of Greece and Ireland. Some suspect Mr Strauss-Kahn’s political ambitions in France caused him to soft-pedal demands for restructuring.

"The IMF should be driven by technocratic considerations," Mr Mandeng says. "Installing politicians and politics at the IMF is problematic. The fund should have looked at the Greek situation from the point of view of Greece and the sustainability of the programme, and it appeared not to."

Prof Rogoff says: "Ninety-eight per cent of the time the nationality of the MD does not matter and the fund runs as a technocratic institution." But he adds that the amount of time the last few managing directors spent in Europe certainly gave the impression that the fund was oriented towards that continent rather than, say, Asia.

Agustin Carstens, the Mexican central bank governor who appears to be the most plausible emerging market candidate, is trying to exploit that perception. He himself is straight out of the traditional IMF mould: trained in economics at the famously orthodox University of Chicago, he served as a deputy managing director at the IMF from 2003-06 and has since been finance secretary as well as central banker.

Yet his pitch when he announced his candidacy this week was a barely veiled appeal to emerging market solidarity. "We need a managing director who can best serve all of the member countries, not merely those experiencing challenges at one particular point in time," he said.

Federal Reserve Lending Revelations Intensify Criticism Of Central Bank's Secrecy
by William Alden - Huffington Post

In the midst of the global financial crisis in 2008, the Federal Reserve lent Goldman Sachs, Credit Suisse and Royal Bank of Scotland at least $30 billion each at interest rates as low as 0.01 percent with no public disclosure of the details, Bloomberg News reported on Thursday.

The latest revelations about the covert infusions of credit provided by the Fed to some of the world's largest banks has amplified accusations that the central bank is a power unto itself, operating according to its own devices and in the interest of major financial institutions -- and beyond accountability to taxpayers.

"It just points out that this was about secrecy to protect banks basically from embarrassment from transparency, which is not supposed to be what the Fed's about," said Dean Baker, co-director of the Center for Economic Policy and Research, in Washington. "That is the fundamental problem with the Fed," Baker added. "They're supposed to be an agency of the government, not an agency of the banks. But reflexively, there they are protecting the banks, again and again and again."

Some experts say that the Fed acted properly to withhold details of the transactions, asserting the broader financial system might well have been spooked had it been known to what degree the central bank was propping up major lenders. "Releasing data closer to the time of the crisis could have had an adverse impact on some firms," said Ernest Patrikis, a partner at the law firm White & Case and a former chief operating officer of the New York Fed. "There's a difference between a crisis and a period of time after a crisis, in terms of impact."

That was the Fed's logic, as it handed out nearly free cash to major banks and other institutions while withholding from public view the names of the recipients, the dollar figures and the terms of the loans. But in recent months, the Fed has been forced by Congress and by a Supreme Court decision -- in a case originally filed by Bloomberg LP, the parent company of Bloomberg News -- to release the details of its so-called emergency lending programs. The Fed undertook those programs throughout 2008, accelerating its lending that fall in the aftermath of the collapse of the investment banking giant Lehman Brothers.

In December, under orders from Congress, the Fed released a trove of documents that name the recipients of $3.3 trillion in aid intended to curb damage from the developing financial crisis. The documents describe a variety of Fed special lending facilities, including one program in which nine firms, five of them foreign, were able to borrow $5 billion for 28 days at the extremely low interest rate of 0.0078 percent, The Huffington Post reported.

In late March, the Fed released information about its primary lending facility -- the so-called discount window -- which had provided ultra-cheap cash during the height of the crisis to a range of firms. During the week in October 2008 when borrowing under the program peaked, foreign banks received more than 70 percent of the $110.7 billion that the Fed lent out, Bloomberg News reported. Arab Banking Corp., a $28 billion lender now majority-owned by Libya's central bank, got at least $3.2 billion that autumn, The Huffington Post reported.

