Tag Archive: International Monetary Fund


 

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ZeroHedge

“Social Explosion” Begins In Greece As Massive Street Protests Bring Economy To A Fresh Halt

One thing that became abundantly clear after Alexis Tsipras sold out the Greek referendum “no” back in the summer after a weekend of “mental waterboarding” in Brussels was that the public’s perception of the once “revolutionary” leader would never be the same. And make no mistake, that’s exactly what Berlin, Brussels, and the IMF wanted.

By turning the screws on the Greek banking sector and bringing the country to the brink of ruin, the troika indicated its willingness to “punish” recalcitrant politicians who pursue anti-austerity policies. On the one hand, countries have an obligation to pay back what they owe, but on the other, the subversion of the democratic process by using the purse string to effect political change is a rather disconcerting phenomenon and we expect we’ll see it again with regard to the Socialists in Portugal.

After a month of infighting within Syriza Tsipras did manage to consolidate the party and win a snap election but he’s not the man he was – or at least not outwardly. He’s obligated to still to the draconian terms of the bailout and that means he is a shadow of his former self ideologically. As we’ve said before, that doesn’t bode well for societal stability.

On Thursday, we get the first shot across the social upheaval bow as the same voters who once came out in force to champion Tsipras and Syriza are staging massive protests and walkouts.

 

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Bloomberg Business

Greece Comes to a Standstill as Unions Turn Against Tsipras

November 11, 2015 — 6:01 PM CST Updated on November 12, 2015 — 6:04 AM CST
  • Unions hold general strike to protest against austerity
  • PM races to satisfy creditor demands in exchange for funds

As Greek workers took to the streets in protest on Thursday, Alexis Tsipras was for the first time on the other side of the divide.

Unions — a key support base for the prime minister’s Syriza party — chanted in rallies held in Athens the same slogans Tsipras once used against opponents. Doctors and pharmacists joined port workers, civil servants and Athens metro staff in Greece’s first general strike since he took office in January, bringing the country to a standstill for 24 hours.

As many as 20,000 protesters gathered in central Athens while a small group of anarchists at the tail of the demonstration threw petrol bombs at police officers at around 1:30 pm local time, a police spokesman said, requesting anonymity in line with policy. The police responded with tear gas and stun grenades.

Greece’s biggest unions, ADEDY and GSEE, are holding marches accusing Tsipras of bowing to creditors and imposing measures that “perpetuate the dark ages for workers,” as the country’s statistical agency released data showing that 1.18 million Greeks, or 24.6 percent of the workforce, remained unemployed in August.

The 41-year-old Greek premier, who was among anti-austerity protesters in previous general strikes, is now racing to complete negotiations with creditors on belt-tightening in exchange for the disbursement of 10 billion euros ($10.7 billion) to be injected into banks. Failure to reach an accord with euro-area member states and the International Monetary Fund on policies including primary residence foreclosures, and stricter rules on overdue taxes, would put the solvency of the country’s lenders in doubt.

“The economic policies Tsipras has to implement are definitely harsher than warranted, and also harsher than they would be if it wasn’t for these seven months of brinkmanship and extreme political uncertainty,” said Manolis Galenianos, a Professor of Economics at the Royal Holloway, University of London. “This wasn’t necessary, it could have been avoided, and the government will now implement deeper cuts to achieve less ambitious fiscal targets.”

 

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Photo by: Marko Drobnjakovic

A woman walks past a local bank set on fire in Kiev’s Independence Square, the epicenter of the country’s unrest, in Ukraine on Feb. 25. The Obama administration is hoping the crisis in Ukraine will breathe new life into its stalled efforts to pass legislation reforming the International Monetary Fund in Congress this year. (associated press)

Administration sees crisis in Ukraine as opportunity to pass IMF reforms

By Patrice Hill

The Washington Times

The crisis in Ukraine has unexpectedly breathed new life in the Obama administration’s stalled efforts to pass legislation reforming the International Monetary Fund in Congress this year.

Administration aides have seized on the crisis as an opportunity to piggyback the reforms to the global financing agency long sought by President Obama, which give a greater voting share on the IMF board to rising developing economies such as China and Brazil, onto a bill providing $1 billion in loan guarantees for Ukraine’s West-leaning government.

