Merkozy’s euro suicide pact

Russia approved to join WTO

Russia enters WTO: A protocol and a t-shirt for 18 years of work
By John Heilprin
Associated Press
Posted: Saturday, Dec. 17, 2011

GENEVA After nearly two decades of trying, Russia gained approval Friday to join the World Trade Organization, a move likely to boost its economy and that of its biggest trading partner, the European Union, at a time of global financial turmoil.

The vote by international trade ministers also provides a measure of victory for Russian Prime Minister Vladimir Putin, who faces popular discontent after allegations of fraud in recent parliamentary elections.

Russia, with the sixth largest economy in the world and a population of 143 million, has been the only member of the Group of 20 leading world economies still outside the 153-nation WTO. Once it formally joins – presumably early next year after ratification from the Russian Duma – Moscow will be subject to the Geneva-based body’s rules for global trade and settling disputes, a change likely to give more confidence to investors outside the country.

The 27-nation EU is Russia’s biggest trading partner for agriculture, fuels, mining and manufacturing. The EU buys 52 percent of Russia’s exports, including the fossil fuels that keep Europe running. Russia, in turn, is third-biggest customer for EU exports, after the U.S. and China.

Russia’s WTO membership is expected to quickly increase EU exports by some $5.2 billion a year, EU trade officials say.

Under the agreement, Russians will be able to buy European-made goods at far lower prices and to sell their oil and gas more efficiently.

‘Cause for celebration’

U.S. Trade Representative Ron Kirk said the development “represents a great cause for celebration.”

Russia’s WTO membership won’t automatically apply to the U.S. A 1974 law requires the U.S. Congress to first approve of permanent normal trade relations with Russia. The Cold War-era law was intended to pressure the Soviet Union to allow emigration, primarily of Jews.

Kirk told the AP that the U.S. recognizes there’s a potential “damaging impact to U.S. exporters” if Congress doesn’t agree.

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EU Leaders and President Medvedev Focus on WTO, Euro Crisis
    2011-12-16 09:34:02  

Russia says it is ready to commit more than 10 billion US dollars to the IMF to help support the struggling eurozone economy.

President Dmitry Medvedev made the pledge in Brussels during the biannual EU-Russia summit.

He said, “In summary, it is only Europe that can help itself, but other countries should also create the conditions for Europe to free itself of the crisis as quickly as possible, so that it develops out of the crisis dead end, and we will help to enable this.”

Medvedev says 41 percent of Russia’s currency reserves are invested in euros, and that Russia is interested in seeing the EU preserved as a powerful economic and political force.

Meanwhile, EU President Herman Van Rompuy acknowledges that Russia and the EU “are strongly inter-dependent.”

“The EU wants to be Russia’s partner in its modernization. We are indeed strategic partners. In many ways we are strongly interdependent in a spirit of mutual benefit. We can only win by deepening our cooperation even further”, said Rompuy.

On Friday, the WTO is set to approve Russia as a member. The country has been trying to join the trade body for the past 18 years.

EU Commission head Jose Manuel Barroso has sent his congratulations.

“After 18 years of negotiation this is a major achievement, indeed it opens new opportunities for trade, and for development of our bilateral economic relations which are already strong”, said Barroso.

Meanwhile, Russia and the EU have also agreed on moves towards visa-free travel.

Advances depend on the implementation of a number of “common steps”, such as introducing biometric passports and preventing illegal migration.

EU-Russia relations further entrenched after Summit

ARTICLE | DECEMBER 16, 2011 – 12:37PM

The biannual EU-Russia Summit came, and went. On 15 December, all representatives gathered round to have talks on some important issues. Although independent of eachother, the EU and Russia are also interdependent. Thus, the Summit can only be described as a platform for co-operation.

Council President Herman Van Rompuy described the Summit as “a Summit of results”, and said that both the EU and Russia were at different yet significant crossroads, but crossroads nonetheless. On one hand, the EU was fighting the market to restore the Euro back to where it belongs, and on the other, Russia was looking forward to modernising its future.

The Summit focused on a number of international and regional issues. Mainly it looked at the Russia WTO accession, visa-free travel and enhancing financial cooperation. It also focused on other issues, including the protracted conflicts in the common neighbourhood, the Arab Spring and the Iranian nuclear programme.

On the topic of the WTO accession, Van Rompoy said: “The Russia WTO accession [would lead to] a myriad of new opportunities for trade, investment and global growth. We have now high expectations on the possibilities to move ahead on the New Agreement with Russia.”

According to a statement issued by the EU, the two sides had agreed on a number of “common steps” towards visa-free travel, such as introducing biometric passports and preventing illegal migration. Van Rompoy also touched on this issue and said: “On mobility, approving the common steps, and amendments on the visa-waiver agreements is an important step further to visa free travel, and opens up for more people-to-people contacts. This will further open up Russia to the EU and the EU to Russia.”

Overall, European Commission President José Manuel Barroso was also pleased with the talks. He said: “The EU and Russia are engaged in building a partnership that goes beyond the relationship between the official authorities. It is important to have closer ties between our peoples.” He added that the decision to launch the Common Steps towards visa-free travel had “clear potential benefits to our citizens and for people-to-people contacts.” However, he also warned the lifting of EU visa requirements on Russian travellers was still years away. He said: “The goal is to have a visa free region but this will probably not happen next year. That’s a longer term goal.”

The topic of the recent election in Duma was also touched upon, which was a touchy subject. The EU expressed their concern over the irregularities and lack of fairness as reported by independent observers, as well as by the detention of protesters. However, the large demonstrations in the aftermath of the vote had been peaceful and the authorities had handled them very well.

