Tag Archives: economics

'Massive jobs shortfall' predicted for global economy

‘Massive jobs shortfall’ predicted for global economy | Business | guardian.co.uk.

‘Massive jobs shortfall’ predicted for global economy

International Labour Organisation said the group of developing and developed nations had seen 20m jobs disappear since the financial crisis in 2008

International Labour Organisation (ILO) director general, Juan Somavia

‘We must act now to reverse the slow-down in employment growth,’ International Labour Organisation (ILO) director general, Juan Somavia, Photograph: Martial Trezzini/EPA

The world’s major economies are heading for a “massive jobs shortfall” by the end of next year if governments do not change their tack on policy, the International Labour Organisation (ILO) said in a study published on Monday.

In the report, prepared with the OECD for G20 labour ministers meeting in Paris on Monday, the ILO said the group of developing and developed nations had seen 20m jobs disappear since the financial crisis in 2008.

At current rates it would be impossible to recover them in the near term and there was a risk of the number doubling by the end of next year, it said.

“We must act now to reverse the slowdown in employment growth and make up for the jobs lost,” ILO director general Juan Somavia said in a statement.

“Employment creation has to become a top macroeconomic priority.”

The number of people in work in the G20 has risen by 1% since 2010, but 1.3% annual growth is needed to return to pre-crisis employment levels by 2015, the ILO said.

“However, employment growth of less than 1% cannot be excluded given the slowdown of the world economy and the anaemic growth foreseen in several G20 countries,” the report said. “Should employment grow at a rate of 0.8% until end 2012, now a distinct possibility, then the shortfall in employment would increase by some 20m to a total of 40m in G20 countries.”

India and China, the world’s most populous countries, were both laggards with less than 1% annual growth in total employment, the report said, so an extra push for jobs could have a major impact on the G20.

However, the report was based on figures for both countries that were not up to date. China’s jobs growth of 0.7% was for 2009, while India’s 0.4% was the average annual change between 2004-2005 and 2009-2010.

After stripping out India, China and Saudi Arabia, which also used 2009 data, employment growth in the other 17 countries was 1.5%, according to a Reuters calculation based on data in the ILO report.

The latest figures for other G20 countries show four with growth rates below 1%, namely Italy, France, South Africa and the United States, while two others – Japan and Spain – have seen a fall in total employment in the past year.

Since the beginning of 2008, Spain, South Africa and the United States had experienced the biggest falls in employment among the G20 countries. Spain and the United States also saw the biggest rises in unemployment rates, followed by Britain.

Cancer cost 'crisis' warning from oncologists

BBC News – Cancer cost ‘crisis’ warning from oncologists.

Related Stories

The cost of treating cancer in the developed world is spiralling and is “heading towards a crisis”, an international team of researchers says.

Their Lancet Oncology report says there is a “culture of excess” with insufficient evidence about the “value” of new treatments and technologies.

It says the number of cancer patients and the cost of treating each one is increasing.

It argues for reducing the use and analysing the cost of cancer services.

About 12 million people worldwide are diagnosed with cancer each year. That figure is expected to reach 27 million by 2030.

The cost of new cancer cases is already estimated to be about £185bn ($286bn) a year.

Rising costs

A group of 37 leading experts from around the world say the burden of cancer is growing and becoming a major financial issue.

Start Quote

We’re on an unaffordable trajectory”

Prof Richard Sullivan Lead author

Their report says most developed countries dedicate between 4% and 7% of their healthcare budgets to dealing with cancer.

“The issue that concerns economists and policymakers is not just the amount of money spent on healthcare, but also the rate of increase in healthcare spending or what has become known as the cost curve.”

It says the UK’s total spend on breast cancer has increased by about 10% in each of the past four years.

“In general, increases in the cost of healthcare are driven by innovation. We spend more because we can do more to help patients.”

For example, the number of cancer drugs available in the UK has risen from 35 in the 1970s to nearly 100, but the report warns they can be “exceedingly expensive”.

It adds: “Few treatments or tests are clear clinical winners, with many falling into the category of substantial cost for limited benefit.”

The cost of drugs is not the only target for criticism.

Lead author Prof Richard Sullivan told the BBC: “It’s not just pharmaceuticals. Biomarkers, imaging and surgery are all getting through with very low levels of evidence – the hurdles are set too low.”

The report calls for a proper evaluation of the relative merits of conventional surgery and less invasive robotic surgery.