In 2008, Bloomberg News asked for Fed records under the Freedom of Information Act, but the Fed resisted. Revealing the names of borrowers could cause "substantial competitive harm" to those institutions because they could be perceived as weak, the Fed argued in a court filing. "[B]ecause Reserve Banks are the 'lenders of last resort,' the fact that an institution is borrowing at the [discount window], if publicly disclosed, can fuel market speculation and rumors that the entity's liquidity strains stem from a financial problem at the institution that is not publicly known," reads a May 2009 statement the Fed filed in a New York district court.

The case went to the Supreme Court, which rejected an attempt by a banking industry group to block the Fed's disclosure. So, for the first time since the Fed's discount window began lending in 1914, the central bank in late March released the identities of its primary facility's borrowers. The latest details came via an investigation published Thursday by Bloomberg News, which reported that Goldman and other financial institutions borrowed additional tens of billions from the Fed's primary source of credit.

A spokesman for the New York Fed, which administered the emergency lending program, said the Bloomberg article merely added the names of the banks that received the loans to previous public disclosures about the existence of the transactions. "The establishment and execution" of the program "were clearly communicated to the public," the spokesperson said in an e-mailed statement. "On March 7, 2008, the New York Fed announced through a public statement its intent to conduct these open market operations. Further, the aggregate results of each auction were immediately posted on the New York Fed's web site."

But the statement the spokesman referenced, written in highly technical language, does not name any recipients and indeed reads like a blanket assertion of lending authority. Fed Chairman Ben Bernanke has often said the Fed should be a more transparent institution. Last month, the chairman spoke to reporters at the first press conference after a committee meeting in the central bank's history. "I personally have always been a big believer in providing as much information as you can to help the public understand what you're doing, to help the markets understand what you're doing, and to be accountable to the public for what you're doing," Bernanke said during the conference.

But Christopher Whalen, managing director of Institutional Risk Analytics, pointed to the latest disclosures about the extent of the Fed's covert operations as a sign that the institution has yet to live up to the standard its chairman has publicly laid out. "People want the information, whether it's loan-level data or data on a security or on an issuer. Whatever it is, they want it," Whalen said. "But you still have the Fed, because they're such a reactionary organization, resisting this."

Fed Gave Banks Crisis Gains on $80 Billion Secretive Loans as Low as 0.01%
by Bob Ivry - Bloomberg

Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc. each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public. The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent. "This was a pure subsidy," said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. "The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?"

The Federal Reserve Bank of New York, which oversaw ST OMO, posted aggregate data about the program on its website after each auction, said Jeffrey V. Smith, a New York Fed spokesman. By increasing the availability of short-term financing when private lenders were under pressure, "this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses," he said.

Not in Dodd-Frank
Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law. "I wasn’t aware of this program until now," said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.

Records of the 2008 lending, released in March under court orders, show how the central bank adapted an existing tool for adjusting the U.S. money supply into an emergency source of cash. Zurich-based Credit Suisse borrowed as much as $45 billion, according to bar graphs that appear on 27 of 29,000 pages the central bank provided to media organizations that sued the Fed Board of Governors for public disclosure.

New York-based Goldman Sachs’s borrowing peaked at about $30 billion, the records show, as did the program’s loans to RBS, based in Edinburgh. Deutsche Bank AG, Barclays Plc and UBS AG each borrowed at least $15 billion, according to the graphs, which reflect deals made by 12 of the 20 eligible banks during the last four months of 2008.

No Exact Amounts
The records don’t provide exact loan amounts for each bank. Smith, the New York Fed spokesman, would not disclose those details. Amounts cited in this article are estimates based on the graphs.

One effect of the program was to spur trading in mortgage- backed securities, said Lou Crandall, chief U.S. economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a research company specializing in Fed operations. The 20 banks -- previously designated as primary dealers to trade government securities directly with the New York Fed -- posted mortgage securities guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac in exchange for the Fed’s cash.

ST OMO aimed to thaw a frozen short-term funding market and not necessarily to aid individual banks, Crandall said. Still, primary dealers earned spreads by using the program to help customers, such as hedge funds, finance their mortgage securities, he said.

