WHY CARS MATTER:  historically, the automobile industry was the "engine" of American employment, producing 3 other industrial or service jobs for every automotive manufacturing one.  It also became the fabricator of motorized materials for war;  question...is this mighty economic "driver" as extinct as T-Rex?

TABLE OF CONTENTS TO 'ECONOMICS 101' HERE:

Lending new meaning to the term "F.I.R.E." sale?
ECONOMICS 101:  And what about jobs...in the U.S.A. and CT?  A 2011 thoughtful article on global picture here.
        BACKGROUND...

Nobel Prize 1973 laureate for inventing Input-Output economics (using the computer for developing economic theories);
An example of others who use input-output theory;
Nobel Prize economist at the NYTIMES
Other theories of economics; 
June 7, 2009 op-ed - "Economy Still at the Brink."
NYTIMES Sunday article; 
From May 2009 Atlantic Monthly.  Conservative think tank article here.
Interesting article on what things are worth...
Commentary by ex- OMB chief 2009-2010 here.


NYTIMES graphic:  Deep Recession Sharply Altered U.S. Jobless Map
NYTIMES
By MICHAEL COOPER
September 26, 2011

When the unemployment rate rose in most states last month, it underscored the extent to which the deep recession, the anemic recovery and the lingering crisis of joblessness are beginning to reshape the nation’s economic map.

The once-booming South, which entered the recession with the lowest unemployment rate in the nation, is now struggling with some of the highest rates, recent data from the Bureau of Labor Statistics show.

Several Southern states — including South Carolina, whose 11.1 percent unemployment rate is the fourth highest in the nation — have higher unemployment rates than they did a year ago. Unemployment in the South is now higher than it is in the Northeast and the Midwest, which include Rust Belt states that were struggling even before the recession.

For decades, the nation’s economic landscape consisted of a prospering Sun Belt and a struggling Rust Belt. Since the recession hit, though, that is no longer the case. Unemployment remains high across much of the country — the national rate is 9.1 percent — but the regions have recovered at different speeds.

Now, with the concentration of the highest unemployment rates in the South and the West, some economists wonder if it is an anomaly of the uneven recovery or a harbinger of things to come.

“Because the recovery is so painfully slow, people may begin to think of the trends established during the recovery as normal,” said Howard Wial, a fellow at the Brookings Institution’s Metropolitan Policy Program who recently co-wrote an economic analysis of the nation’s 100 largest metropolitan areas. “Will people think of Florida, California, Nevada and Arizona as more or less permanently depressed? Think of the Great Lakes as being a renaissance region? I don’t know. It’s possible.”

The West has the highest unemployment in the nation. The collapse of the housing bubble left Nevada with the highest jobless rate, 13.4 percent, followed by California with 12.1 percent. Michigan has the third-highest rate, 11.2 percent, as a result of the longstanding woes of the American auto industry.

Now, though, of the states with the 10 highest unemployment rates, six are in the South. The region, which relied heavily on manufacturing and construction, was hit hard by the downturn.

Economists offer a variety of explanations for the South’s performance. “For a long time we tended to outpace the national average with regard to economic performance, and a lot of that was driven by, for lack of a better word, development and in-migration,” said Michael Chriszt, an assistant vice president of the Federal Reserve Bank of Atlanta’s research department. “That came to an abrupt halt, and it has not picked up.”

The long cycle of “lose jobs, gain jobs, lose jobs” that kept Georgia’s unemployment rate at 10.2 percent in August — the same as it was a year earlier — is illustrated by Union City, a small city on the outskirts of Atlanta.

It suffered a blow when the last store in its darkened mall, Sears, announced that it would soon close. But the city had other irons in the fire: a few big companies were hiring, and earlier this year Dendreon, a biotech company that makes a cancer drug, opened a plant there, lured in part by state and local subsidies.

Then, this month, Dendreon said it would lay off more than 100 workers at the new plant as part of a national “restructuring.”

Union City, with a population of 20,000, now calls itself the place “Where Business Meets the World” and has been trying to lure companies by pointing out its low business taxes, various incentive programs and proximity to Hartsfield-Jackson Atlanta International Airport.

Steve Rapson, the city manager, said that the challenge there, as in much of America, has been to get employers to hire again. “It’s hard to get your mind around what can you do as a city to encourage future jobs and jobs growth,” he said.

The reordering of the nation’s economic fortunes can be seen in the Brookings analysis, which found that many auto-producing metropolitan areas in the Great Lakes states are seeing modest gains in manufacturing that are helping them recover from their deep slump, while Sun Belt and Western states with sharp drops in home values are still suffering. The areas that have been hurt the least since the recession, the study said, rely on government, education or energy production. Places that were less buoyed by the housing bubble were less harmed when it burst.

In Pennsylvania, the analysis found, the Pittsburgh area — which is heavily reliant on education and health care — is weathering the downturn better than the Philadelphia area. In New York, areas around long-struggling upstate cities like Buffalo and Rochester are recovering faster by some measures than the New York City metropolitan area. And the rate of recovery in Rust Belt areas around Youngstown and Akron, two Ohio cities that were hit hard, has outpaced that of former boomtowns like Colorado Springs and Tucson.

In a sign of how severe the downturn has been, the Brookings analysis found that only 16 of the nation’s 100 largest metropolitan areas have regained more than half of the jobs they lost during the recession.

The toll on the nation’s millions of unemployed people has been harsh, with the Census Bureau reporting that the United States had more people living in poverty last year than in any year since it began keeping records half a century ago.

Joblessness is taking a toll on states, too. This month, 27 states will have to pay $1.2 billion to the federal government in interest on the $37.5 billion that they borrowed in recent years to keep paying unemployment benefits.

What is most striking about the high unemployment rates, several economists said in interviews, is how they continue to afflict wide parts of the country.

“It just seems to be so pervasive across the country — except for the breadbasket area — that it’s hard to pick out anybody who is bouncing back,” said Randall W. Eberts, the president of the W. E. Upjohn Institute for Employment Research in Michigan.

Dr. Eberts pointed to another feature of the downturn: people are much less likely to leave their jobs voluntarily. Before the recession, he said, about three million people voluntarily left their jobs each month. Now, around two million people do — leaving fewer openings for job seekers.

So what happened in South Carolina? Richard Kaglic, a regional economist at the Federal Reserve Bank of Richmond, Va., said the state’s lingering troubles reflect what happened when its construction and manufacturing industries were hit hard by the recession. Mr. Kaglic, who is also a pilot, used an aviation metaphor to explain what he meant.

“If your nose is high, if you’re climbing faster and your engine cuts out, you fall farther and it takes you a longer time to recover,” he said. “The conditions we experienced in late 2008, 2009, are as close as you come to an engine-out situation in the economy.”

But Mr. Kaglic said that the recent return of manufacturing jobs was giving him hope, and that one reason for the high unemployment rate was that more people were now seeking work.

“I would look at it as our dreams are delayed,” he said, “rather than our dreams being denied.”

Study says state's economic recovery slowed by rough first half in 2011
Keith M. Phaneuf, CT MIRROR
September 2, 2011

Connecticut was on pace to achieve a strong economic recovery by the end of 2013--until both national and state economies sputtered during the first half of 2011, according to the latest quarterly analysis released Friday by the University of Connecticut.

The failure of federal stimulus grants to spur economic expansion, coupled with subsequent government spending cuts and financial chaos both in American and European markets, means Connecticut will likely have to settle for one-half or even one-third of the recovery it was on pace to achieve over the next two years, according to the report from the Connecticut Center for Economic Analysis.  But the fiscal wrench in Connecticut's recovery engine would have done far more damage had Gov. Dannel P. Malloy and the General Assembly tried to solve the entire state budget crisis with spending cuts, rather than a mix of reductions and new revenue, said economics professor Fred Carstensen, the center's director.

"The state would have enjoyed almost a 10 percent growth in output and recovered another 55,000 jobs, performing better than the national economy. But this was not to be," reads the center's latest analysis, titled "Navigating Tumultuous Waters."

"Virtually all economic forecasts, both for the United States and for the global economy, have been trimmed back," the report adds. "Realistically, Connecticut will not see the improvements it might have seen."

The state lost an estimated 105,000 to 120,000 jobs during what has become known as the Great Recession, which extended from March 2008 through early 2010. Connecticut, which was on pace to see 10 percent growth in economic output and 55,000 jobs recovered by the end of 2013, now likely will have to settle for something much more modest, and only one-third to one-half of those jobs, the center concluded.

One factor in the less-than-robust economic improvement, the report said, is that the state's share of the federal stimulus spending was almost entirely offset by reductions in state and local spending. For example, between the 2008-2009 and 2010-2011 fiscal years, the state used $2.16 billion in stimulus money to prop up its operating budget. The loss of those funds contributed to the $1.3 billion Malloy and the legislature had to cut from the current year's budget.

The stimulus "didn't have the expansionary impact they expected on the economy," Carstensen said. Though that stimulus spending created new jobs--not just in construction but in social services, health care or any other field that receives government contracts--it largely has been neutralized by cutbacks in other government expenditures.

Looking forward, the report said, $1.7 billion in tax increases approved by the legislature and Malloy and $1.6 billion in labor concessions will be a drag on the economy, although that will be partially offset by spending on the Hartford-New Britain Busway and on the Biosciences Connecticut initiative. With the stimulus money ended, however, the state's share of those projects, will have to come from revenues raised locally.

"It's not a free lunch anymore," Carstensen said. New state government initiatives "mean we all have less money to spend on other things."

Still, the center concluded that Connecticut's economy would be in far worse shape had Malloy and the legislature tried to close the entire $3.67 billion deficit built into the 2011-12 budget with spending cuts. They ordered more than $1.6 billion in tax increases at the state and local level, and while this will leave consumers with less money, "it is  much better way of getting our fiscal house in order," Carstensen said.

The center's conclusions drew criticism Thursday from Deputy House Minority Leader Vincent Candelora, R-North Branford, a member of the Finance, Revenue and Bonding Committee and one of the most vocal critics of the new taxes approved by Malloy and his fellow Democrats in the legislature's majority.

"Basically he (Carstensen) is saying you can tax people as much as you want and you still won't change their behavior," Candelora said, adding he believes the study dramatically underestimates how state and municipal tax hikes will curb the spending habits of Connecticut households. "You hear anecdotally from consumers all of the time. If people aren't confident they will save their money."

Increases in state income, sales, corporation, estate, cigarette and liquor taxes are causing that confidence to deteriorate and will stunt the economy, Candelora added.  The challenge posed by the expiration of the federal stimulus has been compounded by unstable financial markets, both at home and abroad, the study also notes: "The financial chaos of this summer has again sucked confidence out of the equity markets, and the continuing crisis in sovereign debt in the European Union has scared investors into the safest available havens--gold and American Treasuries."

The Dow Jones Industrial Average, one of the chief measures of blue-chip stock health, hit a post-recession high of 12,810 on April 29 and hovered for the most part over the 12,000-point level until late July. It would then begin a 2,000-point, three-week plunge, bottoming out on Aug. 19 at 10,817. The Dow has rebounded modestly since then and closed Thursday at 11,493.

Meanwhile, economic crises in Greece and throughout much of Europe has weakened demand there for goods from Connecticut and the rest of the United States, Carstensen said.  Connecticut can help redirect its economy with an increased focus on "green energy," backing technologies to promote more efficient electricity consumption and promoting electric vehicles to combat rising petroleum prices.  The center also repeated its call for a more strategic approach to the use of state tax credits to ensure those investments are tied both to specific pledges of new job growth--and are focused on cutting-edge science and technology fields such as bioscience.

"We have some economic independence in terms of determining what happens to us as a state," Carstensen said, adding that for too many years, governors and legislatures doled out hundreds of millions of dollars in credits that effectively increased company profits--and little else.

The economics professor said Malloy's new First Five program, which will dedicate tens of millions of dollars in state assistance to each of the first five Connecticut companies pledging to create at least 200 new jobs, "is much more symbolic than substantive, but symbolically it is terribly important."

Though a good first step, First Five needs to be expanded into a larger, statewide plan tied to carefully selected targets and specific, measurable job-creation results, he said. "No single company is going to be our savior, Carstensen added.

Sen. Gary D. LeBeau, D-East Hartford, co-chairman of the Commerce Committee and a backer of the First Five program, said that while he agrees with the need to focus state investments on more specific economic goals, he believes expanding research programs at public colleges and universities also could be an important economic development engine.

For example, while the University of Connecticut has an Eminent Faculty program that it uses to recruit top researchers, "we really haven't done enough to bring in the stars that we need," LeBeau said, adding this could trigger additional private-sector and federal funding, and ultimately grow new cutting-edge technology businesses here. There are dollars out there, but we have to be willing to take a little bit of risk and bring in the right people."

The Rescue That Missed Main Street
NYTIMES
By GRETCHEN MORGENSON
August 27, 2011

FOR the last three years we have been told repeatedly by government officials that funneling hundreds of billions of dollars to large and teetering banks during the credit crisis was necessary to save the financial system, and beneficial to Main Street.

But this has been a hard sell to an increasingly skeptical public. As Henry M. Paulson Jr., the former Treasury secretary, told the Financial Crisis Inquiry Commission back in May 2010, “I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street.”

The American people were right to question Mr. Paulson’s pitch, as it turns out. And that became clearer than ever last week when Bloomberg News published fresh and disturbing details about the crisis-era bailouts.

Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.

The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again.

Such a move does not appear imminent; on Friday Ben S. Bernanke, the Fed chairman, told attendees at the Jackson Hole, Wyo., conference that the Fed would take necessary steps to help the economy, but didn’t outline any possibilities as he has done previously.

If the Fed reprises some of its emergency lending programs, we will at least know what they will involve and who will be on the receiving end, thanks to Bloomberg.

For instance, its report detailed the surprisingly sketchy collateral — stocks and junk bonds — accepted by the Fed to back its loans. And who will be surprised if foreign institutions, which our central bank has no duty to help, receive bushels of money from the Fed in the coming months? In 2008, the Royal Bank of Scotland received $84.5 billion, and Dexia, a Belgian lender, borrowed $58.5 billion from the Fed at its peak.

Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said these details from 2008 confirm that institutions, not citizens, were aided most by the bailouts.

“What is the benefit to the American taxpayer of propping up a Belgian bank with a single New York banking office to the tune of tens of billions of dollars?” he asked. “It seems inconsistent ultimately to have provided this much assistance to the biggest institutions for so long, and then to have done in effect nothing for the homeowner, nothing for credit card relief.”

Mr. Todd also questioned the Fed’s decision to accept stock as collateral backing a loan to a bank. “If you make a loan in an emergency secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow?” he asked. “And yet this, the Fed has steadfastly denied ever doing.”

If these rescues were intended to benefit everyday Americans, as Mr. Paulson contended, they have failed. Main Street is in a world of hurt, facing high unemployment, rampant foreclosures and ravaged retirement accounts.

This important topic of bailout inequities came up in Congress earlier this month. Edward J. Kane, professor of finance at Boston College, addressed a Senate banking panel convened on Aug. 3 by Sherrod Brown, the Ohio Democrat. “Our representative democracy espouses the principle that all men and women are equal under the law,” Mr. Kane said. “During the housing bubble and the economic meltdown that the bursting bubble brought about, the interests of domestic and foreign financial institutions were much better represented than the interests of society as a whole.”

THIS inequity must be eliminated, Mr. Kane said, especially since taxpayers will be billed for future bailouts of large and troubled institutions. Such rescues are not really loans, but the equivalent of equity investments by taxpayers, he said.

As such, regulators who have a duty to protect taxpayers should require these institutions to provide them with true and comprehensive reports about their financial positions and the potential risks they involve. These reports would counter companies’ tendencies to hide their risk exposures through accounting tricks and innovation and would carry penalties for deception.

“Examiners would have to challenge this work, make the companies defend it and protect taxpayers from the misstatements we get today,” Mr. Kane said in an interview last week. “The banks really feel entitled to hide their deteriorating positions until they require life support. That’s what we have to change. We must put them in position to be punished for an intent to deceive.”

Given the degree to which financial regulators are captured by the companies they oversee, prescriptions like Mr. Kane’s are going to be fought hard. But the battle could not be more important; if we do nothing to protect taxpayers from the symbiotic relationship between the industry and their federal minders, we are in for many more episodes like the one we are still digging out of.

EVALUATING bailout programs like the Troubled Asset Relief Program and the facilities extended by the Fed against “the senseless standard of doing nothing at all,” Mr. Kane testified, government officials tell taxpayers that these actions were “necessary to save us from worldwide depression and made money for the taxpayer.” Both contentions are false, he said.

“Bailing out firms indiscriminately hampered rather than promoted economic recovery,” Mr. Kane continued. “It evoked reckless gambles for resurrection among rescued firms and created uncertainty about who would finally bear the extravagant costs of these programs. Both effects continue to disrupt the flow of credit and real investment necessary to trigger and sustain economic recovery.”

As for making money on the deals? Only half-true, Mr. Kane said. “Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided, he said. We should have received returns of 15 percent to 20 percent on our money, given the nature of these rescues.

Government officials rewarded imprudent institutions with stupefying amounts of free money. Even so, we are still in economically stormy seas. Doesn’t that indicate that it’s time to try a different tack?
GREEK TRAGEDY HERE

AMERICAN TRAGEDY BEGAN BELOW, PERHAPS?


Japan earthquake cost estimate hits insurers
Reuters
By Myles Neligan
14 March 2011

LONDON (Reuters) – Insurance stocks fell for a second day on Monday as experts estimated that the Japanese earthquake could cost the industry nearly $35 billion, making it one of the most expensive disasters ever.

The Stoxx 600 European Insurance Share Index was down 1.5 percent by 1325 GMT, underperforming the wider market, which was off 0.8 percent, and extending a 1.7 percent drop on Friday.

Reinsurers Munich Re, Swiss Re and Hannover Re fell furthest, posting declines of 3.2-4.5 percent. Together the three have lost 3.1 billion euros ($4.3 billion) in market value since Friday.

Risk modeling agency AIR Worldwide on Sunday said the quake, which killed as many as 10,000 people when it struck northeastern Japan on Friday, could cause an insured loss of between $14.6 billion and $34.6 billion even before losses from a related tsunami are included.

Early estimates of the Japanese quake's likely impact from equity analysts on Friday had been in the region of $15 billion.

The upper end of the new estimate would make Friday's earthquake the second-costliest natural disaster for insurers since Hurricane Katrina. Katrina hit the United States in 2005 and cost insurers $71 billion.

Predictions for the overall cost of the multiple disasters disaster reached over $170 billion on Monday.

Insurers and analysts said it was too early to accurately assess damage caused by the quake, the most powerful ever to hit Japan.

Rival risk modelers RMS and Eqecat, who along with AIR produce scientific estimates of the impact of natural disasters, are expected to issue their initial research in the next few days.

"Given the nature of the destruction, combined with the ongoing recovery efforts and evacuation areas, it will take some time to estimate the damage," Swiss Re said.

NUCLEAR

Insurers said they did not expect to absorb the cost of earthquake-related damage to a nuclear power facility 240 kilometers north of Tokyo, which has stirred fears of a leak of radioactive material across the region.

"Any impacts due to major accidents in Japanese nuclear power plants will not significantly affect the private insurance industry," Munich Re said.

Chaucer, one of the world's biggest insurers of nuclear risk, said it did not expect any big claims because the Japanese Nuclear Act of 1961 absolves nuclear plant operators of liability from damage caused by major natural disasters.

Shares in Chaucer, currently in takeover talks with suitors including private equity tycoon Guy Hands, were up 2.8 percent, partly reversing an 8.5 percent fall on Friday.

PRICING POWER

Some analysts said the disaster, combined with heavy losses already suffered this year from floods in Australia and last month's New Zealand quake, could push up global insurance prices, boosting insurers' shares.

"In our view the loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector," Panmure Gordon analyst Barrie Cornes wrote in a note, estimating the event could cost insurers "in excess of $60 billion."

Shares in the sector have been under pressure due to persistently weak global insurance prices, reflecting stiff competition between well-capitalized insurers. A big loss would erode insurers' capital, forcing them to charge more in an effort to recoup big payouts to customers.

Last year, analysts polled by Reuters said a natural catastrophe would need to cause an insured loss of over $40 billion to lift prices across the market.

GOVERNMENT HELP

The overall impact of the latest disaster on insurers will be mitigated by the Japanese state's role in absorbing earthquake-related damage to households.

The hit will also be limited by a low take-up of insurance by Japanese households and businesses relative to Western countries, and by limited use of reinsurance by domestic Japanese players.

These factors limited the financial impact on insurers after the 1995 Kobe earthquake to about $3 billion, a small fraction of the overall economic loss of $100 billion.

Jefferies International analyst James Shuck estimated the latest quake would generate a more moderate insured loss of between $10 billion and $20 billion, helping to prevent further price falls, but not enough to push them higher.

"We expect some overall stability to global insurance pricing, but not enough to turn the market as a whole," he said.

Falls in the share prices of Lloyd's of London insurers on Friday suggested investors were anticipating a $10 billion loss, but this implicit loss expectation has since increased, according to analyst Tom Dorner at Oriel Securities said.

"Based on the very limited information we have, I'd fall into the camp of those who say the losses are going to be more modest than horrendous," he said.

Ratings agency Fitch said it did not expect major downgrades to insurers' credit ratings as a result of the quake, but warned that some reinsurers could miss current earnings expectations.

Zurich Financial Services also said it was too early to estimate how it would be affected.


THE PULSE OF ECONOMIC DATA IN THE USA...confusing to us!  And economists, too!  How about trying new ideas for taxing?  Musical CEO GAME AT GOVERNMENT MOTORS - THE NEWEST GUY.  WHAT DOES CARLYLE GROUP HAVE TO DO WITH ANY OF THIS?

Vacant Stores By Town: New Britain Is Worst, Simsbury Best
By KENNETH R. GOSSELIN And DAN HAAR, kgosselin@courant.com
1:10 PM EDT, September 23, 2010

Which towns and cities have the highest vacancy rates for stores and restaurants? As expected, the worst performers tend to be the larger and lowest-income municipalities – but there are some exceptions.

Cities and towns in greater Hartford lost nearly 1 million square feet of occupied retail space between May 2009 and June 1, 2010, leaving a wide range of vacancy rates across the region. The study, released this week, was done by KeyPoint Partners in the 26 Hartford area cities and towns with at least 500,000 square feet of retail space. Data is not available for all locations.

Highest Vacancy Rates:

New Britain, 1.6 million square feet total, 22 pecent vacant

East Hartford, 2 million square feet, 21.3 percent vacant

Hartford, 2.7 million square feet, 19.3 percent vacant

East Windsor, 18.6 percent vacant

Berlin, 16 percent vacant

Vernon, 1.5 million square feet, 15.9 percent vacant

Bloomfield, 1.2 million square feet, 14.9 percent vacant

Manchester, 5.6 million square feet, 14.6 percent vacant

Avon, 13.7 percent vacant

South Windsor, 12.9 percent vacant

Lowest Vacancy Rates:

Simsbury, 6 percent vacant

Farmington, 2 million square feet, 6.5 percent vacant

Windsor, 7.4 percent vacant

Canton, 7.9 percent vacant

Enfield, 2.9 million square feet, 8 percent vacant

West Hartford, 2.75 million square feet, 8.8 percent vacant

Wethersfield, 9.2 percent vacant

Plainville, 9.2 percent vacant

Glastonbury, 9.9 percent vacant

Rocky Hill, 10.3 percent vacant



Pace car for the value of the dollar?

'Government motors' is still a lemon
NYPOST
By MARK MODICA
Last Updated: 6:01 AM, April 18, 2011
Posted: 10:19 PM, April 17, 2011

Fans of the federal govern ment's auto bailout will push the "GM comeback" story at this week's New York International Auto Show. Good luck with that one.

Taxpayers still own about 26 percent of GM, and it looks increasingly unlikely that they'll ever get their money back: The share price would have to rise to more than $54, and it's stuck in the low thirties. Here's why:

GM's management team lacks stability, with Dan Akerson being the fourth chief executive in less than two years (oh, and CFO Chris Liddell recently resigned).

One of Akerson's main focuses has been to ballyhoo the Chevy Volt, but Consumer Reports says GM's hybrid "just doesn't make a lot of sense." More important, it isn't selling -- only 1,210 Volts have sold this year through the end of March.

Akerson also likes to talk about China as GM's "crown jewel." Huh? The Chinese market is far less profitable than North America. Anyway, GM lost ground on both market share and profitability in China in the fourth quarter. (China first-quarter sales figures will be issued when GM reports earnings next month.)

GM's European division, Opel, continues to struggle. It's not clear when, if at all, Opel will get out of the red.

Adding insult to injury, Ford -- which avoided a federal bailout -- sold more vehicles than GM in March, for only the second time in the last 13 years. GM sales growth the month before was driven by incentives that were about $1,000 higher per vehicle than Ford and the industry average. This is an indication that Ford benefits from a stronger product lineup than GM.

Of course, part of GM's problem is that when it took a bailout from the Obama administration, it handed a trump card to Obama's stalwart ally, the United Auto Workers. The company's been unable to do much about its huge liabilities for UAW obligations and retiree pensions.

There are other problems. Rising gas prices are sure to hurt GM's more profitable truck and SUV lines, without doing much for the Volt. And GM is the only major automaker that relies on an outside source (Ally Financial) to finance the majority of its retail sales and dealership inventory financing. In-house ("captive") financing is generally thought to be crucial to any automaker's success.

More problems are already in the pipeline. The company's probably going to have to dilute its shares again: It recently laid the groundwork for further dilution by raising the number of authorized shares from 2.5 billion to 5 billion. I don't see how GM can meet its UAW pension obligations without issuing more shares -- but that will inevitably push the stock price even further below the $54 price that's break-even for the taxpayers.

Creditors of the old GM (Motors Liquidation Co.) will soon distribute warrants and shares for "New GM" that equal about 25 percent of outstanding shares -- further diluting the stock. And when they finally get their equity, the bondholders who were forced to wait when the feds bailed out the company are very likely to flood the market with sell orders. Even more selling will come from other major stockholders like investment banks, the US and Canadian governments and the UAW when the IPO lockup period expires on May 13.

Neither current management nor its government masters dare admit it, but the truth is obvious: The bailout's been a disaster for taxpayers and GM's pre-bailout stock- and bondholders -- and for GM itself.

Mark Modica was a business manager at a now-closed Saturn dealership in Chalfont, Pa., and then a steering-committee member of Main Street Bondholders, a coa lition of small GM investors.
Model corruption
NYPOST
By MARK MODICA & HAL JOHN
Last Updated: 10:31 AM, August 13, 2010
Posted: 11:48 PM, August 12, 2010

General Motors plans an initial public offering as soon as today -- a first step in the government's effort to sell its ownership stake to private investors. The IPO comes on the heels of a much publicized plant tour by President Obama, who'll certainly hail the stock sale as proof he made a smart decision by bailing out the automaker with billions of taxpayer dollars.

But, to us, the IPO will be proof of something else: a White House that purposefully trampled the legal rights of investors -- many of whom, like us, are small savers -- to benefit its political supporters. Rather than a model of success and foresight, the GM episode is a model of corruption and cronyism.

Let's review the sordid history. Last year, the federal government bought a majority stake in GM for about $50 billion -- a sum equal to GM's market capitalization in 2000, when it was making record profits.

It should hardly be a surprise that the new GM, with so much money to work with (plus a special $16 billion tax benefit) would start inching into the black again. After all, Ford, without government help, has posted after-tax earnings of about $4.7 billion for the first half of this year -- more than twice GM's, even with the $1.3 billion second-quarter profit that "Government Motors" announced yesterday.

The bailout's announced goals required a more limited intervention than what Washington concocted. For example, a deal could have been brokered with strategic investors, as in a normal distressed sale, with GM's assets -- including its valuable Cadillac and Chevrolet brands and an expanding foothold in China -- passing from weak hands to strong.

But the fact that the administration mainly solicited advice from bankruptcy experts, rather than those in industry, is evidence that alternative solutions weren't considered.

Instead, politicians ran the company their way -- raining taxpayer money on key electoral states like Michigan and rewarding their staunch financial backers in the United Auto Workers union.

The devil, in this case, was in the details of the bankruptcy plan that the government pushed through:

Bondholders -- investors ranging from large institutions to retirees just scraping by, who loaned GM a total of $27 billion -- received just 10 percent of the company. By contrast, the government's $50 billion gave it about 61 percent.

And the union -- in return for the $20 billion that GM owed its health trust -- got a remarkable 17.5 percent of the stock plus $2.5 billion in cash plus $6.5 billion in preferred stock carrying a dividend of about 9 percent.

In other words, the UAW got three to four times as much as the bondholders for a smaller claim on GM's assets. The union even boasted to its members in May 2009 that it had made no concessions on pay, health care or pensions in the restructuring.

In effect, the government divided up GM's creditors into favored and unfavored groups, then gave a fat stake in the reorganized business to the favored (a k a longtime Democratic Party donors). On top of that, Washington also ordered the shutdown of 1,650 GM dealers and another 1,000 Chrysler dealers as part of its takeover.

In last month's audit, TARP's inspector general criticized the Treasury Department for that very decision. Treasury didn't show why the cuts were "either necessary for the sake of the companies' economic survival or prudent for the sake of the nation's economic recovery." The move "substantially contributed to the accelerated shuttering of thousands of small businesses."

Remember this as the president brags about recent gains in auto-industry jobs: Even though some plants have added union jobs, many in the dealerships have been lost.

But our main concern is what happens going forward. A terrible precedent has been set.

Small bondholders are essential to funding US industry. How eager will they be to invest their savings after seeing how the administration misappropriated the federal government's vast power and ignored long-standing bankruptcy law to reward its supporters at the expense of the less powerful?

We're pleased that GM is making a profit and, with the IPO, taxpayers should get some of our money back. But the government takeover of GM absolutely should not be framed as a success or, worse, as a model for the future. It was political bullying at its worst -- an arbitrary action befitting a banana republic, and deeply unfair to small investors who expected their lawmakers to play by the rules.

Mark Modica was a business manager at a now-closed Saturn dealership in Chalfont, Pa.; Hal John is an executive-search consul tant in Chesterfield, Mo. Both were steering committee members of Main Street Bondholders, a coali tion of small GM investors.

Mixed Messages on the Economy
Weekly Standard
BY Irwin M. Stelzer
July 24, 2010 12:00 AM

“The Economy Is Back,” trumpets the upper left  corner of the cover of Time magazine. “The Economy Stinks,” moans the lower right corner. More professionally, Federal Reserve Board chairman Ben Bernanke tells Congress that most of the participants on the Fed’s monetary policy committee view “uncertainty about the outlook for growth and unemployment as greater than normal.” Titans of industry are also confused. They can’t decide whether to give more weight to the good news than the bad, and so they are sitting on $2 trillion in cash that, because of low interest rates, is earning almost nothing. They can’t even seem to find acquisitions that are both strategically sensible and well-priced.

Then there are the expert policymakers. The Organisation for Economic Co-operation and Development (OECD) and the Bank for International Settlements (BIS) are suggesting you lose sleep worrying about the inflation that they think will inevitably result from a long period of low interest rates and excessive money creation. But the International Monetary Fund wants central banks to keep interest rates low to offset the fiscal tightening it is prescribing for most countries. And just in case you have sorted that out, along come some experts, several of them high Fed officials, warning that we are fighting the wrong war when we worry about inflation. It is deflation that is looming, witness hints that price levels are declining. This, they say, is what really should keep you awake at night, since once it takes hold, deflation is terribly difficult to root out of the system, as Japan painfully learned.

What many believe to be the best leading indicator of all -- share prices -- is of little help. Companies announce earnings that beat expectations, and the prices of their shares drop. No sooner have analysts chortled about a triple-digit jump in the averages than they are explaining the next day’s even larger triple-digit decline.

President Obama professes satisfaction at the fact that the private sector has created new jobs in each of the past six months, and then presses Congress to pass a second stimulus because, it seems, the jobs market is weak. Bernanke says that because “financial conditions … have become less supportive of economic growth in recent months” the jobs market is weak he will keep interest rates “very low,” and then announces that he and his colleagues expect economic growth this year to come in at what I would term a satisfactory rate at 3-3.5 percent, and an even better 3.5-4.5 percent rate in 2011 and 2012.     

Then there is Congress. Its members are upset that banks are not lending more freely to the small businesses that account for a large portion of job growth, but pass a massive regulation bill that will undoubtedly cut into bank profits and ability to lend. Congress wants businesses to invest, but refuses to cut back the debt-fuelled spending that everyone knows will result in higher taxes on small businessmen. Lest a few entrepreneurs fail to notice, the president announces that he plans to do just that, if he can get a few reluctant Democrats to go along with the repeal of the “Bush tax cuts for the rich.” And last week, after months of railing against imprudent mortgage lending to sub-prime borrowers, politicians permitted government-owned General Motors to spend $3.5 billion to buy AmeriCredit, a company that specializes in car loans to sub-prime credit risks and in the securitization of those loans.