President Dmitry Medvedev quickly defended the ‘irregularities’ of the Duma elections. Nevertheless, Van Rompuy was pleased that there was an honest discussion of these issues and welcomed Medvedev’s commitment to investigate in a fair and impartial manner reports about electoral problems.

As for the financial crisis, Medvedev claimed that Russia is ready to commit more than $10 billion to the International Monetary Fund to help support the struggling eurozone economy.

He said: “41% of Russia’s currency reserves are invested in euros”, and that Russia is interested in seeing the EU preserved “as a powerful economic and political force.”

Russia enters WTO: A protocol and a t-shirt for 18 years of work

December 17, 2011
Nikita Dulnev
The World Trade Organization is ready to admit Russia to its company.

On Dec. 16, the ministerial conference of the World Trade Organization meeting in Geneva confirmed the protocol for Russia’s WTO membership.  Now the only step remaining for Russia’s accession is an approval of the protocol by the Russian State Duma within 220 days. The decision by the ministerial conference brought to an end 18 years of negotiation.

Russian President Dmitry Medvedev thanked all who participated in the years of talks, and said that he regarded this event as an important achievement for Russia and its trade counterparts. For his part, WTO head Pascal Lamy gave t-shirts to the leaders of the both working groups. 

While Maxim Medvedkov, the head of the Russian delegation got a t-shirt with the caption “Welcome to WTO, finally,” his European counterpart Stephen Johannesson had a shirt that read: “Mission accomplished.”

Now the ball is in Russia’s court. By the end of the summer, the State Duma must ratify the protocol for the country to officially become a WTO member.  However, two of the four parties in the Russian parliament – Just Russia and the Communist Party – recently announced that they would vote against Russia’s accession to the organization. Just Russia refused to comment on the situation, while their communist counterparts claimed that WTO membership would not be beneficial for some sectors of Russia’s economy.

“This will result in serious problems in the agricultural field and real collapse of all processing industry,” said Vladimir Kashin, one of the deputy leaders of the Communist party. Nevertheless, the votes of the other two parties in the Duma – United Russia and the Liberal-Democratic Party of Russia (LDPR) will be enough to ratify the protocol.          

Russia’s gradual integration into the WTO is expected to take place over 10 years. However, Russian businesses and foreign companies operating in the country have already begun preparing for the market liberalization and a decrease in customs.

“The invitation to join the WTO put Russia closer to the observance of international principles and standards in the world trade.  The agreement [regulating Russia’s accession to the WTO] will give an opportunity to representatives of American and other foreign businesses to get more transparency and predictability in the Russian market,” said Edward S. Verona, President and CEO of the U.S.-Russia Business Council (USRBC).

Sergei Kravchenko, CEO of Boeing’s operations in Russia and the CIS said that accession to the WTO will allow Russia to attract foreign investors to long-term projects. “So far, the fact that Russia hasn’t joined the WTO has been met with suspicions by many investors,” he said.  “For example, annually I give a presentation about [business] activity in the country before Boeing’s Board of Directors. And every time Russia’s status in the world trade community results in [numerous] problems and difficulties. Yes, we have plans to invest more than $20 billion and we have already invested $6 billion. But the WTO membership will allow us to be more confident in the investment stability and it is likely to increase our role in the world market.” 

According to Kravchenko, in the long-term, Russia’s accession to the WTO will have an impact on the development of science. “Russia can become a place with a good scientific potential and export intellectual service and be a partner in devepping new technologies,” Kravchenko said.

This may be true in the long-term, but the increased competition is a major challenge for the near future according to Yaroslav Lisovolik, an economist and head of Deutsche Bank Russia.

Given the expected gradual decrease in tariffs and customs and their eventual cancellation on foreign goods, Russian companies will have to keep pace with their foreign rivals. Otherwise, they will be overshadowed in the world market. “It’s a good sign for bolstering the pressure that will result in an growth in efficiency among Russian companies and a price decrease for Russian customers.  The trade effects will be a result of the middle- and long-term consequences, while short-term consequences will indicate an increase in foreign investments and an inflow of portfolio investors,” Lisovolik said.            

West surprised over Russia’s draft resolution on Syria

Dec 16, 2011 16:51 Moscow Time

Russia has proposed its own draft resolution on Syria to the UN Security Council to help resolve the ongoing political standoff between the Syrian opposition and the authorities.  Russia’s UN Envoy Vitaly Churkin said on Friday that the document underscored the need to halt all the violence, a proposal that raised eyebrows in the West, where many admitted that Moscow’s resolution could become the basis for the Security Council’s future compromise resolution.

According to human right activists, at least 5,000 people have been killed since the government crackdown on the opposition began in Syria in mid-March. UN member countries, meanwhile, remain at odds over how to react to the latest developments in this Middle Eastern country. The West insists on slapping tough international sanctions against the Bashar Assad regime which envisage resorting to the use of force against Damascus and which prompts analysts to speak of a possible repeat of the Libyan scenario in Syria. The EU and the US have already imposed unilateral sanctions against Damascus, while Russia continues to call for a diplomatic and political solution of the Syrian gridlock. To date, Russia and fellow veto-wielding China have repeatedly blocked resolutions endorsed by the EU and the US during Security Council sessions. Friday saw a U-turn, however, with Russia initiating a compromise document which condemns both the Syrian authorities and the opposition which Moscow insists must stop the violence. US Secretary of State Hillary Clinton has already signaled her readiness to discuss the Russian resolution.