'Spreads Vary'
"Spreads vary from one transaction to another," making any calculation of dealers’ profits on the Fed loans impossible, Crandall said. The Fed opposed disclosing details of its open market operations because doing so would probably cause borrowers "substantial competitive harm," according to a March 2009 declaration by Christopher R. Burke, vice president of the New York Fed’s markets group. The declaration is filed in federal court.

Revealing the borrowing "could lead market participants to inaccurately speculate that the primary dealer was having difficulty finding term funding against its collateral in the open market and that the dealer itself must therefore be in financial trouble," Burke said in opposing a media request for records about the borrowing.

Bidding Interest Rates
The New York Fed conducted 44 ST OMO auctions, from March through December 2008, according to its website. Banks bid the interest rate they were willing to pay for the loans, which had terms of 28 days. That was an expansion of longstanding open- market operations, which offered cash for up to two weeks.

Outstanding ST OMO loans from April 2008 to January 2009 stayed at $80 billion. The average loan amount during that time was $19.4 billion, more than three times the average for the 7 1/2 years prior, according to New York Fed data. By comparison, borrowing from the Fed’s discount window, its main lending program for banks since 1914, peaked at $113.7 billion in October 2008, Fed data show.

In March 2008, ST OMO was "desperately needed," because of the shaken state of short-term credit markets, said Michael Greenberger, a professor at the University of Maryland School of Law in Baltimore and former director of the division of markets and trading at the Commodities Futures Trading Commission. After the Fed created other lending mechanisms and the Treasury Department began distributing money from the Troubled Asset Relief Program in October, ST OMO became "just a way for banks to have at it," he said.

‘Profit-Making Enterprise’
"At such low interest rates, it’s no longer a rescue, it’s a profit-making enterprise," Greenberger said. "By December, a lot of money was made off this program."

Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, tapped the program most in December 2008, when data on the New York Fed website show the loans were least expensive. The lowest winning bid at an ST OMO auction declined to 0.01 percent on Dec. 30, 2008, New York Fed data show. At the time, the rate charged at the discount window was 0.5 percent.

December Peak
As its ST OMO loans peaked in December 2008, Goldman Sachs’s borrowing from other Fed facilities topped out at $43.5 billion, the 15th highest peak of all banks assisted by the Fed, according to data compiled by Bloomberg. That month, the bank’s Fixed Income, Currencies and Commodities trading unit lost $320 million, according to a May 6, 2009, regulatory filing.

Under ST OMO, cash changed hands through repos, or repurchase agreements, which the central bank has used to move money in and out of the banking system for at least 60 years. In a repo, the dealer sells securities to the Fed and agrees to buy them back for a higher price after a set period of time.

Open-market operations traditionally use repos to influence the federal funds rate, which is banks’ cost of short-term borrowing, said Sherrill Shaffer, the officer in charge of the discount window at the Federal Reserve Bank of Philadelphia from 1994 to 1997. He’s now a banking professor at the University of Wyoming in Laramie. When the central bank increases the money supply -- by paying cash for securities in repos -- interest rates tend to fall. When it drains cash from the system by selling securities in reverse repos, rates can climb.

Using repos to provide emergency cash, a step the Fed announced on March 7, 2008, was a departure from that process, said John H. Cochrane, a finance professor at the University of Chicago Booth School of Business. "The Fed was slamming the pedal to the metal in the lender-of-last-resort category," Cochrane said. "What they did was so far from what we conventionally think of as monetary policy." Credit Suisse’s borrowing peaked at about $45 billion in September 2008, the Fed charts show.

RBS’s use of ST OMO hit about $30 billion in October 2008. The U.K. government has had a stake in the bank since Oct. 13, 2008. "RBS no longer makes any use of these emergency Federal Reserve lending programs and all money borrowed from the Fed has been repaid in full with interest," said Michael Geller, a spokesman for RBS Global Banking & Markets in Stamford, Connecticut.