The aid package — and the IMF’s potential role in aiding the new government in Kiev — will likely come up when Mr. Obama meets for the first time with new Ukrainian Prime Minister Arseniy Yatsenyuk at the White House Wednesday.

Under the administration’s assistance plan, the IMF would lead Western efforts to provide Ukraine with as much as $35 billion in loans in exchange for Ukraine adopting much-needed reforms in its corruption-riddled economy. But the quick action that is needed to help Ukraine avert a default within months may be jeopardized if Congress continues to block the reform bill with its $63 billion increase in the IMF’s lending authority.

Moreover, Treasury Secretary Jack Lew said the U.S. cannot take an aggressive leading role in addressing the crisis, as many in Congress demand, unless lawmakers acts on the reforms. The U.S. in the past has had effective veto power over IMF programs, but the administration’s failure to obtain additional lending power to the international agency from Capitol Hill has been eroding its influence there.

“It is imperative that we secure passage of IMF legislation now so we can show support for the IMF in this critical moment and preserve our leading influential voice in the institution,” Mr. Lew told the Senate Finance Committee, noting that many members of Congress have been “at the forefront of international calls in urging the Fund to play a central and active first-responder role in Ukraine.”

Credibility at stake

International finance analysts say the U.S. will lose credibility in the eyes of the world if it continues to call for action to help the new government in Kiev while holding back the IMF reforms that make that possible. In addition to the IMF receiving increased lending authority in the bill, Ukraine would get greater authority to borrow funds it needs from the IMF to stabilize its ailing economy.

“Since it was the U.S. that spearheaded the 2010 IMF reforms, the legitimacy of U.S. leadership is at stake,” said Jo Marie Griesgraber, executive director of New Rules for Global Finance. “Congressional approval is the only remaining impediment” preventing the reforms from taking effect, she said, as most of the IMF’s other 136 members have already approved them.

“We have heard the calls from Congress for stronger U.S. leadership on Ukraine. This would be an excellent time for Congress to approve the IMF reforms,” she said. “This is a win-win for members of Congress who wish to strengthen U.S. global leadership, specifically its position on Ukraine vis—vis Russia, without additional costs to U.S. taxpayers.”

The administration and IMF proponents argue that the increased IMF lending authority would do little to increase the budget deficit since it involves a reprogramming of funds already approved by Congress for emergency IMF loans during the 2009 financial crisis.

While Republican leaders earlier this year were willing to accept the reforms, they sought unsuccessfully for concessions from the administration in return. Some Republican members of Congress have balked at the legislation, contending that the $314 million on-budget cost is not negligible while the IMF lending programs leave U.S. taxpayers open to potentially large costs if borrowers do not repay their loans — something that has never happened in the IMF’s history.

“According to the Congressional Research Service, the U.S. has never lost money on quota commitments. In fact, there is some nominal interest earned on these commitments,” said Ms. Griesgraber.

 

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Bloomberg

 

Ukraine Aid Measure Approved With IMF Link House Opposes

 

By Derek Wallbank and David Lerman Mar 12, 2014 7:26 PM CT

The Senate Foreign Relations Committee approved an aid package for Ukraine that will face opposition from Republicans over changes in U.S. funding for the International Monetary Fund.

The Democratic-led panel voted 14-3 today for a bill that would give Ukraine $1 billion in loan guarantees it’s seeking as Russian forces occupy the Crimean peninsula. It also would authorize sanctions against Ukrainians and Russians deemed responsible for corruption and violence.

The measure, which had bipartisan support in the panel, “sends a message to Russia and the world that we support Ukraine,” said Democratic Senator Robert Menendez of New Jersey, the panel’s chairman.

U.S. House Speaker John Boehner earlier today rejected attempts by Democrats and the Obama administration to tie additional funds for the IMF to a Ukraine aid package.

“This IMF money isn’t necessary for dealing with this Ukraine crisis that we see today,” Boehner, an Ohio Republican, told reporters in Washington. House Republicans have resisted proposals to increase funds for the IMF for years.