She was echoed by France’s Ambassador to the UN Gerard Araud who welcomed Russia’s proposal pertaining to the draft resolution but said that the text “clearly needs many amendments”. In Moscow, security expert Vladimir Sotnikov says that Russia is concerned about a possible repetition of the Libyan scenario in Syria which is why it has decided to table the appropriate resolution.

“The Libyan scenario is on the cards in Syria where the situation remains tense, Sotnikov says. It is safe to assume that the situation will almost certainly deteriorate in the coming weeks which may finally see an armed conflict between the Syrian authorities and  the West’s coalition forces. Moscow is certainly unhappy about all this and is now trying to prevent the worst case scenario. Having learned lessons from their decision to okay Western resolutions on Libya, the Russian authorities are now demonstrating an independent and balanced stance,” Sotnikov concludes.

Both Russian and Western analysts have expressed confidence that Moscow’s initiative would contribute to tackling the deadlock in the talks on Syria at the UN Security Council. Boris Dolgov, of the Institute for Oriental Studies at the Russian Academy of Sciences, shares their standpoint.

“I think that this could really be the solution, Dolgov says, because everyone knows that Western countries and NATO are trying to prompt the Security Council to adopt a different resolution, which will condemn the Syrian authorities. This may be fraught with a repeat of the Libyan scenario and everything it would entail, including bombardments, Dolgov adds. As for the draft resolution proposed by Russia, it condemns the violence by both the government and the opposition and warns against external military interference in Syria’s domestic affairs. The draft resolution urges both sides to halt the violence as soon as possible, Dolgov says, voicing hope that the Syrian opposition will okay the document which will, in turn, prompt the authorities to follow suit.”

Vitaly Churkin, on his part, pointed out that while the resolution condemns the violence, it does not call for sanctions which Moscow has repeatedly slammed as a “counterproductive measure.”

Russia, EU to cement ties

Dec 17, 2011 15:09 Moscow Time
Russia and the European Union have outlined joint steps to ease visa regulations and confirmed readiness to establish a partnership in the energy sector and in addressing global issues. The relevant agreements were reached between President Medvedev and the EU leaders at a Russia-EU summit in Brussels on Wednesday.

Russia and European analysts alike warned that the summit was unlikely to produce any sensational solutions or high-profile statements. Partially, they were right, given that nearly all of the final statements were the result of lengthy and thorough discussions. However, the dialogue took place in a new political atmosphere due to the unstable economic situation in Europe. For the first time ever, Europe was the one to ask for help. President Medvedev pledged financial support to the EU.

“European countries should demonstrate restraint and stamina given the situation. They should preserve the achievements of the past few decades, and they should preserve the euro. The EU, all of the EU member countries and Russia have a vested interest in that. Russia holds 41% of its currency in euros. Russia will render financial assistance because it has a quota as an IMF member and is prepared to invest its financial resources to help keep the European economy afloat.”

Despite Russia’s readiness to rescue the European economy, EU representatives chose to pursue the “truth” and criticized Russia for its recent elections and for breaches of human rights. Dmitry Medvedev quickly responded to that.

“A whole number of EU countries face similar problems. The rights of Russian speakers are being breached in a number of countries and cases of xenophobia, extremism and neo-Nazism have also been reported in the EU member countries. This is something to contend with.”

In spite of critical remarks from the EU leaders, Russia and the European Union agreed on the steps to ensure transition to visa-free travel. President of the European Council Herman Van Rompuy says that credit for that should go to  President Medvedev personally.

To qualify for simplified visa regulations, Russia has to introduce biometric passports, do away with illegal migration and manage its borders effectively. Moscow has pledged to meet all these requirements in less than a year. It is hoping that short-term visa-free tours to EU countries will become a possibility next year. However, EU officials are in no hurry to introduce that. President of the European Commission Jose Manuel Barroso believes that visa-free travel is a long-term objective. Whoever is right will become clear at the next Russia-EU summit.

Russia’s accession to the WTO is among the joint successes also attributed partly to the EU leaders. Europe is Russia’s major trade partner. According to President Medvedev, bilateral trade between Russia and the EU will total around $400bln in 2011 and is bound to grow in the near future.

US Congress calls for missile defence accord with Russia

Dec 16, 2011 00:53 Moscow Time

The US needs to seek cooperation with Russia on missile defense both on a bilateral basis and also in the framework of the North Atlantic Treaty Organization. The call is part of a Congressional draft defense budget for next fiscal year.

The blueprint is expected to sail through the Senate, after which it will be signed into law by President Barack Obama.

The House members gave the President 180 days to prepare a report on what is being done to reach missile defense accord with Russia.


US thanks Turkey

Dec 17, 2011 03:19 Moscow Time

U.S. to thank Turkey for agreeing to place U.S. defense radar elements on its territory, said the Pentagon chief Leon Panneta during his visit to Ankara.

In meetings with President Abdullah Gul and Defense Minister Ismet Yilmaz he called Turkey a key U.S. ally in the Middle East.

In September Ankara authorized the deployment of missile defenses 700 kilometers from the border with Iran.

The radar will be commissioned before the end of the year. Data from it will go into command centers in the United States and U.S. warships in the Mediterranean.


New US law – a barrier to content piracy or censorship?

Dec 16, 2011 23:14 Moscow Time

The US Senate has been gripped by heated debates over the introduction of the draft law known as the “Stop Online Piracy Act”.