So don’t feel badly if you are confused by the signals coming from the economy and the pundits. If Bernanke and his gaggle of expert economy-watchers are more uncertain than normal, and corporate chieftains don’t know what to make of conflicting signals, and policy wonks conjure up conflicting tales of danger, you have every right to be confused.     

To add to uncertainty, we are in a pre-election period that is unlikely to bring out the best in the political class. Partisanship trumps the public interest, and will until the new congress is sworn in after the new year. Indeed, since defeated members return to their seats and can vote between the November elections and the seating of the new members in January, even the constraint that now exists from the need to obtain democratic legitimacy will be removed.

So, what to make all of this? First, don’t look for a certain guide to the economic future. There is none. You would do as well in predicting the future to engage in the minute inspection of the entrails of a goose as to pore over recent economic data.

Second, concentrate on the bits that are more rather than less certain:

Ø  The housing sector, afflicted with an excessive inventory of unsold houses and potential buyers made nervous by a weak job market, is not likely to recover very soon.

Ø  The jobs market, even if the Fed’s growth forecast proves correct, will improve only slowly, and the long-term unemployed will find it especially difficult to find work, as will poorly educated teenagers and adults.

Ø  Even if businesses do use their spare cash to make acquisitions -- it should come as no surprise if the pace of such deals accelerates -- that won’t do much to create jobs, and might actually produce cost-cutting lay-offs.

Ø  Small-businesses are more rather than less likely to remain on the sidelines, waiting to determine the cost implications of health care “reform” and, if passed, an energy bill, and to see just what the tax-raisers have in mind for them.

 But not all of the things that are more rather than less certain are on the gloomy side of the ledger:

Ø  Corporate earnings are surprisingly robust, adding to the cash piles that will sooner or later be spent.

Ø  Another meltdown of the financial sector is not in the cards.

Ø  Growth in Asia and Latin America is likely although not certain: much depends on whether China’s economy slows, as some are predicting.

Ø  The jobs market is more rather than less likely to improve, albeit slowly.

Ø  Inflation remains tame, permitting the Fed to keep interest rates low for what Bernanke calls “an extended period.”

Most important of all, as The Economist so well puts it, “America still towers over rivals in scientific virtuosity, military power, the vitality of democracy and much else.” That is what will matter in the long run.


Paul Volcker's take (from terrific New Yorker magazine article) on the financial overhaul bill here.
Paulson Likes What He Sees in Overhaul
NYTIMES
By ANDREW ROSS SORKIN
July 12, 2010

“The one thing you’re not going to get me to do is speculate.”

That is what Henry M. Paulson Jr., the former secretary of the Treasury, told me when I called him last week and posed this question: If the Dodd-Frank Wall Street Reform and Consumer Protection Act had been in place during his tenure, would the financial crisis — and the ensuing recession — have happened?

Given that President Obama is expected to sign the bill into law soon — the deadline keeps slipping — it seemed timely to ask the central government actor during the panic of 2008 what he made of the legislation and whether he thought, in practice, it would help us avoid another crisis.

Mr. Paulson, who was speaking by phone from his longtime home in Barrington, Ill. — he recently put his home in Washington up for sale — was initially reluctant to weigh in. He said he had not read all 2,000 pages of the legislation. But as he began talking, despite his insistence that he didn’t want to answer my question, he did exactly that.

“We would have loved to have something like this for Lehman Brothers. There’s no doubt about it,” Mr. Paulson declared about midway into our conversation.

He was referring to a provision of the bill known as resolution authority, which would enable the government to unwind a failing investment bank or insurance company in an orderly way without forcing it into bankruptcy, thus avoiding the unintended consequences that a bankruptcy might create. Mr. Paulson had spoken publicly about the need for resolution authority in June 2008, three months before Lehman’s failure, but did not believe it was politically viable to ask Congress for such powers.

As he recalled those sleepless days in September, he suggested that had he had resolution authority, he would have been able to take over Lehman Brothers and the American International Group without the financial system crumbling. (Of course, there remains a running debate about why Mr. Paulson didn’t seek to have the government bail out Lehman Brothers; he says he didn’t have the powers.)

I followed up by asking whether he believed he would have used the power to take over Morgan Stanley and then, perhaps, even Goldman Sachs. Would he have taken them over, too?

He said that he believed that if the government had had the authority to take over Lehman and A.I.G., it would have stopped the panic endangering other firms.

“It’s hard to believe that winding down Lehman in an orderly way would have put more pressure on Morgan Stanley than what happened,” he said.

But Mr. Paulson said that even more than the resolution authority, he saw the legislation’s creation of a systemic risk council as perhaps the most important aspect of the bill and crucial to preventing the next crisis. The council would give the various parts of government insight into what was going on elsewhere and the power to shut firms down or change practices that might put the system at risk.

“Some things would hopefully have been identified earlier,” he said. While his critics have contended that regulators missed warning signs about impending problems, he said he had little visibility into certain businesses, like A.I.G., until it was too late.

“I doubt that there is any regulator that had all the information that would have allowed something like what was happening at the A.I.G. holding company to have occurred,” he said.

But to fully prevent the crisis of 2008, he said, the Dodd-Frank act would have needed to have been in place not just before September 2008, but years earlier. He suggested it would have had to have been in place even before he joined the administration in 2006 to have had any effect.

“We’d have needed the systemic risk regulator up and running by 2005 or so, to recognize the dangers of ever more lax underwriting and intervene,” he said. His critics might say that his suggestions are a bit too convenient, but Mr. Paulson earnestly said that he and the Bush administration were blindsided by the development of the market for collateralized debt obligations and the importance of “repos,” or repurchase agreements, that kept investment banks afloat, often literally on a overnight basis.

Still, he said he was frustrated that the legislation had focused little on policy, specifically housing policy. “The root causes of all this are housing policies — not just Fannie and Freddie,” he said, referring to the giant mortgage companies. “That hasn’t been dealt with.”

But he did not seem surprised by that development — or lack of. “There’s plenty of blame to go around — the banks, investors, rating agencies, regulators. But let’s not forget policy makers,” he said.

One policy that Mr. Paulson was not so sure of was the so-called Volcker rule, which would largely prohibit banks from investing with their own capital and being in the business of hedge funds and private equity.

“Proprietary trading during the crisis that I dealt with wasn’t what created the problems at WaMu or Countrywide or Wachovia or Lehman Brothers or A.I.G.,” he said. “We were dealing with another set of issues.”

In the end, though, Mr. Paulson said that regulation on its own would not be enough to prevent another crisis. No, that will come down to people.

“As I’ve thought about it, this is very people-driven,” he said. “A lot of this is about the people who have the responsibility for the regulation when there isn’t a crisis and the people who have the responsibility during a crisis. Unless you believe that the big financial institutions were intentionally trying to blow themselves up, they were unable to spot a number of the issues.”

He continued: “I think it is asking a lot for regulators to be perfect — because they won’t be. But what you have here is a mechanism that gives regulation a much greater chance to be successful.”

Economy adds 431K jobs but few in private sector
YAHOO
By JEANNINE AVERSA, AP Economics Writer
4 June 2010

WASHINGTON – A wave of census hiring lifted payrolls by 431,000 in May, but job creation by private companies grew at the slowest pace since the start of the year. The unemployment rate dipped to 9.7 percent as people gave up searching for work.

The Labor Department's new employment snapshot released Friday suggested that outside of the burst of hiring of temporary census workers by the federal government many private employers are wary of bulking up their work forces.  That indicates the economic recovery may not bring relief fast enough for millions of Americans who are unemployed.  Virtually all the job creation in May came from the hiring of 411,000 census workers. Such hiring peaked in May and will begin tailing off in June.

By contrast, hiring by private employers, the backbone of the economy, slowed sharply. They added just 41,000 jobs, down from 218,000 in April and the fewest since January.

"Although the economic outlook is improving, the recovery is still pretty tepid," said Paul Ashworth, senior U.S. economist at Capital Economics.

The weakness in private hiring rattled Wall Street before the market opened. Stock futures tumbled and bond prices rose, as investors sought the safety of U.S. Treasurys.  The unemployment rate, which is derived from a separate survey than the payroll figures, fell to 9.7 percent from 9.9 percent. The dip partly reflected 322,000 people leaving the labor force for a variety of reasons.  All told, 15 million people were unemployed in May.

Counting people who have given up looking for work and part-timers who would rather be working full time, the "underemployment" rate fell to 16.6 percent in May from 17.1 percent in April. That reflected fewer people forced into part-time work. Still, the high underemployment figure shows how difficult it is for jobseekers to find work.  The number of people out of work six months or longer reached 6.76 million in May, a new high. They made up 46 percent of all unemployed people, also a record high.

Employers across a range of industries last month added jobs at a slower pace — or cut them. Factories, professional and business services, leisure and hospitality companies, and education and health care firms all slowed hiring. Financial services, construction companies and retailers all pared jobs. Government, however, led the way in hiring, adding a whopping 390,000 positions last month.

Job gains in April were the same as first reported, while payrolls in March were slightly less — 208,000 versus 230,000.  The prospect of persistently high unemployment is likely to prevent consumers from going on the kinds of shopping sprees they typically do during early phases of recoveries. That's a key reason why this recovery isn't as energetic as those usually seen in the past.

Workers did see wages rise modestly last month.  Nationwide, average hourly earnings rose to $22.57, from $22.50 in April. However, inflation was nibbling into paychecks. Over the past 12 months, wages rose 1.9 percent, while inflation was up 2.2 percent.

The unemployment rate in October hit 10.1 percent, a 26-year high. Some analysts think it could go a bit higher and peak at 10.2 or 10.4 percent by June. However, that's lower than some forecasts earlier this year of 11 percent. 


About 125,000 new jobs are needed each month just to keep up with population growth and prevent the unemployment rate from rising.

Hiring isn't expected to be consistently strong enough to quickly drive down the unemployment rate this year. Economists think the rate will remain above 9 percent by the November midterm elections. That could make Democratic and Republican incumbents in Congress vulnerable.

Only 20 percent of Americans consider the economy in good condition, according to an Associated Press-GfK Poll conducted in mid-May.

Chrysler LLC said and Ford Motor Co. last month announced plans to hire as auto sales have risen. But others are still laying off workers. Hewlett-Packard Co. said this week it is cutting 9,000 jobs in its technology services division. And chocolate-maker Hershey Co. may cut 600 jobs.
Trade group says service sector grows in May
YAHOO
By ALAN ZIBEL, AP Business Writer
3 June 2010

WASHINGTON – The U.S. service sector expanded in May for the fifth consecutive month, suggesting the economy will add more jobs and strengthen.

The Institute for Supply Management, a trade group of purchasing executives, said Thursday that its service index was unchanged at 55.4 in May, the same level as April and March. A level above 50 indicates growth.

ISM also says its jobs measure increased, reversing 28 months of contraction. Employers "are now starting to feel a bit more confidence as far as bringing back some jobs," said Anthony Nieves, a Hilton Worldwide executive who serves as chairman of ISM's non-manufacturing business survey committee.

The service sector is key for the economy as it accounts for about 80 percent of U.S. jobs excluding farmworkers. It includes jobs in such areas as health care, retail and financial services. The service sector has lagged behind the much smaller manufacturing sector in the recovery. Some economist said the level of growth last month wasn't fast enough to help the sector catch up.

"This report was somewhat disappointing in that while continuing to show expansion, there is little upward momentum" in the economy apart from manufacturing, wrote James Marple, senior US economist with TD Bank.

ISM said its measure of business activity rose for the sixth consecutive month. A measure of new orders dipped but still indicated growth. New orders signal future business.

Sixteen of the 18 industries ISM surveys said they grew in May. They were led by arts and entertainment, real estate, the information sector, agriculture, and management and back-office support services companies. The two that shrank were education, health care and social services.

Apology
Toyota probes Corolla steering, considers recall
YAHOO
By YURI KAGEYAMA, AP Business Writer
Feb. 17, 2010

TOKYO – Toyota is considering a recall of its hot-selling Corolla subcompact after complaints about power steering problems — another blow to the world's largest automaker already reeling from a string of recalls for safety troubles.

Despite pressure from some lawmakers, President Akio Toyoda said he won't be attending the U.S. congressional hearing on the automaker's quality lapses, entrusting the job to U.S.-based executives — though would consider an appearance if the committee requests it. He said he wanted to focus on improving quality worldwide.

"I trust that our officials in the U.S. will amply answer the questions," Toyoda said Wednesday in his third news conference in two weeks. "We are sending the best people to the hearing, and I hope to back up the efforts from headquarters."

He said Yoshi Inaba, who heads Toyota Motor Corp.'s North American unit, was more familiar with the U.S. situation and was the best executive to deal with the hearing. Toyoda said he was still making plans to go to the U.S. and dates have yet to be set.

But in an alarming disclosure that could widen Toyota's recall crisis, the executive in charge of quality controls, Shinichi Sasaki, said Toyota was taking seriously the complaints about power-steering problems in the Corolla, the world's best-selling car.

Speaking at Toyota's Tokyo office, Sasaki said the company was putting customers first in a renewed effort to salvage its reputation and would do whatever is necessary if a Corolla fix is needed.

He said it was still uncertain if a Corolla recall would be necessary, but it is an option the automaker is considering.

He didn't disclose model years or regions that could be affected and said there have been fewer than 100 complaints. Toyota sold nearly 1.3 million Corolla cars worldwide last year.

Drivers may feel as though they were losing control over the steering, but it was unclear why, Sasaki said. He mentioned problems with the braking system or tires as possible underlying reasons for the steering problem.

U.S. federal safety officials have also said they are examining complaints from Corolla owners about steering problems.

Toyota has already recalled 8.5 million vehicles globally during the past four months because of problems with sticking gas pedals, floor mats trapping accelerators and faulty brake programming.

Its once pristine reputation for quality has been hammered, and Toyota's share of the critical North American market has nose-dived. Last month was the first time since February 1998 that Toyota's monthly U.S. sales fell below 100,000 vehicles, according to Ward's AutoInfoBank.

Koji Endo, managing director at Advanced Research Japan, said the Corolla problems, if they expand into a recall, would deal another major blow to Toyota.

"If Toyota has to recall Corollas, I wouldn't be surprised if they have to recall more than a million units again. It's going to be another big, big negative," said Endo.

But others said Toyota was sending a message it was going to be quick and thorough about maintaining quality.

"It really shows the company has learned its lesson from the recall debacle by starting to announce every investigation far more quickly," said Ryoichi Saito, auto analyst at Mizuho Investors Securities Co. in Tokyo.

Analysts had mixed views about Toyoda's reluctance to show up at Congress — some critical but others saying it was OK.

Unlike Western chief executives, Japanese presidents are not always expected to be an authoritative figure and play more of a team leader role in a culture that values harmony and consensus. That role is even more pronounced for Toyoda, the grandson of the company's founder who holds special significance for rank-and-file workers and dealers in Japan.

The U.S. House Oversight and Government Reform Committee is holding a hearing on Feb. 24 on Toyota's gas pedal problems. The House Energy and Commerce Committee has scheduled one the next day.

Inaba, Transportation Secretary Ray LaHood and NHTSA Administrator David Strickland are expected to testify at both meetings. The Senate Commerce, Science and Transportation Committee has scheduled a March 2 hearing.

At Wednesday's news conference, a solemn Toyoda reiterated his promise beef up quality controls at the world's No. 1 automaker.

He promised a brake-override system in all future models worldwide that will add a safety measure against acceleration problems that are behind the recent massive recalls. The system is a mechanism that overrides the accelerator if the gas and brake pedals are pressed at the same time.

"We are not covering up anything, and we are not running away from anything," Toyoda said.

The automaker said it was also dealing with questions about whether the gas pedal flaw was electronic and reiterated its investigation has not found any electronic problems.

But it has commissioned an independent research organization to test its electronic throttle system, and will release the findings as they become available.

Scrutiny of Toyota is growing. The U.S. Transportation Department has demanded Toyota hand over documents related to its massive recalls. The department wants to know how long the automaker knew of safety defects before taking action.

Reports of deaths in the U.S. connected to sudden acceleration in Toyota vehicles have surged in recent weeks, with the alleged death toll reaching 34 since 2000, according to new consumer data gathered by the U.S. government.

Toyota told NHTSA in January that the problem appeared in Europe beginning in December 2008. Toyota has said it began fixes on that in August 2009, but the company failed to link that with gas pedal problems in the U.S., which surfaced in October 2009.

Toyota took full-page ads in major Japanese newspapers Wednesday to apologize for the recalls in Japan, which affect the flagship Prius hybrid and two other hybrid models.

"We apologize from the bottom of our hearts for the great inconvenience and worries that we have caused you all," the black-and-white ads say.

Previously...
Government-Owned GMAC Loses $5 Billion in 4Q
NYTIMES
By THE ASSOCIATED PRESS
February 4, 2010
Filed at 9:15 a.m. ET

DETROIT (AP) -- Home and auto lender GMAC Financial Services says it lost $5 billion in the last three months of the year, as losses from its mortgage operations kept the company in the red for another quarter.

GMAC is still working to sell its ResCap home lending division. The unit alone lost more than $4 billion during the quarter. GMAC also took a $3.3 billion charge related to its efforts to sell the unit. 

GMAC's fourth-quarter loss compares with a profit of $7.5 billion in the same quarter last year.

The federal government has poured $16.3 billion into GMAC to keep it afloat and is now its majority owner. The lender has been battered by the downturn in the housing market.

Treasury may be only seller in GM IPO: sources
YAHOO
By Soyoung Kim, Clare Baldwin and Kevin Krolicki
Fri Sep 24, 6:50 pm ET

NEW YORK/DETROIT (Reuters) – The United Auto Workers health care trust and the governments of Canada and Ontario may not participate in General Motors Co's (GM.UL) upcoming IPO in order to avoid taking a cut on the price of their shares, three people with knowledge of the matter said on Friday.

If GM's second and third largest shareholders opt to hold their shares beyond the IPO, that would leave the Treasury as the only stakeholder selling shares and could mean that the total value of the deal could be at the low end of market expectations.

The U.S. Treasury is still aiming to sell at least 20 percent of its stake in order to become a minority shareholder in the top U.S. automaker, five people familiar with the matter said.

The UAW's trust fund for retiree health care -- known as the VEBA -- and Canada together hold just under 30 percent of GM common stock as a result of the automaker's restructuring in a U.S. government directed bankruptcy in 2009.

Both VEBA managers and Canadian officials have raised the possibility of waiting until follow-on stock offerings in order to avoid offering the hefty discounts typically required for initial offerings, the sources said.

All of the people with knowledge of the discussions asked not to be named because preparations for the deal remain private and tightly controlled by U.S. securities laws.

IPOs are typically discounted 10 percent to 15 percent from theoretical fair value to reward investors for taking a risk on a new issue and pave the way for future stock floats.

In GM's IPO, the discount could be as much as 20 percent, sources have said. By comparison, follow-on offerings are typically priced just 3 percent to 7 percent below market.

Initial plans for the landmark IPO envisaged the two other major shareholders selling the same proportion of shares as the U.S. Treasury, which holds 61 percent of GM after its $50 billion taxpayer-funded bailout, sources had previously said.

All of the sources cautioned that no dollar amount has been set for the IPO, adding that the number of shares to be sold and the pricing will not be determined until after GM launches a roadshow for potential investors in early November.

The potential withdrawal by the UAW and Canada as sellers adds weight to the possibility that the offering could come in at the low end of the expected range. The GM IPO has long been seen as raising between $10 billion and $20 billion, making it one of the largest U.S. stock offerings ever.

Meanwhile, UAW President Bob King said on Friday that the union could use the GM IPO to pressure JPMorgan Chase (JPM.N) in a protest against JPMorgan's refusal to declare a moratorium on foreclosures in Michigan and as part of a labor dispute at RJ Reynolds. JPMorgan is one of the lead underwriters on the GM IPO.

GM and the U.S. Treasury have repeatedly declined to comment on the IPO.

A spokesman for the UAW's VEBA was not available for comment. The VEBA holds 17.5 percent of GM common stock. The governments of Canada and Ontario have 11.7 percent.

"We intend to maximize return for Canadian taxpayers and expect to reduce our ownership in GM as quickly as is appropriate," a spokesman for Canadian Industry Minister Tony Clement said in an emailed statement to Reuters.

U.S. auto sales have been weaker than expected this year and some analysts have also rolled back expectations for the strength of recovery in 2011.

The prospect that a follow-on stock offering could correspond to stronger signs of recovery for the industry and GM is a consideration that could lead the UAW and Canada to hold off from selling in the IPO, the sources said.

The U.S. Treasury, meanwhile, is still seeking to get below the 50 percent threshold if market conditions allow, to help distance GM from the "Government Motors" tag that critics have applied, the sources said.

With the approach of U.S. midterm congressional elections in November, the IPO remains a politically sensitive issue. The Obama administration is eager to paint the auto industry bailout and GM's IPO as a success in the face of continued voter skepticism.

GM needs to have a market valuation of about $67 billion if U.S. taxpayers are to break even on the common stock the Treasury still holds, according to an estimate prepared by Neil Barofsky, inspector general for the government's Troubled Asset Relief Program.

That excludes the $2.1 billion in preferred stock also held by the U.S. government.
EDITORIAL: Government Motors repayment fraud
The bankrupt automaker still isn't firing on all cylinders
Washington Times
April 23, 2010

General Motors lost $3.4 billion in the fourth quarter of 2009 and is still struggling to reorganize so the company can try to eke out a profit. This grim reality didn't stop GM from making hay last week for supposedly paying back a $6.7 billion government loan five years ahead of schedule. What was left unsaid was that the automaker used another kitty of taxpayer cash to pay off the earlier government loan. This is an accounting shell game, not progress.

Previously unreleased documents supplied to The Washington Times reveal that GM specifically used funds it received from the Troubled Asset Relief Program to pay off the government loan. According to Neil Barofsky, the special inspector general for TARP, $4.7 billion of $6.7 billion - 70 percent - of what GM paid back came from TARP money the company received. "The one thing a lot of people overlook with this is where they got the money to pay the loan," Mr. Barofsky told Fox News' Neil Cavuto on Wednesday. "It isn't from earnings." The numbers are based on a quarterly report Mr. Barofsky's office provided to Congress last week.

Jared Bernstein, chief economist and economic policy adviser to Vice President Joseph R. Biden Jr., disputes the special inspector general's findings. "That is not correct, I don't think that is correct," Mr. Bernstein told The Washington Times. "[General Motors] repaid with funds from their own cash accounts, from their own earnings." The cash used by GM to pay back the loan "is the property of General Motors, there is no question about that," he insisted. Some of the money used to pay off the loans may have originated from TARP funds, but "it is really hard to know," he equivocated, because the funds are mixed together and "it is like trying to put an omelet back together again."

The Treasury Department's press office also disagreed with Mr. Barofsky's characterization that GM paid off one credit line with another credit line. The watchdog, however, won't budge. When asked how to tell whether the $4.7 billion used to pay off the government loan came from TARP funds and not some other source, a spokesman for the Special Inspector General's Office explained: "We have a letter from General Motors requesting that they take the money out of escrow and pay the other debt down. And the money in the escrow was clearly TARP funding." That letter has been released by the Special Inspector General's Office.

Despite misleadingly rosy propaganda fed to the press, the sad saga of General Motors' transformation into Government Motors continues. As a ward of the state, GM has to do the bidding of its Washington masters and stay in lock step with the Democrats' claims about the company's condition. The truth is that GM's condition remains poor.

The only reason the company has been able to pay off its government loan is because the Obama administration has given GM more money than it has been able to spend. Hence, proceeds from one loan are sitting around to be used to pay down another loan. That's hardly evidence that GM has been a good investment. To the contrary, the shell game makes clear that the Obama administration is wasting billions of taxpayer dollars on a carmaker that is careening toward a cliff.
GM pays back government loans from US, Canada
YAHOO
By TOM KRISHER, AP Auto Writer
21 April 2010

DETROIT – General Motors Co. has repaid $8.1 billion in loans it got from the U.S. and Canadian governments, a move its CEO says is a sign the automaker is on the road to recovery.

CEO Ed Whitacre announced the repayments Wednesday at GM's Fairfax Assembly Plant in Kansas City, Kan., where he said GM is investing $257 million in that factory and the Detroit-Hamtramck plant. He was to meet with top lawmakers in Washington on Wednesday afternoon.  The White House pointed to GM's repayment of the loan and Chrysler LLC's posting of an operating profit in the first quarter of 2010 as concrete signs that the bailout of the U.S. automakers was working.

In a report, the Obama administration noted the American auto industry lost more than 400,000 jobs in 2008 and analysts estimated another 1 million would have been lost had GM and Chrysler been liquidated. In the past nine months, the White House said automakers have added 45,000 jobs, the industry's strongest job growth in nearly a decade.

"This turnaround wasn't an accident of history," White House economic adviser Larry Summers said in a blog posting.

GM got a total of $52 billion from the U.S. government and $9.5 billion from the Canadian and Ontario governments as it went through bankruptcy protection last year. At first the entire amount of U.S. aid was considered a loan as the government tried to keep GM from going under and pulling the fragile economy into a depression.  But during bankruptcy, the U.S. government reduced the loan portion to $6.7 billion and converted the rest to company stock, while the Canadian government held $1.4 billion in loans. Those loans were repaid Tuesday, five years ahead of schedule.

The automaker hopes to begin repaying the remaining $45.3 billion to the U.S. government and $8.1 billion to Canada via a public stock offering, perhaps later this year. The U.S. government now owns 61 percent of the company and Canada owns roughly 12 percent.

"Nobody was happy that GM needed government loans — not the governments, not the taxpayers and, quite frankly, not the company," Whitacre wrote in an op-ed article that appeared on The Wall Street Journal's Web site Tuesday night. "We believe we can best thank the citizens of the U.S. and Canada by making sure that their investments are hard at work everyday, building high quality, fuel-efficient vehicles."

The quality of U.S. vehicles got a surprising vote of confidence in a new poll. An Associated Press-GfK survey finds that slightly more Americans now say the U.S. makes better-quality vehicles than Asia, with 38 percent saying U.S. cars are best and 33 percent preferring autos made by Asian companies.  In a December 2006 AP-AOL poll, 46 percent said Asian countries made superior cars, while just 29 percent preferred American vehicles, reflecting a perception of U.S. automotive inferiority that began taking hold about three decades ago.

GM's investments in the Kansas and Michigan factories will not create any new jobs, but will preserve jobs at both plants. Both will build the next generation of the popular midsize Chevrolet Malibu.

The Kansas plant, which employs 3,869 workers, also builds the midsize Buick LaCrosse luxury sedan. The Detroit-Hamtramck plant, which has 1,048 employees, now builds the Cadillac DTS and Buick Lucerne large sedans and is gearing up to make the Chevrolet Volt rechargeable electric car.  During the financial crisis that led to GM filing for bankruptcy protection last year, the automaker closed 14 factories and shed more than 65,000 blue-collar jobs in the U.S. through buyouts, early retirement offers and layoffs. The company now employs about 40,000 hourly workers in the U.S.

Even the preservation of jobs is good news for a nation with an unemployment rate close to 10 percent.

Employers nationwide in March added 162,000 jobs, the most in three years. But the pace of the economic recovery and job creation won't be robust enough to quickly drive down the unemployment rate. It's been stuck at 9.7 percent for three months, close to its highest levels since the 1980s.

GM had made about $2 billion in loan payments to the U.S. government and $384 million to Canada in December and March, and had promised to repay the full loans by June. But company officials said sales of newer models have improved GM's cash flow and allowed it to make the remaining $5.8 billion in payments early.  U.S. Treasury Secretary Timothy Geithner said in a statement that he's confident GM is on a path toward viability.

"This continued progress is a positive sign for our auto investment — not only more funds recovered for the taxpayer, but also countless jobs saved and the successful stabilization of a vital industry for our country," he said in a statement.

The Treasury Department said total repayments under the Troubled Asset Relief Program, or TARP, now stand at $186 billion, with less than $200 billion in bailout money outstanding.  The government still has $2.1 billion worth of GM preferred stock, plus its 61 percent share of common equity, the statement said.  GM officials say the company's public stock offering will take place when the markets and the company are ready. They will not predict how much of the remaining government debt will be repaid from the stock offering, but said it likely will take years for the governments to divest themselves fully.

The stock offering hinges on GM posting a profit, which Whitacre has said could come this year. GM lost $3.4 billion in the fourth quarter of 2009 on revenues of $32.3 billion.

Page last updated at 23:42 GMT, Friday, 19 February 2010
General Motors boss Whitacre to receive $9m pay package
GM boss Ed Whitacre
Mr Whitacre will receive considerably more than his predecessor

General Motors (GM) has said chief executive Ed Whitacre will get an annual salary of $1.7m (£1.1m), plus $7.3m in shares at a later date.

The pay package was approved by the US Treasury, which spent billions of dollars bailing out the carmaker last year and now owns a large stake in it.

GM also said Mr Whitacre's predecessor, Fritz Henderson, is being paid $59,090 a month as an adviser.

Mr Whitacre took over as interim chief executive in December last year.

Last month, he was officially confirmed in the position on a permanent basis. He is also chairman of GM.

Mr Whitacre was appointed chairman by the US administration last year, having previously run telecoms company AT&T.

His salary compares favourably with that of his predecessor. In an agreement reached last October with the US government, Mr Henderson's pay was cut by 25% to $950,000, about half of what he made in 2008.

Collapsing sales during the economic downturn forced GM to turn to the US government for aid, but this could not prevent it entering bankruptcy protection in June last year.

It emerged from bankruptcy one month later, with the US government owning a 62% stake in the company.

In total, GM received some $60bn in government loans.


AP Source: GM Chairman to become permanent CEO
YAHOO
By TOM KRISHER, AP Auto Writer
January 25, 2010

DETROIT – General Motors Co.'s chairman and interim chief executive, Ed Whitacre Jr., will become the permanent CEO of the automaker, a person briefed on the matter said Monday.

The announcement will be made at an 11:30 a.m. Eastern news conference at GM's downtown Detroit headquarters, the person said.

The person, who asked not to be identified because the announcement had not been made, said Whitacre will say that he is taking the job for good, as well as give an update on GM's business plan.

Whitacre, 68, is a former CEO of telecommunications giant AT&T Inc.

He has been serving as interim CEO since the board ousted former CEO Fritz Henderson on Dec. 1. GM had hired a firm to conduct a global search for a successor.

Whitacre often says in a folksy Texas drawl that he knows little about cars. But he's already shaken up the company by hiring a new chief financial officer and transferring the old one to China, firing the Chevrolet and Buick-GMC brand managers, combining sales and marketing and consolidating control of GM's core North American market under one executive.

He also seems impatient to spur the plodding culture of GM, where decision by committee, an isolated upper management and fear of risk produced mediocre cars for years.

He wants to increase GM's sales and market share while shifting the company's focus to cars from trucks. And he aims to repay $8.1 billion in U.S. and Canadian government loans by the end of June.

Although GM had hired the search firm, there were strong signs that Whitacre would take the job permanently, or at least serve as CEO until the company is on solid enough ground to sell stock to the public in an effort to repay its government loans.

GM owes the U.S. government $52 billion that it used to survive and emerge from bankruptcy protection last year.

At his first meeting with GM's top executives after being named chairman last summer, Whitacre candidly said he likes to be in charge.

"I don't know how to be a chairman and not a CEO," a person at the meeting remembers Whitacre saying.

But he also has told employees and reporters that he would rely heavily on former Wall Street analyst Stephen Girsky and Vice Chairman Bob Lutz for advice in running the company.

Whitacre didn't realize how hard it would be to run the company as an interim CEO, and decided to take the job himself, said Gerald Meyers, a former chairman of American Motors Corp. who now teaches at the University of Michigan.

Having an interim CEO paralyzes the organization because workers tend to lie low to wait for the permanent boss, Meyers said.

"Therefore, his demands and requests and requirements are watered down a lot," Meyers said. "He realized if he's not going to run the joint, he shouldn't be there. So he finally stepped up."

Jeffrey Sonnenfeld, a professor at the Yale School of Management, said it was no secret that Whitacre wanted the CEO job when Henderson was ousted. He said it would have been difficult for anyone to take the post with Whitacre managing as chairman.

"The only surprise is that he wasn't transparent about his plans in the beginning. Why didn't he just assume command then?" Sonnenfeld asked. "His ambitions were clear from the beginning when he pulled the rug from beneath an extremely competent CEO."

Henderson, Sonnenfeld said, was leading a "remarkably, breathtakingly successful turnaround," yet was relieved of his command.

Whitacre, he said, retired too young and was looking for ways to spend his free time. Whitacre has said he was passing time using a bulldozer to clear brush at his Texas ranch.

Meyers, who knows Whitacre, said the move eliminates confusion among GM's ranks. And just because Whitacre is dropping interim from his title doesn't mean the search for a new CEO has ended.