Too much

Another criticism is “overusing” treatments and technologies.

Personalised Medicine

All cancers are not the same, even all breast or lung cancers are not the same.

It is hoped that better testing will bring about an era of “personalised medicine”, meaning drugs can be tailored to specific cancers.

In Japan, testing for the KRAS gene in colorectal cancer patients before deciding whether to use a cancer drug saves £32m per year.

However, the report says that on the whole “the science has not lived up to the promise”.

“It is often easier to order a scan than to reassure the patient or physician on the basis of a careful history and a physical examination,” the report claims.

There is also criticism of “futile care” – providing expensive chemotherapy which gives no medical benefit in the last few weeks of a patient’s life.

Prof Sullivan said: “We’re on an unaffordable trajectory. We either need to manage and reduce the costs or the cost will increase and then inequality rises between rich and poor.”

He said failure to manage costs could result in a “train crash”.

The report says solutions fall into two categories: reducing the cost of services or reducing the number of people using them.

Italy Hits the Iceberg

Italy Hits the Iceberg – By Maurizio Molinari | Foreign Policy.

Perhaps it was already too late for Italy to avoid the financial downgrade that credit-rating agency Moody’s threatened at the beginning of this summer. It’s not as if people didn’t see it coming. Italy’s economy has been battered by rising debt and worsening credit spreads. A default or bailout is every European central banker’s nightmare scenario — it’s the economy “too big to save.” Indeed, as Finance Minister Giulio Tremonti ominously warned in July, “If we don’t act now, then we will be like the Titanic, and even the first-class passengers suffered.” Not to push the analogy, but Italy may have just hit the iceberg. It’s not necessarily sinking, though. The government in Rome can still try to exploit the pressure generated by the current financial crisis to jolt the economy out of its semi-stagnation, launching a bold and comprehensive program of structural reforms to increase productivity and growth, while driving down debt. But does anyone believe that embattled Prime Minister Silvio Berlusconi still has the will — or enough political juice — to do it?

Moody’s Oct. 4 decision to downgrade Italy’s sovereign debt to A2 follows a similar decision by Standard & Poor’s on Sept. 19 that knocked the country down to a single A rating; but Moody’s slash of three notches was in some ways more shocking. Both agencies also give Italy a negative outlook, which means that future downgrades are likely. Italy’s high and mighty have reason to worry.

The downgrades are based on three concerns. First is the sharp deterioration of the international economic outlook, particularly in Europe. This is obviously something over which Italy has no control, but which it’s more impacted by than other advanced countries because of its endemic low growth rates. Italy does not have the fiscal space or the flexibility to change monetary or foreign exchange policies to boost growth. Second, and compounding the problem, sluggish growth risks undermining the otherwise good fiscal results achieved by Italy in the past few years, particularly the primary budget surplus. Third is the political component: Growing frictions within the ruling coalition and its slim parliamentary majority have undermined the government’s ability to enact necessary but unpopular measures to front-load fiscal consolidation and break the numerous logjams that hamper growth. And political uncertainty is not going to disappear anytime soon; even if Berlusconi steps down, it is unclear who will be his successor or whether new elections will lead to a more effective government coalition.

Even if Berlusconi and Tremonti did see the Moody’s iceberg coming, it is unlikely that they could have turned the ship of the Italian economy in time to avoid it. This, however, doesn’t mean that they’re above fault. Italy should have taken immediate action to strengthen its economy and to try to distance itself from the contagion of the debt crisis in Greece and the other European peripheral countries. Specifically, Rome should have embraced the stern recommendations issued in early August by European Central Bank (ECB) President Jean-Claude Trichet and his incoming Italian successor, Mario Draghi, who requested that Italy act with urgency on several fronts, including liberalizing public services and professions, making the labor market more flexible, increasing the retirement age in line with international standards, and streamlining the public administration. These measures, as the ECB urged, should be part of a “comprehensive, bold, and credible strategy of reforms.” Rome gravely nodded and promised to get to work, but the result was more of the same: lots of talking and only marginal improvement.

After some procrastination, the Italian government did push through Parliament a set of measures aimed at having a balanced budget by 2013, a plan that would allow the debt-to-GDP ratio to start to decline from its very high level. But the plan’s effectiveness and credibility have been questioned: Most measures don’t actually cut government spending but rather increase tax revenue, including a much-vaunted program to strengthen tax collection. (We’ll see what comes of that.) In any case, many of the structural reforms and growth-enhancing measures suggested by the ECB are missing.