This draft law has become a real apple of discord between film- and music-producing companies, on the one side, and owners of websites on the other. The former are spending millions of dollars on lobbying this draft law, hoping that it would allow them to considerably cut their losses arising from the illegal copying and publishing of the content they produce. The latter, which include, above all, giants like “Google” or “Twitter” – believe, not without foundation, that this law may pose a threat to their very existence. They are actively supported by human rights activists of all kinds, are equaling this law with an introduction of censorship and claim it would give the government opportunities to spy on Web users.

The anti-piracy act was put forward by a group of US congressmen led by Republican Lamar Smith in October 2011 – and immediately won the support of the Trade Chamber and of the Music and Film Industry Association of America.

The new law would allow blocking websites if they are found to have published unlicensed content.

Paragraph 103 of the draft law probably presents the biggest threat to Web pirates: it gives the owner of intellectual property the right to request a freeze on deposits to a company’s bank account if this company illegally publishes his content on its website.

Owners of various social networks and file-sharing sites, like “YouTube”, “Facebook” or “Flickr”, met this news with little enthusiasm, which is quite understandable.

The draft law has nearly caused a split in the US Republican Party. While Lamar Smith says that this law would protect the interests of US content producers, his fellow party member Darrell Issa replies that the law presents a threat to the Internet’s very existence. Moreover, a real scandal broke out when another senator, Steve King, wrote in his Internet blog that one of his colleagues’ long speech made during the debates over the draft law made him feel terribly bored.

However, all these debates in Congress look like a storm in a teacup when compared if the reaction of the Hollywood and website-owning companies, who are now spending millions of dollars on attempts to persuade the public that this law must definitely be adopted.

At the same time, there are no doubts that the adoption of this law would most probably ruin the America’s image in the world. President Obama often criticizes the governments of China, Iran and a number of other countries for heavy censorship of Web publications – but with this new law, the situation in the US itself would become very similar, all the more so because now, an increasing number of people cannot imagine their lives without the Internet.

Meanwhile, owners of Web companies and Web users who find this draft law discriminative have already conceived a plan of a “counterattack”. Extremely popular “Wikipedia” intends to go on strike – i.e., to suspend the site’s work for some a while in protest against this law. Some time ago, a similar action, also by “Wikipedia”, has dissuaded the Italian government from adopting a similar law.

Those who are actively protesting against censorship in the Web also include a Russian company – the Kasperskiy Laboratory, known for its very popular antivirus program. It has been decided that from January 1, “Kasperskiy” will leave the “Business Software Alliance” which supports the introduction of the “Stop Online Piracy Act”.

New US sanctions against Iran won’t damage US-Russia space ties

Dec 17, 2011 10:30 Moscow Time

The political pressure to suppress weapons abroad has now spilt into funding for space exploration. The House of Representatives yesterday overwhelmingly approved tough new sanctions aimed at forcing Iran to freeze what the West says is a nuclear weapons program and punishing Syria and North Korea. One of the bills specifically takes aim at Russia forbidding any extraordinary payments connected to the International Space Station until President Obama certifies to Congress that Moscow opposes allowing Iran, North Korea and Syria to develop weapons of mass destruction or missile systems. Aleksandr Rodin, Associate Professor at the Moscow Institute of Physics and Technology and Senior Researcher at the Institute of Space Research, and Alex Saltman, Executive Director of the Commercial Spaceflight Federation, talk about the bill and potential impact it could have on the space program in the US and abroad.

Middle East on the verge of disaster

Dec 17, 2011 16:57 Moscow Time

Sanctions, the drone, the Strait of Hormuz have all come to symbolize the deteriorating situation in relation to Iran. Thanks to the US media, reports have been circulating that the Middle East is now in a state of war. Russian analysts are warning against ‘troubling trouble’ and pushing the world towards a new catastrophe. The Voice of Russia’s Vladimir Fedoruk, Sergei Anisimov report.

The West holds Tehran responsible for the new wave of tension. Iran has been blamed for shooting down an American drone but nothing has been said about the fact that the drone was conducting reconnaissance over the territory of a sovereign state. Iran has also been accused of making preparations for a nuclear missile war and relocating its nuclear facilities to achieve this end. But there is no mention of the fact that Tehran is doing so amid reports that Israel, backed by the US, is planning a surprise strike against Iran’s nuclear facilities. Experts say that Israel could strike any time fairly soon. This could lead to a full-scale war with unpredictable consequences.

Andrei Volodin of the Oriental Research Center, comments.

“The West is stoking tensions over Iran and Syria in the Eastern Mediterranean. These moves are designed to distract public attention from the debt crisis gripping the US and Europe. The bringing down of a US drone by Iran shook the American political establishment. Under international law, the drone belongs to Iran.”

Whatever the case, the US forced Iran into a scowl and this will surely cool the hot-headed generals hoping to rein in Iran the way they failed to in Vietnam, Iraq or Afghanistan. Andrei Volodin has this to say.

“The United States and Iran are facing a moment of truth. Many US servicemen are unwilling to go into war with Iran. They know what such a war will cost. Opinions are divided within the US foreign policy establishment as well. For this reason, there is no point in saying that war is about to break out between Iran and the US, the more so since it’s already going on.”

Western analysts are rushing things by signaling war in the Middle East. They are doing so in an effort to restrain Iran. Vladimir Sotnikov of the Oriental Studies Institute, comments.