Annual Report
Frankfurt-based Deutsche Bank’s use peaked at about $20 billion in October 2008, its chart shows. The bank had 87 billion euros ($122 billion) in repurchase agreements with all central banks as of the end of 2008, according to its annual report. London-based Barclays’s peak reached about $20 billion in December 2008, the chart said. Mark Lane, a Barclays spokesman, declined to comment.

UBS, based in Zurich, borrowed as much as about $15 billion in late 2008, the chart shows. "UBS’s usage of those facilities should be seen in the context of our overall desire to maintain flexibility and diversification in our funding sources, even during the crisis," said Kelly Smith, a spokeswoman for UBS in New York. "Given UBS’s substantial presence and commitment to U.S. dollar-denominated markets, utilization of such facilities was relatively modest."

Other banks listed in the Fed charts borrowed less than their peers. New York-based Morgan Stanley and Paris-based BNP Paribas, France’s biggest bank by assets, took no more than about $10 billion. Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co., which is now part of Bank of America Corp., borrowed less than $5 billion each.

Mary Claire Delaney, a spokeswoman for Morgan Stanley, Jon Diat, a Citigroup spokesman in New York, Howard Opinsky, a spokesman for New York-based JPMorgan Chase, and Megan Stinson, a spokeswoman in New York for BNP Paribas, declined to comment on their banks’ borrowings. "Look at it in hindsight and these programs did exactly what they were intended to do -- stabilize the financial system, provide liquidity and instill confidence," said Jerry Dubrowski, a spokesman for Charlotte, North Carolina-based Bank of America.

The bar charts were included in the Fed’s court-ordered March 31 disclosure under the Freedom of Information Act. The release was mandated after the U.S. Supreme Court rejected an industry group’s attempt to block it. Bloomberg LP, the parent company of Bloomberg News, and News Corp. (NWS)’s Fox News Network LLC had sued the central bank after it refused to release lending records under the FOIA.

Basel III break for banks in EU
by Brooke Masters and Nikki Tait - Financial Times

Banks in the European Union could evade part of the tighter Basel III capital requirements under draft legislation implementing the new globally agreed standards across the 27-member bloc.

The 500-plus page draft, which has not been officially released, could allow EU banks to count more of the capital in their insurance subsidiaries than the global rules call for. It will also allow some banks to continue issuing hybrid capital – preference shares and other debt-like instruments – for longer than expected. The biggest French financial companies, including Société Générale and BNP Paribas, and the UK’s Lloyds Banking Group have insurance arms. They would benefit disproportionately from the exception.

The Basel Committee on Banking Supervision agreed last year to tighten the definition of capital and require all banks to maintain core tier one capital equal to 7 per cent of their assets, adjusted for risk. But it is up to national regulators and the European Commission to implement the rules. A regulator involved in the Basel process said that if the two exceptions stand "it would be a violation of the global agreement" and would undermine the international effort to make banks safer.

The Basel III compromise limits the use of insurance capital to 10 per cent of each bank’s total capital stock. It forces banks to gradually reduce their reliance on hybrids, which largely proved useless in absorbing losses during the financial crisis. It prohibits them from counting any hybrids issued after the Basel III standards were announced in 2010. The EU draft amendments to its "capital requirements directive" would allow financial conglomerates to use another method of calculating their capital. Several people who have seen the draft said it could effectively gut the 10 per cent limit on use of insurance holdings.

"You could drive a coach and horses through that exception," said one of them. However, EU officials said they believe the Basel III standards would not be breached because of the strict way in which the conglomerate provisions would be policed. The EU legislation covers a broader scope than the Basel III guidelines, applying to investment firms, the insurance sector and across sectors, as well as to banks. The EU plans to toughen rules for conglomerates.

The draft says that banks could count hybrids issued right up until the Commission formally unveils the amendments, which is likely to be July. That would benefit EU banks that have continued to issue hybrids in defiance of the planned phase-out. EU insiders said the later date is due to concerns about making rules retroactive. Global bankers and regulators are on high alert for cheating on implementation of the Basel standards. US regulators infuriated European counterparts by refusing to implement the Basel II round for many years.