The predicament that the Italian government now faces is like trying to fix the flaws in the Titanic’s construction as it’s hitting the iceberg: Sound the alarm, save the women and children, plug the holes — and while you’re at it, build more lifeboats, double-plate the hull, and make sure that those rivets aren’t subpar.

Markets are asking Italy to resolve long-standing problems that will take years to redress, even assuming its full commitment to the task. This commitment, however, is severely lacking now and in the foreseeable future. Berlusconi is under fire for nonstop sordid revelations about his private life; the current coalition government lacks any clear candidate to replace him; and the opposition is too fragmented and weak to offer a credible alternative. Even civil society seems unable to offer credible leaders. The only exception to this lack of leadership is the president, Giorgio Napolitano, whose moral authority has grown considerably in recent months but whose powers are strictly limited by the Italian Constitution. Napolitano, however, has never said that he’s eager to assume the premiership.

Under these circumstances, it is unclear who will be able to take those bold, comprehensive actions recommended by the ECB; Tremonti is preparing plans, but the political will to push them forward is lacking. This is due largely to Berlusconi — whose weakened stature makes it nearly impossible for him to take command of a fractious government. Meanwhile, Italy remains exposed to the spillover effects of the debt crisis, though its budgetary situation appears much stronger than those of most European countries. But the Moody’s downgrade doesn’t help. It’s now going to be more difficult — and it cost Italy a lot more — to enter credit markets and reassure bondholders.

To make matters worse, like with the Titanic’s sinking, the Carpathia is too far away to come to Italy’s aid. European leaders have been unable to decide on an effective strategy to cope with the debt crisis and contain its effects. The European Financial Stability Facility (ESFS) that is designed to assist countries dealing with the economic crisis is not yet operational, pending the ratification of the last of the 17 eurozone countries, Slovakia. Even assuming the ESFS does come online in the near future, most serious analysts doubt whether it has adequate resources; only $300 billion would be available to it, and most estimates hold that it will take more than $1 trillion to calm the restive markets.

Still, there’s a glimmer of hope on the horizon. There is no doubt that Italy — as well as a number of other eurozone countries — is navigating through very dangerous seas. But it’s not yet a foregone conclusion that it will go down like the Titanic. That said, if Italy’s politicians think that anyone but themselves will come and save them, then they might want to start taking swimming lessons now.

A second Great Depression: Eight drastic policy measures necessary to prevent global economic collapse?

A second Great Depression: Eight drastic policy measures necessary to prevent global economic collapse. – By Nouriel Roubini – Slate Magazine.

The latest economic data suggest that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Bros. in 2008. The risks of an economic and financial crisis even worse than the previous one—now involving not just the private sector, but also near-insolvent governments—are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown?

First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the Eurozone’s periphery such as Greece or Portugal are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the Eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well.

Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.

Third, to restore credit growth, Eurozone banks and banking systems that are undercapitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the U.S. and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential.

Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. Even with policy changes, it takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely.

Today, Spain and Italy are at risk of losing market access. Official resources need to be tripled— through a larger European Financial Stability Facility, Eurobonds, or massive ECB action—to avoid a disastrous run on these sovereigns.

Advertisement

Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity. This needs to be carried out for insolvent governments, households, and financial institutions alike.

Sixth, even if Greece and other peripheral Eurozone countries are given significant debt relief, economic growth will not resume until competitiveness is restored. And, without a rapid return to growth, more defaults—and social turmoil—cannot be avoided.

There are three options for restoring competitiveness within the Eurozone, all requiring a real depreciation—and none of which is viable:

  • A sharp weakening of the euro toward parity with the U.S. dollar, which is unlikely, as the United States is weak, too.
  • A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.
  • A five-year cumulative 30 percent deflation in prices and wages—in Greece, for example—which would mean five years of deepening and socially unacceptable depression. Even if feasible, this amount of deflation would exacerbate insolvency, given a 30 percent increase in the real value of debt.

Because these options cannot work, the sole alternative is an exit from the Eurozone by Greece and some other current members. Only a return to a national currency—and a sharp depreciation of that currency—can restore competitiveness and growth.