“Iran doesn’t respond to pressure. Pressurized by the US and its western allies, it is taking all sorts of painful jabs at them in retaliation. One of such jabs was an operation to block the Strait of Hormuz, which Iran deems as a strategically important waterway. This, however, is a poor reason for starting war. And the time is not the right one either. Barack Obama is unlikely to authorize a military campaign against Iran now that the US presidential race is gaining strength. Iran will be on the agenda of the next US administration.”

The attempts to stoke tensions surrounding Iran, including new US sanctions, stem from a geopolitical intrigue, analyst Stanislav Tarasov says.

“Just a few days ago, President Obama announced the withdrawal of the US contingent from Iraq. Simultaneously, the US is exerting pressure on Iran. The pullout of troops from Iraq may trigger upheavals in Iran. Western experts say that Iran could be interested in turmoil with a view to regain control of Iraq. This is why the US is taking preventive measures. It wants to play for time in order to immobilize Iran in its political and diplomatic maneuvers, reorient it to resolving its domestic problems and diabolize its nuclear program. This will endow the authorities in Baghdad with more confidence so that they could assume control over the country without assistance from the US.”

According to Stanislav Tarasov, there will be no military operations around Iran or in the Gulf in the near future. In all likelihood, he says, the political and diplomatic struggle will intensify, sanctions will be toughened and new statements about the blockade of the Strait of Hormuz will follow in response. Both parties involved are aware that war in the Middle East is fraught with a disaster for the US and the rest of the world.

Christine Lagarde: European financial crisis is too serious for eurozone countries to solve alone

The European financial crisis is “escalating” and is so serious that it is unlikely to be solved by eurozone countries alone, the head of the International Monetary Fund warned last night.

British taxpayers are now likely to be involved in an internationally co-ordinated bail-out led by the International Monetary Fund [IMF] for countries in the single currency.

The managing director of the IMF, said the escalating financial crisis now needed to be addressed as “collectively as possible”. Without action, the world faces the spectre of a 1930s-style depression, she said.

Mrs Lagarde spoke out after other European countries indicated that they were unlikely to back a new treaty designed to shore up the single currency.

Hungary and the Czech Republic said they would not agree to any new deal that involved European-wide taxes. David Cameron has already vetoed any British involvement. Yesterday, the head of the IMF described the prospects for the global economy as “quite gloomy”.

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating,” Mrs Lagarde said.

“If the international community doesn’t work together, the risk from an economic point of view is that of retraction, rising protectionism, isolation.

“This is exactly the description of what happened in the Thirties and what followed is not something we are looking forward to.”

She added: “It is not a crisis that will be resolved by one group of countries taking action.

“It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.”

Mrs Lagarde said global economic leaders needed to take a holistic approach toward addressing systemic weaknesses, such as those exposed by the current euro crisis. “It is going to require efforts, it is going to require adjustment, and clearly it is going to have to start from the core of the crisis at the moment, which is obviously the European countries and in particular the countries of the euro zone,” she said.

The remarks are her most outspoken warning yet on the need for co-ordinated international action, which she likened to Alexander the Great splitting the Gordian knot. “It is really that Gordian knot that needs to be cracked, that needs to be addressed as collectively as possible, starting with those at the centre but with the support of the international community probably channelled through the IMF,” she said.

At last week’s European summit, leaders agreed to contribute an extra €200  billion (£169 billion) to the IMF to “help deal with the crisis”.

Britain was thought to have agreed to provide another £30 billion in loans, but government sources have ruled out providing more than the extra £10  billion already agreed by Parliament.

The IMF has pledged to agree extra funding by next Monday and Mrs Lagarde’s comments indicate that non-European countries will also be asked for additional money – a move likely to prove controversial with America and China.

It also raises the prospect that funds from some of the world’s poorer nations, such as Brazil and India, will be used to prop up some of the wealthiest European countries which have failed to control their public spending.

A spokesman for the IMF said: “What is happening now is that conversations, contacts are taking place between the fund and its membership about the scale and the amount in which this could be brought to a conclusion.

“I can’t offer you much by way of detail.”

Last night, Russia announced that it would provide $10 billion [£6.44 million] to the IMF eurozone bail-out fund. The offer was made after EU countries agreed to lift visa controls for Russian visitors.

The head of the European Central Bank said in a speech in Berlin that the 17 eurozone governments “are now on the right track”.

“The unavoidable short-term [economic] contraction may be mitigated by the return of confidence,” said Mario Draghi.

He urged politicians to “speak unambiguously”, then “deliver”.

Australian Banks Given One Week To Prepare For European “Meltdown”

Tyler Durden's picture
Submitted by Tyler Durden on 12/15/2011 15:19 -0500

Whereas previously we had heard extensive horror stories about banks being told to prepare for the end of the world in case the European summit (the latest and greatest one from last Friday which was supposed to find a cure for cancer among other things) failed, and even went so far as to read about preparations for trading in the drachma on a when issued basis, once the summit passed (and it was clear that media posturing would do nothing to fix what has already been a failure and it would be best to remove the threats of “reality” from the public’s attention) all such “end of the world” speculation promptly disappeared – after all why remind people that things are now worse than ever.  Until today. According to the Australian Finance Review (link – subscription required), banks down under “have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis.” Aka a European “Meltdown.” And since we don’t have immediate access to the article, we leave it to Bloomberg First Word to describe for us what the article says:

  • Australian Prudential Regulation Authority envision worst-case scenario of 12% unemployment, 30% drop in house prices, 40% fall in commercial property values, AFR says
  • Banks will assume that write-offs, other mitigation measures are unavailable; later stress tests might allow for such steps, AFR says
  • Australia’s banks have A$87.2b of exposure to Europe, or 2.7% of assets, with A$74.6b of it mostly tied to bank borrowers in France, Germany, Netherlands, AFR says, citing RBA statistics

Why is this notable? Because unlike before, when media reports were really a propaganda ploy to get European politicians to collaborate (what has now proven to be an impossible task), and nothing but a rhetorical device, this time around, the warning is for real. And, more importantly, we have a sense of urgency, courtesy of the 1 week deadline: the question then is is it really that bad, and does Europe truly have a little over a week for global banks to prepare for the inevitable fall out?