Is Your Pension Fund "Going for Broke"?
by Robert Jay - EWI

Mutual fund cash levels have fallen to record lows in recent months. The one-word question is: Why?
The near-certain answer is this: money managers are incredibly optimistic about how they think risk assets will perform. Otherwise they would hold more cash, to defend against the future. 

In the past, low levels of mutual fund cash often coincided with market tops. The opposite is also true, as you can see below (the recent 3.4 percent cash level noted in the chart is an all-time record low!):

 With that record low 3.4 percent cash level in mind, now consider the cash levels of the nation's two biggest pension funds.
The California Public Employees Retirement System (CalPERS) recently had only 2 percent of its $230 billion allocated to cash or equivalents.
The California State Teachers' Retirement System (CalSTRS) recently had even less in cash or equivalents: just 1.4 percent of its $152.9 billion.
The investment officers who oversee those funds clearly are not afraid of risky investments. They've jumped into them with both feet. (In a recent interview with CNBC, the Chief Investment Officer of CalPERS said he's aiming for a 7.75 percent annual return, which would meet his pension promise.)
All is well when most financial markets are rising. But what if stocks and other risky assets tank again?
It may comfort CalPERS and CalSTRS shareholders to know that the funds are "diversified." CalPERS has 67.1 percent in global equity, 20 percent in global fixed income, and over 7 percent in real estate. CalSTRS has 54.1 percent in global equity, 17.5 percent in fixed income, and over 11 percent in real estate.
But does diversification necessarily protect a portfolio from substantial losses? Should you be comforted by a pension fund that's "spreading the risk?" 
"Myth -- diversification protects investors from losses. EWI dispelled this myth long ago, but it took every bit of [the financial collapse], when nearly all markets were down 30%-50%, for the idea of diversification to finally come under scrutiny."
Elliott Wave Financial Forecast, February 2010
This "diversification" lesson comes from very recent financial history. Many markets can go down together.
Millions of households count on the financial health of pension funds. According to CNBC, the present shortfall is about $2 trillion. Pension fund officers are "going for broke" -- which, so far, has worked during the rally.

Pensions Leap Back Into Hedge Funds
by Steve Eder, Gregory Zuckerman and Michael Corkery - Wall Street Journal

Public pension plans are lifting hedge-fund investment, seeking to boost long-term returns despite losses suffered in some funds in the financial crisis.

Also, pension officials are using the historically strong returns of hedge funds to justify a rosier future outlook for their investment returns. By generating more gains from their investments, pension funds can avoid the politically unpalatable position of having to raise more money via higher taxes or bigger contributions from employees or reducing benefits for the current or future retirees.

The Fire & Police Pension Association of Colorado, which manages roughly $3.5 billion, now has 11% of its portfolio allocated to hedge funds after having no cash invested in these funds at the start of the year. "There has been some deserved criticism of hedge funds, but many hedge funds during the market downturn in 2008 did better than the S&P 500," said Dan Slack, the chief executive of the system.

While pensions have been investing in private equity and what are called alternative investments for many years, hedge funds have represented a smaller part of their portfolio. The average hedge-fund allocation among public pensions has increased to 6.8% this year, from 6.5% for 2010 and 3.6% in 2007, according to data-tracker Preqin. The number of public pension plans investing in hedge funds has leapt 50% since 2007 to about 300, according to Preqin. State pension systems had $63 billion invested in hedge funds as of their fiscal 2010 and are expected to invest another $20 billion in hedge funds in the next two years, according to a recent report by consultant Cliffwater.

Hedge funds typically bet on and against stocks, bonds or other securities, often using borrowed money. Investors have been giving more cash to hedge funds in recent months, as they regain comfort with markets after two years of solid returns.