"He doesn't have to stay forever — but that's always the case," Meyers said. "Now it's indefinite. It would be embarassing, two weeks from now, for him not be CEO. A decent amount of time is going to go by."

Earlier this month the GM board hired Microsoft Corp. CFO Chris Liddell to take the same post at GM, and Whitacre said Liddell would be a candidate to take the CEO post permanently.

Whitacre was chairman and chief executive of AT&T and its predecessor companies from 1990 to 2007. During his tenure, he led the company through several acquisitions and sales.

Whitacre also sits on the boards of Exxon Mobil Corp. and the railroad company Burlington Northern Santa Fe Corp.

In a wide-ranging talk with reporters at GM's Detroit headquarters earlier this month, Whitacre predicted that GM would be profitable this year, although he said that was dependent on the economy and other factors.

A full-year profit for GM, which left bankruptcy protection in July, would be the company's first since 2004 when it made $2.7 billion. It has posted more than $88 billion in losses since then.


Are you surprised?
GMAC to get $3.5 billion in added aid from government: report
Wed Dec 30, 2009 2:51 am ET

NEW YORK (Reuters) – GMAC Financial Services is close to getting about $3.5 billion in added aid from the U.S. government, on top of the $12.5 billion already received since December 2008, the Wall Street Journal reported.

The announcement is expected within days and will coincide with GMAC taking additional steps to absorb losses related to its mortgage operations, the Journal reported, citing people familiar with the situation.

One person told the Journal that the measure has been crafted to return the company to profitability in the first quarter of 2010.

The new capital will likely allow GMAC to avert placing its ailing mortgage unit, Residential Capital LLC, or ResCap, into bankruptcy, the Journal reported, citing these people.

"As we have previously stated, GMAC has been conducting a strategic review of its business and evaluating options to address the challenges at ResCap and the mortgage operations," said GMAC spokeswoman Gina Proia in an email statement.

"Critical objectives in the process would be to take actions that position GMAC for improved financial performance and to repay the U.S. government," she said.

GMAC did not detail any specific actions.

Payback Time: Many See the VAT Option as a Cure for Deficits
NYTIMES
By CATHERINE RAMPELL
December 11, 2009

Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services.

Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.

“We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.”

The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt.

Like universal health care, every other industrialized country in the world already has a value-added tax (as do about 100 emerging countries). And also like universal health care, this once-taboo policy option has recently been invoked, at times begrudgingly, by many prominent Washingtonians, including the House speaker, Nancy Pelosi; John Podesta, who was co-chairman of President Obama’s transition team; and two former Federal Reserve chairmen, Alan Greenspan and Paul A. Volcker

Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers.

Since then, federal spending has ballooned, while the government’s ability to raise taxes has become increasingly inefficient. Consider the page length of the tax code and tax regulations, which has expanded by more than 70 percent, according to Thomson Reuters Tax and Accounting. (There are more words crammed onto each page, too.)

The tax system is now a compendium of lobbied-for ifs, ands and buts. As the tax code has been embellished and then Swiss-cheesed, the portion of Americans footing the nation’s income tax bill has shrunk.

“There are many more deductions and credits, which can often encourage inefficient behavior such as tax shelters,” said Leonard E. Burman, a public affairs professor at Syracuse University, about the changes to the tax system since the 1986 reform. “The ideal tax system has a broad base — few deductions or exemptions — and low rates.”

Most of the rest of the industrialized world — including, most recently, Australia — has already taken this lesson to heart by imposing value-added taxes. Unlike income taxes, which are often front-loaded on the rich, then subsequently diluted, a value-added tax is paid by almost everybody. That broad base is one of its major advantages, and why the International Monetary Fund frequently recommends it to countries that need to raise money quickly.

What is good for economic purposes, however, can be bad politics, especially since Mr. Obama pledged not to raise taxes on the bottom 95 percent of Americans. (And many Republicans have pledged not to raise taxes on the bottom 100 percent of Americans.)

The value-added tax is also the darling of many economists for its bounce-a-quarter-off-its-abs efficiency. Its administrative costs to the government are generally low. It is also considered less of a drag on the economy over the long run than raising income taxes, which discourage people from saving money and thereby making capital available to businesses.

To understand why a value-added tax is considered so efficient, you have to understand how it usually works.

Imagine the production of a new dress, in three steps:

¶A fabric store sells a tailor enough silk to make one dress, at a total price of $10 before taxes;

¶The tailor sews a dress and sells it to Macy’s for $30 before taxes;

¶Macy’s then sells the dress to a shopper for $50, before taxes.

Let’s say the value-added tax is 10 percent. The government will collect some tax revenue in each step of the production process, from roll of fabric to cocktail-party scene-stealer, but each business in the chain gets credit for the tax already paid by other suppliers.

When selling the cloth to the tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of supplies the tailor purchases. The tailor pays the fabric store $11, and the store remits $1 to the government.

When the tailor sells his dress to Macy’s, he calculates the value-added tax as $3, or 10 percent of his $30 pretax price. Macy’s pays the tailor $33.

But instead of sending the full $3 to the government, the tailor gets to subtract the $1 of taxes he had already paid to the fabric store. So he sends $2 to the government.

When Macy’s sells the dress to a shopper, it adds another 10 percent, so the shopper pays $55, or $50 plus $5 in tax. That would be in addition to any state or local sales taxes consumers have to pay, depending on the locale.

Macy’s checks to see how much the previous companies in the supply chain — the fabric store and the tailor — have already paid the government in value-added taxes, and subtracts that from the $5. Macy’s ends up remitting just $2 to the government.

The government receives $5 total, or 10 percent of the final purchase price, but from three different businesses.

Although more complicated, value-added taxes are considered better than equivalent sales taxes — where the tax is levied only when the consumer buys a product — for two main reasons.

First, if a single business evades the value-added tax, the government does not lose a large portion of money, because it will collect taxes at other stages of production.

Since companies usually get credit for taxes already paid by their suppliers, companies will pressure other businesses in the production chain to prove they paid their taxes. That means the system is somewhat self-policing.

To some foes of big government, though, the efficiency of the tax is also its fatal flaw. Conservatives worry that it enables the government to raise money with such little effort that it will encourage Washington to spend even more.

On the other hand, liberals are wary of value-added taxes because they are regressive. Poor people spend a higher portion of their income buying things than the rich, meaning lower-income people would be disproportionately hurt.

That is why countries often make other major changes to their tax code at the same time.

In Australia, the government imposed a value-added tax in the middle of an overhaul of the system in 2000, which included making the income tax system more progressive. “Many countries with VATs have income taxes that start out at higher income thresholds,” said James Poterba, an economics professor at M.I.T. Combining a broad-based VAT with a steeply progressive income tax, he said, avoids affecting the poor too much.

But just as the income tax has been hollowed out by countless loopholes, so could a value-added tax. Many European countries, for example, have counteracted the regressive qualities of the tax by exempting broad categories of goods, like groceries and children’s clothing.

This always creates problems, economists say. Companies are tempted to mislabel their products so they can avoid the tax.

“What really is the difference between prepared food versus nonprepared food?” said Alan J. Auerbach, an economics professor at the University of California, Berkeley. “You start having to split hairs, and that can become quite complicated.”

Besides cheating the government of revenue, this sort of behavior also distorts what people choose to buy, causing a drag on economic development, Mr. Auerbach said.

Moreover, in some industries — like financial services — it is difficult to evaluate how much value is added because of the way they make their money.

The solution in many places, like New Zealand, is to exempt the financial services industry. But that might not go over well in a country whose federal debt has recently swelled precisely because of a major banking crisis.

Such political hurdles, along with a still-tentative economic recovery, make a consumption tax — or a tax increase of any kind — unlikely in the immediate future. But with economists like Kenneth Rogoff of Harvard predicting that federal tax revenues will need to rise by 20 to 30 percent in the next few years, politicians may hold their noses and decide this tax is the least worst option.

“Of course, we want to take down the health care cost, that’s one part of it,” Ms. Pelosi told Charlie Rose of PBS. “But in the scheme of things, I think it’s fair to look at a value-added tax as well.”


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Dubai debt fears hammer stocks
YAHOO
By Jeremy Gaunt, European Investment Correspondent
November 26, 2009

LONDON (Reuters) – Debt problems in Dubai hit financial markets across the board on Thursday, sinking global stocks, helping lift safe-haven bonds and taking the dollar up from a 14-year low against the yen.

Gold climbed to a new record high but fell back as the dollar rose.

Banking stocks came under pressure because of potential exposure to any bad debt in the Gulf, as did shares in European car companies, some of which are part-owned by sovereign wealth funds from the region.

Markets were also trading without much input from the United States, where it was the Thanksgiving holiday.

Dubai said on Wednesday it wanted creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.

The announcement triggered widespread concern about the once-booming Gulf region's financial health, although some investors differentiated between leveraged Dubai and other more solidly wealthy emirates and countries in the region.

But the worries fed directly into a general nervousness in financial markets about the real state of the world economy at a time when investors are also seeking to lock in 2009 profits.

"The Dubai story is weighing heavily on stock markets and people are looking to safe havens so there's some flight to quality again," said Charles Berry, a bond trader at LBBW.

Others, such as Royal Bank of Scotland, said Dubai's bombshell meant investors would now have to "re-appraise the quality of sovereign support for state-owned entities in the region."

Dubai sought to ease some concerns about international port operator DP World (DPW.DI), saying its debt was not included in the restructuring.

But markets stayed nervous and the cost of insuring debt through credit default swaps around the Gulf rose.




GM to end Hummer after sale to Chinese buyer fails
By DAN STRUMPF, AP Auto Writer
Feb. 24, 2010

DETROIT – General Motors Co. said Wednesday it will shut down Hummer after its bid to sell the brand to a Chinese company collapsed.

Heavy equipment maker Sichuan Tengzhong Heavy Industrial Machines Co. pulled out of the deal for Hummer, known for its hulking, military-style SUVs, because it was unable to get clearance from Chinese regulators within the proposed deal timeframe, the manufacturer said in a separate statement.

GM said it will continue to honor existing Hummer warranties.

"We are disappointed that the deal with Tengzhong could not be completed," said John Smith, GM vice president of corporate planning and alliances. "GM will now work closely with Hummer employees, dealers and suppliers to wind down the business in an orderly and responsible manner."

GM has been trying to sell the loss-making brand for the last year and found a suitor in Tengzhong, but resistance from Chinese regulators created difficulties from the start.

As recently as Tuesday, private investors were trying to set up an offshore entity in a last-minute effort to complete the acquisition ahead of a Feb. 28 deadline. That plan, along with other options, was unsuccessful, according to a person close to the situation. The person declined to be identified in order to speak more freely.

"There's no way forward with that," this person said. "We're out of time."

Hummer, which traces its origins to the Humvee military vehicle built by AM General LLC in South Bend, Ind., acquired a devoted following among SUV lovers who were drawn to the off-road ready vehicles. But the vehicles drew scorn from environmentalists and sales never recovered after gasoline prices spiked above $4 a gallon in the summer of 2008.

The H3, the most fuel-efficient vehicle in Hummer's lineup, averages about 16 mpg. The vehicles are built at GM's factory in Shreveport, La. GM sold just over 9,000 Hummers in 2009, down two-thirds from 27,000 the year before.

Hummer is the second brand after Saturn that GM has failed to sell as part of its restructuring. GM sold Swedish brand Saab to Dutch carmaker Spyker Cars NV earlier this year. Pontiac is being discontinued.

GM is focusing its efforts on its four remaining brands: Chevrolet, GMC, Cadillac and Buick.
GM, Tengzhong reach Hummer deal
YAHOO
By Matt Andrejczak, MarketWatch
Oct. 9, 2009, 2:17 p.m. EDT

SAN FRANCISCO (MarketWatch) -- General Motors Co. said Friday it has clinched a definitive agreement to sell its Hummer brand to Chinese firm Sichuan Tengzhong Heavy Industrial Machinery Corp.

The deal, which still needs to be approved by regulators in the U.S. and China, is expected to preserve more than 3,000 sales and manufacturing jobs in the U.S.

Tengzhong will acquire ownership of the Hummer brand, trademarks, and assume existing dealer network agreements. GM will continue to manufacture the military-styled sports utility vehicle until June 2011, with an optional one-year extension.

The purchase price was not disclosed. Tengzhong will acquire Hummer through an investment entity, in which it will hold an 80% stake. Private entrepreneur Suolang Duoji from China's Sichuan Province will own the remaining 20%.

When GM made its quick trip through bankruptcy this summer, the auto maker indicated that Hummer could fetch $500 million or more. Before the sale was officially announced, Reuters and Bloomberg, citing sources familiar with the deal, said Hummer would sell for about $150 million.

Tengzhong said in June that it had struck a preliminary deal to take over Hummer, the civilian version of a vehicle built for U.S. military use. Tengzhong makes heavy trucks and industrial equipment.

The state of Michigan has offered tax breaks for Hummer to build its headquarters, design and engineering facility in the Detroit suburb of Southfield.

The H2 Hummer is assembled in Indiana, while the H3 is made in Louisiana.

The outsized SUV hit hard times when fuel prices began to escalate and the economy cratered. Hummer's smallest model gets only 16 miles per gallon in combined city and highway driving. Sales took a big hit when gasoline prices topped $4 a gallon and came under renewed pressure as the economy tumbled into recession.

Through September, GM had sold only 8,193 Hummers in the U.S. this year, down 64% from the same period last year. In September, only 426 Hummers were sold nationwide, according to Autodata Corp.

Design changes are afoot to make the Hummer more fuel-efficient.

Hummer said it will offer an alternative fuel powertrain in every model and add E85 FlexFuel capability in the 2010 H3 and H3T models. The SUV maker also said it's working to get certified for a diesel H3 to be sold outside North America.

"Backed by a privately owned and well-capitalized company, we are going to be able to focus on providing customers with more efficient models that deliver Hummer's promise of authentic, purpose-built design and engineering," Hummer CEO James Taylor said in a prepared statement.

As part of its restructuring, GM slimmed down to focus on the Chevrolet, GMC, Buick, and Cadillac brands. Saturn and Hummer are among the four brands GM planned to eliminate or sell.

Last week, GM's deal to sell its Saturn brand to Penske Automotive Group fell apart when Penske failed to line up a replacement manufacturer. GM now plans to shut down the brand.


"You should never see how laws or sausages are made." 
If you didn't watch the CT Legislature on TV, you would have no way of knowing how hard they work!  UBS underattack?  Spain, Portugal near the brink, as well - and the woes of the Irish?

S&P cuts Cyprus' credit grade by a notch to BBB
YAHOO
By MENELAOS HADJICOSTIS - Associated Press
27 October 2011

NICOSIA, Cyprus (AP) — International rating agency Standard & Poors on Thursday cut Cyprus' credit grade by one notch to BBB, or two notches above junk status, over concerns about its banks' exposure to Greece's debt and delays in shoring up its public finances.

The agency also kept the eurozone member on CreditWatch negative, meaning that further downgrades are possible.

The Finance Ministry explained that the reason for the S&P downgrade hinged on the increased risk that Cypriot banks may incur greater losses from a steeper drop in the value of their Greek sovereign bond holdings as part of a Greek debt restructuring.

The ministry said that S&P also pointed to delays in adopting further measures to shrink the country's large deficit.

This is the latest in successive credit downgrades by all three major credit ratings agencies for the small island of 1 million people in recent months. The main reason cited is the exposure to Greek sovereign debt by the country's two largest banks — Bank of Cyprus and Marfin Popular Bank — estimated at a combined euro5 billion ($7.02 billion).

Moody's and Fitch ratings agencies have downgraded Cyprus to Baa1 and BBB respectively, while both have slapped the country with a negative outlook.

Bank of Cyprus and Marfin Popular said Thursday that they can cover needed capital buffers and are moving to boost their liquidity through a combination of measures including issuing convertible securities and profits.

The banks said a European Banking Authority stress test shows they require additional buffers of around euro1.47 billion ($2.06 billion) and euro2.1 billion ($2.95 billion) respectively.

The buffers are needed to raise banks' core Tier 1 capital ratio to at least 9 percent by the end of June under new EU rules aimed at staving off any debt crisis-induced credit crunch.

The Finance Ministry said according to S&P, key to Cyprus' credit rating stabilizing is for Cypriot banks to withstand steeper losses on their Greek bond holdings without resorting to state support.

Moreover, the euro18 billion ($25.27 billion) Cyprus economy which S&P projects will see flat growth this year and next, mustn't deteriorate as a result of the situation in Greece.

The government also needs to push through a package of spending cuts and tax hikes worth euro840 million ($1.17 billion) incorporated in the 2012 draft budget, despite opposition to a planned sales talks increase from 15 to 17 percent.

Finance Minister Kikis Kazamias said the measures are expected to shrink the deficit from the current 6.5 percent of gross domestic product to 2.8 percent next year.

"The government intends to take immediate and determined action and take all those necessary measures to achieve both fiscal consolidation as well as dealing with the financial system's challenges, in cooperation with the Central Bank," the Finance Ministry said in the statement.

The downgrades have impeded Cyprus from tapping international markets for loans as interest rates on its bonds have shot up dramatically. The island is turning to Russia for a euro4.5 billion ($6.32 billion) loan with a 4.5 percent interest rate to meet its short-term fiscal needs and to refinance maturing debt.

The Finance Ministry said S&P regards the Russian loan and an ongoing search for offshore natural gas deposits as positives, but not enough to buttress fiscal consolidation.

Ireland wants bank bondholders to share the pain
YAHOO
By Carmel Crimmins
27 March 2011

DUBLIN (Reuters) – Ireland's government wants to impose losses on some senior bondholders in Irish lenders to reduce the burden on taxpayers from a prolonged banking crisis, a senior minister said on Sunday.

Dublin wants to impose losses on banks' senior unsecured bonds not covered by a state guarantee, which currently amount to over 16 billion euros, as part of a new deal with the European Union, the European Central Bank (ECB) and the International Monetary Fund (IMF).

"A sustainable and comprehensive solution for Irish banking that involves recapitalization but also involves an element of burden-sharing ... That is certainly the outcome that the government is looking for," Simon Coveney, minister for agriculture, told state broadcaster RTE.

Under an EU-IMF bailout agreed late last year Ireland can impose losses on banks' junior debt, but the ECB is opposed to treating senior bondholders, which are ranked on a par with depositors, in the same fashion for fear of a contagion risk.

Ireland's new government, elected in February, has said the state cannot afford the current EU-IMF bailout deal and European finance ministers will decide on what sort of concessions they can offer Dublin in coming weeks.

They are awaiting the results of fresh stress tests on Ireland's banks, expected to show a capital hole of around 25 billion euros, on March 31 before deciding on any new deal.

Coveney said investors are already pricing in the possibility of a restructuring of senior bank debt given that it is trading at a discount in the secondary market.

"Markets are already ahead of us on this one. There is an acceptance that there is a possibility if not a likelihood that bondholders in Irish banks may have to share some of the pain," he said.

Analysts widely expect the government to impose losses on senior bondholders in nationalized lenders Anglo Irish Bank and Irish Nationwide because they have sold their deposits and are being wound down.

Hitting any unsecured unguaranteed senior bonds in Bank of Ireland and Allied Irish Banks (AIB), which amount to over 11 billion euros, would be more controversial.

Rumours that AIB was planning to miss a coupon payment on a bond, denied by the bank, helped send the yield on two-year Irish sovereign paper soaring to euro-era highs as investors feared a sovereign restructuring was in the works.

Moody’s Cuts Portugal’s Credit Rating
NYTIMES
By JAMES KANTER
July 13, 2010

BRUSSELS — Portugal’s credit rating was cut two notches Tuesday by Moody’s Investors Service, lending urgency to the discussions of E.U. finance ministers about how banks would be affected if a government were to default on its debts.  Moody’s said it was cutting Portugal’s sovereign bond ratings to A1 — still investment grade — from Aa2. It noted that the national debt had risen sharply relative to gross domestic product as a result of spending on economic stimulus measures, and it warned that weak growth would weigh on government finances for two or three more years.

The Portuguese Finance Minister Fernando Teixeira dos Santos said the downgrade, which followed cuts by other rating agencies, was expected.

“There is no point grieving over this,” Mr. Teixeira dos Santos was quoted as saying by The Associated Press in Lisbon. “We have to do what the markets demand, which is swiftly put our public finances in order.”

Meanwhile, officials in Brussels were discussing for a second day how many details to release from bank stress tests when the data are made public July 23. The tests are meant to reassure investors that a safety net of €750 billion, or nearly $1 trillion, will be enough to calm the debt crisis. But the results could also push banks to seek extra financing to increase the cushion against potential losses.

“The European banking sector is, over all, resilient,” Olli Rehn, the European commissioner for economic and monetary affairs, said Monday night. “At the same time, when we publish the stress tests we will have to prepare for any pockets of vulnerability.”

The euro fell slightly against the dollar Tuesday, partly on concerns about the results of the stress tests and warnings that more needed to be done to clarify how they were being conducted. But stocks rose, with the Stoxx Europe 600 index gaining 1.6 percent by early afternoon.  Countries in the European Union, along with the International Monetary Fund, created the superfund earlier this year to ease fears about mounting debt in Europe.

Some governments want the fund to be available for banks that fail their stress tests and that are unable to recapitalize in the markets.  Slovakia, however, has held up the formal activation of the fund. Its new government has sought negotiations on how much it will contribute.

Jean-Claude Juncker, head of the group of euro zone finance ministers, said that the issues raised by Slovakia could be resolved and that the fund would be “available without any doubt by the end of the month.”

Much of the concern in Europe has been about the Spanish banking sector, where the implosion of a housing bubble helped set off a deep recession and ensuing concern about the public finances.  But on Monday, the Fitch ratings agency said that even under extreme stress, Spain’s national fund for restructuring its banking sector would be more than adequate to cover potential losseson the domestic loan portfolio.

Mr. Rehn offered additional encouragement to Spain, saying that he expected “the same competent teamwork and resilience will be seen in the Spanish economy and its reforms” as had been displayed by the nation’s victorious soccer team Sunday night.  The stress tests on the health of 91 banks are being carried out by the Committee of European Banking Supervisors, which is made up of national regulators from across the European Union.

The list of banks includes most of the German Landesbanks, which have close ties to local governments, as well as numerous Spanish thrift institutions, or cajas.  Both categories are regarded as vulnerable, and investors and analysts have sought more detailed information on their holdings and liabilities.  The largest multinational banks in Europe will also be tested, including HSBC and Barclays in Britain, Deutsche Bank and Commerzbank in Germany, and Société Générale and BNP Paribas in France.

Banks in some Eastern European countries will be tested, including Poland, Slovenia and Hungary.




Basis economic theories of calculating GDP...
Sounds like China - and how about this - remember the solar breakthroughs in Spain???

As Spain Acts to Cut Deficit, Regional Debts Add to Its Woe
NYTIMES
By SUZANNE DALEY
December 30, 2011

FIGUERES, Spain — Facing a wider than expected budget deficit, Spain’s new government announced a $19.3 billion package of tax increases and spending cuts on Friday and admitted that the country’s finances were probably even worse because of overspending by the autonomous regions.

Spain’s new prime minister, Mariano Rajoy, said the austerity package was needed to maintain the confidence of European bond markets after it became clear that the budget deficit was expected to reach 8 percent of gross domestic product this year — two percentage points above the government’s target.

And while Spain’s overall fiscal status is nowhere near as dire as Italy’s, it has another problem all its own, as the new budget minister, Cristóbal Montoro, made clear Friday: serious budget shortfalls in its 17 autonomous regions, which have spent recklessly in the past decade.

Evidence of the regional profligacy dots the countryside. On the top of a hill here in the birthplace of Salvador Dalí, in northeastern Spain sits a giant, empty penitentiary.

But even without a single prisoner in residence, the prison is costing Spain’s heavily indebted regional government of Catalonia $1.3 million a month, largely in interest payments. If prisoners were actually moved in, it would cost an additional $2.6 million a month.

So it sits empty, an object of ridicule around here, often referred to as the “spa.”

Analysts say the mistakes are adding up. The Bank of Spain announced this month that regional debt had surged 22 percent, to $176 billion in September from $144 billion the year before. And some experts say that there remain tens of billions of dollars in “hidden” regional debt yet to be discovered.

The financial state of the regional governments is so bad, in fact, that some may be willing — maybe even eager — to shed some of their wide-ranging and costly responsibilities, like health care and education.

Much as the debt crisis is forcing the European Union to refashion its relationship with its member countries, stepping up oversight and control, some experts believe that some of Spain’s autonomous regions may be less so in the future.

“Whether publicly or not, some of the regional governments are saying: ‘Take this away from me. I didn’t realize how difficult it would be,’ ” said Ángel Berges Lobera, an economist at the Universidad Autónoma de Madrid and an expert on regional debt.

In recent years, the regions and municipalities have racked up debts, offering generous public services and investing in a wide range of projects, some of them bordering on the ridiculous, critics say.

Castilla-La Mancha, for instance, an agricultural region bordering Madrid, built itself an airport complete with a runway big enough for jumbo jets. But it may close soon, as no airline — even with smaller planes — is interested in flying there.

Municipalities have not done much better. They have also been accumulating debt, a total now of about $48 billion.

One town, Alcorcón, about 10 miles southwest of Madrid, spent $150 million on a cultural center, complete with a permanent circus and free birthday parties for its children.

“It’s been chaos out there,” said Lorenzo Bernaldo de Quirós, an economist who has been critical of Spain’s system of autonomous regions, a structure developed after Gen. Francisco Franco’s dictatorial rule ended in 1975.

And there is that “hidden debt,” most of it in unpaid bills, which is not included in Spain’s total national indebtedness of $915 billion. That could easily amount to $25 billion to $40 billion more, experts say.

And the bad news probably is not over. Some experts believe that as newly elected members of Mr. Rajoy’s Popular Party take control of some regional administrations, they are sure to unearth even more financial excesses. That is what happened in Catalonia, where the “hidden debt” problem first popped up this year. When elections were held there in 2010, the ratio of debt to regional G.D.P. was believed to be less than 2 percent. But after the vote, the departing government disclosed that its full year deficit could be 3.3 percent. The new government later revised that figure again, to 3.8 percent.

Experts believe that this kind of markup is possible elsewhere, including Andalusia in the south, which has Seville as its capital. “Andalusia could be spectacular,” Mr. de Quirós said.

Some areas, like the Basque region, which suffered particularly severe repression under Franco, pushed hard for the right to govern themselves. Now, however, the trend seems to be heading in the other direction.

One important factor favoring a redrawing of Spain’s system of autonomous regions was the landslide victory of the Popular Party. That gave the conservatives control over the central government and most regional administrations, something that had never happened before.

In the past, the regions and the central government, usually from opposite parties, could blame one another for whatever fiscal issues arose. But that is not going to work this time.

“They used to fight to tell the voters, ‘It’s not my fault,’ ” said Mr. Berges Lobera, the economist. “Now they can’t do that.”

Spain’s autonomous regions have huge responsibilities. They are generally in charge of administering schools, universities, health and social services, culture, development and, in some cases, policing.

The education and health care portfolios are particularly problematic, because those costs just keep growing. At the same time, some main sources of financing — taxes on real estate sales and building permit fees — have dried up with the collapse of the housing boom.

For that reason, some regions may actually want the central government to take health care and education back. In July, officials from the regions of Murcia, Valencia and Aragón suggested as much.

Catalonia, like the Basque region, remains fiercely independent. But it faces an uphill battle as it tries to get its budget under control. The prison in Figueres, which experts say was not needed, was not the only big project the region undertook in the last few years, arguing that public works would provide much-needed economic stimulus in the face of Spain’s high unemployment rate, currently 22 percent.

In addition to the prison, Catalonia started highway projects and a 30-mile extension of Barcelona’s subway system, which has now proved difficult to halt. “We have a lot of contractual obligations that don’t make these projects easy to stop,” said Albert Carreras, the secretary general of the regional Ministry of the Economy. In recent months, however, Catalonia has been slashing its budget in ways that other regions expect to have to follow soon, though like many other regional governments, it failed to meet its year-end targets.

The cuts have spawned a range of protests and strikes, involving even high school students, including those at the Institut Francesc Maciá, a secondary school on the western outskirts of Barcelona. When Adria Junyent, 17, found himself in a philosophy class so large that his teacher had to use a microphone to be heard, he organized a “sleep-in” in the auditorium.

“We were not the only ones with problems,” he said. “The chemistry classes had their budget cut for Bunsen burners. There are all kinds of cuts. This didn’t even happen under Franco.”
Spain Says Deficit Bigger Than Expected, Hikes Taxes
NYTIMES
By REUTERS
December 30, 2011

MADRID (Reuters) - Spain's new government said on Friday that this year's budget deficit would be much larger than expected and announced a slew of surprise tax hikes and wage freezes that could drag the country back to the centre of the euro zone debt crisis.

In its first decrees since sweeping to victory in November, the centre-right government said the public deficit for 2011 would come in at 8 percent of gross domestic product, well above an official target of 6 percent.

It announced initial public spending cuts of 8.9 billion euros ($11.5 billion) and tax hikes aimed at bringing in an additional 6 billion euros a year to tackle the shortfall.

"This is just the beginning ... We're facing an extraordinary and unexpected situation, forcing us to take extraordinary and unexpected measures," Deputy Prime Minister Soraya Saenz de Santamaria said.

Spain has been under market scrutiny over its ability to control its public finances, and Madrid has seen risk premiums soar to record highs on contagion fears as the euro zone debt crisis spread.

Ten days ago the Treasury said the central government budget deficit was on course to meet a full-year target of 4.8 percent of GDP, which analysts said would push Spain's overall public deficit above its 6 percent target for the year.

But the scale of the overshoot took some economists by surprise and led them to forecast a deeper recession, ending the year on a downbeat note for the euro zone as a whole.

"This is a strong shock. I didn't expect this kind of deficit increase. How can we achieve the objective using personal income taxes and capital taxes? This means making the recession much worse," economist at Barcelona ESADE university Robert Tornabell.

While Italy's debt mountain has been the biggest concern in financial markets in recent months, Spain had been seen as faring somewhat better. Measures taken by the previous Socialist government, while costing it the election, have kept the markets from pushing Spanish yields to unsustainable levels.

But as recession looms across the euro zone, the new government faces a rocky few years. After Friday's initial round of tax hikes and spending cuts, it plans to unveil a final 2012 budget by the end of March.

The Socialists cut the budget shortfall from 11.2 percent of gross domestic product in 2009, and the conservatives must take up the baton and bring the deficit down to 4.4 percent in 2012 and 3 percent in 2013.

If the final 2011 deficit hits the 8 percent mark, as the conservatives say, the government will need to make total savings worth more than 35 billion euros in 2012 to meet the official target.

TAX THE RICH

Spain's economy, the fourth-largest in the euro zone, is likely to have shrunk as much as 0.3 percent in the fourth quarter, Economy Minister Luis de Guindos said this week, and many economists expect output to keep shrinking in early 2012.

The collapse of the property market after the 2007 global credit crunch and shrinking consumer confidence have hit the economic cornerstones of construction and services, leaving Spain struggling to grow since emerging from recession in 2010.

Now, the euro zone debt crisis and fear of economic slump across the bloc has hit Spanish export growth, the only element of the economy to promote growth through 2011.

The tax hikes announced by the conservatives on Friday, which they have always said would be counterproductive to a struggling economy, will be aimed at the country's wealthiest.

The government froze civil servants wages, but also pledged to help the country's poorest by raising pensions and holding electricity tariffs steady for small consumers.

Beyond deficit reduction, the new government said it would concentrate its first few measures on the broken labor market, which has left Spain with an unemployment rate more than double the European Union average, and the banking system.

Spain has rapidly lost competitiveness since the birth of the single currency bloc as wages have followed a higher-than-average inflation rate, a situation the conservatives have pledged to changed through labor reform.

Spanish wages have risen by 20.8 percent in 2003-2008 compared to just 9.7 percent in Germany according to data from the IESE business school.

The government is in talks with unions and employers' representatives to produce a reform plan in the first two weeks of January.

Meanwhile, the banking system has been badly hit by the burst property bubble and new Prime Minister Mariano Rajoy has said the banks must be forced to announce losses on the housing market in a new step in the ongoing restructuring plan.

But some economists say that while Spain must reform and cut costs, its future depends on decisions by euro zone leaders on creating a viable backstop for troubled regional economies.

"There is very little that the Rajoy government can do on its own to bring down Spain's borrowing costs significantly, not least as its fiscal policies are going to depress growth further. The real challenge in Spain is to get the economy moving," said Spiro Sovereign Strategy's Nicholas Spiro.
Fitch downgrades Spain, warns of more cuts
Reuters
By Walter Brandimarte
7 October 2011

NEW YORK (Reuters) - Fitch on Friday cut Spain's credit ratings by two notches, just a few minutes after downgrading Italy, saying the intensification of the euro zone debt crisis has had a negative impact in the entire region.

The ratings agency cut Spain's credit ratings to AA-minus from AA-plus. It kept a negative outlook on the new rating, in a sign more downgrades are possible in the next couple of years.