Lastly, how long until our own prudent leaders decide it may be time to push the Stress Test scheduled for next year forward, just in case the “unthinkable” does happen, and US banks end up getting stampeded even as the rest of the world is already prepared for a worst case scenario?

We are confident Tim Geithner will get right back to us asap on all of these open items.


Euro Might Not Survive In Current Form: Uncertainty Leaves Investor Basket On Fire

35 comments |  December 15, 2011

Italian yields rose again Wednesday. The take-up of the 5-year tap was not awful, but obviously less than what the market was hoping for. Meanwhile, the Treasury auctioned 30-year bonds at a record low yield of 2.925% and a bid-to-cover ratio over 3.

And that’s where we stand today. The status quo is that US bonds have a bottomless bid and European securities are consistently offered. I suspect that is partly a response to the approach of year-end, and some of that trend will reverse after the end of the year, but I suspect that investors with long-dated liabilities, like pension funds, probably see the US long bond as probably a much better source of duration than long bonds from European sources.

After all, the notion that the Euro might not survive in its current form is finally…uh…gaining currency. While a narrowed Euro should probably be a stronger currency, the uncertainty associated with a splintering bloc – who will be in it, or will the Euro simply evaporate altogether? – deters investors from keeping as many eggs in that basket. The basket is on fire.

For all the wailing about the Euro’s decline below $1.30 Wednesday, to near the lowest levels of the year, Armageddon it is not. The chart below shows the Euro/USD exchange rate over the last five years. Clearly, the Euro does not look strong. But neither is this alien territory, at least not yet.

click to enlarge

Source: Bloomberg.Euro is weak, but it isn’t exactly in no-man’s-land.I am tempted to call the dollar the least-ugly stepsister, and say that the weakness of the Euro/USD exchange rate is all about weakness of the Euro rather than dollar strength, but Wednesday the dollar was very strong against the constant candle of commodities. While Tuesday commodity indices were strong despite the dollar weakness, Wednesday virtually every commodity fell. Precious Metals fell 5.2%, led by a thrashing of silver; the energy group was also down around 5% and the DJ-UBS Commodity Index as a whole lost a whopping 3.6%.So were investors right Tuesday when they bid commodities up, or right Wednesday when they cratered them? My personal view is that they were closer to right Tuesday, but again this may be so much year-end noise. Raising liquidity by selling commodity futures-backed investments is easy to do, and the commodity trading business is a capital-intensive one for banks at a time when capital is increasingly scarce.

Unsurprisingly, with commodities down that much and the Treasury auctioning $12bln 5-year TIPS Thursday, breakevens and inflation swaps were weak. Inflation swaps fell 5-15bps. TIPS were unchanged to lower, while nominal markets rallied with the 10y nominal Treasury down to 1.90% and the 10y TIPS still at -0.08%.

Tuesday I showed a fairly violent chart that illustrated how European real yields have risen relative to US and UK real yields. In contrast to the violence of real yield movements, the movements in inflation expectations have been sedate if not stately. This is because an important part of the movement in European real yields is due to the deterioration in the perceived credit quality of the underlying bonds. Inflation swaps tracking inflation in different economies, however, have the same underlying credit (you face your counterparty on a fully collateralized basis) so the relationships are much more stable. For a long time, UK expected inflation (RPI) has been higher than US expected inflation (CPI) which has in turn been higher than Euro expected inflation (see chart).

Source: Enduring Investments.The general configuration of inflation markets has been static for some time.Now, you would think that, all else being equal, the recent debacle in Europe would imply much lower inflation on the continent. In fact, European inflation expectations have risen and are now trading as close to US inflation expectations as they have since the inflation swap market began, other than the late-2008 to late-2009 period when the US was in crisis. In late 2008 and for parts of 2009, 10-year inflation swaps in the US actually traded as much as 80bps below 10-year inflation swaps in Europe.But why should the spread tighten when the US is in crisis, and also when Europe is in crisis? The answer is that in both crises, the dollar strengthened versus the Euro. A change in the foreign exchange rate has the effect of importing or exporting inflation from one country to the other. When the dollar is strong, US inflation declines relative to European inflation. When the dollar is weak, the opposite holds true.

However, the currency has nothing to do with the overall level of inflation (call it “global inflation”). Both inflation rates can rise, or both can fall, based on other causes, while the currency determines which one rises or falls more relative to the other. One such cause, and frankly the one that is far and away the mostimportant effect, is the collective action of central banks.

In 2008, central bank intervention was far less coordinated and initially it was quite substantially behind the curve since central banks had been in tightening mode just prior to the crisis; also, we had a not-insignificant fall in money velocity and the dollar, being thus more scarce, strengthened relative to commodities prices (that is to say, commodities prices declined). In the current circumstance, central banks are coordinated and are easing much more aggressively; moreover, bank lending is not plunging like it was in 2008.