Leaving the common currency would, of course, threaten collateral damage for the exiting country and raise the risk of contagion for other weak Eurozone members. The balance-sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies. Appropriate use of official resources, including for recapitalization of Eurozone banks, would be needed to limit collateral damage and contagion.

Seventh, the reasons for advanced economies’ high unemployment and anemic growth are structural, including the rise of competitive emerging markets. The appropriate response to such massive changes is not protectionism. Instead, the advanced economies need a medium-term plan to restore competitiveness and jobs via massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy. Only such a program can provide workers in advanced economies with the tools needed to compete globally.

Eighth, emerging-market economies have more policy tools left than advanced economies do, and they should ease monetary and fiscal policy. The International Monetary Fund and the World Bank can serve as lender of last resort to emerging markets at risk of losing market access, conditional on appropriate policy reforms. And countries like China that rely excessively on net exports for growth should accelerate reforms, including more rapid currency appreciation, in order to boost domestic demand and consumption.

The risks ahead are not just of a mild double-dip recession, but of a severe contraction that could turn into the Great Depression II, especially if the Eurozone crisis becomes disorderly and leads to a global financial meltdown. Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II. The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.

Read this story at Project Syndicate.

IMF says US and Europe risk double-dip recession

US and Europe risk double-dip recession, warns IMF | Business | guardian.co.uk.

International Monetary Fund’s World Economic Outlook says slow, bumpy recovery could be jeopardised by Europe’s debt crisis or over-hasty attempts to cut America’s budget deficit

IMF cuts growth forecast for UK

Wall Street protest

A protest on Wall Street. Confidence has fallen and the risks are on the downside, the IMF said in its half-yearly report. Photograph: Keystone/Rex Features

The International Monetary Fund warned on Tuesday that the United States and the eurozone risk being plunged back into recession unless policymakers tackle the problems facing the world’s two biggest economic forces.

In its half-yearly health check, the Washington-based fund said the global economy was “in a dangerous place” and that its forecast of a slow, bumpy recovery would be jeopardised by a deepening of Europe’s sovereign debt crisis or over-hasty attempts to rein in America’s budget deficit.

“Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said as it cut its global growth forecast for both 2011 and 2012.

The IMF also cut its growth forecasts for the UK economy and advised George Osborne to ease the pace of deficit reduction in the event of any further downturn in activity.

The IMF’s World Economic Outlook cited the Japanese tsunami and the rise in oil prices prompted by the unrest in north Africa and the Middle East as two of a “barrage” of shocks to hit the international economy in 2011. It said it now expected the global economy to expand by 4% in both 2011 and 2012, cuts of 0.3 points and 0.5 points since it last published forecasts three months ago.

“The structural problems facing the crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion,” the IMF said.

Speaking at a press conference in Washington, Olivier Blanchard, the IMF’s economic counsellor, said there was “a widespread perception” that policymakers in the euro area had lost control of the crisis.

“Europe must get its act together,” Blanchard said, adding that it was “absolutely essential” that measures agreed by policymakers in July, including a bigger role for the European Financial Stability Fund (EFSF), should be made operational soon.

“The eurozone is a major source of worry. This is a call to arms,” he said.

Blanchard said the fund was cutting its growth forecasts because the two balancing acts needed to ensure recovery from the recession of 2008-09 have stalled. Governments were cutting budget deficits but the private sector was failing to make up for the lost demand. Meanwhile, the global imbalances between deficit countries such as the US and surplus countries such as China looked like getting worse rather than better.

“Markets have become more sceptical about the ability of governments to stabilise their public debt. Worries have spread from countries on the periphery of Europe to countries in the core, and to others, including Japan and the US, Blanchard said.

He added that there was a risk of low growth, fiscal, and financial weaknesses could easily feed on each other.

“Lower growth makes fiscal consolidation harder. And fiscal consolidation may lead to even lower growth. Lower growth weakens banks. And weaker banks lead to tighter bank lending and lower growth.” As a result, there were “clear downside risks” to the fund’s new forecasts.

Developing nations lead the way

In its report, the IMF said it expected the strong performance of the leading emerging nations to be the main driving force behind growth in the world economy. China’s growth rate is forecast to ease back slightly, from 9.5% in 2011 to 9% in 2012, while India is predicted to expand by 7.5% in 2012 after 7.8% growth in 2011.

Sub-Saharan Africa is expected to continue to post robust growth, up from 5.2% in 2011 to 5.8% in 2012.