Risks to the fiscal consolidation of Spain have risen as prospects for the country's economic growth declined, Fitch said in a statement.
Moody’s Puts Spain’s Debt on Review
NYTIMES
By JULIA WERDIGIER
July 29, 2011

LONDON — Casting a greater shadow over Spain’s economy, Moody’s Investors Service said Friday that it might cut the country’s credit rating in the coming months because of concerns about rising borrowing costs and the risk that private investors might have to bear some of the pain in any future bailouts.

Moody’s said it would consider cutting Spain’s long-term rating of Aa2 by only one level, which would still be a healthy investment grade.

The euro fell along with Spanish bond prices after the announcement, which comes as European leaders are trying to limit the prospect of the sovereign debt crisis, which has already ensnared Greece, Ireland and Portugal, from spreading to much bigger countries like Italy and Spain, both of which are struggling with weak economies.

Spanish and Italian bonds recovered slightly after a second European bailout for Greece was announced last week, but have dropped again this week as investors fret over whether the package will be sufficient and how long it will take to implement.

In its statement Friday, Moody’s wrote that the latest package could put additional burden on owners of Spanish debt because of the precedent set regarding the role of private bondholders.

As part of that bailout, banks and other private investors are to contribute about $72 billion by swapping their existing debt for new bonds with later maturities.

“Funding costs have been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments,” Moody’s said. “Pressures are likely to increase still further following the announcement of the official package for Greece, which has signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits.”

Moody’s on Wednesday cut the rating for Cyprus and Standard & Poor’s reduce its rating for Greece, already in junk territory, by another two notches to CC, saying Greece might still default on its debt.

Moody’s said on Friday that it would weigh any risks to Spain’s debt rating against its relatively low public debt ratio compared to other European Union nations, such as Greece. It also praised the central government for meeting its 2010 target for reducing its budget deficit and the implementation of economic and social measures, including recapitlizating the banking sector.

But, it said, “challenges to long-term budget balance remain due to Spain's subdued economic growth and fiscal slippage within parts of its regional and local government sector.”

It noted “positive signs” from the export sector but said domestic demand continued to be weak, in part due to the high unemployment rate.

The National Statistics Institute in Madrid reported Friday that the jobless rate fell in the second quarter to 20.9 percent, down from 21.3 percent in the previous quarter, but still the highest in the European Union.

Prime Minister José Luis Rodríguez Zapatero has cut wages and froze state pensions to reduce the government debt, but Spain’s financing costs surged again when European leaders failed to immediately agree on a bailout for Greece earlier this month.

Finance Minister Elena Salgado, speaking on Spanish radio Onda Cero, called on her E.U. partners to implement the decisions made last week in Brussels “more quickly” to reassure markets, Bloomberg News reported.

“Spain is on the right path for fiscal consolidation,” she said, while also noting that “Moody’s won’t take action” for another three months.
Caja Madrid said to ask for 3 billion euros of support
A string of downgrades hit the caja sector from S&P and Fitch
By Barbara Kollmeyer, MarketWatch
June 1, 2010, 10:03 a.m. EDT

MADRID (MarketWatch) -- The stream of negative news from Spain's savings bank sector continued on Tuesday, with a report that the second largest player, Caja Madrid, will tap the government for 3 billion euros ($3.6 billion) of rescue funds.

A spokesperson for Caja Madrid said the report that appeared in several Spanish newspapers saying it will ask for funds from the government's rescue fund was "speculation."

The savings bank said last Friday it was in talks to merge with several regional cajas -- Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja.

More bad news emerged for Caja Madrid when Standard & Poor's placed its A/A-1 long and short-term ratings on the savings bank on CreditWatch negative, saying it expects "pronounced pressure" on its operating profit this year and into 2011.

The negative status reflects the possibility of lowering counterparty credit ratings on Caja Madrid, though S&P said any downgrade is unlikely to exceed one notch. It's standalone credit profile and its hybrid securities could suffer a downgrade by one or more notches, warned the ratings agency.

S&P said Caja Madrid, Spain's fourth-largest banking group by total assets, will be closely monitored over the next 18 months to evaluate the magnitude of expected deterioration.

Downgraded on Tuesday was Spanish bank Banco Sabadell, the nation's sixth-largest group by total assets.

Fitch Ratings, who downgraded Spanish sovereign debt last Friday, cut its long-term debt rating on Sabadell to A from A+.

Fitch also downgraded Caja de Ahorros del Mediterraneo's long-term debt to BBB+ from A- with a negative outlook, and Banco de Valencia and Bancaja each to BBB from BBB+ with stable outlooks.

Caja de Ahorros del Mediterraneo is Spain's only publicly traded savings bank. Those shares (SIBE:ES:CAM) were down 0.2% in Madrid.

It wasn't all bad for Sabadell, whose shares were down 3.6% amid weaker Spanish and European markets overall from nearly the start of trading.

Fitch praised its "good domestic retail franchise, particularly with small to medium-sized enterprises, as well as its track record of sound pre-impairment operating profit, good cost efficiency and an improvement in regulatory capital."
Boxing in savings banks

Up until a couple of weeks ago, the term "caja", which literally means box or chest, was not such a familiar term with global investors, but many are now getting a crash course as news is rapidly spilling out from the sector.

Spain has 45 savings banks and an increasing number are now in merger talks -- ailing from the collapse of the housing market -- amid some estimates that the country has 30% more bank branches than it needs.

Pressure to merge and restructure has come from the International Monetary Fund and the Spanish government.

The government has set up a Fund for Orderly Bank Restructuring, or FROB, to speed along this process, and given the savings banks until June 30 to ask for the money they need.

The fund has a total value of €99 billion and is funded with €9 billion of capital and up to €90 billion of government-backed debt.

And concerns over cajas have added to pressure on Spanish stocks, over fears that caja bailouts will cost the government much more than it anticipates, at a time when it's struggling to bring down a budget deficit from 11.2% in 2009 to 3% in 2013 -- a requirement under euro-area membership.

After relatively light losses in the prior session with key U.S. and U.K. markets closed, Spanish stocks were sinking again Tuesday.

The IBEX-35 (SIBE:XX:IBEX) was down 2.6%, reflecting some of the biggest losses among European exchanges. See Europe Markets

Some of the losses are a hangover from last Friday after Fitch became the second major ratings agency to downgrade Spanish sovereign debt -- to AA+ from AAA.

Standard & Poor's cut Spain's debt rating back in April and other agencies have been expected to follow, with Moody's the last to keep its Spain rating at AAA.

Fitch believes that Spain's 20%-plus unemployment rate, the legacy of its construction boom and a high level of indebtedness, will weigh on private consumption and investment in the medium term, complicating matters for the government, which last week got its austerity measures passed in parliament by a single vote.

Fitch said the FROB fund should be enough to cover expected losses from Spain's banking sector, "using very conservative non-performing loss and loss-given default ratios, and assuming no pre-impairment operating profit nor support from existing shareholders."

The caja sector, it noted, is "more exposed to the real estate and construction sectors, which could weigh more heavily on its asset quality. Furthermore, the restructuring of this sector is progressing slowly, which could intensify constraints on the supply of credit and affect the pace of economic recovery for the country."

GREEK TRAGEDY?



Greeks Start 2-Day Strike as Aid Vote Nears
NYTIMES
By RACHEL DONADIO and NIKI KITSANTONIS
October 19, 2011

ATHENS — Skirmishes between demonstrators and police broke out outside the Greek Parliament at the start of a two-day general strike on Wednesday as tens of thousands of Greeks took to the streets in the largest demonstration in Athens in months, if not years. A crowd of dozens of youths took advantage of the moment to smash several storefronts and begin looting.  Local media put the crowd estimates at around 80,000 people; some news Web sites said more than 100,000. Police would not release official figures yet. The civil servants' union said some 500,000 people were involved.

 A spokesman for the Athens police said 16 officers were injured, one by stone-throwing demonstrators, and that three demonstrators were also hurt. There was no immediate information on arrests.

The protest, called by the country’s two main labor unions, aims at a new round austerity measures that the debt-ridden government must pass through Parliament on Wednesday night and Thursday to secure the next installment of aid from the European Union. Only that will avert a default next month that could shake the euro zone and reverberate through the global economy.  European Union leaders are preparing to meet Sunday to decide on the release of the installment, $11 billion, part of a $150 billion bailout engineered last year. They will also be looking at a much broader European rescue designed to protect the bloc should Greece default.

Shops, bakeries and gas stations closed. Most international travel was suspended, with all flights canceled, the national rail service halted and ferries moored in port. Public transportation was running on a limited service to enable workers to attend protest rallies. Tax offices, courts and schools shut down, hospitals were operating with only emergency staff and customs officials walked off the job.

Civil servants, who have been the most vociferous in their protests, continued sit-ins at ministries and state agencies, obliging government officials to meet in other venues including the Parliament building, which was the scene of violent clashes between protesters and police in June when the last set of austerity measures was voted into law.  The skirmishes came as small groups of demonstrators wearing hoods and armed with clubs and flags began throwing rocks at the police outside Parliament, who fired back tear gas. Some demonstrators set fire to a guard booth. Blocks away, demonstrators set fire to garbage dumpsters, which are piled high with trash due to a recent strike by garbage collectors.

Many in the crowds said they did not normally protest, but that the situation had evolved dramatically in recent months.

“We’ve reached a certain limit,” said Vasia Retsou, 30, a public school kindergarten teacher, who said she had come to protest for the first time, as she marched in a group of students.

Anastasia Dotsi, 70, a retired bank worker, said anger had driven her out to protest. “We have been crushed as a people,” she said. She said her son and daughter, who both work in the private sector, had not been paid in months and were struggling to pay their mortgages and support their families.

“There’s no precedent for this,” Ms. Dotsi added. “I have never been a leftist, I voted for Pasok” — the Socialist party of Prime Minister George Papandreou — “I consider myself a middle class person. But they’ve pushed us to become extremists.”

As she stood at the base of Syntagma Square, Maria Sarrafidou, 53, a psychiatrist, said that three psychiatric care centers where she had worked had closed down in recent months. At the same time, she added, she sees more patients in her private practice, but they pay her less.

“Mostly panic disorders,” she said. “In the last two years I’ve seen children and adults. They have no hope for the future. They wait and wait, this is the most difficult part,” she added. “They don’t know what’s going to happen.”

The two labor unions that called for the general strike, which represent about 2.5 million workers, are leading resistance to the new package of cutbacks. The measures include additional cuts in wages and pensions, thousands of public-sector layoffs and changes to collective-bargaining rules.

As in the last vote on austerity measures, in June, this round of Parliamentary votes is expected to be close. The governing Socialist Party has a fragile majority of four in the country’s 300-seat Parliament, and some lawmakers are said to be wavering. One legislator, Thomas Robopoulos, resigned his seat in protest on Monday, although he was replaced by another Socialist deputy and so his move did not narrow the government’s majority. Another, former labor minister Louka Katseli, has said she would reject one article in the bill on collective bargaining.

Resistance is limited, with most governing party legislators expected to approve the changes, and support from a smaller opposition party is possible. But the government was taking no chances. In a bid to galvanize support on Tuesday, Prime Minister George Papandreou appealed to Socialist lawmakers to put the common good above personal concerns.

“We must endure this battle so that the country can win, we must be calm and rise to the challenge,” he said, noting that passing the new measures were crucial to clinching crucial rescue funding from foreign creditors.

“The vote will boost our negotiating position, it will give us strength for the E.U. summit,” he said. The key goal for Greece, Mr. Papandreou said, was “to stay in the euro zone.”

Later on Tuesday, Mr. Papandreou met Antonis Samaras, leader of the conservative opposition New Democracy Party, but failed to gain his support. The prime minister was to meet with the heads of smaller opposition parties on Wednesday.
Moody’s cuts Greek rating, warns on precedent
Debt swap almost certain to result in default, ratings firm says
By William L. Watts, MarketWatch
July 25, 2011, 6:10 a.m. EDT

FRANKFURT (MarketWatch) — Moody’s Investors Service cut Greece’s credit ratings by three notches Monday, describing default as almost certain and warning that the new bailout plan for the country sets a negative precedent for creditors of other debt-strapped euro-zone nations.

Moody’s lowered Greece’s local- and foreign-currency bond ratings from Caa1 to Ca, one level above default, and assigned them a developing outlook.
Click to Play
Europe's Week Ahead: BP, Deutsche Bank earnings

Some of Europe's biggest banks will report earnings next week, including Deutsche Bank, UBS, Credit Suisse, and Banco Santander. In the U.K., oil giant BP PLC will release results on Tuesday.

European leaders last week approved a rescue plan that combines 109 billion euros ($156.5 billion) in fresh financing with an expected €37 billion debt relief from the private sector through a debt swap.

“The announced [European Union] program along with the Institute of International Finance’s (IIF’s) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%,” Moody’s said in a statement.

The downgrade and comments by Moody’s were credited with adding to pressure on European stocks, while peripheral euro-zone bond yields were on the rise.

The yield on 10-year Italian government bonds (ICAPSD:IT:10YR_ITA)  rose 13 basis points to 5.46%, according to FactSet Research data. The yield premium demanded by investors to hold Italian 10-year bonds over comparable German bunds widened 16 basis points to 2.66 percentage points.

The 10-year Spanish government bond yield rose 9 basis points to 5.84%, pushing the spread versus bunds to 3.04 percentage points. Yields move in the opposite direction of prices.

Fitch Ratings on Friday said the bond swap would constitute a “restricted default.” Fitch said it would downgrade Greece’s rating on the day the proposed exchange closes, then issue new ratings on the replacement bonds that would likely be “low speculative grade.”

Moody’s said it would also reassess Greece’s ratings after the debt exchange.
Bad precedent

In a separate report analyzing the impact of the rescue plan on other euro-zone countries, Moody’s said the precedent set by the bond swap means that the overall bailout program is “credit-neutral” for holders of sovereign debt issued by Ireland and Portugal.

For other high-debt euro-zone sovereigns, the “negatives will outweigh the positives and weigh on ratings in the future,” Moody’s said.

The warning, which echoes remarks by Fitch on Friday, comes despite European leaders’ insistence that the Greek debt swap won’t be applied to other countries.

Moody’s said that “despite statements to the contrary, the support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece.”

For Greece’s fellow bailout recipients Ireland and Portugal, the decision by European leaders to lower interest rates and extend the maturities of loans under the European Financial Stability Facility, offset the negative precedent, Moody’s said.

But for creditors of “other non-Aaa sovereigns with high debt burdens or large budget deficits, the positive elements of the announcement ... need to be weighed against the negative implications of this precedent-setting package should any country face financing challenges similar in severity to Greece’s,” Moody’s said.

“Call it a self-fulfilling prophecy or a vicious circle, but the rating agencies comments suggest that the likelihood is that over the medium term contagion has been increased by the events of last week rather than decreased,” said Gary Jenkins, head of fixed-income research at Evolution Securities in London.
Good for Greece

Moody’s praised the rescue program and the debt exchange for increasing the likelihood Greece will be able to stabilize and eventually reduce its overall debt burden. The company said the plan benefits all euro-zone sovereigns “by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt.”

But Greece will still face a tough time meeting challenges to its solvency, with its total debt load expected to remain well above 100% of gross domestic product for many years, the firm said.
Fitch calls default, Greece pledges no let-up on debt
YAHOO
Reuters
By Ingrid Melander and Patrick Graham
23 July 2011

ATHENS/LONDON (Reuters) - Fitch ratings agency declared Greece would be in temporary default as the result of a second bailout, which Athens said had bought it breathing space.

But the agency pledged to give Greece a higher, "low speculative grade" after its bonds had been exchanged and said Athens now had some hope of tackling its debt mountain, which most economists still expect to force a deeper restructuring in the future.

An emergency summit of leaders of the 17-nation currency area agreed a second rescue package on Thursday with an extra 109 billion euros ($157 billion) of government money, plus a contribution by private sector bondholders estimated to total as much as 50 billion euros by mid-2014.

Under the bailout of Greece, which supplements a 110 billion euro rescue plan by the European Union and the International Monetary Fund in May last year, banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower rates.

"Fitch considers the nature of private sector involvement... to constitute a restricted default event," said David Riley, Head of Sovereign Ratings at Fitch.

"However, the reduction in interest rates and extension of maturities potentially offers Greece a window of opportunity to regain solvency, despite the formidable challenges that it faces," he said.

The summit agreed the region's rescue fund, the European Financial Stability Facility, will be allowed to buy bonds in the secondary market if the European Central Bank deems that necessary to fight the crisis.

It can also for the first time give states precautionary credit lines before they are shut out of credit markets, and lend governments money to recapitalize banks, both moves which Germany blocked earlier this year.

German central bank chief Jens Weidmann was openly critical of the package, saying it shifted risks onto taxpayers in countries with stronger finances and weakened incentives for governments to keep their finances under control.

"This weakens the foundation for a currency union based on fiscal self-responsibility," said Weidmann, a European Central Bank policymaker, although he conceded the deal could help ease financial market tensions.

As part of the package, the euro zone leaders also made detailed provisions for limiting the damage of a temporary default -- the first in western Europe for more than 40 years.

"There is a great breath of relief for the Greek economy and this will gradually pass on to the real economy," Greek Finance Minister Evangelos Venizelos told reporters. "But by no means does this mean we can relax our efforts."

Riley told Reuters Greece may languish in default for only a few days and would likely get re-rated at single B or CCC.

Among other steps, the leaders agreed to ease terms on bailout loans to Greece, Ireland and Portugal; maturities will be extended to 15 years from 7.5 and interest cut to around 3.5 percent from 4.5-5.8 percent now.

Doubts remain about whether the plan went far enough to assure not only Greece's debt sustainability but that of Ireland, Portugal and other heavily indebted nations.

The package yielded "more than expected but not enough to make us sleep comfortably," Barclays economists said. They were disappointed that European leaders did not agree to expand a euro zone rescue fund.

The wider EFSF role is designed to prevent bigger euro zone states such as Spain and Italy from being shut out of markets because of fears of a weaker country defaulting.

Funds are sufficient so far but the burden could rise substantially. A precautionary credit line for a large country like Italy might total more than 500 billion euros over several years, overwhelming the EFSF's current 440 billion euros.

German Chancellor Angela Merkel said all euro zone debtors had to act decisively to repair their finances.

"Italy's austerity program was absolutely good. But it will be a process and demands further steps in the future," she told a news conference.

DEBT MOUNTAIN

French President Nicolas Sarkozy said the measures would reduce Greece's debt by 24 percentage points of gross domestic product from about 150 percent today.

That still leaves a colossal debt for an economy deep in recession with no recourse to a competitive devaluation.

What is more, the figures are based on what analysts say are optimistic projections for growth and returns from a sweeping privatization program.

"Our estimates suggest that Greek debt/GDP ratios will fall around 25 percentage points over 5 years as a result of these measures but will still be a whopping 120 percent in 2016 even assuming that the full 50 billion euros of privatization measures are implemented," analysts at JP Morgan said.

"We therefore believe that (bond) spreads will widen again as short covering dissipates and reality sinks in."

Greek, Irish and Portuguese bonds jumped before relinquishing their gains and traders said expectations of a larger restructuring down the road were undimmed.

The European leaders' promise of a "Marshall Plan" of European public investment to help revive the Greek economy may help, though details were thin.

Ratings agencies Standard & Poor's and Moody's are likely to follow Fitch's lead since banks and insurers are set to write down the value of Greek bonds by 21 percent, with more losses maybe to follow.

"We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65 percent," said Gary Jenkins, head of fixed income research at Evolution.

Shares in Europe's banks rose as it became apparent that the major players had limited their losses on Greek bonds to just over 5 billion euros.

The summit accord was based on a common position crafted by Merkel and Sarkozy in late night talks in Berlin on Wednesday with ECB President Jean-Claude Trichet.

The ECB relented and signaled it was willing to let Greece default temporarily as long as it was strictly a one-off.

But Fitch said it would expect similar private creditor involvement in any future help for Ireland and Portugal if they had not stabilized their finances by 2013.

Many economists believe the only way out of the euro zone's debt crisis in the long run may be closer integration of national fiscal policies -- for example, a joint euro zone guarantee for countries' bonds, or issuance of a joint euro zone bond to finance all countries. Germany has opposed this.

Sarkozy, at least, is looking to more sweeping reforms.

He said France and Germany would make proposals by the end of August on how to improve the governance of the bloc, to "clarify our vision of the future of the euro zone."

Merkel said she would not allow a union of automatic transfers from richer to poorer states. "This shall not happen according to my conviction," she told a news conference.
The Greek Way of Sorrow
How a charismatic politician with the slogan “Change” launched Greece on the path to ruin
National Review
Napoleon Linardatos
June 28, 2011 4:00 A.M.

Thirty years ago this fall, on October 18, 1981, a charismatic academic with rather limited government experience and with a one-word slogan, “Change,” was elected prime minister of Greece. His name was Andreas Papandreou. Greeks may now wish that 30 years ago they had had a Tea Party movement. Things could have turned out differently.

Thirty years ago, Greece was in an enviable position on the matter of national debt, with its debt just 28.6 percent of GDP. Few advanced countries can manage that kind of debt-to-GDP ratio. By the end of Papandreou’s first term in office, that ratio had nearly doubled, with debt at 54.7 percent of GDP. By the end of his second term, the figure was in the mid 80s.

The 1980s in Greece were a time of dramatic expansion of government. Papandreou and his Socialist party created a new government-run health-care system, dramatically expanded employment in the public sector, nationalized failing companies, and increased government handouts of every shape and form.

It was a government expansion so large and many-sided that in the end it generated a revolution of expectations and attitudes about the role of government in society. No government since then has been able to reverse that revolution, no matter how willing it was or how pressing the circumstances.

It is in this detrimental position that the current prime minister, George Papandreou, son of Andreas, finds himself. A sorry state of affairs created by one generation to be dealt with by another, the sins of the father to be paid for by the son — this is the material that Greek tragedies are made of.

The statism of the Eighties got another boost when subsidies from the European Union started to pour in, and yet another boost in 2001 when Greece adopted the euro and discovered that she could borrow at very cheap rates. The euro and the subsidies played the same role in Greece that oil has played in the Middle East: the lifeline of an unsustainable economic system, the enabler of a demagogic political class.

Now the Greek government finds itself with a debt-to-GDP ratio somewhere north of 140 percent and quickly rising. Since May of 2010, that problem has also become the European Union’s problem. Because Greece is a member of the EU and the eurozone, it is feared that her instability will lead to the destabilization of other weak members of the EU. Greece cannot go out to the markets to service her debt and finance her new deficits; that has become the care now of other nations’ taxpayers across the continent.

The agreement between the EU and Greece stipulated that Greece would drastically reduce her deficits in return for European aid. That was to be achieved by budget cuts and tax increases. The Greek government since then has mostly intended budget cuts and vigorously pursued tax increases.

Such an approach is not surprising considering the political clout that government employees enjoy in Greece. One of every four working adults is a government employee. The government at the beginning made some across-the-board cuts in salaries and pensions, but since then it has basically tried to address the issue of public finance with tax increases.

The absolutely dismal results of those tax increases have not persuaded the younger Papandreou and his colleagues to reduce the size of government and its tax, regulatory, and corruption burden on the economy. The Greek government employs lots of people, even by European standards; the increase in unemployment since the crisis started has come exclusively from the private sector. Finland may have the best educational system in Europe, but its ratio of students to teachers is double that of Greece, which has one of the worst educational systems. In area after area of governmental activity, Greece has the most people employed per population but also the worst results: a way-above-average number of tax collectors but very poor tax collection; an above-average number of policemen but dismal public order; a record number of local courts but perhaps the slowest justice system on the continent; a record number of hospitals but one of the worst systems of health care.

There are hundreds of governmental organizations that employ thousands of people and no one knows what they do, how they do it, or indeed if they do anything at all. Recently it was found that there was a government agency for the preservation of a lake that was drained decades ago.

Then there are the companies owned or controlled by the government. One of them is the Railroad Organization, which has annual revenues of €100 million, pays annual salaries of €400 million, and each year has a loss of about €1 billion. Now the government pretends that it is cleaning up the Railroad Organization’s finances by transferring the employees from the company to the central bureaucracy of the government. That kind of cleaning up would embarrass even an Enron executive.

On the other hand, the Greek government has no problem increasing taxes. Taxes on income and property, on sodas and swimming pools, on cars and natural gas, on corporate profits of years past, on everyone’s electricity bill. The Valued Added Tax (VAT) for many goods is now at 23 percent.

The Greek government finds itself in a very difficult place. It cannot continue to squeeze the private sector for more euros. The Greek private sector, which has become a kind of new serf class, is very weak and rapidly shrinking. On the other hand, the public sector — with salaries two and three times that of the private sector, plum benefits, egregious pensions, and early retirements — is just too politically powerful to be messed with. There is a solution to the Greek crisis; the only problem is that solutions in Greece tend not be to politically viable things.

Greeks like me cringe when we hear people like Paul Krugman lecturing Americans on how a government takeover in a certain sector of the economy will facilitate in the future reforms that are necessary now.

There stands Greece today, a year after it was bailed out by the taxpayers of other countries, facing the choice of reforming itself or going to utter ruin, and it cannot make up its mind.

The thirty years of hardcore statism have destroyed not only the economy of the nation, but also its ability to do politics, to articulate choices and ideas for the crisis at hand. Everything seems already decided, pre-determined, and set in stone, like the annual government budgets with their immovable expenditures tied to vote-rich constituencies.

Back in the mid-Eighties I was a primary-school student. I didn’t understand the politics, but I could feel the pathos of a country that had just “discovered” that there is a thing called a free lunch. Oftentimes, one is asked what one most missed having in one’s childhood. I couldn’t have told you at the time, but I can with certainty answer today: a Tea Party.

There are Americans who wonder what American exceptionalism is. I know.

— Napoleon Linardatos is a Greek conservative blogger 

No Greek Budget Cuts, No Bailout Aid-German Finance Minister
NYTIMES
By REUTERS
June 26, 2011

FRANKFURT (Reuters) - German finance minister Wolfgang Schaeuble warned that a veto of the Greek government's austerity plans by parliament this week could mean Athens will not receive a bailout tranche it needs to remain solvent.

"If the package is rejected, which no one expects actually, then the prerequisites would no longer exist for the IMF, EU and euro zone countries to release the next tranche of aid," he told German Sunday newspaper Bild am Sonntag.

Athens needs to get its fifth slice of a 110 billion euro (97.8 billion pounds) EU/IMF bailout worth 12 billion euros, without which the country would be unable to cover pressing funding needs after July 15.

"The stability of the entire euro zone would be in danger and we would need to quickly ensure that the risk of contagion for the financial system and other euro area countries would be contained," he said.

The Greek parliament is due to vote on Wednesday and Thursday on measures that include 6.5 billion euros worth of extra austerity steps for this year and savings of 22 billion euros for 2012-2015 to cut deficits and keep qualifying for EU/IMF aid. It also speeds up the sale of state assets under a 50 billion euro privatisation programme.

"We are doing everything to prevent the crisis from escalating, but we must be ready for everything. That's our responsibility and we are preparing ourselves for that," he said.

"I am confident that a majority can be found in the Greek parliament for the austerity package," Schaeuble added.

The PASOK part of Greek Prime Minister George Papandreou counts 155 MPs in a 300-strong parliament, but his already razor thin majority may be undermined by two announced defections.

In Bild am Sonntag, Finance Minister Schaeuble also said that he expected private sector creditors to participate willingly in a second bailout package, which is likely to be similar in size to the 110 billion euros of EU/IMF loans from May 2010 and should tide Greece over until the end of 2014.

"Stabilising the situation in Greece and bringing it under control is really in the absolute interest of all investors. Therefore the private sector doesn't need any additional incentives," Schaeuble said.

German banks, which say they have some 10-20 billion euros in exposure to Greece, have called for the state to guarantee their risk with taxpayer money should they participate in some form of a debt rollover.

ROLLOVER INTENTIONS

The industry association head of Germany's private lenders, Michael Kemmer of the BdB, told national daily Der Tagesspiegel that banks were pushing for better conditions since they had a fiduciary responsibility to their depositors.

"Were it to come to a lengthening of the bond maturities, it must be certain that the debt would have a higher standard of quality," Kemmer said in comments to be published on Monday.

On Friday, a senior German banking source said domestic lenders were still examining a variety of proposals and that they would not agree to commit to any rollover deal without a signal from ratings agencies that there would be no default.

German private creditors have been asked by the Finance Ministry to submit spreadsheets with data on their Greek exposure and their intentions to roll over the debt by Sunday evening, two sources familiar with the meetings said.

Separately, Welt am Sonntag wrote that as of Friday banks were only offering to grant a one-year extension, instead of the five that the German government wanted.

Speaking to Bild am Sonntag, Schaeuble also said that he was confident his coalition could muster up the votes necessary to approve the creation of the European Stability Mechanism (ESM), the permanent fund to finance euro zone sovereign bailouts that goes into effect in 2013.

"I don't have the slightest doubt that once the summer break is over the treaty over the European Stability Mechanism finds a sufficient majority in the Bundestag and Bundesrat," he said, referring to the upper and lower houses of parliament.

(Reporting by Christiaan Hetzner; editing by Sophie Walker)
Some Greeks Fear Government Is Selling Nation
NYTIMES
By RACHEL DONADIO and STEVEN ERLANGER
June 22, 2011

ATHENS — They are the crown jewels of Greece’s socialist state, and they are now likely to go to the highest bidder: the ports of Piraeus and Thessaloniki; prime Mediterranean real estate; the national lottery; Greek Telecom; the postal bank and the national railway system.

And then comes the mandated deeper round of austerity measures, which will slash the wages of police officers, firefighters and other state workers who are protesting in Athens, and raise the taxes of citizens already inflamed by a recession-plagued economy and soaring joblessness.

After winning a pivotal confidence vote on his new cabinet on Tuesday, Prime Minister George Papandreou now has an even tougher task: to carry out a radical remedy of forced auctions and fiscal austerity for a sickened economy already in a deep slump.

The European Union, the European Central Bank and the International Monetary Fund, known as the “troika,” say that is the only way out for a heavily indebted Greece, while some economists say the program resembles medieval bloodletting — a dose of pain highly unlikely to revive the patient.

Mr. Papandreou’s first task is to persuade his governing Socialist Party to pass a bill that would save or raise about $40 billion by 2015, equivalent to 12 percent of Greece’s gross domestic product, through wage cuts and tax increases, at a time when the economy is shrinking.

To put that in perspective, spending cuts and tax increases of a similar scale in the United States would amount to $1.75 trillion, considerably more sweeping than even the most far-reaching proposals for reducing the American federal budget deficit. And Greece has promised to generate another $72 billion by selling off prime state assets, which many Greeks consider a fire sale of national patrimony.

While the commitment to austerity will allow Greece access to a fresh infusion of international aid, a growing chorus of economists say that the government’s new program will at best delay default and a restructuring of its debt, which is already more than 150 percent of the country’s gross domestic product. Steeper budget cuts and tax increases, they say, are the enemy of economic growth, which Greece desperately needs to make its debt burden lighter.

“You cannot keep on milking the cow without feeding it,” said Konstantinos Mihalos, the president of the Hellenic Chamber of Commerce in Athens.

In fact many economists fear Greece has already entered a “debt trap,” where paying the interest on its mound of debt requires more and more loans. “The Greeks have been told to accept more of the medicine that has already failed to treat the disease,” said Simon Tilford, chief economist at the Center for European Reform in London.

The Greeks have already reduced their deficit by five percentage points of the gross domestic product, “unprecedented cuts in a modern economy,” Mr. Tilford said. “But the cuts have had a much stronger negative impact on the economy than the troika imagined, and fiscal austerity has pushed the economy deep into recession. Debt can only be paid out of income, and that means growth.”

Greece does not have access to many tools to fight recession, like devaluing its currency or cutting interest rates, at least as long as it remains a member of the euro zone. Its monetary policy is controlled by the European Central Bank.

Some independent economists accept that Greece has no choice but to try a fresh round of cuts. Edwin M. Truman of the Peterson Institute for International Economics in Washington said Greece had to go through more pain because it had run a budget deficit even before making payments on its debt, meaning it needed loans to pay off its loans.

Only after Greece reorganizes its budget, tax collection and labor market and is running a surplus — not including interest payments on the debt — can economists begin to calculate how much in debt payments Greece is actually able to afford, and then figure out how big a debt restructuring it needs.

“As long as they’re running a primary deficit, they need to keep tightening the belt,” Mr. Truman said. “Rescheduling now doesn’t relieve Greece of the burden of fixing the economy to create a surplus.”

It is not getting any easier. In the year since its first bailout, Greece has cut $17 billion through across-the-board wage cuts, layoffs and attrition in its bloated state sector, which employs 800,000 people, a quarter of the Greek work force. But given its recession, the economy shrank and tax revenues fell, meaning that Greece did not meet the original target of a government deficit of 9.1 percent of G.D.P. as agreed with its foreign lenders, prompting them to demand more cuts.