I believe that European inflation should rise relative to US inflation temporarily while the greenback strengthens, but that both should rise relative to commodity price inflation. The latter, clearly, is not yet happening, but you can still see in the chart below that commodity prices are falling much less dramatically than they did in 2008, and the crisis now I think is at its root even more severe.

Source: Bloomberg.Commodities prices are falling but much less-dramatically than in 2008.The severity of this crisis is not in terms of the pace of economic growth (which I don’t think is likely to contract, in the US at least, as dramatically as it did in 2008) but in terms of the long-term damage being done to financial intermediaries and sovereign credit. No countries fell in 2008, and the banking sector in the US continues to function today. The damage was very large, but it was diffuse. In 2012, we are likely to see some more banks nationalized, and the European financial sector which is already significantly dormant is likely to look very different at year-end from year-beginning. Greece will default and some other countries likely will as well, and there is a reasonable likelihood that the Euro will have a different constituency. But central banks will continue to create liquidity. Oh, will they create liquidity. And so I want to be long commodity indices.Data Thursday, while still not of prime importance, is likely to continue the recent trend of mildly positive releases. Initial Claims (Consensus: 390k vs 381k), if it achieves the consensus number, will drive the story about an “improving labor market” further along. Empire Manufacturing (Consensus: 3.00 vs 0.61 last) and Philly Fed (Consensus: 5.0 vs 3.6) are expected to be essentially unchanged. Industrial Production/Capacity Utilization (Consensus: +0.1%/77.8%) are to be roughly flat. (Ignore PPI, which is expected to be +0.2% and +0.2% ex-food-and-energy, and wait for CPI to get auseful measure of inflation). I will say that the Citigroup Economic Surprise Index, near a record level last reached in March, suggests that we should begin to brace for some disappointments, but I don’t think these forecasts represent economists getting too far “out over their skis” and I don’t expect big disappointments.

Equities should remain heavy, but one other point I want to make (and keep making) is that these December moves ought to be taken with a grain of salt. The moves will be more dramatic simply because it’s year-end, and sometimes big moves will happen for no other reason than that one big player needed to liquidate a position. We little people can’t know much about those moves, so work hard to avoid overreacting. By now you should already have the position you’re comfortable holding until January, and very little should cause you to change that.

The holiday season means that only a few more of these articles will be published before the end of the year. But there are still some to come, including my year-end piece with updated long-term asset projections and a portfolio allocation exercise. Wouldn’t it be a great holiday gift to your friends to turn them onto this blogger?

This article is tagged with: Macro ViewMarket Outlook

On the brink of a global credit crunch

Robert Gottliebsen

Published 7:26 AM, 15 Dec 2011 Last update 10:25 AM, 15 Dec 2011

It is now apparent that we are facing the likelihood of a major global credit squeeze, which will hit Europe harder than any other region. But its effects will be felt around the globe, including in Australia. In times of credit squeezes, asset values are put under pressure. To some extent global share and commodity markets are beginning to adjust for the looming squeeze. Other assets, like property, may follow if the squeeze intensifies.

Two events in the last 24 hours have locked in my view of a looming credit squeeze. The first was a cable from theFinancial Times in London saying that European bankers are worried about how a wall of corporate debt, that is set to mature in 2012, will be refinanced. The wall was credited by the so-called collateralised loan obligations – structured investment vehicles that buy loans made to private equity firms to finance acquisitions. These CLOs are about to go into run-down mode.

The FT says the CLO problem is going to become acute in the next 12-18 months because there are billions of euros worth of leveraged loans coming due. The crunch will be particularly acute for the smaller companies.

In all there are about €250 billion worth of leveraged loans maturing in Europe between now and 2017 and the banking system is in no position to refinance them. Not only does this remove a source of credit to the wider economy but it will really hit the businesses which borrowed. European credit markets are bracing for more defaults.

Then came the second event. The Boston Consulting Group last night released a survey about the effect of Basel III on global banks and the sums are scary. BCG says that Basel III will require global banks to raise €354 billion in extra capital, including €221 billion by European banks. The Europeans expect to have completed their capital adjustment by the end of 2013.

The capital ratio improvement will be achieved partly by extra capital but partly by contracting balance sheets. If banks can find someone to buy their loans that will be good, but often the reduction in balance sheet size will be achieved by not making more loans and pressing companies to repay. In other words, a credit squeeze.

This is happening at the same time as the European problems which have caused many European banks to lose their existing capital if they had to write down their sovereign debt assets to market. But they do not admit to this disaster.

So we have the absurd situation of European banks that in reality have no capital being assumed to have capital and being required to raise €221 billion more than their existing inflated capital figure. In reality, the amounts that are required are beyond any ability to raise the money.

These comments are mine. BCG does not link the banks’ current capital plight with Basel III. However, BCG does point out that corporations are going to be most affected by the need for more bank capital and that in the scramble for money bank margins will be reduced.

Australia, of course, is not immune because we are one of the biggest wholesale borrowers in the world, funding about 40 per cent of our banking system that way. That 40 per cent figure is set to shrink dramatically over the next three years because the money may not be there. The reduction will be achieved by banks being tougher in granting loans and raising deposits in Australia. In addition, European banks will want to offload their Australian assets, so we will have our own version of the European CLO problem.

It all adds up to quite a credit squeeze and it’s hard to see a way out unless Europe goes into massive money-printing mode.

Merkozy’s euro suicide pact

Special to The Japan Times

HONG KONG — British Euro-skeptics and many Conservatives were triumphant that Prime Minister David Cameron cast his veto in defense of the City of London at the European summit recently; to British liberals, it was a night of shame that the United Kingdom was so easily isolated; to Europe generally it was a chance to move on.