The rich developed countries, by contrast, are forecast to grow by just under 2%, slightly faster than the 1.6% pencilled in by the IMF for 2011.

“However, this assumes that European policymakers contain the crisis in the euro periphery area, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate.”

“The risks are clearly to the downside,” the IMF added, pointing to two particular concerns – that policymakers in the eurozone lose control of the sovereign debt crisis, and that the US economy could weaken as a result of political impasse in Washington, a deteriorating housing market or a slide in shares on Wall Street. It said the European Central Bank should consider cutting interest rates and that the Federal Reserve should stand ready to provide more “unconventional support”.

It said: “Either of these two eventualities would have severe implications for global growth. The renewed stress could undermine financial markets and institutions in advanced economies, which remain unusually vulnerable. Commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in developing countries.”

The IMF said that in its downside scenario, the eurozone and the US could fall back into recession, with activity some three percentage points lower in 2012 than envisaged. Currently, the fund is expecting the US to grow by 1.8% in 2012 and the eurozone by 1.1%.

“In the euro area, the adverse feedback loop between weak sovereign and financial institutions needs to be broken. Fragile financial institutions must be asked to raise more capital, preferably through private solutions. If these are not available, they will have to accept injections of public capital or support from the EFSF, or be restructured or closed.”

The IMF urged Republicans and Democrats in Washington to settle their differences: “Deep political differences leave the course of US policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels.”

UBS $2 billion rogue trade suspect held in London

UBS $2 billion rogue trade suspect held in London | Reuters.

LONDON/ZURICH | Thu Sep 15, 2011 9:23am EDT

(Reuters) – Swiss bank UBS said a trader had lost it around $2 billion in unauthorized deals, and police in London arrested 31-year-old Kweku Adoboli in connection with the case.

Adoboli — a director of exchange traded funds and “Delta 1” working in the bank’s London office, according to his profile on networking site LinkedIn — was arrested on suspicion of fraud, sources told Reuters.

“I can confirm that an employee of the bank was arrested in London in connection with the statement,” a UBS spokesman said.

UBS said it might post a third-quarter loss after the rogue trades, a huge blow as it struggles to rebuild its credibility after years of crises.

The loss effectively cancels out the 2 billion-franc saving that the bank had hoped to make in a cost-cutting program announced last month in which it will axe 3,500 jobs.

It also threatens the future of UBS’s investment bank, which is being reviewed by chief executive Oswald Gruebel as part of a wide-ranging restructuring following heavy losses in the credit crisis and a damaging scandal over bankers helping rich U.S. clients dodge taxes.

UBS, which said no client positions were affected, is scheduled to hold an investor day on November 17 at which it was expected to announce major restructuring of the investment bank.

“The matter is still being investigated, but UBS’s current estimate of the loss on the trades is in the range of $2 billion,” the bank said in a statement.

UBS employed almost 18,000 people in its investment bank at the end of June, most of them outside Switzerland, particularly in London and the United States.

UBS shares were down 9.1 percent at 9.935 Swiss francs at 1320 GMT, while the European banking sector was up 4.78 percent.

“(This) is a staggering demonstration that all the clever systems that the banks now have, especially after the financial crisis, still cannot stop a determined individual getting round them if they want to,” said Chris Roebuck, Visiting Professor at Cass Business School in London.

“It will yet again confirm to the majority of shareholders who are Swiss that investment banking is not ‘proper’ banking, as private banking is.”

UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches followed by repeated pledges to fix risk systems.

KERVIEL

Any losses in its investment bank risk scaring UBS’s rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world’s biggest wealth manager but has slipped to third place.

“This loss has the scope to have a material impact on the perception of UBS’s private bank, impacting its future operating trends,” Goldman Sachs analysts Jernei Omahen and Peter Skoog said in a note.

“Today’s announcement therefore adds to the long list of arguments (and pressure) for a substantially smaller investment bank.”

UBS’s news caused disbelief among market operators.

The last similar case was when Jerome Kerviel, then a trader at Societe Generale, racked up a $6.7 billion loss in unauthorized deals revealed in 2008. Kerviel was sentenced to three years in prison in October 2010. [ID:nL5E7KF0M4]

Both Kerviel and Adoboli were the same age when the scandal broke and both worked with so-called Delta 1 products, derivatives which closely track the underlying securities and give the holder an easy way to gain exposure to several asset classes. Examples include equity swaps, forwards, futures and exchange-traded funds.