The IMF overhaul is backed by the Obama administration, chief executive officers of major U.S. companies and Republican former secretaries of state Henry Kissinger and Condoleezza Rice, who have said funding the IMF would help Ukraine.

Senate Timing

Ukraine’s prime minister, Arseniy Yatsenyuk, went to the Capitol tonight after meetings in Washington with President Barack Obama and Secretary of State John Kerry. Speaking to reporters after he met in a closed-door session with Foreign Relations Committee members, Yatsenyuk said he wasn’t concerned about the time that it might take for Congress to approve the requested economic assistance.

“It always takes time to make good things,” he said.

He called the U.S. pledge of $1 billion in loan guarantees “the first real and concrete step how to stabilize the situation in my country, and we praise it.”

While Senate Majority Leader Harry Reid told reporters he hoped the measure approved today can be taken up by the full Senate tomorrow, Adam Jentleson, a spokesman for the Nevada Democrat, said the legislation may not be considered before members leave for a break until March 24. The Senate may depart as soon as tomorrow.

Three Republicans voted against the Senate measure in the committee: Senators James Risch of Idaho, John Barrasso of Wyoming and Rand Paul of Kentucky.

 

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The New Republic

ECONOMICS MARCH 13, 2014

If Ukraine Defaults, They Can Blame House Republicans

Ukraine needs loans to avoid a default and they need them fast. Last week, Secretary of State John Kerry pledged $1 billion to support Ukraine, but that money is now caught up in a political fight in Congress. Democrats want to include long-overdue reforms to the International Monetary Fund that would allow Ukraine to borrow more from the fund, but Republicans are opposed – unless, of course, Democrats will agree to a one-year delay of an IRS rule. “Let’s make sure we all understand something: The IMF money has nothing to do with Ukraine,” House Speaker John Boehner said on Thursday. But they do: They’d allow Ukraine to borrow 60 percent—around $600 million—more from the IMF.

In 2010, the G20 countries agreed to changes to the IMF that would transfer $63 billion from an emergency fund to the main fund and give emerging countries a larger representation on the board. For the U.S., the implications are minor. It does not increase our contributions to the fund and slightly reduces our voting power, but we retain veto power over major policy decisions. More than 130 countries have already approved of these reforms, but they cannot go into effect until Congress passes them.

 

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The New Zealand Herald

 

IMF team to remain in Ukraine

WASHINGTON (AP) The head of the International Monetary Fund says an IMF fact-finding team in Ukraine will begin negotiations with authorities to develop an economic reform program that could lead to financial help from the lending organization.

Christine Lagarde said Thursday the team that went to Ukraine March 4 and normally would return to Washington to report to the IMF board will now remain until March 21.

 

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WASHINGTON Wed Mar 12, 2014 11:37am EDT

 

U.S. Treasury Secretary Jack Lew testifies before the Senate Budget Committee about the President's 2015 Budget on Capitol Hill in Washington, March 12, 2014. REUTERS-Kevin Lamarque

1 of 2. U.S. Treasury Secretary Jack Lew testifies before the Senate Budget Committee about the President’s 2015 Budget on Capitol Hill in Washington, March 12, 2014.

Credit: Reuters/Kevin Lamarque

 

 

(Reuters) – The United States is hearing that its refusal to approve previously negotiated reforms for the International Monetary Fund could reduce the nation’s influence at the institution, Treasury Secretary Jack Lew said on Wednesday.

U.S. lawmakers have been reticent to approve the IMF quota reforms that were agreed to in 2010 and would give developing countries a bigger say at the international lender.

The reforms would not reduce Washington’s power at the IMF, where the United States is the sole country with veto power.

The Obama administration hoped Congress would tack approval of the IMF quota reforms onto legislation for an aid package for crisis-stricken Ukraine, but the outlook for that happening remains uncertain.

 

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IMF to revise upwards global growth forecast: Christine Lagarde

AFPJan 7, 2014, 10.34PM IST

(International Monetary…)

…..NAIROBI: The International Monetary Fund will revise upward its global growth forecast in about three weeks, Managing Director Christine Lagarde said Tuesday in Nairobi.