It is said that Germany rules, France reigns and Britain is lost in a fog in La Manche (the English Channel). In the U.S. and other markets, there is skepticism mixed with cynicism whether the European fiscal pact can work, with some economists claiming that the deal amounts to an economic suicide pact.

We in Asia should be worried that nothing discussed in Brussels, even with the prodding and advice and help of visiting fireman Timothy Geithner, the U.S. Treasury secretary, does much to recharge global growth or even offers a vision beyond Europe. Asia will be badly affected and needs to develop its own pan-Asian leadership and economic vision since it seems that the West is ready to surrender to economic Alzheimer’s disease.

As summits go, it was a minor drama. Bleary-eyed performances after a single all-night session are nothing in the history of the European Union, especially compared with what former British Prime Minister John Major called a “four-shirter” — when leaders spent four nights arguing. This time the U.K. was swiftly isolated, told it could not expect special favors for its financial industry and bade, as Der Speigel headlined it, “Auf Wiedersehen, England.” The rest of Europe went their own way in following the “Merkozy” (as German Chancellor Angela Merkel and French President Nicolas Sarkozy are nicknamed) plan for austerity and punishment for countries that don’t keep their deficits under control.

Observer columnist Will Hutton, principal of Hertford College, Oxford, declared that Cameron was guilty of “an act of crass stupidity” in putting the casino interests of the City of London before the country, pointing out that the financial services industry in the U.K. represents only 7.5 percent of gross domestic product and the City only a third of that. Europe is the dominant influence on the U.K.’s economy and the country is already suffering greatly from turbulence in the eurozone, but the country’s politicians pretend that they are a mid-Atlantic player, not a comfortable place to be during economic storms with an increasingly indifferent U.S.

The U.S. has made it plain that the political influence and the economic investment that the U.K. gets derives from the country being a key player in the EU. Japanese corporate investors have said similar things, and that the offshore market of the U.K. alone would not justify building British factories. Equally, the U.K. exclusion from the new group of 27 (with the addition of Croatia as the 28th member of the EU) means that it could be left out while the Merkozy EU enacts new financial rules without British participation.

Still, the U.K.’s sulk is likely to make the eurozone’s already difficult task more difficult since the other 27 members will have to manage treaties intended for the full membership with one major member missing.

Even if they can get round the legal obstacles, Merkozy has set a difficult to impossible task. The fiscal pact aims to ladle out austerity medicine as a way of servicing massive existing debts, something that is almost a contradiction in terms: Austerity and cutbacks tend to reduce growth and increase the debts as a percentage of GDP. Mario Draghi, the new head of the European Central Bank, has again sternly refused its funds to bail out governments. No wonder, the Merkozy plan is being called a suicide pact.

The OECD, the club of rich countries, warned that borrowing by industrialized governments has topped $10 trillion this year and the “animal spirits” of markets — meaning their unpredictability — will be a threat to governments that need to borrow. Italy needs to borrow €157.4 billion by the end of April, Spain €63.4 billion and France €177.8 billion. If Italian bond yields go back to 7 percent, it could not afford to borrow.

Commercial banks in the EU are already facing dire times. The latest stress tests revealed a capital shortfall of €115 billion among eurozone banks, with German banks showing notable deterioration in core capital assets. The risk is that Europe is spinning into a giant whirlpool of a vicious circle, even without further austerity.

By the measures of the Stability and Growth Pact (of 1997), setting 3 percent of GDP as the limit for a government’s deficit and 60 percent of GDP as the limit for total debt, only Estonia, Finland and Luxembourg have been within the limits every year for the past 11 years. Ireland was within the limits until the 2008 crisis sent its deficits and debts soaring as it went to the rescue of its banks.

Germany, with a deficit of 4.3 percent of GDP last year and debts of 83.2 percent, has exceeded the deficit limit in all but four of 11 years and been within the debt limit only in 2001. France is in a worse state, with a deficit of 7.1 percent, and with recalcitrant trade unions, and debts of 82.3 percent. Yet the new fiscal compact demands balanced or surplus budgets, with an annual structural deficit of no more than 0.5 percent of GDP. Where is the money going to come from to pay the fines — if the deal ever gets that far?

Arguments will continue about how right the Germans are to be so stubbornly self-righteous defending their own austerity and damning the “Club Med” countries for their profligacy. There is a democratic as well as political problem with letting Eurocrats decide tighter fiscal rules.

Jose Manuel Barroso, the head of the European Commission demanded that countries should submit draft budgets to him as part of Brussels’ “enhanced surveillance.” Who elected him and which voters can throw him out?

The more closely the EU fiscal pact is examined, the more it appears to be a deal that ignores the present grim reality.

Where is Asia in all this? Where are the brave leaders of China, India or Japan in trying to help Europe come to its senses? The only way that Europe can get on track if austerity is the order of the day is by exporting. But can export-led Asian countries like China and Japan offer markets? It seems unlikely. Europe’s slowdown towards recession will sharply reduce Asia’s export markets — and thus the overall economic growth prospects — for China and Japan. India is somewhat better off in not relying on exports.

But no Asian country can feel comfortable about what happened in Brussels. The risk is that we are all being sucked into an economic whirlpool.

Kevin Rafferty is editor in chief of PlainWords Media
The Japan Times: Saturday, Dec. 17, 2011

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For nation shall rise against nation, and kingdom against kingdom: and there shall be famines, and pestilences, and earthquakes, in divers places.
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