“It is amazing that this is still possible,” said ZKB trading analyst Claude Zehnder. “They obviously have a problem with risk management. Even when the amount isn’t so high, it is once more a loss of confidence that casts UBS in a poor light.”

“With this they are losing a lot of credit that they had regained with effort,” he added.

Switzerland’s financial markets regulator FINMA said it had been informed of the case and was in close contact with UBS.

HEADS TO ROLL?

The bank has in the past two years tried to rebuild the investment bank that nearly felled it during the financial crisis. It needed a state bailout after heavy losses on U.S. subprime mortgage-related securities.

Under Gruebel and investment bank boss Carsten Kengeter — themselves both once traders — it hired hundreds of traders in a bid to boost its bond business.

Several analysts said the incident made it more likely Kengeter would be in the firing line, while Gruebel could step down sooner rather than later.

“Gruebel saved the bank from destruction, so his main job is done. It is only a matter of time before he steps down. If it means he leaves a little sooner, it does not change a lot. But the investment bank is a bit of a disaster, and the knives will be out for Kengeter,” said Peter Thorne, analyst at Helvea.

Another analyst who declined to be named said: “Some important heads are going to have to roll, and some are saying that after a series of missteps with the IB, Kengeter himself will have to go.”

Former Bundesbank head Axel Weber is due to join the UBS board in May and take over as chairman in 2013.

The weak performance of the investment bank and tough capital rules in Switzerland had already attracted intense scrutiny over how UBS will cope, with analysts calling for a retrenchment of the investment bank.

The rogue trader scandal came as Swiss politicians were debating tough new capital rules designed to make sure big banks can weather future crises without having to be bailed out by the state.

“It shows that investment banking is a risky business and that it is important that systemically relevant functions are clearly separated from the rest of the banking business,” Caspar Baader, parliamentary leader of the right-wing Swiss People’s Party, told Swiss television.

($1 = 0.880 Swiss franc)

(Additional reporting by Andrew Thompson in Zurich, Sarah White, Steve Slater, Keith Weir, Stefano Ambrogi and Douwe Miedema in London; Writing by Sophie Walker; Editing by Will Waterman, Dan Lalor and Alexander Smith)

An Impeccable Financial Disaster

An Impeccable Disaster – NYTimes.com.

 

On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. — Europe’s equivalent to Ben Bernanke — lost his sang-froid. In response to a question about whether the E.C.B. is becoming a “bad bank” thanks to its purchases of troubled nations’ debt, Mr. Trichet, his voice rising, insisted that his institution has performed “impeccably, impeccably!” as a guardian of price stability.

Fred R. Conrad/The New York Times

Paul Krugman

Readers’ Comments

Indeed it has. And that’s why the euro is now at risk of collapse.

Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.

And all indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively.

I’ve complained a lot about the “fiscalization” of economic discourse here in America, the way in which a premature focus on budget deficits turned Washington’s attention away from the ongoing jobs disaster. But we’re not unique in that respect, and in fact the Europeans have been much, much worse.

Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.

Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. And while it was hit hard by the collapse of its housing boom, it’s still a relatively low-debt country, and it’s hard to make the case that the underlying fiscal condition of Spain’s government is worse than that of, say, Britain’s government.

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Which brings us back to the impeccable E.C.B.

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

Adding to the problem is the E.C.B.’s obsession with maintaining its “impeccable” record on price stability: at a time when Europe desperately needs a strong recovery, and modest inflation would actually be helpful, the bank has instead been tightening money, trying to head off inflation risks that exist only in its imagination.

And now it’s all coming to a head. We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer.

So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.

Infrastructure bank could be part of jobs package

Infrastructure bank could be part of jobs package – Yahoo! News.

WASHINGTON – A national infrastructure bank that would entice private investors into road and rail projects could be a major part of the jobs package that President Barack Obama hopes will finally bring relief to the unemployed.

The White House hasn’t divulged the contents of the package that Obama is to unveil in an address to a joint session of Congress next week. But the president has pushed the idea of an infrastructure bank in recent speeches and has praised Senate and House bills that create such a government-sponsored lending institution.

Whether the bank, which would need time to organize, could have any real impact on the jobs situation in the coming year — and particularly before the November 2012 elections — is in dispute.

Obama seems to think it would.