European demands have placed Mr. Papandreou in an increasingly untenable position. He must sell the increasingly restive Greek people on more austerity with no clear signs of recovery. And he has to persuade his Socialist Party on reforms that undo almost everything the party has stood for in the past.

At least one Socialist member of Parliament, Alexandros Athanasiadis, has already announced that he will not vote for the new austerity measures, citing his opposition to selling part of the state’s stake in the electricity utility whose power plants dominate his district in northeastern Greece.

On Wednesday, members of the public power company union, Genop, occupied the Transport Ministry and orchestrated some power failures to protest the sale, which seeks to reduce the state’s stake to 34 percent from 51 percent in the profitable company.

To many Greeks, selling that and many other state-owned companies and assets, even those that currently lose money, is tantamount to a loss of sovereignty — especially if wealthy investors from Germany and the other big European powers pushing austerity of Greece end up purchasing the assets for a hefty discount.

“We’ve always been advocates of privatization because the national state cannot play the role of the entrepreneur and has in fact proven to be a complete disaster every time they attempt to do so,” said Mr. Mihalos of the Athens Chamber of Commerce.

“But at these extremely low levels, especially for those companies quoted on the stock exchange, we have to be very wary,” he added. “If we go by today’s values, as a result of the recession and the crisis the country finds itself in, it will be really selling the crown jewels at a pittance of their cost.”

Mr. Papandreou’s government has not managed to make a convincing case for the sell-off to many Greeks, where the idea of a fire sale has taken hold, setting off a wave of national indignation. “Imagine if you asked me for my apartment, and I gave you the whole building,” said Dorothea Ekonomopoulou, a public school teacher in Athens, as she stood among demonstrators in Syntagma Square this week.

Rachel Donadio reported from Athens, and Steven Erlanger from Paris.
The Great Greek Illusion
NYTIMES
By ROGER COHEN
June 20, 2011

LONDON — Greece has long held emotional sway over Europe. All the cradle-of-Western-civilization talk earned it leniency, even indulgence. The European Union was not ready to go mano-a-mano with the birthplace of democracy.

Past glory is a wonderful thing — and a lousy guide for present policy. That’s true in the Holy Land, in Kosovo and in Athens. Greece should not have been allowed into the euro. It failed to join in 1999 because it did not meet fiscal criteria. When it did meet them in 2001, the fix came through phony budget numbers.

But Europe’s bold monetary union required an Athenian imprimatur to be fully European. So everyone turned a blind eye.

In fact, recent history would have been a much better guide. Greece has had an awful past century. Let’s begin with the wars of 1912-13 that wrested northern Greece from Ottoman control. Then came the massive population exchange, or “ethnic cleansing,” negotiated at Lausanne in 1923 under which about 400,000 Muslims were forced to move from Greece to Turkey and at least 1.2 million Greek Orthodox Christians from Turkey to Greece.

That upheaval was followed by the 1930s dictatorship of General Metaxas; the brutal German occupation of 1941-44; and a devastating civil war in the late 1940s that bequeathed an ideological struggle between left and right whose visceral quality endures.

The rightist military dictatorship of 1967-74 that rounded up and exiled leftists fanned the embers of the civil war. The ongoing conflict with Turkey over Cyprus, involving its own “population exchanges,” ensures the memory of 1923 has not been entirely laid to rest.

So forget Socrates. Read Bruce Clark’s excellent “Twice a Stranger” on the effects of the Lausanne population exchange and the psyche of modern Greece. Clark writes of Greece as a society “where blood ties are far more important than loyalty to the state or to business partners.”

That’s not a state of mind conducive to tax-paying, collective effort or balanced public finances. It doesn’t rule them out but it doesn’t help. It’s no surprise that Greece took the euro as a means to live on the never-never — ending up with a debt load equivalent to 150 percent of gross domestic product and rising.

Yes, E.U. membership provided some balm to Greek wounds. That’s the great merit of the E.U.: It detoxifies history. But Greece remains a nation suspicious of outsiders — when you’ve been lorded over by the Ottomans you don’t want to be lorded over by central bankers — and a place where state structures command scant loyalty.

That does not bode well. It suggests the latest bailout, after the $158 billion last year, may just be good money chasing bad.

I’ve never seen Europe in such dire straits. Greece is full of the aganaktismenoi , or the outraged, who resent the sharp cuts and sales of state industries made necessary because there is no drachma to devalue in order to regain competitiveness.

Like protesters in Spain, they feel the poor and unemployed are paying for the errors of politicians, the evasions of the rich, and the whole globalized system that rewards the tech-savvy initiated while punishing those left behind.

Their anger is understandable.

In many ways the euro crisis, the European crisis, is an apt symbol of our times. A borderless order conceived by technocrats, sustained over a heady period by low interest rates, appreciated by the moneyed classes who made more money, is today facing popular revolt combined with the relentless pressure of its contradictions.

Strikes and violent protest are one measure of a Europe that now leaves many citizens unmoved by the great achievements of European integration. Open borders are beginning to close again. Turkey is turning its back on the Union. Germany has checked out from its postwar European idealism. America lambasts Europe for its military fecklessness. Many Greeks and Spaniards feel Europe is no more than a scam.

The bottom line is this: A monetary union among radically divergent economies without the buttress of fiscal or political union has no convincing historical precedent.

For a while, the easy-money boom allowed everyone to overlook the fact that peripheral economies like Greece’s or Portugal’s were not gaining competitiveness or “converging,” but amassing unsustainable deficits and debt. Now the hard facts are plain.

Given explosive Greek politics, German exasperation and the limits of what the Greek people will accept, I think the best imaginable outcome over time is probably an orderly Greek default rather than a disorderly one.

There’s simply no readiness to take the fundamental steps — like approving the issue of “E-bonds” underwritten by all the euro area’s taxpayers or the creation of a European Union finance ministry — that would convince markets the euro zone is ready to assume the logic of monetary union. As a result, the trends already evident — away from convergence — will continue over time.

Greece was not ready for the euro. Its classical past was of less relevance than its recent past. A lie is like a snowball: The longer it rolls, the bigger it gets. No salvage operation can hide that.
S&P slashes Greece to lowest, says default likely
YAHOO
By George Georgiopoulos and Walter Brandimarte13 June 2011

ATHENS/NEW YORK (Reuters) – Greece became the lowest-rated country in the world in the rankings of Standard & Poor's on Monday, putting it below Ecuador, Jamaica, Pakistan and Grenada.

The rating agency cut Greece three notches and warned it would view a likely debt restructuring as a default.

This was the latest blow for the country's Socialist government, which is scrambling to push a new austerity package through parliament to clinch continued funding under a year-old bailout plan despite rising public discontent.

Barely a year after Athens was granted a first 110-billion-euro aid package, the European Union, the IMF and the European Central Bank are working on a second funding deal.

Meanwhile, European banks holding Greek debt appear to be moving toward agreement on buying new bonds to replace those they hold that reach maturity.

S&P said European policymakers looked increasingly likely to impose a restructuring of Greece's debt -- either via a bond swap or by extending bond maturities -- as a means of having the private holders of Greek bonds share the burden.

"In our view, any such transactions would likely be on terms less favorable than the debt being refinanced, which we, in turn, would view as a de facto default according to Standard & Poor's published criteria," the agency said.

In such a case, S&P added, Greece's credit rating would be lowered to "selective default," or SD, while the ratings on the country's debt instruments would be cut to D.

It cut Greece's long-term sovereign credit rating to CCC, four steps away from default, from B. The short-term rating was affirmed at C and all ratings were removed from credit watch.

The move takes S&P's rating of Greece one notch below Moody's Caa1, while Fitch ranks Greece at B+. This makes Greece the lowest country in S&P's rankings.

S&P said the outlook on the long-term rating remained negative, a sign that another downgrade is likely in the next 12 to 18 months.

GREECE'S WILL TO STAY IN EURO

Reacting to the downgrade, Greece said the move by Standard & Poor's overlooked the government's commitment to carry on with tough fiscal efforts to repair public finances and remain a member of the 17-member euro currency club.

"The decision also overlooks the government's moves to avoid any problems relating to Greece's contractual obligations, as well as the will of all Greeks to plan our future inside the euro zone," the Finance Ministry said in a statement.

Several banks have come out publicly in favor of rolling over their holdings of Greek debt, including France's Credit Agricole, which owns Greek bank Emporiki.

Germany's banking association said on Saturday it backed the idea of private creditors participating in the rescue.

The banks' participation would be part of a second bailout for Greece worth around 120 billion euros aimed at giving Athens more time to tackle its 340-billion-euro debt load, under the assumption that it will not be able to borrow on international markets this year or next.

Concerns that a second rescue may trigger a credit event drove the cost of insuring Greek government debt against default to a record high of 1,600 basis points on Monday.

Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit, meaning it costs 1.6 million euros to protect 10 million euros of exposure to Greek bonds.

The U.S. stock market briefly turned negative and the euro pared gains against the dollar after the downgrade. Brent crude also fell after the move increased investors' nervousness over the economy and oil demand.

There are differences between the leaders of European Union states and the ECB, which remains opposed to private sector involvement in any Greek debt restructuring, saying it may set off a chain reaction in financial markets that would undermine the credit-worthiness of other stressed euro zone sovereigns.

EU leaders will discuss a new deal at a June 23-24 summit.

Ben May, an economist at London-based Capital Economics, said he did not see the S&P downgrade as having a material impact on the timing of a new funding package.

"We believe some form of a second bailout package will be in place to avoid a disorderly default," he said.

After failing to meet fiscal targets under the first bailout deal the government, which is trailing the conservative opposition in opinion polls, has decided to raise taxes and slash spending more than planned this year to avoid default.

The prospect of more austerity and rising unemployment has fueled 20 days of protests in central Athens with a big general strike planned for Wednesday, challenging the government as its new package is headed for parliament for a vote.


Fitch Downgrades Greece to One Step Above Default
NYTIMES
By THE ASSOCIATED PRESS
July 13, 2011

ATHENS, Greece (AP) — Greece suffered another sovereign downgrade on Wednesday, when the Fitch agency slashed its credit worthiness by three notches further into junk status and only one grade above default.

The agency cut Greece's rating from B+ to CCC, bringing it in line with the other two major agencies, Moody's and Standard and Poor's, which had downgraded the country's bonds to a similar level last month.

Greece relies on loans from a euro110 billion ($155 billion) international bailout from other eurozone countries and the International Monetary Fund, and discussions are under way for a second bailout to keep the country's crisis from destabilizing other larger European economies.

However, no decisions have been made so far on how much more help Greece will get or in what way private holders of Greek bonds could contribute towards easing repayments. Credit ratings agencies have warned they could consider a voluntary rollover of Greek debt as a form of default.

"Today's rating downgrade reflects the absence of a new, fully-funded and credible EU-IMF program for Greece, coupled with heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece's weakening macroeconomic outlook," Fitch said in a statement.

While the main aspects of further help were discussed at a meeting of EU finance ministers earlier in the week, "no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming," it said.

The agency also noted that Greece has been missing fiscal targets set out as conditions for receiving the first bailout, from which it began drawing funds in May last year.

"Fitch's 'CCC' rating encapsulates substantial credit risk and acknowledges that default is a real possibility," it said. "As previously stated by Fitch, private sector involvement would likely be viewed as a sign of sovereign credit impairment and could trigger a rating default event."

The move came as the IMF said Greece's government must move quickly and decisively to bring its huge public debt under control.

To the outrage of labor unions across the country, the government has embarked on a punishing new round of austerity measures after missing its deficit-cutting targets so far in 2011.

Spending cuts and tax hikes have already sparked frequent strikes and demonstrations, with protests often turning violent in central Athens.

Moody's downgrade tips Greece closer to brink
YAHOO
By Angeliki Koutantou and William James Angeliki
7 March 2011

ATHENS/LONDON (Reuters) – Moody's slashed Greece's credit rating by three notches on Monday due to an increased default risk, raising the specter that the distressed euro zone sovereign may have to restructure its debt, perhaps before 2013.

The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.

Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.

"The likelihood of a default or distressed exchange has risen since its last downgrade of the Greek government debt rating in June 2010," Moody's said in a statement.

The downgrade sent a ripple of anxiety around credit markets, raising the price of insuring Greek, Portuguese and Spanish debt against default and the risk premium on holding Greek bonds rather than benchmark German bunds.

Portuguese government bond yields hit a euro lifetime high of 7.65 percent, heightening pressure on Lisbon to seek an EU/IMF bailout in the wake of Greece and Ireland.

Ahead of a euro zone summit on Friday, European Monetary Affairs Commissioner Olli Rehn made the case for reducing interest rates paid by Athens and Dublin on euro zone rescue loans and extending the maturities to enable them to achieve debt sustainability.

Moody's cited risks to Greece's fiscal consolidation program from a revenue shortfall and difficulties in reforming healthcare and state-owned companies.

Greece signed a 110 billion euros ($154 billion) rescue package with the EU and IMF last May to avoid default in exchange for draconian austerity measures which it has begun to implement. But many see the repayment terms as too onerous.

"The sheer magnitude of the task becomes ever more apparent," said Sarah Carlson, Moody's lead analyst on Greece.

Even if it fulfils the entire three-year adjustment program, its debt is projected to reach 158 percent of gross domestic product in 2013, a level widely seen as unsustainable.

"There is a risk that conditions attached to any kind of continuing support after 2013 could take solvency criteria into account that the country may not be able to satisfy, and therefore could result in a restructuring of existing debt," Carlson told Reuters.

"HIGHLY SPECULATIVE"

The European Central Bank, which has intervened repeatedly since last May to calm bond markets by buying euro zone peripheral sovereign debt, said it made no purchases last week in the run up to Friday's euro zone summit.

Moody's was the first of the three major ratings agencies to classify Greek debt as "highly speculative."

The Greek Finance Ministry said it had ignored progress in implementing its fiscal consolidation plan, including an improvement in revenue collection.

"Decisions such as Moody's today can initiate damaging self-fulfilling prophecies," it said.

However, some analysts said the bond market was already pricing in a managed Greek default.

"This is not going to be the last downgrade for Greece," said Christoph Weil, an economist at Commerzbank. "The market has already discounted that Greece will need to restructure its debt so the rating agencies are just running behind the market."

On Friday, euro zone leaders will discuss measures to enforce stricter budget discipline, boost economic competitiveness and strengthen the bloc's financial rescue fund in an attempt to draw a line under the debt crisis.

Rehn said there was a case for lowering the interest rate on both Greek and Irish loans and giving them longer to repay.

"The issue now and tomorrow is debt sustainability, and therefore I can see that there is a case to reduce the interest rates paid by Greece and Ireland," he told reporters.

"In that context, it is important that we also look at loan maturities so that we can go beyond the hump of 2014 and 2015 and that also contributes to debt sustainability."

Germany, the EU's reluctant paymaster, has hinted it may agree to extending the maturity of Greek loans to seven years, like Ireland's, and possibly ease the interest rate slightly.

But Berlin's ruling center-right coalition parties and the Bundesbank have strongly opposed any purchase of distressed sovereign bonds by the euro zone rescue fund and any lending to Greece to buy back its own debt on the market at a discount.

Moody's said it was concerned by the lack of certainty about the nature of financial support that will be available to Greece after 2013, and its implications for bondholders, although its central scenario remains that bondholders will not bear losses.

HAIRCUT?

Private economists see losses for investors as more likely in the longer term.

"We expect, not immediately but in the coming years, that more measures will be needed, maybe even a haircut," said Juergen Michels at Citigroup.

The spread on 10-year Greek debt against benchmark Bunds widened by 8 basis points following the Moody's downgrade, which came amid intense negotiations among euro zone countries on a package of measures intended to overcome the sovereign debt crisis that has shaken the currency bloc since November 2009.

Center-right leaders meeting in Helsinki last Friday agreed in principle to increase the effective lending capacity of the temporary European Financial Stability Facility and review the loan conditions to Greece and Ireland.

But Germany, Finland and the Netherlands opposed allowing the rescue fund to buy bonds or to lend distressed countries money to buy their own bonds, participants said.

Some EU officials see the hardline stance as pushing Greece toward restructuring, but only after west European banks have had time to raise their capital base to cope with the fallout from potential Greek losses.

Greece Approves Pension Overhaul Despite Protests
NYTIMES
By LANDON THOMAS Jr. and NIKI KITSANTONIS
July 8, 2010

ATHENS — The Greek government took a major step forward in overhauling its debt-plagued economy by forcing through, in principle, a pension bill that would dramatically cut the cost of Greece’s welfare state by increasing the retirement age and slashing benefits.

For Prime Minister George Papandreou, who commands a seven member majority in his country’s fractious parliament, the bill’s many provisions represent the beginning of end of the cradle-to-grave state compact that his father put in place in the early 1980s.

The plan was approved in principle by a vote of 159-137 late Wednesday. Individual provisions were to be voted on Thursday before a final vote on the whole package.

Three months into an historic bail program worth 110 billion euros — about $140 billion or half of Greece’s annual gross domestic product — the government has so far exceeded the deficit cutting benchmarks set by the International Monetary Fund. Government officials here see the bill’s passage as further evidence for still-skeptical international investors that Greece is committed to pushing through painful reform measures.

“This is our passport out of hell,” said Yannis Stournaras an Athens-based economist who has advised past Socialist governments. “It represents the toughest challenge for Papandreou and goes to the very heart of his party. No politician has ever been able to do this.”

Greece’s generous pension system has allowed many employees to retire before they turn 50 and earn the right to rich payouts calculated on the basis of bonus-laden salaries. The bill would unify the retirement age at 65 years of age for both men and women and would reduce payouts by calculating salaries on lifetime income as opposed to a worker’s highest, most recent pay.

It would also make it easier for Greek companies to fire workers.

Athens was to a large extent shut down Thursday as public sector workers gathered in protest before the parliament building in Syntagma square. According to police estimates, the numbers were between 5,000 and 10,000 and despite a few challenges by hooded youths carrying sticks and axes, riot police with gas masks and shields seemed to be in control of the situation.

“Nobody expected this — this is worse than the occupation under the Germans,” said Nikos Stathas, 60, a plumber who is just retiring now. He says he has just got his pension, but he is worried about his children and grandchildren. “This will demolish their retirement,” he added.

Such strong sentiments aside, by most accounts protests have been relatively restrained since three people was killed in an attack on a bank in May — a sign perhaps that Greeks, while angry and unhappy at the sacrifices forced upon them, understand that they face little other choice than to tighten their belt.

Mr. Papandreou, a life-long Socialist, has managed to keep control of his party despite protests among influential advisers like his economy minister, Louka Katseli.

A team from the I.M.F. and the European Union is due in Athens next month to examine the government’s progress, before the next 9 billion euro tranche is to be released.

Mr. Stournaras pointed out that the Greek economy performed better than expected in the first quarter, sustained by a surprisingly robust showing for private consumption, which was up by 1.5 percent.

A sharp cutback in public investment caused growth to decline by 2.5 percent for the quarter, but Mr. Stournaras expects the economy to shrink by less than the I.M.F. estimate of 4 percent and he forecasts a budget deficit this year of about 7 percent.

According to a presentation by the government’s debt management agency, sharp decreases in public sector wages and investment, plus an increase in taxes have driven the improved deficit picture.

"The government's popularity is holding up very well," said Paul Mylonas, chief economist at the National Bank of Greece. "But after several years of reform, adjustment fatigue may set in if light does not appear at the end of the tunnel."

Indeed, senior government officials concede that they have yet to win back the confidence of foreign bond investors, many of whom believe that some form of a debt restructuring is inevitable, as the 10 percent-plus yields on the government’s long term debt show.

“No one in Greece is looking at a debt restructuring. It’s just not going to happen,” said Petros Christodoulou, the head of the debt management agency insisted last month at an investor conference in London.

Still, doubts abound that the economy can survive the dramatic public sector retrenchment and continue to generate needed tax revenues to make a dent in a debt that even within three years will still be at around 120 percent of G.D.P.

Greek unions call new strike over pension reform
Yahoo
12 May 2010

ATHENS, Greece – Greek labor unions announced a new general strike to protest pension reforms next week, as government officials waited Wednesday for the first installment of a euro110 billion ($140 billion) rescue package designed to stave off bankruptcy.

Greece's two main public and private sector unions set a walkout for May 20 — a day after Greece must repay some euro9 billion ($11.4 billion) in expiring debt, using loans from its eurozone partners and the International Monetary Fund.

The Mediterranean country's acute debt problems, resulting from years of overspending and falsified accounts, battered global markets and weakened the euro. In response, the European Union and the IMF threw together a euro750 billion ($952.35 billion) standby package early Monday to prevent the debt crisis from spreading and protect the common euro currency. That package came in addition to the billions already pledged to Greece.

On Wednesday, EU officials also advocated unprecedented scrutiny of countries' spending plans even before they go to their respective parliaments for approval, and serious financial penalties for countries that break the rules.

Greek finance ministry officials said a first installment of the international rescue package — euro5.5 billion ($6.98 billion) from the IMF — was due later Wednesday. Athens also expects euro14.5 billion ($18.4 bllion) requested from the European Union to arrive just before the May 19 deadline.

Next week's strike will cancel flights, ferry and rail services, leave hospitals on emergency staff and close schools and public services. There will also be demonstrations in major Greek cities, raising fears of further street violence.

During riots in Athens last week, three workers died as a bank was torched by demonstrators. Some 100,000 people took to the streets to protest austerity measures the center-left Socialist government took to secure the international bailout.

Unions say those earning low wages will suffer disproportionately from the proposed increase in retirement ages and pension cuts. The reforms follow public service pay cuts and consumer tax increases that the government says will save euro30 billion ($40 billion) over the next three years and bring the budget deficit under the EU ceiling of 3 percent of annual national output — compared to Greece's current 13.6 percent.

Giannis Panagopoulos, head of the GSEE private sector union, said further strikes would follow next week's walkout.

"To the unfair and anti-social fiscal measures announced by the government, there comes now to be added an equally unfair draft law on the social security system," Panagopoulos said.

GSEE and the ADEDY civil servant union already planned protests in central Athens later Wednesday.

The country's borrowing costs declined further Wednesday, with the yield difference between Greek and benchmark German 10-year bonds at 4.45 percentage points in afternoon trading — down from a record 10 points last week.

Stocks on the Athens stock exchange gained slightly, with the benchmark general index closing 0.8 percent up at 1,749.59 points.
Greece, Debt and a Lesson
NYTIMES
By DAVID LEONHARDT
May 11, 2010

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country.

Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator. Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government.

Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals.

The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint.

This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out. Mr. Greenstein’s politics make him sympathetic to the worry that all the deficit talk will become an excuse to pull back on stimulus spending while unemployment remains high or to gut social programs. But he also knows the numbers well enough to understand that our Greece moment, whether it takes the form of a crisis or not, is coming.

“Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

•

For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state. Greek citizens will soon have a harder time retiring in their 40s.

Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility.

It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit.

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.

Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient.

What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices.

“It’s not a matter of whether we have the resources to solve our problems,” as Alan Krueger, the chief economist at the Treasury Department, says. “It’s a matter of political will.”

For now at least, our elected officials are hardly the only ones who lack that will.


EU Seeks Mechanism to Contain Greek Debt Crisis
NYTIMES
By REUTERS
May 9, 2010
Filed at 9:56 a.m. ET

BRUSSELS (Reuters) - European Union finance ministers called for strong action to ensure stability before they met on Sunday to discuss ways of ring-fencing Greece's debt crisis to stop it spreading to countries like Portugal and Spain.  The European Commission will ask the ministers to extend an aid mechanism for non-euro zone countries to nations in the single-currency bloc to safeguard euro zone financial stability, EU sources said.  The Commission will also ask the extraordinary meeting of ministers to raise the existing amount available under the mechanism, called the balance-of-payments facility, by 60 billion euros ($80.5 billion). The maximum available now is 50 billion euros.

"We are going to defend the euro... we have to give more stability to our guarantee," Spanish Economy Minister Elena Salgado told reporters before the Brussels talks.

Ministers of France, Finland and other countries also stressed the need to defend the euro currency.

"I think it is important that we do everything we can to stabilize the markets, to show that we are coming through one of the difficult periods, and that we are prepared to do what is necessary to ensure that we have that stability," British finance minister Alistair Darling told reporters.

Financial markets have been pounding euro zone countries with high deficits or debts as well as low economic growth, threatening to force Portugal, Spain and Ireland into a position where, like Greece, they would need to seek financial aid.  An EU summit on Friday approved 110 billion euros ($147 billion) in emergency EU/IMF loans to Greece over three years to help it over a budget crisis in exchange for austerity measures so sharp that they have already caused violent protests.

Economists estimate that if Portugal, Ireland and Spain eventually come to require similar three-year bailouts, the total cost could be some 500 billion euros.  The EU sources said the 60 billion top-up under the aid mechanism would be used as base capital, or collateral, for borrowing on the markets, which would allow the Commission to raise up to 10 times that amount.  The 60 billion top-up would be guaranteed by all 27 members of the European Union and the loans, if paid out to an EU member, would carry conditions set by the International Monetary Fund, one EU source said.

As an additional measure for euro zone countries only, the Commission will propose a separate mechanism of intergovernmental loans, the source said.

MARKET TURMOIL

The leaders of the 16 countries that use the single currency, who have been accused of heightening market uncertainty through lack of action, agreed last week to speed budget cuts and ensure deficit targets are met this year.

"The euro zone is going through the worst crisis since its creation," French President Nicolas Sarkozy said after Friday's euro zone summit in Brussels.

Fears that a euro zone debt crisis could rock banks and the global economy like the September 2008 collapse of U.S. bank Lehman Brothers swept through markets last week, pushing global stocks to around a three-month low.  Last week's euro zone summit asked for a European Stabilisation mechanism to be ready before markets open on Monday.  Some economists said the move was welcome news, but it would cure the symptoms, rather than the disease.

"By putting in place additional safeguards for the euro area financial system, governments finally appear to be rising to the challenge of the sovereign debt crisis," Morgan Stanley said in a research note to clients.

"But, like the measures taken before - for the benefit of Greece - a stabilisation fund is just buying time for distressed borrowers," the bank said.

It added: "The fiscal policy action taken in these countries during this "extra time" is essential. If yet another rescue mechanism isn't followed by aggressive austerity measures, the problem just continues to fester - and could eventually spread even wider."

Greek parliament votes in favour of austerity measures
Page last updated at 16:17 GMT, Thursday, 6 May 2010 17:17 UK
George Papandreou
Prime Minister George Papandreou said violence was not a solution

Greece's parliament has voted in favour of the hefty cuts and reforms proposed by the government to address the country's financial crisis.

With 172 of 300 votes in favour, one report said a second vote would have to be passed for the bill to become law.

The vote comes a day after three bank workers died in a petrol bomb attack as demonstrations over the planned austerity measures turned violent.

The finance minister said the measures were the only way to avoid bankruptcy.

But as the vote was held demonstrators gathered outside parliament to protest against the measures.

The deaths have shocked many in Greece. Bank workers have gone on strike in anger at the loss of their colleagues. 

Mourners paid their tributes outside the bank where the three workers were killed

Prime Minister George Papandreou said violence was "not a solution".

"The future of Greece is at stake. The economy, democracy and social cohesion are being put to the test," he said in parliament ahead of the vote.

'Avoid bankruptcy'

Greek finance minister George Papaconstantinou has warned Greece is two weeks away from defaulting on part of its debt; bonds worth 8.5bn euros ($12bn; £7.2bn) fall due on 19 May.

GREEK AUSTERITY MEASURES
Public sector pay frozen until 2014
Public sector salary bonuses - equivalent to two months' extra pay - scrapped or capped
Public sector allowances cut by 20%
State pensions frozen or cut; contribution period up from 37 to 40 years
Average retirement age up from 61 to 63; early retirement restricted
VAT increased from 19% to 23%
Taxes on fuel, alcohol and tobacco up 10%
One-off tax on profits, plus new gambling, property and green taxes

"The state's coffers don't have that money," he told parliament earlier. "Because today... the country can't borrow it from the international market.

"And because the only way for the country to avoid bankruptcy and suspension of payments is to take the money from our European partners and the International Monetary Fund."

But in order to receive the 110bn euro ($142bn; £95bn) bail-out, Greece must agree to a three-year austerity programme, he said.

The measures include wage freezes, pension cuts and tax rises.

The aim is to achieve fresh budget cuts of 30bn ($38bn; £25bn) euros over three years, with the goal of cutting Greece's public deficit to less than 3% of GDP by 2014. It currently stands at 13.6%.

'Fair demands'

Wednesday's deaths - the first such fatalities in protests in nearly 20 years in Greece - have shocked many people in Greece.


What went wrong in Greece?

An old drachma note and a euro note
Greece's economic reforms that led to it abandoning the drachma as its currency in favour of the euro in 2002 made it easier for the country to borrow money.
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The Marfin bank branch where the two women - one pregnant - and a man died has become the focus for grieving, with a steady stream of flowers being placed at the front door by people paying their respects, the BBC's Duncan Kennedy in Athens reports.

Shops and businesses have been clearing up after the riots. Many are boarded up, others are burnt out shells, he adds.

Bank workers took to the streets on Thursday to demonstrate their outrage at the deaths.

President Karolos Papoulias has warned Greece is on the "brink of the abyss".

"We are all responsible so that it does not take the step into the void," he said in a statement.

However, unions have been undeterred by Wednesday's events, urging members to continue demonstrating.

The GSEE private sector union condemned the "fires, blind violence, vandalism", but added: "We are determined to pursue and extend our struggle to meet our fair demands."



E.U. Official Vents Frustration Over Ratings Agencies
NYTIMES
By JAMES KANTER
May 5, 2010

BRUSSELS — The European Union’s financial services commissioner, Michel Barnier, vented his frustration with U.S.-based credit ratings agencies Wednesday as Moody’s Investors Service put Portugal on review for another possible downgrade that could make it more difficult for the country to service its debt.

Mr. Barnier was briefing reporters ahead of his first official visit to the United States, where he was to meet the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner. He will also meet with Wall Street titans like Lloyd C. Blankfein, the chief executive of Goldman Sachs, and Jamie Dimon, the chief executive of JPMorgan Chase.

Mr. Barnier complained that there were too few debt rating agencies, and he suggested that they were overly dominated by U.S. owners.

“There are not enough ratings agencies, not enough competition, and not enough diversity,” he said. “Why should there not be an agency that is more European than those that exist today?”

A decision by Standard & Poor’s, also based in the United States, to downgrade Greece’s debt to junk status last month enraged E.U. officials, who questioned whether the ratings agencies were accurately assessing how likely it was that countries in the euro zone would default on their sovereign debts.

Mr. Barnier said it was “an open question” whether such an alternative agency should be run by the private sector or by a public body.

During his trip, Mr. Barnier will quiz Mr. Blankfein on controversial financial transactions like credit default swaps as part of efforts to gather data before deciding whether or not to ban certain practices in Europe, E.U. officials said.

Another thorny issue for Mr. Barnier is regulation of hedge funds. In March, Mr. Geithner warned Mr. Barnier in a letter not to pass a law on hedge funds “that would discriminate against U.S. firms and deny them the access to the E.U. market that the currently have.”

Mr. Barnier said Wednesday he would use his visit to Washington to establish a closer working relationship with Mr. Geithner and to reassure him that he was doing everything he could to pass a law that would be nondiscriminatory. But Mr. Barnier said that he would explain to Mr. Geithner that the final decision on legislation would be up to E.U. governments and the European Parliament.

Mr. Barnier may also deliver that message to top players in the private equity industry, like Henry Kravis, a co-founder of Kohlberg Kravis & Roberts, at a dinner Sunday in New York.

On Monday in Brussels, a powerful committee in the European Parliament is expected to hold a preliminary vote on the proposed law on hedge funds, which could include rules that would raise the bar for access of foreign funds and fund managers to the E.U. market.



Euro economists expect Greek default, BBC survey finds
Andrew Walker By Andrew Walker Economics correspondent, BBC World Service
28 March 2011 Last updated at 06:01 ET

Greece is likely to default on its sovereign debt, according to the majority of respondents to a BBC World Service survey of European economists.  Two-thirds of respondents predicted a default. However, most thought the euro would survive in its current form.

The euro crisis began when it became clear that Greece would struggle to pay its debts and had to be given rescue loans by the EU and the IMF last year.  The BBC approached 52 professional economic forecasters for their views.  Since the Greek rescue, the Irish Republic has also had to seek help. And Portugal seems increasingly close to meeting the same fate.

The forecasters the BBC surveyed are experts on the euro area - they are surveyed every three months by the European Central Bank (ECB) - and as well placed as anyone to peer into a rather murky crystal ball and say how they think the crisis might play out.  The survey had a total of 38 replies and two messages came across very strongly.

Default expected

Most expect there will be a default by at least one government, but despite that, they think the eurozone will remain in one piece.

Nearly two-thirds of respondents - 25 out of 38 - said there would be a default.  All of them said Greece would probably fail to pay all its debts. Gabriel Stein of Lombard Street Research in London was one of them.