“We will be revising upwards the global forecast of the economic growth,” she told a press conference in the Kenyan capital, adding that it would be premature to say any more.

Lagarde, who was wrapping up a two-day visit to Kenya, gave no reason for the revision.

When it issued its latest World Economic Outlook report in October, the IMF lowered its forecasts, saying that global growth “remains in low gear”.

It said it expected the global economy to grow 2.9 percent year-on-year in 2013 and 3.6 percent in 2014. That represented a downward revision of 0.3 and 0.2 percentage points, respectively, from its July estimates.

Emerging-market economies, although still accounting for most global growth, were losing more momentum than previously thought, the IMF said in November, although advanced economies, in particular the United States, were showing signs of picking up.

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World Economic Forum chance to ‘push the reset button’ on global economy

The World Economic Forum is an an opportunity to “push the reset button” on the global economy and to seek solutions to fundamental issues, according to the body’s executive chairman. Speaking ahead of the next week’s gathering of world leaders and power brokers in the Swiss ski resort of Davos, Klaus Schwab said the world…

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Davos debates income inequality but still invites tax avoiders

The rich and powerful at the World Economic Forum are not as worried as they should be about the gap between rich and poor

World Economic Forum founder Klaus Schwab

Mind the gap: World Economic Forum founder Klaus Schwab has warned against the concentration of wealth in too few hands. Photograph: Fabrice Coffrini/AFP/Getty Images

Those on the outside might imagine that the business leaders who gather in Davos each year to chew the fat are concerned only about enriching themselves. Critics might imagine that the company bosses, jetting to the World Economic Forum 5,000 feet up in the Swiss Alps in their helicopters, mink-clad trophy wives in tow, are oblivious to the struggles of the poor. But they would be wrong.

As the rich and powerful make their last-minute preparations for their week up the magic mountain, they want the message to be sent out that they understand about inequality. They feel the pain. Truly they do.

The evidence for the “Davos gets it” line comes from the annual risk report compiled by the WEF. It asks 700 of its members what they think will be the most pressing threats to the global economy over the coming decade. Inequality is seen as the most likely risk.

Klaus Schwab, who created the Davos meeting in the 1970s, is pleased about that finding. As a good old-fashioned social democrat, he wants his members to take a history lesson and realise that capitalism cannot survive if income and wealth become concentrated in too few hands. For much of the 20th century, the more far-sighted business leaders realised this. They understood that their workers needed reasonable wages so that they could buy the goods and services they were making. They grasped the idea that a market system in its rawest form was incompatible with democracy and so acquiesced while some of the rough edges were knocked off via progressive taxation, welfare states and curbs on capital. Deep down, they feared that the Russian revolution would provide a template for disaffected workers in the west.

Attitudes have changed in the past 30 years. The so-called Great Compression of incomes seen from the 1930s to the 1970s went into reverse, with the top 1% grabbing the fruits of growth. The rich used their money and their influence to ensure that governments did their bidding. After the Berlin Wall came down, there was no rival model and less need to show restraint. With the arrival of a unipolar world came a return to a more aggressive form of market economics that had not been seen since the early days of industrialisation.

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World Economic Forum

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The IMF wants you to pay 71% income tax

Tax

December 12, 2013 
Sovereign Valley Farm, Chile

The IMF just dropped another bombshell.

After it recently suggested a “one-off capital levy” – a one-time tax on private wealth as an exceptional measure to restore debt sustainability across insolvent countries – it has now called for “revenue-maximizing top income tax rates”.

The IMF’s team of monkeys has been working around the clock on this one, figuring that developed nations can increase their overall tax revenue by increasing tax rates.

They’ve singled out the US, suggesting that the US government could maximize its tax revenue by increasing tax brackets to as high as 71%.

Coming from one of the grand wizards of the global financial system, this might be the clearest sign yet that the whole house of cards is dangerously close to being swept away.

Think about it– solvent governments with healthy economies don’t go looking to steal 71% of people’s wealth. They’re raising this point because these governments are desperate. And flat broke.

The ratio of public debt to GDP across advanced economies will reach a historic peak of 110% next year, compared to 75% in 2007.