On average, hedge funds as a class have delivered for large pension funds that have dabbled in them over time, data show. Large pension funds scored median annualized returns of 6.8% investing in hedge funds in the past decade, compared with 5.7% from stocks and 6.1% from bonds, according to Wilshire Associates, an investment consultant in Santa Monica, Calif. Private equity delivered 6.7%. While hedge funds outperformed stocks in the financial crisis as an industry, some individual funds suffered significant losses or closed.

When looking at average hedge-fund performance, "there is nothing magical being created," said Steven Foresti, head of the investment research group at Wilshire. "They are not a panacea."

David St. Hilaire, who oversees the $230 million City of Danbury Retirement Plan, created hedge-fund investments for his fund's comparatively smooth recovery from the financial crisis and calls them helpful from an actuarial standpoint because of the returns they project. He said the fund has 27% of its assets in alternatives and that this percentage is likely to get bigger.

In March, the New York City Police Pension Fund voted to invest in a firm that puts money into a variety of hedge funds, the first such move by the city's pension funds, which manage $117 billion. In the past few months, two more New York City pensions made the same decision. Together the three funds invested $450 million with hedge-fund firm Permal Group. It is a "first step into hedge funds," said Larry Schloss, the New York City chief investment officer. He says he hopes the investment will help the city's pension system avoid the "wild ride" it has taken in recent years. The system had $115 billion before market tumble in 2008, when it fell to $77 billion.

New Jersey's State Investment Council, which sets investment policy for the state's pension fund, voted last week to raise the target allocation for hedge funds to 10% from 6.7%, which would make hedge funds the $73 billion fund's largest alternative investment asset. The bullishness comes despite a moment in the financial crisis when the fund found itself adding cash to hedge funds it was invested in that were wobbling.

"Whatever problems we've had, hedge funds have been our best performer among our alternatives," said Andrew Pratt, a spokesman for the New Jersey Treasury, which oversees the pension fund's investment operations.

By contrast, the Pennsylvania State Employees' Retirement System has been paring its hedge-fund allocation to about 15% at the end of 2010 from about 26% at the start of 2008. The $25 billion pension system was disappointed after suffering a 16% loss on its hedge-fund investments in the financial crisis despite pursuing a so-called absolute return strategy that has a goal of no losses, a pension fund spokesman said. "We see hedge funds as having a smaller, though still significant and important role in the asset mix," spokesman Robert Gentzel said.

Tepco Faces 'Massive Problem' Containing Radioactive Water at Fukushima
by Stuart Biggs and Yuriy Humber - Bloomberg

As a team from the International Atomic Energy Agency visits Tokyo Electric Power Co.’s crippled nuclear plant today, academics warn the company has failed to disclose the scale of radiation leaks and faces a "massive problem" with contaminated water.

The utility known as Tepco has been pumping cooling water into the three reactors that melted down after the March 11 earthquake and tsunami. By May 18, almost 100,000 tons of radioactive water had leaked into basements and other areas of the Fukushima Dai-Ichi plant The volume of radiated water may double by the end of December and will cost 42 billion yen ($518 million) to decontaminate. according to Tepco’s estimates.

"Contaminated water is increasing and this is a massive problem," Tetsuo Iguchi, a specialist in isotope analysis and radiation detection at Nagoya University, said by phone. "They need to find a place to store the contaminated water and they need to guarantee it won’t go into the soil."

The 18-member IAEA team, led by the U.K.’s head nuclear safety inspector, Mike Weightman, is visiting the Fukushima reactors to investigate the accident and the response. Tepco and Japan’s nuclear regulators haven’t updated the total radiation leakage from the plant since April 12. Tepco has been withholding data on radiation from Dai-Ichi, Goshi Hosono, an adviser to Japan’s prime minister, said at a press briefing today. Hosono said he ordered the utility to check for any data it hasn’t disclosed and release the material as soon as possible.

'Public Distrust'
"This kind of repetition will invite public distrust," Chief Cabinet Secretary Yukio Edano told reporters today when asked whether the perception that the government has withheld data since the accident is eroding public trust. "This is a grave situation for the entire nuclear energy administration as much as the accident itself is."