"Greece is bust, essentially. It will default because there is no way it can fulfil the fiscal and growth targets necessary to not default and make the debt sustainable," he said.

More than a third - 14 - said the Irish Republic would do so as well. Seven of them, including Gabriel Stein, predicted a default by Portugal.  However, Massimiliano Marcellino, head of the Economics Department at the European University Institute in Florence, said there would be no defaults.

"The countries in the worst conditions are sufficiently small to be rescued and there seems to be sufficient political support for that," he said.

"Whether this is a good idea or not is a different issue.

"It would be better to allow defaults but this is not the right moment politically and economically to discuss a default clause".

Greece, the Irish Republic and Portugal are small economies, as Mr Marcellino says.  However, there are concerns in the financial markets about a few other countries too.  Some forecasters expected defaults from large economies that would strain the EU's resources and its political commitment to the eurozone's stability: two said Italy and one of them said Spain as well.

So the dominant view among the forecasters we heard from is that Greece will default and there is a sizeable minority who expect more.

Euro survival

In answer to the question "Can the euro survive intact?", 33 of the 38 said it could.  Didier Duret, chief investment officer at ABN Amro private banking, says the eurozone will not break up.

"It's simply that the costs - indirect and direct - are just too big, in a pure quantitative assessment. But if we also include all the political fallout, it would have huge historical implication to the balance of Europe and we will abandon the geopolitical safe haven that Europe represents," he said.

There were a handful, though, who dispute that view, including Heikki Taimio of the Labour Institute of Economic Research in Helsinki.

"There will be increasing divergence between the north and the south. Some countries in the north will, at some point in the not too distant future, no longer tolerate this," Mr Taimio said.

"That would mean expulsion for some countries in the south. Before this happens, we shall see all kinds of efforts to keep the members together."

Crisis response

Most - 23 of the 38 - thought the handling of the crisis by the ECB and the European Commission had been satisfactory or better.  The role of these bodies has been central.

The Commission has been co-ordinating the political response by the member states, who have given the rescues financial backing.  The ECB added another dimension by going into the financial markets and buying the debts of governments in difficulty. It has also lent funds to banks that might otherwise have gone under, further aggravating the strains in the eurozone.

The bail-outs and the ECB's intervention have their critics. But most of the experts we surveyed thought they had performed reasonably.

So this is the big picture that emerges from a group of people whose views the ECB thinks it worth testing on a regular basis: the eurozone has some more stressful times ahead, including at least one probable default, but it will survive intact.
Op-Ed Contributor
For Greece’s Economy, Geography Was Destiny
NYTIMES
By ROBERT D. KAPLAN
April 25, 2010

Stockbridge, Mass.

THE debt crisis that caused Greece to ask for an international bailout on Friday has been attributed to many things, all economic: Greece’s budget deficits, its lack of transparency and its over-the-top corruption, symbolized by the words “fakelaki,” for envelopes containing bribes, and “rousfeti,” political favors. But there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography.

Greece is where the historically underdeveloped worlds of the Mediterranean and the Balkans overlap, and this has huge implications for its politics and economy. For northern Europe to include a country like Greece in its currency union is a demonstration of how truly ambitious the European project has been all along. Too ambitious, perhaps, many Germans and other Northern Europeans are now thinking.

That Europe’s problem economies — Greece, Italy, Spain and Portugal — are all in the south is no accident. Mediterranean societies, despite their innovations in politics (Athenian democracy and the Roman Republic) were, in the words of the 20th-century French historian Fernand Braudel, defined by “traditionalism and rigidity.”

The relatively poor quality of Mediterranean soils favored large holdings that were, perforce, under the control of the wealthy. This contributed to an inflexible social order, in which middle classes developed much later than in northern Europe, and which led to economic and political pathologies like statism and autocracy. It’s no surprise that for the last half-century Greek politics have been dominated by two families, the Karamanlises and the Papandreous.

It is also no accident that the budding European super-state of our era is concentrated in Europe’s medieval core, with Charlemagne’s capital city, Aix-la-Chapelle (now Aachen, Germany), still at its geographic center — close by the European Union power nexus of Brussels, The Hague, Maastricht in Holland and Strasbourg, France. This stretch of land, the spinal column of Old World civilization, is Europe’s richest sea and land interface.

The Low Countries, with their openness to the great ocean and wealth of protected rivers and waterways inland, were ideal for trade, movement and consequent political development. The loess soil is dark and productive, even as the forests provided a natural defense. European antiquity was defined by the geographic hold of the Mediterranean, but as Rome lost its hinterlands, history moved north.

It is not only the division between north and south that bedevils Europe. In the fourth century, the Roman Empire split into western and eastern halves, with dueling capitals at Rome and Constantinople. Rome’s western empire gave way to Charlemagne’s kingdom and the Vatican: Western Europe, that is. The eastern empire, Byzantium, was populated mainly by Greek-speaking Orthodox Christians, and then by Muslims after the Ottoman capture of Constantinople in 1453.

The Carpathian Mountains, which run northeast of the former Yugoslavia and divide Romania into two parts, partly reinforced this boundary between Rome and Byzantium, and later between the prosperous Hapsburg Empire in Vienna and the poorer Turkish Empire in Constantinople. Greece is far more the child of Byzantine and Turkish despotism than of Periclean Athens.

In antiquity Greece was the beneficiary of geography, the antechamber of the Near East — the place where the heartless systems of Egypt and Mesopotamia could be softened and humanized, leading to the invention of the West, so to speak. But in today’s Europe, Greece finds itself at the wrong, “orientalized” end of things. Yes, it is far more stable and prosperous than places like Bulgaria and Kosovo, but only because it was spared the ravages of Soviet-style communism.

To see just how much geography and old empires shape today’s Europe, look at how former Communist Eastern Europe has turned out: the countries in the north, heirs to Prussian and Hapsburg traditions — Poland, the Czech Republic and Hungary — have performed much better economically than the heirs to Byzantium and Ottoman Turkey: Romania, Bulgaria, Albania and Greece. And the parts of the former Yugoslavia that were under Hapsburg influence, Slovenia and Croatia, have surged ahead of their more Turkish neighbors, Serbia, Kosovo and Macedonia. The breakup of Yugoslavia in 1991, at least initially, mirrored the divisions between Rome and Byzantium.

The Greek debt crisis is the biggest challenge since those Yugoslav secessions to Europe’s attempt at overcoming its geographical and historical divisions. Whereas in the early decades of the cold war the European enterprise had to heal only the long-time rift between France and Germany, now it is a matter of Carolingian and Prussian Europe — Brussels and Berlin — incorporating the far-flung Mediterranean and Balkan peripheries.

And it is precisely because Europe, for the first time in history, faces no outside threat to its security that it may fall prey to the narcissism of its internal contradictions. That the European Union’s northern powers aren’t willing to bail Greece out entirely by themselves, but are relying on the International Monetary Fund to kick in up to $20 billion, shows that there are limits to how far they will go toward the dream of a unified supercontinent.

Still, just as geography has divided Europe, it also unites it. For example, a lowland corridor from the Atlantic to the Black Sea has allowed travelers for centuries to cross the length of Europe with speed and comfort, contributing to Europe’s cohesion and sense of itself. The Danube, as the Italian scholar Claudio Magris rhapsodizes, “draws German culture, with its dream of an Odyssey of the spirit, towards the east, mingling it with other cultures in countless hybrid metamorphoses.” Central Europe, cleft from the West during the cold war, is the continent’s universal joint: a fact that puts the responsibility for surmounting the politics of historical division squarely on the shoulders of a united Germany.

Germans should realize that Greece, with only 11 million people, nevertheless remains the ultimate register of Europe’s health. It is the only part of the Balkans accessible on several seaboards to the Mediterranean, is roughly equidistant from Brussels and Moscow, and is as close to Russia culturally as to Europe by virtue of its Eastern Orthodox Christianity. In a century that will likely see a resurgent Russia put pressure on Europe, especially on the former Soviet satellite states in the east, the state of politics in Athens will say much about the success or failure of the European project.

The good news is that northern Europeans know this, and will not let Greece fail. Indeed, to let Greece drift politically eastward would forfeit any hope of a big and inclusive Europe — geographically, politically and culturally — in favor of a small and petty one, Charlemagne’s empire pretending to be Rome.


11 September 2010 Last updated at 16:36 ET
Greek unions protest against PM's austerity plans

Greek unions have staged mass protests in the city of Thessaloniki against the government's austerity programme.  The protests were largely peaceful but police used tear gas on a small group which broke away from the rally.  But Prime Minister George Papandreou, who is attending a trade fair in the city, has said he is not going to give up on his government's austerity plans.  On Friday, the government said there would be further austerity measures, in addition to those already announced.

Some 20,000 people marched through Thessaloniki to protest against Mr Papandreou's swingeing cuts, which have already had a significant impact on public spending.  The country's trade unions have said they believed the government wanted to "overthrow" workers' rights, on top of cutting public sector wages and pensions.  The march was largely peaceful but minor clashes were reported and police fired tear gas at a small group which broke away from the main rally.

Security concern

Mr Papandreou said he would not be swayed by the demonstrations and that he was "not thinking of the political cost".

"We are fighting for the survival of Greece. Either we'll win together, or we'll sink together."

"I ask all the country's productive forces to join us, to support this great change."

Earlier on Saturday, a shoe was thrown at Mr Papandreou, although landed wide of its target.  Dr Stergios Prapavezis, a respected local cancer specialist - was detained along with his 15-year-old daughter and Stavros Vitalis, a farmer with whom he set up a protest movement called the Patriotic Front.  Before the incident, Dr Prapavezis had told the BBC that the prime minister was not welcome in the northern region because he had surrendered Greece's sovereignty and subjected ordinary people to poverty.

The BBC's Malcolm Brabant in Thessaloniki says that with 3,000 police patrolling the city's streets, the fact that a single shoe thrower got so close to the prime minister will be a source of major embarrassment.

The centre-left government imposed a tough austerity programme in May in return for a 110bn-euro ($140bn; £91bn) bail-out from the International Monetary Fund (IMF) and the European Union that helped it stave off bankruptcy.

Dr Stergios Prapavezis is led away by police after throwing a shoe at the prime minister in Thessalonki.  On Friday evening, Finance Minister George Papaconstantinou said it was on track to reduce its budget deficit from 13.6% of GDP in 2009 to 8.1% this year, and pledged to maintain the pace.

"We will continue as we started," he was quoted as saying by the Associated Press news agency.

"[However,] several more months must pass before we can convincingly show that what has been done was not a flash in the pan, and that we won't fall to pieces at the first sign of hardship."

Mr Papaconstantinou said he planned to overhaul several state-run corporations including the Greek Railway Company, which has 10.7bn euros of debts.

"As a society, we have shown that we understand the problem," he said.

The government also wanted to introduce reforms in the tourism, education, agriculture and energy sectors in the coming year, he added.  Official figures published earlier this week showed the contraction of the Greek economy was accelerating. It is expected to shrink by 4% this year.  Inflation has also reached 5.5% - its highest level in more than a decade - and more than half a million people were officially out of work in June.
European situation, according to a New York Times graphic...
Greece Calls for Activation of Financial Rescue Package
NYTIMES
By NIKI KITSANTONIS and MATTHEW SALTMARSH
April 23, 2010

ATHENS — Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested an international bailout on Friday, an unprecedented step that will test the bonds of the European Union.  In a nationally televised address, Prime Minister George Papandreou said two waves of austerity measures introduced by the government over the past few months had failed to convince the markets that Greece would get its finances under control or be able to avert defaulting on a mountain of debt.

“Now there is the risk of the sacrifices of the Greek people being lost as rates of borrowing continue to rise,” he said, speaking from the Aegean island of Kastellorizo.

“The time has come for us to ask our partners in the E.U. to activate the mechanism we formulated together,” he said, referring to an emergency aid package arranged two weeks ago. The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, as well as up to €15 billion from the International Monetary Fund.

The activation of the E.U.-I.M.F. rescue plan, Mr. Papandreou said, “will send a strong message to the markets that the E.U. is not playing their game and will not leave its currency at risk.”

The announcement means that money from the I.M.F. can be expedited once the board of the fund has approved the terms. The fund is expected to provide €12 billion, according to E.U. officials.

“We are prepared to move expeditiously on this request,” Dominique Strauss-Kahn, the I.M.F. managing director, said in a statement issued in Washington.

The loans pledged by Greece’s euro-zone partners are still awaiting approval by legislators in some of the countries. French lawmakers, for example, will discuss France’s 21 percent contribution early next month.  In Germany, the bailout has proved to be politically unpopular and could face legal challenges before the country’s Constitutional Court.  The Finance Ministry in Berlin said that the E.U. and I.M.F. must first agree that the aid is needed as a last resort. But he said the German government is “ready to act” to clear the way in parliament.

“We in Germany are pledged to solidarity and we will show it,” Mr. Offer told reporters. “We’re doing this to stabilize the euro, which means it’s also in our own national interest.”

The European Commission, the European Central Bank and the I.M.F. have been holding talks in Athens to finalize the terms of the aid package, which were expected to be completed next week.  But even with those talks moving ahead investors have been worrying about the country’s financing needs in coming months and years.  Greece needs to raises around €10 billion in May to cover redemptions, coupon payments and its primary government deficit, according to investors.

The yield on benchmark 10-year Greek government bonds fell to 8.1 percent Friday after the reports, having touched fresh record Thursday close to 9 percent. The euro rose against the dollar after briefly touching the lowest point in a year early in the day.  The Athens composite share index gained almost 4 percent around midday, with shares in Greek banks surging after their recent sharp declines.

In his address, Mr. Papandreou did not confirm on widespread speculation in Athens that the release of the loans for Greece would be dependent on additional austerity measures. The two previous packages have already amounted to about 6 percent of gross domestic product.

Describing Greece's dire economic situation as “a sinking ship” his Socialist administration inherited from the outgoing conservatives last October, Mr. Papandreou said the rescue mechanism would “allow us to rebuild our ship with strong and resilient materials.”

On Thursday the European Union revised higher its estimate of the country’s 2009 budget deficit — meaning that austerity measures being negotiated with the I.M.F. and euro-zone countries might have to bite deeper.  Eurostat, the European Union’s statistics agency based in Luxembourg, raised its estimate of the country’s budget deficit for 2009 to 13.6 percent of gross domestic product, from the recent Greek government prediction of 12.9 percent.

The Greek Finance Ministry said in a statement that the announcement by Eurostat did not alter its goal of reducing the deficit by at least four percentage points of G.D.P. in 2010, as laid down in the Greek stability and growth program, which it forwarded to the European Commission for scrutiny.

Meanwhile, Moody's Investors Service, the ratings agency, downgraded the government bond ratings of Greece to A3 from A2 and placed them on review for further possible downgrade in view of the “significant risk that debt may only stabilize at a higher and more costly level than previously estimated.”

Even with the decline in yields Friday, investors expect a higher return for holding Greek 10-year debt than equivalent bonds issued by the Philippines and India.


Greece hit by strikes, riots over austerity plan
YAHOO
By ELENA BECATOROS, Associated Press Writer
March 11, 2010

ATHENS, Greece – Serious street clashes erupted between rioting youths and police in central Athens Thursday as some 30,000 people demonstrated during a nationwide strike against the cash-strapped government's austerity measures.

Hundreds of masked and hooded youths punched and kicked motorcycle police, knocking several off their bikes, as riot police responded with volleys of tear gas and stun grenades.

The violence spread after the end of the march to a nearby square, where police faced off with stone-throwing anarchists and suffocating clouds of tear gas sent patrons scurrying from open-air cafes.

Police say 12 suspected rioters were detained and two officers were injured.

Rioters used sledge hammers to smash the glass fronts of more than a dozen shops, banks, jewelers and a cinema. Youths also set fire to rubbish bins and a car, smashed bus stops, and chopped blocks off marble balustrades and building facades to use as projectiles.

Thursday's strike — the second in a week — brought the country to a virtual standstill, grounding all flights and bringing public transport to a halt. State hospitals were left with emergency staff only and all news broadcasts were suspended as workers walked off the job for 24 hours to protest spending cuts and tax hikes designed to tackle the country's debt crisis.

Riot police made heavy use of tear gas during the start-and-stop clashes throughout the demonstration, including outside Parliament. Strikers and protesters banged drums and chanted slogans such as "no sacrifice for plutocracy," and "real jobs, higher pay." People draped banners from apartment buildings reading: "No more sacrifices, war against war."

The demonstrators included hundreds of black-clad anarchists in crash helmets and ski masks, who repeatedly taunted and attacked riot police with stones and petrol bombs, at one point spraying officers with brown paint. Shopkeepers along the demonstration route hastily rolled down their shutters, while a few blocks away, people sat at outdoor restaurants, nonchalantly continuing their meals.

Tear gas wafted through the city center's streets, sending businessmen in suits scurrying for cover, their eyes streaming.

Minor clashes also broke out in the northern city of Thessaloniki, where about 14,000 people marched through the center.

Fears of a Greek default have undermined the euro for all 16 countries that share it, putting the Greek government under intense European Union pressure to quickly show fiscal improvement.

It has announced an additional euro4,8 billion ($65.33 billion) in savings through public sector salary cuts, hiring and pension freezes and consumer tax hikes to deal with its ballooning deficit, but the measures have led to a new wave of labor discontent.

The cutbacks, added to a previous euro11.2 billion ($15.24 billion) austerity plan, seek to reduce the country's budget deficit from 12.7 percent of annual output to 8.7 percent this year. The long-term target is to bring overspending below the EU ceiling of 3 percent of GDP in 2012.

The new plan sparked a wave of strikes and protests from labor unions whose reaction to the initial austerity measures had been muted. Thursday's strike shut down all public services and schools, leaving ferries tied up at port and suspending all news broadcasts for the day. However, some private bank branches were open despite calls from the bank employees' union to participate in the strike.

While their colleagues clashed with groups of protesters, some police joined the demonstration.

About 200 uniformed police, coast guard and fire brigade officers, who cannot go on strike but can hold protests, gathered at a square in the center of the city shortly before the marches got under way.

"The police and other security forces have been particularly hard hit by the new measures because our salaries are very low," said Yiannis Fanariotis, general secretary of one police association. He said the average policeman made about euro1,000-euro1,200 ($1,360-$1,635) a month if weekend and night shifts were included.

Joining the protest "doesn't feel strange, because we are working people like everybody else and we are all shouting out for our rights," he said.

The government says the tough cuts are its only way to dig Greece out of a crisis that has hammered the common European currency and alarmed international markets — inflating the loan-dependent country's borrowing costs.

But unions say ordinary Greeks are being called to pay a disproportionate price for past fiscal mismanagement.

"They are trying to make workers pay the price for this crisis," said Yiannis Panagopoulos, leader of Greece's largest union, the GSEE.

"These measures will not be effective and will throw the economy into deep freeze."

A general strike last Friday was marred by violence during a large protest march. Riot police used tear gas and baton charges against rock-throwing protesters, who smashed banks and storefronts, while left-wing protesters roughed up Panagopoulos as he was addressing a rally.

The labor unrest could spark fears that the government will have trouble in implementing its new measures.

Greece insists it doesn't need a bailout, and its European partners are reluctant to fund one. But it has called for European and international support for its program, saying that unless it receives that support and the cost for it to borrow on the market falls, it might have to appeal to the International Monetary Fund for help.

On Wednesday night, Deputy Prime Minister Theodore Pangalos said Greece could bypass the costly process of borrowing from edgy markets by urging international institutions to buy its bonds at a set interest rate.

"We want, if there is an unjustified speculative attack against Greek bonds, to know that one of these institutions that have the substantial means to absorb such market products will come and say 'look here, I am buying Greek bonds at this price, with this interest rate,'" Pangalos told private Mega TV.

He did not say which institutions he was referring to, or elaborate on the interest rate.

Markets think some kind of rescue would be organized if default looms. Speculation has focused on possible guarantees for Greek bonds or help from state-owned banks in other eurozone countries.

Page last updated at 14:32 GMT, Thursday, 4 March 2010
The Greek island of Santorini in the Aegean Sea. File photomap
Only 227 of Greece's 6,000 islands are inhabited

Greece should sell islands to cut debt - Merkel allies
By Oana Lungescu , BBC News, Berlin

Greece should consider selling some of its uninhabited islands to cut its debt, according to political allies of German Chancellor Angela Merkel.

Josef Schlarmann and Frank Schaeffler told Germany's Bild daily that the Greek state should sell stakes in all its assets to raise more cash.

Greek PM George Papandreou is due to meet Mrs Merkel in Berlin later this week for talks about the crisis.

Mr Papandreou has already announced a strict austerity programme.

'Affordable' islands

"Sell your islands, you bankrupt Greeks - and the Acropolis too!" says the headline in the Bild newspaper.

It sounds like the sort of daydream induced by too much ouzo, but the idea comes from two senior politicians in Europe's biggest economy.

Mr Schlarmann is a senior member of Mrs Merkel's Christian Democrats and Mr Schaeffler is an MP for the Free Democrats - the junior partner in the centre-right coalition.

Both confirmed to the BBC that they wanted to start a debate about what Greece could do to help itself and bolster the battered euro.

Those who face insolvency, Mr Schlarmann said, must sell everything they have to pay their creditors.

He advised Mrs Merkel not to promise any financial aid when she met Mr Papandreou in Berlin.

According to a poll published on Thursday, 84% of Germans think that the EU should not help Greece out of its debt crisis.

It is true that dotted in the blue waters of the Aegean are some of the country's most valuable assets - about 6,000 islands, of which only 227 are inhabited. Many of them are privately owned by the world's super-rich.

According to a specialised real-estate website, Greek islands evoke images of sunglass-sporting shipping magnates sipping champagne on enormous yachts, but cost as little as $2m (£1.3m).

Relatively affordable, the website says - unless, of course, you're a Greek.


Europe Union Moves Toward a Bailout of Greece
NYTIMES
By STEPHEN CASTLE and LANDON THOMAS Jr.
March 1, 2010

BRUSSELS — In a tense game of brinksmanship, the European Union is moving toward the first bailout in the history of its common currency, which is expected to involve loan guarantees from the German and French governments to encourage their banks to buy Greek debt.

Even as the negotiations continue, the bloc is insisting that Athens impose further, painful austerity measures, in part to overcome political opposition in Germany to providing aid to the spendthrift Greeks.

During a brief visit, due to start Monday, Olli Rehn, the European commissioner for economic and monetary affairs, will press for more spending cuts and tax increases in Greece as a precursor to an emerging package of financial support.

With no structure in place for dealing with a threatened default within the 16-nation euro zone, officials are making up the rules as they go along. That means that politics — as much as economics — is determining the outcome of the worst crisis in the decade-long lifespan of the euro, creating a kind of phony war in which battles are being fought by leaks and behind-the-scenes briefings.

European officials say that the purchase of Greek bonds by state-owned lenders like Germany’s KfW — backed by German government guarantees — is likely to be involved in any solution and has been an option under discussion for three weeks.

Other alternatives, including ones that involve more countries in the euro zone, are also being discussed. France’s state-owned bank Caisse des Dépôts et Consignations, may be involved, one Greek newspaper reported Saturday, while France’s Finance Minister. Christine Lagarde, told Europe 1 radio on Sunday that there are “a certain number of proposals in the euro zone, involving either private partners or public partners or both.”

But Germany’s Chancellor, Angela Merkel, is not ready to sign off on a rescue, officials said, before Greece has pushed through further cuts.

One European official, speaking on condition of anonymity because of the sensitivity of the subject, said that Greek officials appeared to be briefing journalists on the prospect for an big rescue package in the hope of pushing the European Union into a quick solution, or of convincing the markets that help is at hand.

“The Germans will not put a euro on the table until there is a credible austerity package,” the official said.

Simon Tilford, chief economist at the Center for European Reform, said that France and Germany recognize that some form of bailout is inevitable, but that, to enable a bailout to be sold to a skeptical German public, the Greeks first “have to be seen to be suffering.”

Much of the negotiating focuses on the Greek prime minister George Papandreou. On Friday, Mr. Papandreou met with Josef Ackermann, the chairman of Deutsche Bank, in Athens; on March 5 he plans to visit Mrs. Merkel in Berlin. He also is scheduled to meet President Obama in Washington on March 9.

Lurking behind the discussion are a variety of power plays involving Brussels, Paris, Berlin and Athens. Germany is reluctant to sanction any bailout knowing that, as the euro zone’s biggest economy, it will bear the brunt of the cost. But France and Germany also believe that any recourse by Greece to the International Monetary Fund would damage the prestige of the euro, highlighting its inability to sort out internal problems.

Moreover, France’s president, Nicolas Sarkozy is said to be particularly reluctant to see a rescue orchestrated by the monetary fund, which is led by Dominique Strauss-Kahn, a Frenchman and a potential rival in the next presidential elections.

Precisely that threat is being made privately by Greek officials, according to one European diplomat, who spoke on condition of anonymity due to the sensitivity of the issue.

The Greek government can be pushed only so far, said Daniel Gros, director of the Center for European Policy Studies.

Such brinkmanship on both sides was brought about by the lack of clarity from an European Union summit earlier this month when leaders promised “determined and coordinated action” if needed to protect the euro’s stability.

Refusing to specify what this would be, European leaders sought to inject more rigor into Greece’s budget deficit reduction program.

Having concealed its true economic situation and largely squandered the proceeds of the good economic years, Greece is not seen as a deserving cause in Berlin.

“Germany has, in the last 10 years, been through very painful social reform which mean curtailing rights and social benefits and pushing back the retirement age,” said Thomas Klau of the European Council on Foreign Relations and author of a book on the birth of the euro. “The argument in Germany is ‘why should our workers work to the age of 67 to enable Greeks to retire earlier?’”

But Mrs. Merkel is under equally strong pressure from her European partners to protect the euro from the consequences of a Greek default. “She has to show leadership,” Mr. Klau said, “in taking and pushing through a decision which is unpopular with her electorate and much of her party and is not backed wholeheartedly by her junior coalition party”.

Already the Greeks have agreed to freeze wages, cut bonus, crackdown on tax evasion and raise the official retirement age. But European officials have made it clear that they do not believe these measures go far enough to narrow Greece’s budget deficit. Athens is now weighing an increase of two percentage points in the 19 percent value-added tax, higher fuel prices and the possible abolition of one of two additional months of pay received by public sector workers and by employees of many private firms.

The new austerity package is likely to be announced after Mr. Rehn’s visit to Athens but well in advance of a crucial meeting of European finance minister on March 16.

For weeks now the Greek government, which faces 23 billion in debt repayments in April and May, has been testing investor’s diminishing appetite for its bonds via a 3 to 6 billion euro ($4 billion to $8 billion) 10-year offering that it had hoped to bring off at an interest rate in the 6 percent range. That would be well above the roughly 3 percent rate investors receive on German bonds but not as costly as the 7 percent or so rate that some investors claim is necessary to compensate them for the extra risk of buying Greek bonds.

The offering itself is fairly small. But its significance for Europe and the bedraggled euro is far greater.

“I see this as a game of chicken between the markets and the German finance ministry,” Mr. Gros said.

Greece is pressing for a much detail as possible on rescue contingencies to ensure that it will be get some relief from the attack in the markets for imposing a harsh plan on its restive public.

Greek officials have privately pointed out that, when a country goes to the International Monetary Fund, it gets protection from the markets until its economy has stabilized.

For example, in November 2008 when Hungary went to the monetary fund it received a stand-by loan worth about euros 12.3 billion, then $15.7 billion, of which euros 4.9 billion or $6.3 billion was on tap immediately and the remainder available in five installments subject to quarterly reviews.

Without similar help the Greek austerity drive might prove counterproductive.

“Cutting public spending by this amount,” Mr. Tilford said, “when there is no other source of demand in the economy, when export demand is extremely weak and the country is running a huge current account deficit, is almost certain to push their economy into a slump.”

Without the I.M.F., the only credible source of support to ease the shift in fiscal policy in Greece are the other European governments that rely on the euro as well.

“The Greeks are in a bad position,” Mr. Tilford said, “but their bargaining power is stronger than some governments concede. If the euro zone doesn’t come up with something they will have little option but to go to the I.M.F.”

SEC examines destabilizing effects of CDS
YAHOO
Feb. 25, 2010

WASHINGTON (Reuters) – Securities regulators said on Thursday they are examining the potential abuses and destabilizing effects of credit default swaps, a financial instrument that can be used to speculate on an issuer's credit worthiness.

The Securities and Exchange Commission comments come after Federal Reserve Chairman Ben Bernanke said regulators were looking at how Goldman Sachs (GS.N) and other Wall Street companies helped Greece arrange derivative deals.[nN25251885]

The SEC would not confirm or deny it was investigating Goldman's role in Greece.

"As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices," SEC spokesman John Nester said.

Goldman had no comment.

It is unclear what regulators are examining regarding Goldman's dealings with Greece. Bernanke did not specify.

The SEC has said it has more than 50 probes involving credit default swaps, collateralized debt obligations and other derivatives-based instruments.

The SEC has already expanded some of its insider trading investigations to examine derivatives and credit default swaps.

Used to insure against the default of debt issuers, credit default swaps were blamed for exacerbating the financial crisis by spreading losses from bets on risky mortgages and other debt.

Because swaps and other over-the-counter derivatives are not traded on a central exchange, regulators cannot monitor their activity for any potential wrongdoing.

Congress is working on legislation to shed light on the $450 trillion private derivatives market. This legislation is currently stalled in the Senate.

The SEC said any derivatives legislation should ensure that securities-based swaps are regulated as strongly as the security that underlies the swap.

The agency also said Congress needs to give it the tools needed to police the markets and shed light on the opaque market.

(Reporting by Rachelle Younglai; editing by Carol Bishopric)

Fed to look into insurance contracts on Greek debt
YAHOO
By JEANNINE AVERSA, AP Economics Writer
Feb. 25, 2010

WASHINGTON – Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the central bank is looking into the use by Goldman Sachs and other Wall Street firms of a sophisticated investment instrument to make bets that Greece will default on its debt.  Bernanke said the Fed is looking into companies' use of credit default swaps, a form of insurance against bond defaults. Bernanke made the comments at the start of a Senate Banking Committee hearing, the second day where the Fed chief testified on Capitol Hill about the state of the economy.

"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive, " Bernanke said, adding that the Securities and Exchange Commission probably will be looking into this matter as well.

"We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S," Bernanke said.

The panel's chairman, Sen. Christopher Dodd, D-Conn., said he is troubled that this practice could worsen Greece's debt crisis.

"We have a situation in which major financial institutions are amplifying a public crisis for what would appear to be for private gain," Dodd said.

Dodd wondered whether there ought to be limits on the use of credit default swaps to prevent "the intentional creation of runs against governments."

On another topic, Bernanke said that the snowstorms and bad weather that have recently affected the country will likely have a short-term — but not permanent — impact on unemployment and layoffs. He said policymakers will "have to be careful about not overinterpreting" upcoming data.

Even though the economy is growing once again, senators on both side of the aisle worried about high unemployment — now at 9.7 percent — rising home foreclosures and difficulties people and businesses have in getting loans.

"The state of our economy as a whole may be improving, but if we're talking about the situation of ordinary American families, I think I can sum up this recovery in three words: not good enough," Dodd said.

Senators pressed Bernanke for ideas about what Congress can do to help out, especially in bringing down unemployment. The Senate on Wednesday approved a package aimed at generating jobs by giving companies a tax break for hiring the unemployed.  Bernanke shied away from providing recommendations but did say that if additional stimulus measures are approved, it would be "very constructive" to pair them with a plan on how the government intends to lower record-high deficits down the road.

On the economy, Bernanke repeated the message he delivered Wednesday to the House Financial Services Committee: that record low interest rates are still needed to make sure that the budding economic recovery is lasting and to help relieve high unemployment.  And, Bernanke again argued against Senate efforts to strip the Fed of its powers to regulate banks, saying such a move would be a "grave mistake."

Doing so, would deprive the Fed of information that factors into the setting of interest rates to influence overall economic activity, he said. Bernanke also argued that the Fed would lose insights into the health of not only individual banks but also of the entire banking system.

Dodd has wanted to rein in the Fed's power and remove it from overseeing banks as part of a broader legislative revamp of the nation's financial structure. That conflicts with the Obama administration's stance as well as the approach taken by House lawmakers in their financial overhaul bill.



Greek prime minister: no new austerity measures
YAHOO
By NICHOLAS PAPHITIS, Associated Press Writer
12 September 2010

THESSALONIKI, Greece – The Greek government is planning no new austerity measures as part of efforts to pull the country out of debt, the prime minister said Sunday. George Papandreou said the government was on track to meet targets for reducing its deficit by nearly 40 percent this year.

"We will not need any new measures," he said during a news conference a day after making his annual speech on the economy on the sidelines of a trade fair in northern Greece, and reiterated that Greece did not plan to restructure its debt — a move that he said would have been "catastrophic" for the economy.