That’s a staggering increase. Most of the ‘wealithest’ nations in the West now have to borrow money just to pay interest on the money they’ve already borrowed.

 

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vigilantchannel·

Published on Jul 22, 2012

The man who forced the government of Iceland to resign and kicked out the IMF representatives from his country, Hordur Torfarson, is now teaching meta-modern democracy throughout Europe.The rest of the world would benefit from following the example set by Iceland: Arresting the corrupt bankers who are responsible for the current economic turmoil.

Debtocracy documentary about Greece // ΧΡΕΟΚΡΑΤΙΑ http://www.debtocracy.gr/

Full employment contributes above all to achieving human dignity.”
”It’s nice to be important ,but is more important to be nice.”

The financial crash in Iceland in 6 minutes according to ABC´s 20/20.
http://youtu.be/X35R_3ZN-t8

Iceland economic crisis documentary
http://youtu.be/5R7DczXyIcA
http://www.crisiswatch.net/EconomyCri…

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Olafur Ragnar Grimsson Iceland president ‘Let banks go bankrupt’

AussieNews1 AussieNews1

Published on Jan 25, 2013

Iceland President Olafur Ragnar Grimsson tells Al Jazeera’s Stephen Cole that Europe should let banks that are ran “irresponsibly” go bankrupt.

Speaking at the annual World Economic Forum in Davos, Grimsson also held his country as a model of economic recovery after its near-collapse four years ago.

“We didn’t follow the traditional prevailing orthodoxies. And the end result four years later is that Iceland is enjoying progress and recovery.”

Source, credit to Aljazeera- http://www.aljazeera.com/video

FAIR USE NOTICE: This video has been posted to further advance our understanding of environmental, political, human rights, economic, Technological, democratic, scientific, and social justice issues which constitutes a “fair use” of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107 for research and educational purposes.

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Municipal police demonstrate during a general strike in Athens on July 16, 2013.

Municipal police demonstrate during a general strike in Athens on July 16, 2013.
Tue Jul 16, 2013 1:37PM GMT
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The latest austerity measure is required by the country’s international lenders, including the European Union and the International Monetary Fund (IMF), in order for Athens to start receiving EUR 6.8 billion (USD 8.9 billion) of fresh aid.”

Thousands of Greeks have staged a substantial rally in the capital city of Athens to protest against a bill that includes plans to cut thousands of civil service jobs.

At least 16,000 protesters gathered outside the parliament in Athens on Tuesday, shutting down municipal services by disrupting public transport and medical work.

The massive walkout came after unions called for a general strike against fresh austerity measures the government is imposing in order to receive billions of euros in bailout loans.

The latest austerity measure is required by the country’s international lenders, including the European Union and the International Monetary Fund (IMF), in order for Athens to start receiving EUR 6.8 billion (USD 8.9 billion) of fresh aid.

The Greek bill is expected to be passed on Wednesday, placing 4,200 public workers, including teachers, school wardens, and municipal police under so-called redeployment.

By the end of this year, some 25,000 civil servants must be redeployed overall and an additional 4,000 fired in order for the country to receive the tranche in bailout rescue loans.

Greece is experiencing its sixth year of recession, which has forced it to impose harsh austerity measures over the past four years in return for multi-billion-euro international bailouts to avoid defaulting on its debt.

The measures are deeply unpopular among the population as citizens have seen their pensions cut and their salaries reduced by up to 40 percent.

Furthermore, the country’s overall unemployment rate has reached a level not seen in its modern history as it stands at 27 percent; the rate is at a shocking 64 percent among the youth.

GMA/PR/SS

 

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                                                               American Empire

US Prepares to Overthrow Malaysian Government

 

Key to encircling and containing China, US sets proxies in motion for color revolution in Malaysian streets. 

 

Image: US-proxy Anwar Ibrahim leads a Bersih rally in Malaysia. While Bersih has attempted to claim it is “independent” and simply pursusing “fair and clean elections,” it is clearly a vehicle for returning Anwar Ibrahim back into power. Additionally, Bersih shares the same ties to the US State Department’s National Endowment for Democracy (NED) as its crypto-leader Anwar Ibrahim – representing a dangerous and seditious conflict of interest.