Japan’s nuclear safety agency estimated in April the radiation released from Dai-Ichi to be around 10 percent of that from the accident at Chernobyl in the former Soviet Union in 1986, while a Tepco official said at the time the amount may eventually exceed it. "Tepco knows more than they’ve said about the amount of radiation leaking from the plant," Jan van de Putte, a specialist in radiation safety trained at the Technical University of Delft in the Netherlands, said yesterday in Tokyo. "What we need is a full disclosure, a full inventory of radiation released including the exact isotopes."

Radiation leakage from Fukushima was raised at a hearing of the U.S. Senate Environment and Public Works Committee this week. U.S. regulations may need to be changed after the Fukushima meltdown, William Ostendorff, a member of the U.S. Nuclear Regulatory Commission said. The Japanese utility is trying to put the reactors into a cold shutdown, where core temperatures fall below 100 degrees Celsius (212 degrees Fahrenheit), within six to nine months. Ostendorff rated the chance of Tepco achieving that goal at six or seven out of 10.

Tepco took more than two months to confirm the meltdowns in three reactors and this week reported the breaches in the containment chambers. The delay in releasing information has led to criticism of Prime Minister Naoto Kan for not doing more to ensure Tepco is keeping the public informed.

'Fundamentally Incorrect'
"What I told the public was fundamentally incorrect," Kan said in parliament on May 20, referring to assessments from the government and Tokyo that reactors were stable and the situation was contained not long after March 11. "The government failed to respond to Tepco’s mistaken assumptions and I am deeply sorry." Public disagreements emerged this week between Tepco and the government over whether orders were given to halt seawater injection into reactors to cool them the day after the tsunami.

Tepco is considering whether to discipline the manager of the Fukushima plant, Masao Yoshida, after he ignored an order to stop pumping seawater, Junichi Matsumoto, a general manager at the company, said yesterday. He was commenting after Kyodo News cited Tepco Vice- President Sakae Muto saying Yoshida will be removed for disobeying the order. Hosono said Yoshida is needed at the plant to contain the crisis.

The earthquake and tsunami knocked out power in the Fukushima plant, depriving reactor cooling systems of electricity. Fuel rods overheated, causing fires, explosions and radiation leaks in the worst nuclear accident since Chernobyl. Japan’s Nuclear and Industrial Safety Agency on April 12 raised the severity rating of the Fukushima accident to 7, the highest on the global scale and the same as Chernobyl. The partial reactor meltdown at Three Mile Island in Pennsylvania in 1979 is rated 5.

The government needs to investigate the total amount of radiation leaked from the plant to ascertain damage to the ocean from contaminated water, said van de Putte, also a nuclear specialist at environmental group Greenpeace International. The group found seaweed and fish contaminated to more than 50 times the 2,000 becquerel per kilogram legal limit for radioactive iodine-131 off the coast of Fukushima during a survey between May 3 and 9.

Mol, Belgium-based Nuclear Research Centre and Herouville- Saint-Clair, France-based Association pour le Controle de la Radioactivite dans l’Ouest confirmed they conducted analysis of the samples supplied by Greenpeace.

Radiation Readings
Ascertaining the cumulative volume of radiation emitted by the plant is possible, van de Putte said. "Perhaps the government will speak about this matter after the detailed accident analysis," the University of Nagoya’s Iguchi said. "It’s possible to calculate this with the time- series plant data recorded in the control room. The most important thing we need to know is the amount of fuel left in the reactor core."

Tepco is planning to treat the contaminated water at Dai- Ichi with a unit supplied by Areva SA (CEI) from mid-June. The decontam ination equipment can process 1,200 tons of water a day, Tepco said. The company had little choice in pouring water on the reactors because the risk of contamination was outweighed by the risk of leaving fuel rods exposed, Peter Burns, a nuclear physicist with 40 years of radiation safety experience, said in an interview.

Burns, the former representative for Australia on the United Nations’ scientific committee on atomic radiation, added pumping in the water "was a desperate measure for desperate times."