In exchange for euro110 billion ($140 billion) in rescue loans over three years from the International Monetary Fund and some EU countries, Greece has implemented strict fiscal control in an effort to reduce the budget deficit from 13.6 percent of annual output in 2009 to 8.1 percent this year.

Unions have been angered, however, by austerity measures that have included cutting salaries and raising taxes.

Asked whether Greece might ask for an extension of the EU-IMF package beyond its 2013 end date, Papandreou said the government did not intend to ask for an extension, and could even leave the program early if good progress was made.

The year 2013 "is truly the end of this process," Papandreou said. "The faster we complete the major reforms in our country ... the sooner we will be able to exit these restrictions. That could even happen before 2013, provided we do well."

The government's main challenge now is to boost revenue, which is lagging behind targets, although the shortfall is offset by better than expected performance in spending cuts.

According to the latest figures released by the Finance Ministry last week, net revenue increased 3.3 percent in the first eight months of the year, against a target of 13.7 percent for the year. However, spending fell by 12 percent from January to August, compared with an end-year target of 5.8 percent.

Papandreou acknowledged that revenue shortfall was a problem, but said that overall "we are ahead of our targets."

"I have every confidence that, by the end of the year ... we will have achieved the 40 percent reduction of deficit," he said.

IMF and EU inspectors are due in Athens next week to review Greece's progress in overhauling its economy, while the country is due to receive a second installment of loans worth euro9 billion ($11.45 billion).

Greece is relying on the loans to refinance its debt, as the interest rates demanded for its long-term government bonds on the international market are so high they have essentially locked the country out of the market. Investors are demanding about 9 percent more interest for Greek 10-year government bonds than they do for the equivalent German benchmark bonds.

Papandreou said financial markets had reacted to Greece's troubles in a "mob-like" manner in keeping the country's borrowing costs so high, and that this showed the EU-IMF package was necessary to restore confidence in Greece's economy.

"I am confident that this confidence that is growing will have a strong impact on the markets" and therefore on bringing down borrowing costs, he said.

On Saturday night, Papandreou gave a speech on the economy, promising to cut the tax rate on companies' retained profits from 24 to 20 percent next year to offer "a strong incentive for investments and competitiveness."

He also pledged this year to open up restricted professions — including truck drivers, notaries, taxi drivers and pharmacists — deregulate the energy market, settle on privatization targets, facilitate major investments and simplify business licensing procedures.

11 September 2010 Last updated at 16:36 ET
Greek unions protest against PM's austerity plans

Greek unions have staged mass protests in the city of Thessaloniki against the government's austerity programme.  The protests were largely peaceful but police used tear gas on a small group which broke away from the rally.  But Prime Minister George Papandreou, who is attending a trade fair in the city, has said he is not going to give up on his government's austerity plans.  On Friday, the government said there would be further austerity measures, in addition to those already announced.

Some 20,000 people marched through Thessaloniki to protest against Mr Papandreou's swingeing cuts, which have already had a significant impact on public spending.  The country's trade unions have said they believed the government wanted to "overthrow" workers' rights, on top of cutting public sector wages and pensions.  The march was largely peaceful but minor clashes were reported and police fired tear gas at a small group which broke away from the main rally.

Security concern

Mr Papandreou said he would not be swayed by the demonstrations and that he was "not thinking of the political cost".

"We are fighting for the survival of Greece. Either we'll win together, or we'll sink together."

"I ask all the country's productive forces to join us, to support this great change."

Earlier on Saturday, a shoe was thrown at Mr Papandreou, although landed wide of its target.  Dr Stergios Prapavezis, a respected local cancer specialist - was detained along with his 15-year-old daughter and Stavros Vitalis, a farmer with whom he set up a protest movement called the Patriotic Front.  Before the incident, Dr Prapavezis had told the BBC that the prime minister was not welcome in the northern region because he had surrendered Greece's sovereignty and subjected ordinary people to poverty.

The BBC's Malcolm Brabant in Thessaloniki says that with 3,000 police patrolling the city's streets, the fact that a single shoe thrower got so close to the prime minister will be a source of major embarrassment.

The centre-left government imposed a tough austerity programme in May in return for a 110bn-euro ($140bn; £91bn) bail-out from the International Monetary Fund (IMF) and the European Union that helped it stave off bankruptcy.

Dr Stergios Prapavezis is led away by police after throwing a shoe at the prime minister in Thessalonki.  On Friday evening, Finance Minister George Papaconstantinou said it was on track to reduce its budget deficit from 13.6% of GDP in 2009 to 8.1% this year, and pledged to maintain the pace.

"We will continue as we started," he was quoted as saying by the Associated Press news agency.

"[However,] several more months must pass before we can convincingly show that what has been done was not a flash in the pan, and that we won't fall to pieces at the first sign of hardship."

Mr Papaconstantinou said he planned to overhaul several state-run corporations including the Greek Railway Company, which has 10.7bn euros of debts.

"As a society, we have shown that we understand the problem," he said.

The government also wanted to introduce reforms in the tourism, education, agriculture and energy sectors in the coming year, he added.  Official figures published earlier this week showed the contraction of the Greek economy was accelerating. It is expected to shrink by 4% this year.  Inflation has also reached 5.5% - its highest level in more than a decade - and more than half a million people were officially out of work in June.
Page last updated at 13:11 GMT, Wednesday, 3 March 2010

 Greece backs new round of tax rises and spending cuts
Demonstration by striking workers in Athens, 10 Feb 10
Greece has been hit by a wave of public sector strikes

The Greek government has approved a new package of tax rises and spending cuts to save 4.8bn euros ($6.5bn; £4.4bn) and ease its budget crisis.

The measures include a rise in sales and luxury taxes, a 30% cut in the holiday bonuses paid to civil servants, and a pensions freeze.

The EU had called for austerity measures amid fears that Greece's problems could undermine the eurozone.

PM George Papandreou has likened the budget crisis to a "wartime situation".

ANALYSIS
Malcolm Brabant
By Malcolm Brabant, BBC News, Athens
In a country with Byzantine financial practices, one of the more idiosyncratic traits of Greek employment law is the requirement that workers receive their annual remuneration in 14 segments.

The methods vary, but in principle, employees get a full month's extra wages at Christmas, an extra half month's salary to help during the summer holiday period, plus another half month's salary at Easter.

The bonuses carry great symbolic value in Greece, but the European Commission has urged the government to scrap them for civil servants.

Some of the cabinet have been reluctant to do so, not least because of strong opposition from trades unions. The unions fear that any reduction in the bonuses will not be just for the duration of the crisis but will be permanent.

The main civil service union has called a 24-hour strike on 16 March.

He told reporters: "These decisions are necessary for the survival of the country and the economy, so that Greece can exit the vortex of speculators and defamation, so that we can breathe and keep on fighting."

The socialist government has pledged to reduce Greece's budget deficit from 12.7% - more than four times the limit under eurozone rules - to 8.7% during 2010.

It is also seeking to reduce its 300bn euro ($419bn; £259bn) debt.

Correspondents say businesses in Greece are likely to react badly to further tax increases, as they see them as being counter-productive, discouraging consumer spending and contributing to a further downward spiral.

There have already been strikes by trades unions in protest against the government's cost-cutting plans.

And Panayiotis Vavouyios, head of the retired civil servants' association, said: "It is a very difficult day for us. These cuts will take us to the brink.

"Brussels is demanding cuts and the government is doing nothing to stop them. To make poor pensioners pay for this crisis is a disgrace."

The German government welcomed the additional Greek austerity measures, saying they were likely to inspire confidence in Athens.

European debt and deficit figures

Transport strikes lay bare Europe's malaise
YAHOO
By JAMEY KEATEN, Associated Press Writer
Feb. 23, 2010

PARIS – With economic recovery barely there and talk of austerity spreading, many European workers are pushing back.

French air traffic controllers walked off the job Tuesday just as Lufthansa pilots ended a strike and British Airways cabin crews voted to launch one of their own. Greek unions prepared to shut down much of their country Wednesday with wide-ranging strikes.

These workers — like those blockading the Athens stock market, and demonstrators angry at proposed delayed retirements in Spain — fear for their hard-earned comforts as European governments and companies tighten belts to stay solvent.

The walkouts are the latest signs of a broader unease about jobs and benefits, and what the future holds for a continent struggling to stay competitive on a global scale.

From Communist-backed protesters who blocked the Athens stock market Tuesday to labor unions angry at plans to require Spaniards to retire at 67 instead of 65, Europeans face the unsettling prospect of seeing some of the comforts and benefits won over the decades slip away.

Air traffic controllers walked off the job across France as a four-day strike began on Tuesday, testing the patience of would-be travelers and forcing the cancellation of hundreds of flights. Unions called the walkout to protest plans to integrate European air traffic control across six countries — which workers fear will lead to losses of jobs and civil servant benefits.

Workers and unions say they are digging in to protect the European social safety net from fraying and to keep austerity measures from sapping consumer demand and thus the economy.

"The dangers of pricing oneself out of a job have nowhere been more apparent than they are today," said Howard Wheeldon, a senior strategist at inter-dealer broker BGC Partners in London.

"The solution is ... for companies to be even more efficient and that of necessity means employing fewer staff," said Wheeldon. That's what managers at British Airways and Lufthansa are facing, he said.

Thousands of Lufthansa pilots resumed work Tuesday after suspending a strike over concerns that cheaper crews from the German carrier's smaller airlines in other countries could replace them one day. Big European carriers have been pummeled in recent years by high jet-fuel prices, competition from low-cost rivals and falling demand for first- and business-class tickets — where profit margins are higher.

"Cost pressure has always governed airlines," said Per-Ola Hellgren, an analyst at Germany's Landesbank Baden-Wuerttemberg. "The pressure is much greater than in the past. The conditions were never really great and now they're worse than ever."

While airline workers face market pressures, the air traffic controllers are subject to a government push for efficiencies at a time of high state deficits and lackluster economic conditions.

Eric Heraud, a spokesman for the French state-run civil aviation agency DGAC, suggested the controllers are acting out of fear.

"This strike is a little bit disproportionate," because the French government is committed to keeping workplace protections, he said. Heraud said labor unions representing controllers in the five partner nations — Belgium, Germany, Luxembourg, the Netherlands and Switzerland — all supported the integation plan.

The malaise about pending government cutbacks and efficiency-seeking extends beyond the air travel sector.

In Spain, labor unions have called protest rallies for Tuesday evening in Madrid, Barcelona, Valencia and other cities to protest a government plan to raise the retirement age from 65 to 67 age as part of an austerity package. Greek unions are calling a wide-ranging strike for Wednesday to protest austerity measures aimed at getting the country out of a government debt crisis. The action is expected to ground flights, reduce medical service and close schools and government offices, while some private sector unions will also stay off work.

Transport labor unions in the Czech Republic were meeting Tuesday to decide whether to go on strike to protest taxation of their workers' benefits. The unions want parliament to change a new law on value added tax that took effect this year.
Greek PM rules out bailout but urges EU solidarity
YAHOO
By PAN PYLAS and ELENA BECATOROS, Associated Press Writer
Feb. 19, 2010

LONDON – Greek Prime Minister George Papandreou told other European leaders Friday that Greece intended to solve its debt crisis on its own, as the government replaced the head of its debt management agency ahead of key moves to refinance its massive deficit.

The news that Petros Christodoulou, former head of asset management at the National Bank of Greece, will take over from Spyros Papanicolaou comes as financial markets continue to fret about the Greek government's ability to pay off its debt. Those worries have undermined confidence in the 16-country euro currency.

The Finance Ministry did not give a reason for the appointment in its announcement late Thursday.

Greece has taken a hammering in markets in recent months, after the new government sharply revised the budget deficit shortly after the elections to 12.7 percent of gross domestic product from a 3.7 percent forecast months earlier — sending Europe into a new phase of the financial crisis over mounting debts by Greece and several other euro-zone countries.

Spreads of Greek government bonds over the equivalent German benchmark bonds — a key indicator of the market's perception of a risk of default — have spiraled in recent weeks, and stood at 326 basis points on Friday afternoon. Papandreou reiterated in London that Greece's troubles were "our responsibility" and that Greece was not seeking a bailout. But he said Athens' woes affected all and that the country needed the support of its partners in the EU.

"Higher interest rates for us means higher interest rates for Europe....What we are simply saying is we'd like to borrow on the same terms as other countries in the European Union and the eurozone," Papandreou said at a conference of socialist leaders.

The Prime Minister would not be drawn onto whether Greece was preparing a multibillion euro bond issue next week as around euro20 billion of its debt needs to be refinanced in April and May. There is mounting speculation in the markets that Greece will begin looking to tap investors before the end of February to take advantage of improved market conditions — last month the spread over German bonds stood at around 400 basis points.

Papandreou repeated his view that the country was not looking for a bailout from its partners in the 16-country eurozone but "simply saying we have a program and we need support for this program." Papandreou's government has pledged to cut its budget deficit by four percentage points in this year alone.

Papandreou also met with British Prime Minister Gordon Brown and Spain's premier Jose Luis Rodriguez Zapatero, as well as Foreign Secretary David Miliband — in addition to being Prime Minister, Papandreou also holds the foreign affairs brief.

Zapatero, whose government is also facing pressure in the markets to bring down its budget deficit, gave Papandreou support and said deficits across Europe would come down once the recovery from recession was firmly established.

"Of course we are going to reduce the deficits.....we are not going to fall in the trap of the ideas of those who have created the financial crisis," he said.

"The large majority (of Greeks) has no responsibility for what has happened, and much less Papandreou's government..it deserves the trust of European institutions, of the markets and he has the trust of all the European governments," Zapatero added.

Back in Athens, Greek drivers lined up for gas at the few stations still open Friday as a customs strike against government austerity measures left many pumps running dry. The fuel shortage was the first serious consequence of growing labor protests against the government's emergency cuts, aimed at easing the debt crisis in Greece and shoring up market confidence.

Customs workers have extended their strike against salary freezes and bonus cuts through next Wednesday, when unions across Greece will hold a general strike that is set to bring the country to a standstill.

Athens has come under intense pressure by its European Union partners to bring its finances under control and explain the use of financial deals known as currency swaps and how they affected the country's debt and deficit figures.

Greece has announced a series of harsh austerity measures and says the swaps debt deal, made with U.S. investment bank Goldman Sachs, was above board and will be explained in a letter being sent by the finance minister to the European Union.

The EU's top economy official, Olli Rehn, gave the Greek government until Friday to supply answers on the use of the currency swaps.

"There will be a response. There is a letter by the Finance Minister," government spokesman Giorgos Petalotis said, adding it would "most likely" be sent on Friday.

EU officials said however that the letter had not been received by early Friday evening, and that once they received the letter, time would be needed to analyze its contents.

Earlier this week, European finance ministers warned Athens it would have to impose even tougher budget cuts if its current austerity program can't reduce the deficit to 8.7 percent this year. Athens has until March 16 to report back to the EU on its progress.

European Commission spokeswoman Amelia Torres said Rehn will visit Greece "before the middle of March." She did not elaborate, but the timing of the visit seemed designed to step up the pressure on Athens.
Bomb explodes outside a JP Morgan office

Last Updated: 3:04 PM, February 16, 2010
Posted: 1:48 PM, February 16, 2010

A bomb detonated Tuesday outside JP Morgan Chase & Co.’s offices in Athens, Reuters reported, citing a police source.

No injuries were reported.

It was a time-bomb at JP Morgan's offices in central Athens," a police official told Reuters. "The explosion damaged the outside door and smashed some windows."

A local newspaper reportedly received a warning call prior to the explosion, according to Reuters.

Greece's economic problems have roiled markets across the world in recent weeks, as concerns about its fiscal crisis casts doubt on the strength of the euro.
Greece faces deadline on swaps
YAHOO
By AOIFE WHITE, AP Business Writer
Feb. 16, 2010

BRUSSELS – Greece has only days to explain its use of complex financial deals that it used to mask debt and just a month to prove that its drastic budget cuts go far enough to reassure markets — and other EU governments reluctant to bail Athens out if it can't pay its bills.

The Greek crisis has plunged the 16 nations that use the euro into a crisis by breaking rules on debt and deficit that underpin Europe's currency union amid worries that its problems could be even bigger because its public finance figures cannot be trusted.

The EU's top economy official, Olli Rehn, said Tuesday that he wanted the Greek government to supply answers by Friday on how it used currency swaps and how that affected debt and deficit figures.

European Union finance ministers on Tuesday also gave Greece a deadline of March 16 to show that it can make big spending cuts to bring its deficit down from the EU's highest, 12.7 percent, to 8.7 percent this year.

They said in a statement that this was essential to "remove the risk of jeopardizing the proper functioning of economic and monetary union."

Eurozone nations — who have pledged to provide a financial bailout to Greece if needed — said they would demand new spending cuts, higher value-added taxes and fuel taxes and new taxes on luxury goods, including cars, if Greece can't make the deficit reductions it is promising.

Greece now has a month to show that it can make real savings from a freeze on public sector salaries, cuts to bonuses and stipends and promises to reform pensions and health care.

The government is facing opposition at home. Greek customs officials walked off the job Tuesday for a three-day strike which will hamper imports and exports.

But Greek Finance Minister George Papaconstantinou insisted that he is already ahead of schedule on swinging budget reductions and that public finances reported a slight surplus last month thanks to a one-off tax on large companies.

"It's a matter of credibility for the country," he told reporters. "The execution of the Greek budget for the month of January, based on preliminary figures, is going quite well. We have actually a surplus."

Greece says it isn't asking for financial help and won't need any — but it is facing a credibility crisis as a Feb. 1 report commissioned by the Greek finance ministry warns of "significant debt revisions" for 2009 statistics due to swaps, debt to suppliers and state-guaranteed loans that may default.

The report said some swaps are now "being done in order to transfer interest from the current year to the future, with long-term loss to the Greek state."

Rehn said "it is clear that a profound investigation must be done on this matter," promising that he would check to see if all rules were respected.

"If it turns out that there is such kind of securitization of swaps that are not in line with the rules of the time, then of course we would need to take action," he said.

The EU can take Greece to court, under threat of daily fines, to change its statistics methods. It is already threatening legal action for Greece's failure to report accurate public finance figures last year.

Papaconstantinou said Monday that such swaps were legal when Greece used them and that it is not using them now and will stick to EU statistics rules on new financing deals.

Papaconstantinou also said Greece was not alone among EU nations in using such deals. Rehn said he was not aware of similar problems with other countries but that "this has still to be verified."

Rehn also took a shot at the investment banks that advised Greece to mask debt. Reports in The New York Times and Germany's Der Spiegel said that Greece used U.S. financial institution Goldman Sachs to engage in the swaps. The bank did not comment when contacted last week.

"I think the banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics," he said.

Traders' fears that Greece might not make debt repayments increased Tuesday, with the spread of the Greek government bond widening to 3.35 percentage points against the benchmark German bond. The spread was below 3.00 points last week on hope of a detailed eurozone bailout plan.
EU Asks Greece to Explain Derivatives Reports
NYTIMES
By REUTERS
Filed at 10:02 a.m. ET
February 15, 2010

BRUSSELS (Reuters) - The European Union has asked Greece to explain reports that it engaged in derivatives trades with U.S. investment banks that may have allowed it to mask the size of its debt and deficit from EU authorities.

According to the New York Times, one contract in 2001 -- carried out just as Greece was joining Europe's monetary union -- involved Greece selling forward future lottery receipts and airport landing fees in exchange for cash to write down debts.

The deal was treated as a currency trade rather than a loan, according to the newspaper, allowing Greece to hide it from public view while meeting EU deficit limits.

Greece's finance minister, George Papaconstantinou, on Monday dismissed suggestions that his country may have played fast and loose with monetary rules, saying the transactions Greece took part in were permissible at the time.

"The kind of derivatives contracts reported by some newspapers were legal at that time," he told reporters in Brussels. "Greece was not the only country to use them... They were made illegal, (and) we have not used them since then."

The issue has become a focus of attention as Greece has now acknowledged that it has a budget deficit of nearly 13 percent of gross domestic product -- more than four times EU limits -- and a national debt equivalent to 120 percent of GDP.

The fiscal problems have led to pressure on Greek debt in bond markets and weakened the European single currency.

The European Commission, the EU's executive that is responsible for enforcing EU laws, said it had asked Greece to explain what contracts it had engaged in as Eurostat, the EU's statistics agency, had never been informed.

"I want to state that Eurostat was not aware of such transactions," Commission spokesman Amadeu Altafaj told a regular briefing on Monday.

"But I can tell you that Eurostat has indeed, following these reports, already requested the Greek authorities for an explanation by the end of February."

Asked if the derivatives trades that Greece is alleged to have conducted fell within EU budget rules, Altafaj said:

"We need the information on what kind of transactions took place, if they did (take place), and what was the effect on the government accounts of Greece... This is something that we don't have the information (on) yet and we have requested."

TRANSPARENCY

A senior Greek finance ministry official told Reuters that Greece's current debt financing operations were transparent and complied with Eurostat rules.

But Eurostat, which already has profound concerns about the reliability of Greek macroeconomic data, is likely to take a very hard look at exactly what transactions took place and when.

"This is why we are requesting more capacity for Eurostat to indeed to have more thorough and deeper view on these statistics. Reliable statistics are a key issue in management of public finances," Commission spokesman Altafaj said.

What Greece appears to have carried out, at least on one occasion, is a currency swap, which Altafaj said would have to be examined to see if it met EU rules.

"If this is legitimate in government management operations, which is one of the issues that is at stake, yes it is, it is legitimate, if, and I understand if, the underlying exchange rates and or interest rates of such swaps are calculated from the observed market rate, and this is something that we will have to assess based on the information we receive," he said.

At a meeting later on Monday, euro zone finance ministers are expected to exert more pressure on Greece to implement planned budget deficit cuts. EU leaders pledged last week to help Athens resolve its crisis if needed, but they are still hoping to avoid having to provide concrete aid.
Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis
NYTIMES
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
February 14, 2010

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.  As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.  It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.  In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.  Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.  A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.  Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.

“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.  The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.  Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”
?
Dark and murky photos - like "dark pools?"  Still going strong a year later...but Commodity Futures Trading Commission "regulates" more (r) - or does it, we ask?


CFTC takes another shot at swap trading plan
YAHOO
By Christopher Doering and Rachelle Younglai
16 December 2010

WASHINGTON (Reuters) – The chief U.S. derivatives regulator on Thursday proposed a new plan to make trading in the most popular swaps as transparent as stock exchanges, while trying to ensure that requirements for less popular swaps don't end up killing them.  Dozens of firms, such as IntercontinentalExchange Inc, hope to qualify as swap trading venues as the opaque swaps market is forced onto the public stage as part of the Wall Street financial overhaul mandated by the U.S. Congress.

How market regulators define these Swap Execution Facilities, or SEFs, will determine who will be in the business of trading and brokering the swap contracts.  The Commodity Futures Trading Commission voted 4-1 to issue a proposal allowing swap execution facilities to use various trading systems as long as certain requirements are met.

A week earlier, CFTC Chairman Gary Gensler was forced to delay the long-awaited plan due in part to Republican and industry concerns that the rule was not flexible enough.

The proposal would allow SEFs to have electronic trading systems similar to stock market order books, where bids and offers are continuously updated.  Swap venues also could have a "request for quote" system, as long as the request for a quote to buy or sell a swap was sent to at least five market players in the trading system.

But the SEF would have to give all market participants the option to post both firm and so-called "indicative" quotes, where the trader indicates what price he would be willing to trade without committing to the trade.
Both types of quotes would have to be viewed by multiple parties.

Republican Commissioner Jill Sommers, who said the original proposal was too narrow in scope, balked at that measure and said it may limit competition.

"In my view this provision is not mandated by Dodd-Frank and may limit competition by shutting out applicants who wish to offer (Request For Quote) systems without this type of functionality," said Sommers, who voted against the proposal.

Fellow Republican Commissioner Scott O'Malia also had concerns and questioned whether the plan would serve all markets in a "manner that is transparent."

Allowing market participants to post "indicative" quotes is designed to ensure that less liquid derivatives are not forced into a fully transparent environment that traders say would ultimately deter participants from posting true bids and offers.  Under the Dodd-Frank overhaul, the CFTC has been given the power to police most of the estimated $600 trillion over-the-counter derivatives market. The SEC is in charge of security-based swaps, which is at most about a 10th of the market. The SEC is expected to offer a similar plan in the new year.

The original CFTC proposal offered three tiers of transactions: larger trades that meet a specific level of volume, smaller trades that are not block trades but don't have major volume, and other transactions such as block trades where an SEF could provide end users the chance to trade even though it is not required.

Companies that traditionally have been big players in the over-the-counter swaps market are working to ensure they stay in the game as the business moves under the CFTC's regulatory oversight. Barclays, Credit Suisse, Morgan Stanley and others have met with the agency to discuss the new trading platforms.

The CFTC proposal is open for a 60-day comment period.

A Secretive Banking Elite Rules Trading in Derivatives
By LOUISE STORY, NYTIMES
December 11, 2010

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.  Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.  Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.  But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.

“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.

Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.

Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.

The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.

But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.

Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.

The Department of Justice is looking into derivatives, too. The department’s antitrust unit is actively investigating “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,” according to a department spokeswoman.

Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level — an enormous savings for investors.

“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”

Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation.

Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank, which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace.  The Deutsche spokeswoman also said the banks’ role in this process has been a success, saying in a statement that the effort “is one of the best examples of public-private partnerships.”

Established, But Can’t Get In

The Bank of New York Mellon’s origins go back to 1784, when it was founded by Alexander Hamilton. Today, it provides administrative services on more than $23 trillion of institutional money.  Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed.  Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis.

Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market.

The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. “But we don’t qualify. We certainly think that’s kind of crazy.”

The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.  Mr. Kannambadi said Bank of New York’s clients asked it to enter the derivatives business because they believe they are being charged too much by big banks. Its entry could lower fees. Others that have yet to gain full entry to the derivatives trading club are the State Street Corporation, and small brokerage firms like MF Global and Newedge.

The criteria seem arbitrary, said Marcus Katz, a senior vice president at Newedge, which is owned by two big French banks.

“It appears that the membership criteria were set so that a certain group of market participants could meet that, and everyone else would have to jump through hoops,” Mr. Katz said.

The one new derivatives clearinghouse that has welcomed Newedge, Bank of New York and the others — Nasdaq — has been avoided by the big derivatives banks.

Only the Insiders Know

How did big banks come to have such influence that they can decide who can compete with them?

Ironically, this development grew in part out of worries during the height of the financial crisis in 2008. A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds. The panic led to the need to bail out the American International Group, for instance, which had C.D.S. contracts with many large banks.

In the midst of the turmoil, regulators ordered banks to speed up plans — long in the making — to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market.  Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq.  Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive.

None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.

Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.  Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.

Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.

“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”

Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.

The precise amount that banks make trading derivatives isn’t known, but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives.

The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.

If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price — and the commission, or fee — are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition — and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002.

Not so with derivatives. For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a bank. The trader matches that order with someone selling the same type of derivative.  Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly.

And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.

It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.

An Electronic Exchange?

Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year.

But Mr. Griffin’s proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps.

Big banks that handle most derivatives trades, including Citadel’s, didn’t like Citadel’s idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.

So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICE’s clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICE’s clearinghouse, according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment.

The banks also refused to allow the deal with ICE to close until the clearinghouse’s rulebook was established, with provisions in the banks’ favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York.  The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.

Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves.

“The one thing I know the banks are concerned about is their risk capital,” he said. “You really are going to get some comfort that the way the entity operates isn’t going to put you at undue risk.”

Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit.  This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markit’s agreement. And so, essentially boxed in, they agreed to the terms, according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markit’s terms.)

Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffin’s dream of a new, electronic trading system.  With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchange’s clearinghouse effort. The exchange set up a risk committee that, like ICE’s committee, was mainly populated by bankers.

It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.

Kim Taylor, the president of Chicago Mercantile Exchange’s clearing division, said “the market” simply wasn’t interested in Mr. Griffin’s idea.

Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.

“It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.

Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee.

“We spent and we still continue to spend a lot of time on thinking about governance,” said Peter Barsoom, the chief operating officer of ICE Trust. “We want to be sure that we have all the right stakeholders appropriately represented.”

Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”

“It’s a stunning amount of money,” Mr. Griffin said. “The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since they’re not sure if they’ll be winners or losers, their basic instinct is to resist change.”

In, Out and Around Henhouse

The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States.  That puts them in a pivotal position to determine how derivatives are traded.

Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses.  Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt.

Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits.  The banks already have a head start. Even a newly proposed rule to limit the banks’ influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules — on topics like transparency and possible electronic trading — will drastically change derivatives trading, or leave the bankers with great control.

One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.

“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”
Goldman case likely to unleash torrent of lawsuits
YAHOO
By DANIEL WAGNER, AP Business Writer
17 April 2010

WASHINGTON – The fraud charges against Goldman Sachs & Co. that rocked financial markets Friday are no slam dunk, as hazy evidence and strategic pitfalls could easily trip up government lawyers. Yet that hardly matters, experts say, because the allegations will kick off a new era of litigation that could entangle Goldman and other banks for years to come.

The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.

Goldman said the charges are "unfounded in law and fact." In a written response to the charges, the bank said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio — not the hedge fund client. Goldman said it lost $90 million on the deal.

That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.

The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.

"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."

Among the legal action expected in the coming months:

• Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable could come as early as Monday. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent Friday as the bank lost $12.5 billion in market capitalization.

• Suits by investors who believe Goldman sold them on deals that were doomed to fail. The investors in the transaction at the heart of the SEC case could sue first, followed by others who believe their losses were similar.

• Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.

• Charges by regulators about other mortgage investments at Goldman and elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday the agency is racking up evidence on other deals in the overheated market that preceded the financial crisis.

Already the case has provoked legal questions from foreign governments, according to published reports. That's because the financial crisis forced many countries to bail out banks that lost money on investments arranged by Goldman.

German regulators are considering legal action against Goldman, newspaper Welt am Sonntag reported, quoting a spokesman for Chancellor Angela Merkel.

The charges would be on behalf of IKB Deutsche Industriebank AG — an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others. IKB invested in the deal regulators are targeting.

The flurry of legal activity is likely to proceed separately from the SEC's case against Goldman, which experts said faces numerous pitfalls.

To prove its fraud case against Goldman, the government must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The government's greatest challenge, experts said, will be boiling the case down to a simple matter of fraud. The issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the government's claims.

"If you wanted to go after Goldman with a complaint that wouldn't stick, this would be perfect," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "If you look at these products, almost all of them look like hoaxes because of the junk inside."

Legal experts pointed to the paucity of evidence in the government's lawsuit, which contains short excerpts from e-mails but lacks key information about what the various investors knew and what actions they took.

The quality of the evidence was not clear from the complaint, said Jacob Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA.

Frenkel said there's been an uptick in "cases where the government chooses select excerpts from e-mails as the basis for its allegations only to find the balance of the text or other e-mails prove otherwise."

For example, prosecutors last fall tried unsuccessfully to use a series of e-mails to convict two Bear Stearns hedge fund executives. They wanted to convince jurors that there was behind-the-scenes alarm at the hedge funds as investments in complex securities tied to mortgages began to slide.

The jurors were not swayed. After the verdict, some jurors told reporters they found the evidence against the two executives flimsy and contradictory. Others suggested the pair were being blamed for market forces beyond their control.

Goldman already has advanced a similar argument. "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities" were in the investment pool, the bank said in a written response to the charges Friday.

That's part of a time-honored tradition of defusing accusations by bringing in details that may or may not be relevant, said James Cohen, a professor at Fordham University School of Law.

"Traditionally it's in the interest of the party that has Goldman's role to muddy the waters — it's rarely in their interest to have the picture as sharp as HDTV," Cohen said.

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.


SEC looks at changes for 'dark pools'
YAHOO
By MARCY GORDON, AP Business Writer
October 21, 2009

WASHINGTON – Federal regulators considered tighter oversight Wednesday for so-called "dark pools," trading systems that don't publicly provide price quotes and compete with major stock exchanges.

The Securities and Exchange Commission was expected to propose new rules that would require more stock quotes in the "dark pool" systems to be publicly displayed.

The alternative trading systems, private networks matching buyers and sellers of large blocks of stocks, have grown explosively in recent years and now account for an estimated 7.2 percent of all share volume. SEC officials have identified them as a potential emerging risk to markets and investors.

The SEC initiative is the latest action by the agency seeking to bring tighter oversight to the markets amid questions about transparency and fairness on Wall Street. The SEC has floated a proposal restricting short-selling — or betting against a stock — in down markets.

Last month, the agency proposed banning "flash orders," which give traders a split-second edge in buying or selling stocks. A flash order refers to certain members of exchanges — often large institutions — buying and selling information about ongoing stock trades milliseconds before that information is made public.

Institutional investors like pension funds may use dark pools to sell big blocks of stock away from the public scrutiny of an exchange like the New York Stock Exchange or Nasdaq Stock Market that could drive the share price lower.