 

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May 15, 2013 (AltThaiNews) – US-funded opposition fronts have vowed to overthrow the Malaysian government via disruptive and potentially violent street protests in the wake of general elections that saw their leader Anwar Ibrahim soundly defeated despite massive support from Western media, NGOs, and direct government intervention. Free Malaysia Today (FMT) reported in their article, “‘BN will be toppled this year’,” that:

Pro-Pakatan Rakyat groups have vowed to overthrow the Barisan Nasional government this year through a massive street rally.

Speakers at a forum held yesterday unanimously agreed that waiting for five years until the next
general election was too long, and vowed to overthrow BN this year through “force”.

FMT also added that:

Electoral watchdog group Bersih 2.0 steering committee member  Hishamuddin Rais pointed out that it was useless to take their unhappiness to the courts as he claimed the justice system was being controlled by the government.

“That is why we must take to the streets. We have to come out. What Najib likes is wrong, and what he doesn’t like is what we have to do,” he said.

“We will mobilise a big group and rally on the streets. This is not a threat, this is a promise,” he stressed.

Bersih, of course, is a US State Department-funded opposition front aimed to bolster US-proxy candidate Anwar Ibrahim, formerly of the IMF and World Bank, and a frequent visitor to the insidious National Endowment for Democracy (NED) in Washington D.C. It is in fact, NED that funds Bersih through its subsidiary, the National Democratic Institute (NDI).
The Malaysian Insider reported on June 27, 2011 that Bersih leader Ambiga Sreenevassan:

“…admitted to Bersih receiving some money from two US organisations — the National Democratic Institute (NDI) and Open Society Institute (OSI) — for other projects, which she stressed were unrelated to the July 9 march.”

A visit to the NDI website revealed indeed that funding and training had been provided by the US organization – before NDI took down the information and replaced it with a more benign version purged entirely of any mention of Bersih. For funding Ambiga claims is innocuous, the NDI’s rushed obfuscation of any ties to her organization suggests something far more sinister at play.

Photo: NDI’s website before taking down any mention to Malaysia’s Bersih movement. (click image to enlarge)

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In addition to Bersih, other faux-electoral monitors are also directly funded by the US government. While the Western media attempts to portray such organizations as “independent,” the Merdeka Center for Opinion Research, for example, is likewise funded directly by the US through NED.

Anwar Ibrahim himself was Chairman of the Development Committee of the World Bank and International Monetary Fund (IMF) in 1998, held lecturing positions at the School of Advanced International Studies at Johns Hopkins University, was a consultant to the World Bank, and a panelist at the Neo-Con lined National Endowment for Democracy’s “Democracy Award” and a panelist at a NED donation ceremony – the very same US organization funding and supporting Bersih and so-called “independent” election monitor Merdeka – paints a picture of an opposition running for office in Malaysia, not for the Malaysian people, but clearly for the corporate financier interests of Wall Street and London.

 

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    Image Source                           Angela Merkel, Chancelière allemande.

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Proper analysis of Mario Draghi’s figures suggests Germany is a major cause of the crisis – not a wage productivity paragon

Mario Draghi, president of the European Central Bank: his analysis of the euzozone crisis is flawed, argues Andrew Watt. Photograph: Lisi Niesner/Reuters

Over the course of the last week’s tense negotiations over a Cyprus bailout deal, much of the commentary has focused on the role of Europe’s finance ministers. But perhaps closer attention should be paid to Mario Draghi, the president of the European Central Bank. On 14 March Draghi made a presentation to heads of state and government on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended.

Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success; structural rigidities and greedy trade unions lead to failure. QED.

According to the Frankfurter Allgemeine Zeitung, which reported the affair approvingly, the impact of Draghi’s intervention was devastating. François Hollande, the French president, who had earlier been calling for an end to austerity and for growth impulses, was, according to the newspaper, completely silenced after the ECB president had so clearly demonstrated, with incontrovertible evidence, what was wrong in Europe – or rather in certain countries in the eurozone – and what must be done.