“We’ve got the potential to create an infrastructure bank that could put construction workers to work right now, rebuilding our roads and our bridges and our vital infrastructure all across the country,” he said at a news conference in July.

But Janet Kavinoky, director of infrastructure issues at the U.S. Chamber of Commerce, cautioned that “even in the next two years I don’t believe the bank is going to be that kind of job creator.”

The best way to spur job growth in the short term is for Congress to pass long-stalled bills to fund aviation and highway programs, she said.

The Chamber of Commerce strongly supports the infrastructure bank. Kavinoky said the United States is one of the few large countries that lack a central source of low-cost financing for construction projects. But she said it’s going to take time to get it running and come up with a pipeline of projects where funds can be invested.

Sen. John Kerry, D-Mass., who’s sponsoring an infrastructure bank bill, argued that “we have projects all across America that are ready to go tomorrow.” He said the bank “could have money flowing in the next year easily.”

Michael Likosky, senior fellow at the NYU Institute for Public Knowledge and author of “Obama’s Bank: Financing a Durable New Deal,” says he is working with transportation agencies in California and New York that “are waiting for the federal government to say they are going to support these projects.”

A commitment to a national infrastructure bank could also provide a positive spark to financial markets and encourage investment, he said.

The bank would supplement federal spending on infrastructure by promoting private-sector investment in projects of national or regional significance. The private sector currently provides only about 6 percent of infrastructure spending.

Supporters, which range from the Chamber of Commerce to the AFL-CIO, say pension funds, private equity funds and sovereign wealth funds have hundreds of billions of dollars ready to be invested in low-risk infrastructure projects.

It’s better than having pension fund money go to Treasury bonds, Likosky said. “It’s really about changing our approach; we’re in tough economic times and we will be for a while. We have to make sure the money we have goes further.”

The Kerry bill would require $10 billion in start-up money from the government to get the first loans going and cover administrative costs. The bank would be government owned, run by a board of directors, independent of any federal agency and self-sustaining after the initial expense. Public-private partnerships, corporations and state and local governments would be eligible for the loans.

The bank’s directors would pick which projects to finance based on an analysis of costs, benefits and revenue streams, such as from tolls or fees, for repaying the loan. Once the terms of the loan, including interest rates and fees to cover risk, are set, the Treasury Department would disburse the loan.

Urban projects would have to be at least $100 million in size, rural ones $25 million. The infrastructure bank’s loan could cover no more than 50 percent of a project’s costs.

“There is going to be a revenue stream for payback and therefore the project is going to stand on its own because it will be a good enough project to attract private-sector funding,” said Sen. Kay Bailey Hutchison of Texas, one of several Republican co-sponsors of the Kerry plan.

Supporters estimate the bank could set up as much as $160 billion in government loans over a decade and anchor as much as $650 billion in projects.

In the House, Rep. Rosa DeLauro, D-Conn., has a similar bill that relies on $25 billion in start-up money and makes use of bonds as well as loans to stimulate construction projects. Both Kerry and DeLauro would cover transportation, water and energy projects.

DeLauro would also include communications projects. She says her bill is modeled after the European Investment Bank, which has been financing infrastructure projects for 50 years and last year invested more than $100 billion.

Obama, in his 2012 budget proposal, envisioned spending $30 billion to start an infrastructure bank within the Transportation Department that would provide grants as well as loans to transportation projects.

That idea drew opposition from the House Transportation Committee chairman, Rep. John Mica, R-Fla. He said in a recent article in the congressional newspaper Roll Call that it would be better to increase help for existing state infrastructure banks “rather than increasing the size of the bloated federal bureaucracy, as some advocate, by creating a national infrastructure bank.”

Kerry pointed to a 2009 American Society of Civil Engineers report that said $2.2 trillion needs to be spent over five years to bring the nation’s roads, bridges and water systems up to an adequate level. He said Congress needs to both pass a new highway bill and agree on alternatives like the bank.

“If we can leverage $650 billion and get money going in the transportation bill, we can begin to nibble away at the problem,” Kerry said.

The Shape of the Global Economy Will Fundamentally Change

The Shape of the Global Economy Will Fundamentally Change – By Mohamed El-Erian | Foreign Policy.

Who would have thought just 18 months ago that a member of the eurozone, the most elite club of economies in Europe, could have a worse credit rating than Pakistan? And yet this is the case for Greece today, perched on the verge of a debt restructuring; two other eurozone countries (Ireland and Portugal), meanwhile, are already in Europe’s intensive care unit, receiving large bailouts.