"Given the growth of dark pools, this lack of transparency could create a two-tiered market that deprives the public of information about stock prices," SEC Chairman Mary Schapiro said at the agency's public meeting Wednesday.

When investors place an order to buy or sell a stock on an exchange, the order is normally displayed for the public to view. With some dark pools, investors can signal their interest in buying or selling a stock but that indication of interest is communicated only to a group of market participants.

That means investors who operate within the dark pool have access to information about potential trades which other investors using public quotes do not, the SEC says.

The SEC proposal would require indications of interest to be treated like other stock quotes and subject to the same disclosure rules.

A 1999 SEC rule established a separate set of regulations for alternative trading systems, which have grown to 29 from 10 in 2002. Examples include: London-based Turquoise Trading Ltd., a European system established by Citigroup Inc., Goldman Sachs Group Inc., France's Societe Generale SA and other major banks; Toronto-based Alpha was set up by several major Canadian banks; and Liquidnet Inc. in New York.

NYSE chief executive Duncan Niederauer has asked the SEC to subject the alternative systems to a stricter set of regulations that is closer to the regime for the major exchanges. His proposed changes would go further than those being considered by the SEC.

"We are not against dark pools," Niederauer said Tuesday in a conference call with reporters. "We're in favor of competition; we'd just like it to be a level playing field."

Sen. Charles Schumer, D-N.Y., sent a letter to Schapiro asking the SEC commissioners to consider stricter regulations for the trading systems as well as establishment of a consolidated surveillance system for all markets, for which the alternative systems would contribute some of the cost.
NYSE chief urges changes for 'dark pools'
YAHOO
By MARCY GORDON, AP Business Writer
October 20, 2009

WASHINGTON – With federal regulators poised to propose changes for so-called "dark pools," the head of the New York Stock Exchange said tighter rules should be applied to the alternative trading systems that don't publicly provide price quotes and compete with traditional exchanges.

The Securities and Exchange Commission is expected to propose new rules on Wednesday that would require fuller display of information on trades, bids and offers for the "dark pool" systems.

NYSE CEO Duncan Niederauer and Sen. Charles Schumer, D-N.Y., have asked the SEC to subject the alternative systems to a stricter set of regulations that's closer to the regime for the major exchanges. Their proposed changes would go further than those being considered by the SEC.

"We are not against dark pools," Niederauer said Tuesday in a conference call with reporters. "We're in favor of competition; we'd just like it to be a level playing field."

The SEC initiative is the latest action by the agency seeking to bring tighter oversight to the markets amid questions about transparency and fairness on Wall Street. The SEC has floated a proposal restricting short-selling — or betting against a stock — in down markets.

Last month, the agency proposed banning "flash orders," which give traders a split-second edge in buying or selling stocks. A flash order refers to certain members of exchanges — often large institutions — buying and selling information about ongoing stock trades milliseconds before that information is made public.

The alternative trading systems have grown explosively, accounting for an estimated 7.2 percent of all share volume. SEC Chairman Mary Schapiro has identified them as a potential emerging risk to markets and investors, and asked agency staff earlier this year to examine ways of bringing greater transparency to them.

The systems are private networks matching buyers and sellers of large blocks of stocks. Institutional investors like pension funds may use them to sell big blocks of stock away from the public scrutiny of an exchange like the NYSE or Nasdaq Stock Market that could drive the share price lower.

"This lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially," Schapiro said in a speech in June. "For example, the lack of reliable information can prompt speculation and suspicion about the basis for market fluctuations."

Schumer sent a letter to Schapiro asking the SEC commissioners to consider stricter regulations for the trading systems as well as establishment of a consolidated surveillance system for all markets, for which the alternative systems would contribute some of the cost.

SEC approval would be required to set up a new alternative system or make changes in operations of an existing one.

"I respectfully ask that you consider the proposals ... to ensure that (alternative trading systems), while continuing to provide beneficial competition to registered exchanges that directly and indirectly benefits retail investors, do not undermine the fairness, transparency and integrity in our markets," Schumer wrote.

A 1999 SEC rule set up a separate set of regulations for alternative trading systems, which have grown to around 30 from 10 in 2002. A prominent ATS is Turquoise, a European system established by Citigroup Inc., Goldman Sachs Group Inc., France's Societe Generale SA and other major banks. The NYSE's Arca Europe also is an ATS.
Schumer jumps into dark pool debate ahead of SEC meet
YAHOO
By Jonathan Spicer
October 20, 2009

NEW YORK (Reuters) – U.S. Senator Charles Schumer on Tuesday jumped in to the debate over anonymous trading venues known as dark pools, calling for tough new regulations a day before the U.S. Securities and Exchange Commission meets to consider new rules.

Schumer, among the most vocal of lawmakers pressing for market structure reform, urged in a letter to SEC Chairman Mary Schapiro that the regulator adopt some of the most robust measures now on the table, and called for a new market-wide monitor.

He said the growth of dark pools, which now number more than 40, risks undermining fair and transparent markets, and that regulation has not kept pace. The private venues are used primarily to trade large blocks of stock, and have proliferated this decade as the marketplace went electronic.

"We want to keep them in existence ... but we want a much more level playing field, which is what we don't have right now," Schumer said on a media conference call, adding the fragmented market "compromises the ability of regulators to monitor and enforce such abuses as front running and market manipulation..."

Dark pools, the largest of which are run by banks such as Goldman Sachs (GS.N) and Credit Suisse (CSGN.VX), account for an estimated 10 to 15 percent of overall U.S. equity volume.

The SEC meets Wednesday to consider proposals for changes that are expected to shed more light on the venues, including requiring them to display more quotes and publicly reveal more data on volumes.

The industry also expects more clarity on whether actionable indications of interest, or IOIs, which dark pools and exchanges use to communicate, should be treated as quotes.

Schumer said all actionable IOIs should be treated as quotes, which would effectively kill them, and that the threshold beyond which dark pools must display quotes should be dropped from 5 percent to 1 percent.

He also called on the SEC to consider real-time reporting of dark pool trades to the consolidated tape -- a measure that many expect, but that some warn could hamper institutions' ability to execute big, complicated orders.

Schumer made a splash this summer when he called for the elimination of so-called flash orders, which some exchanges sent to specific market players before routing them to the wider market. The SEC last month proposed to ban flashes.

ANTICIPATING NEW RULES

NYSE Euronext (NYX.N), which runs the New York Stock Exchange and participated in Schumer's conference call, on Tuesday said it would begin next month offering a means by which dark pools and broker-dealers could report trading.

The service -- which effectively dusts off a so-called trade-reporting facility, or TRF, that has been mostly dormant for a year -- is backed by units of Goldman, Barclays PLC (BARC.L), UBS AG (UBSN.VX), Knight Capital (NITE.O), and by Getco, the big high-frequency market-maker.

All U.S. off-exchange trading is now printed on Nasdaq OMX's (NDAQ.O) TRF, which accounts for some 35 percent of overall volume. NYSE's rival TRF would standardize volume reporting, print it daily on its website -- and represents a way for the exchange to facilitate any new SEC rules.

Schumer said dark pools should face more robust start-up regulations, and should share the costs of providing market-wide surveillance -- an argument long held by NYSE Euronext CEO Duncan Niederauer, who was also on the call.

Schumer did not identify which body should act as monitor.

U.S. market surveillance is now shared by in-house teams at the trading venues, as well as the Financial Industry Regulatory Authority (FINRA). The SEC is the umbrella regulator and police for stock and options markets.



E.U. and U.S. regulators at odds over derivatives
DAY
By STEVENSON JACOBS AP Business Writer
Article published Mar 14, 2010

To European officials, financial derivatives are dangerous weapons that worsened Greece's debt crisis and should be curbed.  To Wall Street, they're tools that reduce risk and generate profits and should be left alone.

Now, regulators on both sides of the Atlantic are trying to figure out who's right and what to do about it. At stake are billions in profits that banks say would be threatened by too much regulation. Yet supporters of tougher rules say the global financial system is at risk as long as derivatives remain largely unregulated.

Derivatives are instruments whose value depends on an underlying asset, such as mortgages or stocks. They can help hedge risks. But derivatives can also produce steep losses, or huge profits, if the value of their underlying asset sinks.

European officials say some derivatives are too harmful to be left alone. They warn they may ban some credit default swaps, a type of derivative that insures debt. In a visit to Washington this week, Greece's prime minister argued that speculators were using the swaps to bet against his country's debt. He said this has escalated Greece's borrowing costs, making it harder to dig out of its debt crisis.

The European Commission on Tuesday threatened to ban speculative trading of credit default swaps by investors who don't actually own a country's underlying debt. These are called "naked" trades. German Chancellor Angela Merkel called on the U.S. to curb such trades.  But U.S. regulators have resisted such calls. They favor only regulating the products, not curtailing them.

Coordination of any derivatives regulation is vital. Unless rules in the United States and Europe are synchronized, global traders inevitably would shift to wherever the most lenient rules exist.
The regulatory conflict comes days before the expected unveiling of a bill to overhaul the U.S. financial system. Sen. Christopher Dodd, D-Conn., the Banking Committee chairman overseeing the legislation, wants more transparency in derivatives markets.

His bill is expected to require most derivatives trades to pass through clearinghouses so transactions would be done more openly. Such transactions are now largely traded among financial institutions with little transparency or regulatory oversight. Critics say this can lead to abusive and dangerous behavior.

Speaking in New York this past week, Gary Gensler, head of the U.S. Commodity Futures Trading Commission, renewed his call for regulating the $600 trillion global financial derivatives market. But he stopped short of endorsing Europe's call for trading curbs.

Whatever rules Congress proposes, Gensler said "there should be no such exemption for" credit default swaps. The swaps account for an estimated $60 trillion of the derivatives trade.
The banking industry says it supports making derivatives less secretive but has lobbied against strict bans.

In a September speech in Germany, CEO Lloyd Blankfein of Goldman Sachs, one of Wall Street's biggest derivatives players, embraced the idea of clearinghouses. He said they would "reduce bilateral credit risk, increase liquidity and enhance the level of transparency through enforced margin requirements and verified and recorded trades."

But he warned against overregulating credit default swaps. He said the swaps "worked as they were intended to" during the financial crisis.

"If we simply ban customized derivatives to satisfy the perception that everything associated with these markets is bad, we run the risk of limiting ... business investment and, ultimately, economic growth," Blankfein said.

The main lobbying group for derivatives has also rejected calls for banning certain credit default swaps. It says the amount invested in the swaps cannot destabilize Greece because it represents only a small fraction of the country's outstanding debt.  Investors hold $406 billion worth of outstanding Greek bonds, according to Citigroup. But they hold only $9 billion in insurance against that debt through credit default swaps.  Given the relatively small amount of swap bets, "it is difficult to conclude (they're) dictating price levels," the International Swaps & Derivatives Association said in a statement.

After the 2008 collapse of Lehman Brothers, then the largest clearinghouse for swaps, EU regulators demanded banks set up clearinghouses for trades in Europe. So far, three EU-based clearinghouses are operational: ICE Clear, Eurex Clearing and LCH. Clearnet SA.

Speaking this week, Gensler said U.S. authorities are "working well" with overseas regulators.

"I'm optimistic we'll end up at roughly the same spot," he said.

Yet already there are signs that not even regulators within Europe agree on how dangerous derivatives really are. Germany's Merkel is calling for a ban on speculative credit default swaps. Yet her country's market regulator, BaFin, said this week it's found no evidence of an upswing in such trades on Greek government bonds.

A major cause of the rise in credit default swap rates has been growing demand for hedging against Greek risk, according to BaFin. It said data released by the U.S. Depository Trust & Clearing Corp. "do not point to massive speculative activities."

The Federal Reserve is investigating how Goldman Sachs and other banks are using the swaps and other derivatives. The Securities and Exchange Commission is examining the issue, too.  The securities industry says that blaming the products for Greece's problems is akin to shooting the messenger. The price of the swaps reflects merely the perceived risk of buying Greece's debt, it says.

A year ago, credit-default swap investors had to pay $250,000 to insure $10 million of Greek debt, according to CMA Datavision. By last month, the cost surged to a record $420,000. As of this past Wednesday, the rate had fallen to less than $300,000 after Greece announced a $6.5 billion austerity package. Still, that's about 10 times the cost of insuring $10 million of U.S. debt.

Regulator faults Wall Street banks on derivatives
YAHOO
By MARCY GORDON, AP Business Writer
March 11, 2010

WASHINGTON – Wall Street banks are seeking exemptions to proposed new financial derivatives rules that could shield more than half the trades that should be subject to disclosure, a federal regulator said Thursday.

The chairman of the Commodity Futures Trading Commission, Gary Gensler, criticized Wall Street's stance on proposed new oversight for the shadowy $600 trillion derivatives market. Derivatives have been blamed for hastening the 2008 financial crisis.

Gensler told a financial industry gathering that Wall Street has not been "enthusiastic" about the proposed new regulations now before Congress.

His comments came as the leaders of France, Germany and Greece called for a clampdown on the kind of speculative trading in derivatives blamed for worsening Greece's debt crisis and undermining the European currency recently.

Gensler, in several speeches in recent days, has been renewing his call for new regulation aimed at bringing transparency to, and prevent manipulation in, the sprawling global derivatives market. At his address Thursday to the meeting of the Futures Industry Association in Boca Raton, Fla., he also got in some mild barbs at Wall Street.

Billions in trading profits for the big investment banks could be threatened by new rules for derivatives, which passed the House in December as part of the overhaul of financial regulation and is now before the Senate. Many in the financial industry have indicated support for requiring derivatives trades to go through clearinghouses, "that is, as long as it only applies sometimes," Gensler said.

"Wall Street appears to be aligning themselves with corporate end users in an effort to exempt customer transactions from central clearing," he said. Though only about 9 percent of derivatives trades involve companies that use them to hedge against risk, "Wall Street seems to be making the case" that banks using them in financial transactions also should be exempt, Gensler said.

Such an exception, he warns, could leave 60 percent of the derivatives trades that rightfully should go through clearinghouses without price transparency.

"Let there be no mistake: Wall Street has not been enthusiastic about this reform," Gensler said in the text of his speech. "After the worst crisis in 80 years, though, we need real reform that protects the American public."

The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Companies of all kinds use derivatives to hedge against risks — airlines ensuring against spikes in fuel prices, for example. A potent coalition of nearly 200 companies that use derivatives — including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. — has lobbied Congress to make the case that legislative proposals to regulate derivatives could severely increase costs for corporate America.

Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the worldwide derivatives market. The collapse of the swaps nearly toppled American International Group Inc. in the fall of 2008, prompting the government to support the insurance conglomerate with about $180 billion in aid. The swaps have come under heightened scrutiny in recent days against the backdrop of the Greek financial crisis, with Greek officials blaming speculators' use of them to bet against Greece's debt for hiking the country's borrowing costs.

In Europe Thursday, French President Nicolas Sarkozy, German Chancellor Angela Merkel and the leaders of Greece and Luxembourg called for a crackdown on credit default swaps and asked European Commission President Jose Manuel Barroso to launch an investigation into their role in the trading of government bonds in European nations.

The leaders also called for mandatory reporting of all derivatives trading in Europe and said the EU should consider banning speculative trading in credit default swaps.

Gensler, in an address in New York on Tuesday, said that imposing new oversight on derivatives would "greatly reduce" the risk posed by credit default swaps, although "additional reforms ... should be considered to address the unique characteristics" of the swaps.

If Congress decides to exempt from the new rules some derivatives transactions used by companies to hedge against risk, he said, "there should be no such exemption for" credit default swaps, which are conducted almost entirely between financial institutions.

"The recent chill winds blowing through Europe, including press reports that Greece used derivatives to help mask its fiscal health, are reminders of the pressing need for comprehensive regulation," Gensler said in his speech Thursday to the futures industry gathering.
Key House Panel Votes to Regulate Derivatives
NYTIMES
By STEPHEN LABATON
October 16, 2009

WASHINGTON — A key House committee voted on Thursday to regulate, for the first time, trading in the arcane financial instruments known as derivatives, which have been linked to the financial crisis that shocked Wall Street and cut into the savings of millions of Americans.

The 43-to-26 vote by the Financial Services Committee was mostly along party lines and was a big step in President Obama’s proposed overhaul of rules covering the nation’s financial system.

The measure is part of a bill that will be debated by the House and Senate. Michael S. Barr, the assistant Treasury secretary for financial institutions, called the bill “absolutely essential to preserving a strong marketplace.”

One common derivative is the credit default swap, which has been cited repeatedly in the various examinations of the near-collapse of the financial system.

The day-to-day progress of the regulatory bill is being followed by a large cadre of people who hope to influence its contents as it makes it way toward final passage. Representatives from a surfeit of industries have descended on the Financial Services Committee.

The financial services industry alone has poured more than $220 million into lobbying in 2009, much of it in anticipation of this Congressional effort now beginning. As usual for major financial services legislation, lawmakers have heard an earful from small community banks and large Wall Street banks, as well as from insurance companies, credit card companies, credit unions, mutual funds and hedge funds.

But since virtually every imaginable company could be touched by the comprehensive legislation proposed by the Obama administration, the surprisingly broad array of lobbyists trooping to Capitol Hill also includes advocates for airlines, pawnbrokers, real estate developers, farmers, car dealers, manufacturers, retailers and energy and telephone companies. They want to make sure any new oversight of the financial system does not lead to tighter regulations of their businesses or make it more expensive for them to finance their operations or hedge their risks.

Other groups are lobbying over whether the rules should be changed to make it easier to sue corporations and their advisers and whether restrictions should be eased to enable shareholders to have a greater say in the election of directors and the pay of senior executives.

“The legislation proposes to regulate significant aspects of the economy, and any time you have that kind of legislation, it is bound to draw to Congress the interests of many — lawyers, labor unions, consumer groups and many companies,” said Steven A. Elmendorf, a former senior aide to the House Democratic leadership who represents several major financial institutions and groups.

Mr. Elmendorf suggested that the legislation could keep the lobbyists busy for many weeks since it is the subject of deliberations by at least four committees in the House and Senate, along with floor action in both chambers and then more meetings to reconcile competing bills.

“There will be a lot of opportunities and ways the bill can change,” he said. “This will be a long process.”

Gazing across a hearing room jammed with lobbyists and lawyers, Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, made an observation on Wednesday about a proposed amendment that some lobbyists interpreted as a comment about the keen interest of their clients.

“Watching sausage being made and watching legislation being made isn’t always attractive,” Mr. Frank said.

Even though President Obama vowed to change the culture of corporate influence on Washington, the administration has contributed, albeit inadvertently, to making this a banner year for lobbyists. As the White House has awakened the alphabet soup of federal agencies from their deregulatory slumber of the previous eight years, lobbying shops have emerged to fight for their clients’ newfound interests.

In the case of financial overhaul legislation, the corporate interests have particular sway with moderate and conservative Democrats, whose votes are essential for the legislation to progress through Congress. So far the lobbyists have been moderately successful in influencing the contours of the legislation, judging by the ever-growing list of exemptions from tougher oversight of derivatives and from supervision by the proposed consumer financial protection agency.

The House Financial Services Committee, for instance, approved a provision on Wednesday that Mr. Frank said would exempt “the great majority” of businesses that use derivative instruments to hedge their business risks from trading such instruments through exchanges or clearinghouses. Senior officials at the Commodity Futures Trading Commission and the Securities and Exchange Commission have been critical of the exemptions, saying they would create too large a loophole for financial instruments that were unregulated and played a central role in the economic crisis.

On Wednesday, the administration announced its support for the exemptions. Mr. Barr, the assistant Treasury secretary, said in a telephone briefing with reporters that, while the administration did not propose the exemptions, they were “reasonable ones” that would still permit aggressive oversight because the legislation would impose supervision on the dealers of derivatives instruments.

The new consumer protection agency has become a particular magnet for lobbying efforts. Bankers have waged a multimillion-dollar campaign to kill the agency or at least to substantially weaken the powers the administration would like it to have. The United States Chamber of Commerce, which claims a membership of more than three million businesses, is conducting a $2 million advertising campaign against the agency. The campaign has gained enough political traction to prompt President Obama to publicly chastise it as misleading.

The chamber joined 17 other trade associations, including the Financial Services Roundtable and the Business Roundtable, in a letter sent this week to House members opposing the agency.

The administration has proposed that the new agency protect consumers from abusive or deceptive credit cards, mortgages and other loans. But responding to the concerns that the agency could try to exert its jurisdiction over an array of other industries that lend money, like retailers and car dealers, Mr. Frank has made clear his intention to exempt many other businesses from oversight as part of his effort to steer the measure through Congress.

The political obstacles to the creation of a consumer protection agency are formidable. In the last decade, banking and other interests that now oppose the agency’s creation contributed more than $77 million to the members of the House Financial Services Committee, according to the Center for Responsive Politics, a nonpartisan research organization that studies the influence of money on policy.

Two of the largest recipients of money from the financial sector over the period have been Mr. Frank, whose campaigns have received more than $3 million, and Representative Spencer Bachus of Alabama, the senior Republican on the committee and a leading critic of the administration’s plan.
SEC, CFTC Could Ban ‘Abusive Swaps’ Under Frank Bill
YAHOO
Dawn Kopecki
Fri Oct 2, 6:54 pm ET

Oct. 2 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank would give regulators authority to ban “abusive swaps” under legislation to revamp oversight of the over-the-counter derivatives market

The Securities and Exchange Commission and Commodity Futures Trading Commission would be authorized to “prohibit transactions in any swap” that regulators determine “would be detrimental to the stability of a financial market or of participants in a financial market,” according to a 187-page draft measure released today by Frank.

Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Among the fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans.

Frank’s legislation would require the most common and actively traded over-the-counter derivatives contracts to be bought and sold on exchanges or processed through a regulated trading platform.

‘Major’ Factor

“Lacking and lagging regulation of OTC derivatives was a major contributing factor to last year’s crisis, including the highly leveraged credit default swaps at AIG that prompted government intervention,” Representative Melissa Bean, an Illinois Democrat who serves on Frank’s committee, said in an e- mailed statement.

The legislation also would give the Treasury Department the final say if the SEC and CFTC couldn’t agree on joint regulations, including setting position limits or the treatment of products that are economically similar, such as stock options and stock futures. A three-page proposal released by Frank in July would have given that power to a new Financial Services Oversight Council.

Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives that were created primarily to protect lenders and bondholders from company defaults. Some lawmakers and regulators have said they may have been used to spread false rumors about financial companies to drive down stock prices.

U.S. Job Seekers Exceed Openings by Record Ratio
NYTIMES
By PETER S. GOODMAN
September 27, 2009

Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

“There’s too much uncertainty out there,” said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. “There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing.”

The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.

In Milwaukee, Debbie Kransky has been without work since February, when she was laid off from a medical billing position — her second job loss in two years. She has exhausted her unemployment benefits, because her last job lasted for only a month.

Indeed, in a perverse quirk of the unemployment system, she would have qualified for continued benefits had she stayed jobless the whole two years, rather than taking a new position this year. But since her latest unemployment claim stemmed from a job that lasted mere weeks, she recently drew her final check of $340.

Ms. Kransky, 51, has run through her life savings of roughly $10,000. Her job search has garnered little besides anxiety.

“I’ve worked my entire life,” said Ms. Kransky, who lives alone in a one-bedroom apartment. “I’ve got October rent. After that, I don’t know. I’ve never lived month to month my entire life. I’m just so scared, I can’t even put it into words.”

Last week, Ms. Kransky was invited to an interview for a clerical job with a health insurance company. She drove her Jeep truck downtown and waited in the lobby of an office building for nearly an hour, but no one showed. Despondent, she drove home, down $10 in gasoline.

For years, the economy has been powered by consumers, who borrowed exuberantly against real estate and tapped burgeoning stock portfolios to spend in excess of their incomes. Those sources of easy money have mostly dried up. Consumption is now tempered by saving; optimism has been eclipsed by worry.

Meanwhile, some businesses are in a holding pattern as they await the financial consequences of the health care reforms being debated in Washington.

Even after companies regain an inclination to expand, they will probably not hire aggressively anytime soon. Experts say that so many businesses have pared back working hours for people on their payrolls, while eliminating temporary workers, that many can increase output simply by increasing the workload on existing employees.

“They have tons of room to increase work without hiring a single person,” said Heidi Shierholz, an economist at the Economic Policy Institute Economist. “For people who are out of work, we do not see signs of light at the end of the tunnel.”

Even typically hard-charging companies are showing caution.  During the technology bubble of the late 1990s and again this decade, Cisco Systems — which makes Internet equipment — expanded rapidly. As the sense takes hold that the recession has passed, Cisco is again envisioning double-digit rates of sales growth, with plans to move aggressively into new markets, like the business of operating large scale computer data servers.

Yet even as Cisco pursues such designs, the company’s chief executive, John T. Chambers, said in an interview Friday that he anticipated “slow hiring,” given concerns about the vigor of growth ahead. “We’ll be doing it selectively,” he said.

Two recent surveys of newspaper help-wanted advertisements and of employers’ inclinations to add workers were at their lowest levels on record, noted Andrew Tilton, a Goldman Sachs economist.  Job placement companies say their customers are not yet wiling to hire large numbers of temporary workers, usually a precursor to hiring full-timers.

“It’s going to take quite some time before we see robust job growth,” said Tig Gilliam, chief executive of Adecco North America, a major job placement and staffing company.

During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months.

Though layoffs have been both severe and prominent, the greatest source of distress is a predilection against hiring by many American businesses. From the beginning of the recession in December 2007 through July of this year, job openings declined 45 percent in the West and the South, 36 percent in the Midwest and 23 percent in the Northeast.

Shrinking job opportunities have assailed virtually every industry this year. Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17 percent this year.

In the suburbs of Chicago, Vicki Redican, 52, has been unemployed for almost two years, since she lost her $75,000-a-year job as a sales and marketing manager at a plastics company. College-educated, Ms. Redican first sought another management job. More recently, she has tried and failed to land a cashier’s position at a local grocery store, and a barista slot at a Starbucks coffee shop.

Substitute teaching assignments once helped her pay the bills. “Now, there are so many people substitute teaching that I can no longer get assignments,” she said.

“I’ve learned that I can’t look to tomorrow,” she said. “Every day, I try to do the best I can. I say to myself, ‘I don’t control this process.’ That’s the only way you can look at it. Otherwise, you’d have to go up on the roof and crack your head open.


INPUT-OUTPUT ECONOMICS, we think, supports this analysis - government jobs have little "multiplier" value

State and local gov't workers' job security fades
YAHOO
By CHRISTOPHER LEONARD and CHRISTOPHER S. RUGABER, AP Business Writers
3 July 2010

For years, most people who worked for state or local governments accepted a fact of life: Their pay wasn't great. The job security was.  Now that's gone, too.  States and municipalities are facing gaping budget gaps. Many have responded by slashing services, raising taxes and, for the first time in decades, making deep job cuts.  And public employees should brace themselves: Some economists say the job cuts could worsen in the second half of the year.

Those government layoffs make it harder to reduce the national unemployment rate, now 9.5 percent. The rate did fall slightly in June because more than a half-million out-of-work Americans gave up their job searches. Once people stop seeking work, they're no longer counted as unemployed.  The economy is already under pressure from weak consumer spending, sinking stock prices, a European debt crisis and a teetering real estate market.

"It's certainly a drag on economic growth in our outlook," Mark Vitner, an economist at Wells Fargo, said of the loss of public-sector jobs.

It's also a burden for residents. As state and municipal employees are cut, so are services. It takes longer to register a car, see a school nurse or travel to work by bus.  In California, state-run Department of Motor Vehicle offices have been closed on selected furlough Fridays to cut costs.  In New York City, a new budget will close up to 30 senior centers, shutter a 24-hour homeless center in Manhattan and eliminate nurses at schools with fewer than 300 students.

In Atlanta, the metro transit agency shut 40 bus lines and closed restrooms in June. Even so, 300 employees might lose their jobs to close a $69 million budget gap.  Julie Bussgang used to have assistants to help her keep order in her kindergarten classroom in Albany, Calif. Last year, those assistants were cut. Bussgang was left on her own.

"I've had kids calling for help from the bathroom, and I was alone with 24 kids," she says. "We got through far less of the curriculum than we did in the previous year. Everything took longer."

State and local governments cut 95,000 jobs in the first half of the year even as the economy slowly recovered. Private employers, by contrast, added 593,000 jobs in that time. It's the first time the public sector has cut jobs while the private sector has added jobs since 1981, said Marisa Di Natale, a director at Moody's Economy.com.

In the second half of the year, 152,000 more local and state government employees will be laid off, estimates Nigel Gault, an economist at IHS Global Insight.  Counting companies that work with state governments, a total of 900,000 jobs could be lost to states' budget shortfalls, according to the Center on Budget and Policy Priorities, a think tank in Washington.

From teachers and probation officers to recreation workers and transportation specialists, public employees who never imagined their jobs could be in jeopardy are discovering they are.  They are people like 24-year-old Brianna Clegg, who had never hesitated to take on school loans in pursuit of her teaching certificate.

"I was always hearing, 'There's a huge need for teachers.'"

Yet as California's budget crisis mounted last year, thousands of teaching jobs were slashed. One was Clegg's job teaching fourth grade in Stockton, Calif.  When she sought another position, she made a grim discovery: In a state in which roughly 26,000 teachers have been laid off, openings existed for 39 teachers. Clegg wasn't among the fortunate few.

Across the country, the trouble stems from shrinking state income and sales tax revenue, a consequence of the recession. Total state revenue dropped 11 percent from fiscal year 2008, when the recession began, to fiscal 2010, according to the National Association of State Budget Officers.

Compounding the problem, Democrats in Congress have failed to come up with the votes to spend about $50 billion to help states pay for Medicaid programs and avoid teacher layoffs. Governors made a plea for the money to help them avoid layoffs. Kansas Gov. Mark Parkinson said his state might have to lay off 3,600 teachers.

Senate Republicans have argued that the nation can't afford further spending in light of record-high budget deficits.

Until recently, state governments had been able to paper over some of their funding shortfalls with money from last year's $787 billion federal stimulus package. Now that's drying up. As a new fiscal year begins this month in most states, they're struggling to balance their budgets, as required by every state but Vermont.  So they're cutting services and laying off employees.

"We do expect more layoffs to come," Vitner said. "State and local governments are having to make the cuts they didn't have to make a year ago."

Hardest hit have been states — like California, Arizona and Nevada — whose housing markets had overheated and then deflated, said Brian Sigritz of the National Association of State Budget Officers. But budget crises have spread nearly everywhere. About 46 states face total budget gaps of at least $112 billion this year, the Center on Budget and Policy Priorities says.

At least 26 states have cut jobs this year to try to close budget deficits. Five others have imposed temporary layoffs. Their tight budgets have led many states to shift more spending burdens to localities, adding to budget problems in many cities.  For every worker who's been laid off, many others worry that they're next. The sense of long-term security that once attached itself to a state or local government job is gone.

One of them is Daryl Seaman, who was so confident in his job security just a year ago that he built a new home for his family. As a probation officer for Madison County, Ill., he didn't think his job would ever be in jeopardy.  Twelve months later, Seaman has been demoted because of county budget cuts. He finds himself obsessing with co-workers over the next round of layoffs that could claim their jobs.

"Everybody is panicking," Seaman says.

Seaman's wife teaches in a district that has laid off some teachers with less seniority. With two teenage daughters to support, they're saving everything they can.

"We're just afraid to spend any money," Seaman says.
Does Aid to States Stimulate the Economy, or Votes?
NYTIMES
By Casey B. Mulligan (an economics professor at the University of Chicago)
August 26, 2009, 8:23 am


About one-third of the aid in the “stimulus” law is aimed at state and local governments. This allocation — largely intended to save the jobs of government employees, among other goals like providing more services for struggling families — vastly overstates the importance of state and local government in the national employment picture, and thereby diminishes the law’s potency as a stimulus to national employment.

If, as some of the experts say, it were the task of federal fiscal policy to put people back to work, you would think that stimulus spending would be allocated to the various sectors in rough proportion to the jobs that were lost, or might be lost.

Before this recession started, state and local government employment was only 14 percent of national employment and a lesser percentage of national payroll spending — far less than the one-third of the importance it was given in the stimulus law.

State and local governments are seeing declines in their revenues from income, sales and other taxes. Some of those governments have cut hours or the number of workdays for their employees. But lots of industries are seeing their revenues decline, and have reduced working hours, so these changes do not put state and local governments in a special position.
Source: Casey B. Mulligan, analysis of Bureau of Labor Statistics data

Although stimulus advocates insist that saving state and local government is the secret to an effective stimulus law, economists have known for a long time that state and local government employment is more stable than private-sector employment, even without special stimulus aid. The chart above shows how, by the time the stimulus law was being debated this January, the private sector had lost four million jobs during this recession, whereas state and local government employment had grown by 124,000. (Since then, state and local government has lost 14,000 jobs –- for a cumulative gain of 110,000 jobs –- while the private sector lost another 2.9 million.)

In the average month, over two million private-sector employees were let go,