Things are not as they seem, however. Draghi’s presentation contains a simple but fatal error – or should that be misrepresentation? As the note to the graphs indicates, the productivity measure is expressed in real terms. In other words, it shows how much more output an average worker produced in 2012 compared with 2000. So far so good. However, the wage measure that he uses, compensation per employee, is expressed in nominal terms (even if, interestingly, this is not expressly indicated on the slides). In other words, the productivity measure includes inflation, but the wage measure does not.

 

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Cyprus Salvaged After EU Deal Shuts Bank to Get $13B

By Rebecca Christie, James G. Neuger & Patrick Donahue – Mar 25, 2013 10:24 AM CT

Cyprus dodged a disorderly sovereign default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in an overnight negotiating melodrama that threatened to rekindle the European debt crisis and rattle markets.

“It’s been yet another hard day’s night,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels early today. “There were no optimal solutions available, only hard choices.”

It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of euro-crisis management that has dominated European policy making for more than three years. Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.

The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors. Efforts to win an alternative bailout from Russia, which loaned Cyprus 2.5 billion euros in 2011 when the nation was shut out of international markets, failed.

‘Playing Games’

“Nobody knows where we are heading,” said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been unemployed for six months. “People are playing games with Cyprus. We are alone. Nobody is supporting us.”

The euro retreated 0.4 percent, trading at $1.2935 at 2:33 p.m. in Frankfurt, after initially rising as much as 0.5 percent. Stocks gained, with the Stoxx Europe 600 Index rising 0.5 percent. Italian 10-year bonds erased their decline since last month’s inconclusive election.

German Chancellor Angela Merkel lauded the agreement as lawmakers in her coalition embraced the package, which should go to a vote in Berlin in the coming weeks. The agreement goes a “long way” toward satisfying Germany’s Bundestag, Christian Democratic lawmaker Norbert Barthle said in an interview.

Bartering

The breakthrough came after Anastasiades bartered with officials including EU President Herman Van Rompuy, European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde. It was then sealed by the finance ministers, some of whom went out to dinner while the talks were ongoing.

With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

Debt Doubts

The squeezed banking industry will likely lead to a “sharp drop” in Cyprus’s gross domestic product this year and next, according to Reinhard Cluse, a London-based economist at UBS AG. As a result, the euro group’s debt-to-GDP ratio target of 100 percent by 2020 “must be doubted,” he said.

The Cypriot Finance Ministry said in a January presentation that bailing out the country may push debt to a peak of about 140 percent of GDP next year.

“Cyprus’s sovereign debt problems will remain an issue of concern — for European policy makers and for the markets,” Cluse wrote in a note to clients today.

Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls to prevent a run on deposits when they reopen.

The union representing Cypriot banking workers said today the Mediterranean island is faced with a “painful compromise,” according to a statement posted on its website. It urged employees to be ready to return to work when banks reopen.

Better Solution

“This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel. He said the deal was beyond the range of “political possibilities” a week ago.

The Cypriot parliament won’t have to vote again because it has already passed laws on bank restructuring, officials said. On the creditors’ side, legislatures in Germany, Finland and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.

Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.

Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said of the talks.

Solvent Banks

The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to Bank of Cyprus “in line with applicable rules.”

The seizure of larger deposits may spark tensions with Russia, the source of an estimated $31 billion in holdings in Cypriot banks according to Moody’s Investors Service. A Cypriot mission to Moscow last week failed to yield an alternative to the European-sponsored bailout.

Still, Russian President Vladimir Putin ordered his government to discuss restructuring a 2011 loan to Cyprus, Russian news service RIA Novosti cited a spokesman as saying.

The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.

Nine Months

In a replay of tensions over aid for Greece at the outset of the crisis, European governments had wrangled over aid for Cyprus for nine months, exposing holes in the revamped economic management system that was built in three years of emergency policymaking, often at all-night summits.

A tightening of Europe’s budget-deficit restrictions and new rules to penalize countries with unbalanced economies or asset bubbles failed to stop the rot in Cyprus, which makes up less than 0.2 percent of euro-region output.

Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, one group brandishing a banner that said: “It’s capitalism, stupid.”

Source  Bloomberg

 

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