And who would have thought that a rating agency would dare question the sacred AAA credit rating of the United States, the sole supplier of global public goods such as the international reserve currency (the dollar) and a financial system that serves as the nexus of international capital flow? Still, that’s exactly what Standard & Poor’s has done: In August the agency downgraded the United States’ AAA status to AA+, citing policymaking uncertainty in Washington and the country’s lack of a long-term plan to deal with its fiscal problems.

And who would have thought that the same country, which is renowned for its flexible labor markets and dynamic entrepreneurship, would experience a persistently high unemployment rate? Well, this is the case for the United States, where unemployment is stuck at around 9 percent, unemployment among 20-to-24-year-olds is a staggering 14.5 percent, and the related joblessness problems are becoming increasingly structural in nature.

There are, of course, several bespoke reasons for these developments. But together, they speak to major realignments that are fundamentally changing the character of the global economy and how it functions. Three things in particular have had a significant influence, and they will continue to shape the world we live in for years to come.

First, too many advanced economies face problems rooted far below the surface, in their balance sheets and in the structure of their economies. This is not just about the unemployment crisis and the rapidly deteriorating public finances that, in cases such as Greece’s, have reached alarming levels. It is also about malfunctioning housing markets, a continued breakdown in bank credit intermediation, and weak political leadership in the midst of messy party politics.

Second, rather than deal with these structural problems, policymakers have preferred to kick the can down the road. As a result, the problems have festered and become more entrenched, and the risk of adverse contagion has risen.

This is most obvious in Europe, where a liquidity approach — involving piling new debt on top of already crushing obligations — has repeatedly been applied to Greece’s debt solvency crisis. This has also transferred massive liabilities from the private sector to Greek and European taxpayers and contaminated previously healthy institutions such as the European Central Bank. It is also the case in the United States, where unprecedented stimulus spending has failed to sufficiently reignite growth and job creation.

Third, several emerging economies have hit their developmental breakout phase, largely undeterred until now by the misfortunes of the developed world. You see this in Brazil, China, Indonesia, and several other countries. In the process, they have gone from strength to strength, so much so that their economies have started overheating at a time when more established countries are languishing. This is new territory for the global marketplace, one in which the less mature countries are more robust and resilient than their advanced peers and are able to grow sustainably at high levels while also strengthening their balance sheets.

Absent a major policy mistake — a lurch toward protectionism, disorderly defaults, or disruptions to the international payment and settlement system, for instance — we should expect these global realignments to continue.

It will take several years for the advanced economies to fully rehabilitate their balance sheets and restore the conditions for high growth and employment creation. In the meantime, income and wealth distribution will become even more skewed, morphing from an economic issue into a sociopolitical one.

The combination of stretched balance sheets and disappointingly slow growth also means that the advanced countries will opt for a mix of approaches to deal with recurrent debt concerns as they continue to de-lever from the age of credit and debt-entitlement. Some, such as Britain, will rely primarily on years of budgetary austerity. Others, like Greece, will succumb to debt restructuring.

Then there is the United States, the economy that anchors the core of the global economic and financial systems. It will initially opt for financial repression — essentially a hidden taxation of creditors and depositors — and attempt higher inflation to address its balance sheet issues. With time, however, it will likely be forced into greater austerity amid noisy political posturing and bickering.

The messier this transition, the greater the risk of undermining the international standing of America’s global public goods. This in turn will challenge a global monetary system built on the assumption that its core — the United States — remains economically strong.

This is an important qualifier for what otherwise would be a far more encouraging outlook for much, though not all, of the emerging world. Look for these countries to continue to close the income and wealth gaps vis-à-vis the advanced countries. In the process, they will pull millions more out of poverty, providing them with greater economic opportunities and better access to education, health care, and nutrition.

As they continue to grow, emerging countries will push for greater accommodation on the part of a global economy that is still overdominated by the advanced economies. Global governance issues will come to the fore. International institutions will be pressured to reform more seriously. And multilateral negotiations will need to be more respectful of the growing strength of the emerging countries.

All this translates into an unusually fluid global economy — and a world in which many established parameters will instead become variables. The sooner we prepare for it, the greater the chance that we are beneficiaries of the transformations taking place, not their victims.

Just another Global Dialog Project Sites site