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To: Sam Citron who wrote (225)3/2/2009 11:50:19 AM
From: Sam Citron
   of 264
EU Rejects a Rescue of Faltering East Europe [WSJ]

BRUSSELS -- European Union leaders, led by German Chancellor Angela Merkel, rejected a call by Hungary for a sweeping bailout of Eastern Europe, as the bloc struggled to find consensus on an approach to the spiraling financial crisis at a summit Sunday.

The global recession has greatly strained the bonds holding together the 27 nations that now make up the European Union, formed in the wake of World War II, and poses the most significant challenge in decades to its ideals of solidarity and common interest.

Ms. Merkel said she couldn't see the need for a broad grant of aid to Eastern Europe. "The situation is very different" in Europe's economies. "We cannot compare Slovakia nor Slovenia with Hungary," she told reporters.

Hungarian Prime Minister Ferenc Gyurcsany, who proposed a bailout package of up to €190 billion ($240.84 billion), warned that without aid a "new Iron Curtain" would descend on Europe and again separate East from West. Hungary has been battered by declining demand for its exports and a plummeting currency -- straining Hungarians who borrowed in euros to buy houses that have now sunk in value.
[German Chancellor Angela Merkel holds a press conference on March 1, 2009 at the end of an Economic summit of European leaders at the EU Council headquarters in Brussels.] Getty Images

German Chancellor Angela Merkel holds a press conference at the end of an Economic summit of European leaders in Brussels.

The summit was originally called by Czech Prime Minister Mirek Topolanek to discuss concerns about rising protectionism in stimulus plans being proposed by individual nations. With the recent collapse of the government in Latvia, Eastern Europe's growing problems became the main focus. But leaders left Brussels with few concrete decisions and no indication that the richer EU states of Western Europe would be white knights for the East.

Consensus was hard to find even in Eastern Europe: leaders of relatively stronger countries -- fearful of appearing weak and being tarnished by international markets to which they need access for borrowing -- split with their neighbors over the wisdom of bailouts.

"Our position is that we must differentiate between countries that are in difficulties and those that are not," Polish Finance Minister Jacek Rostowski said. Poland, which benefited from years of healthy economic growth, is in better shape that some of its more-indebted neighbors. But it has seen a substantial fall in the value of its currency as investors scramble out of the region.

Hungary also proposed speeding up adoption of the euro -- now generally used by the Western European countries -- in the East.

Strict EU rules meant to maintain the euro's strength require that countries have strong fiscal positions before adopting the common currency. That has left out Eastern European nations grappling with budget deficits, inflation -- or both.

The fall of Iceland -- whose banks failed in part because Iceland's currency collapsed -- has reinvigorated calls by a number of countries to make it easier to join the safety and stability of the euro.

But both the bailout and calls for Eastern European countries to join the euro sooner were coolly received by Western European nations. Ms. Merkel and French President Nicolas Sarkozy both separately suggested that Eastern countries should look elsewhere -- to the International Monetary Fund, for instance -- for help.

Behind the tensions: The recession has struck the 27 EU nations with widely varying force. Large and steady economies such as Germany's are facing an inevitable slowdown, but smaller peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline.

The impact on Eastern Europe, which boomed in recent years, has been especially intense. Latvia, which financed its own expansion by borrowing from abroad, is literally running out of money as the credit crunch shuts those spigots off. Last week, Standard & Poor's cut Latvia's credit rating to junk.

And, as some in Eastern Europe warned, deep pain could well emerge elsewhere. All eyes are on Ireland, which is slashing public-sector pay as it scrambles to close a budget deficit that could reach nearly 10% of gross-domestic product. A protest last month in Dublin drew more than 100,000 people.

Other large countries, such as France and the U.K., face substantial domestic troubles and have little desire to persuade their populations to add the East's problems to their own.

The EU's disinclination to fund a regional bailout suggests that the IMF and other multilateral institutions will take on an even larger role in coming months -- a role that IMF officials have said they recognize. The IMF is looking to double its war chest for lending to $500 billion, and the EU is weighing whether or not to make a loan for that purpose. Last week, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank said they would provide €24.5 billion in financing for banks in Eastern Europe.

The IMF has been active on Europe's periphery: Iceland, Hungary, Latvia and Ukraine have turned to the agency for aid.

Most critical was the cold shoulder from Germany, which, as Europe's largest economy and the one with most access to borrowing, would play the largest role in financing any aid. Germany, the EU's strongest economy, is unwilling to unwind its own fiscal discipline to pay for the spending excesses of others. Admitting countries with weaker finances could hurt the strength of the euro or push up inflation across the euro zone.

At present, 16 of the 27 EU members use the euro. In Eastern Europe, only Slovakia and Slovenia do. To join, countries must keep budget deficits, government debt and inflation below specified ceilings. The recession has complicated some of those aims, particularly as some governments take on more debt. Another requirement calls for countries to hold their currencies within a preset range to the euro for two years.

That has wreaked havoc on euro-adoption plans in Hungary and Poland, where currencies have tumbled. Of the 11 EU members that don't use the euro, only Denmark could be reasonably close to adopting it. The misadventures of Iceland have provided an ample demonstration of the safety the euro offers in a storm. The North Atlantic island is not an EU member, though it shares many EU rules as part of the European Economic Area.

Iceland's three big banks -- virtually the country's entire banking system -- had expanded abroad by borrowing heavily in euros and sterling. When the credit crunch cut off their funding and the Icelandic krona fell precipitously, Iceland found itself without enough foreign currency to bail out the banks, a situation possibly avoidable if Iceland had used the euro. All three banks collapsed, and some on the island are pushing for quick accession to the EU.

Mr. Topolanek of the Czech Republic, whose country is among the strongest in Eastern Europe, said "the EU is going to leave no one in the lurch." Mr. Topolanek also said leaders had agreed to have further discussions about the EU rules for euro adoption, but that there was "broad agreement" that "it would be an error to change the rules of the game now."

The EU resolved one contentious issue on the eve of the summit: It approved France's much-criticized plan to give €6 billion in low-interest loans to domestic car makers. The French plan had drawn howls of protectionism -- particularly from the Czech Republic, where PSA Peugeot Citroen SA makes small cars -- since it made the aid contingent on the car makers keeping French factories open.

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From: Sam Citron3/4/2009 11:46:23 AM
   of 264
Reports of New Stimulus in China Lift Shares [NYT]

Stocks rose around the world on Wednesday, as investors reacted to speculation that China may expand its stimulus measures.

Shares increased on reports that Premier Wen Jiabao of China was considering new spending measures on top of the $585 billion plan already proposed. An announcement could come as early as Thursday in China.

In early trading, the Dow Jones industrial average was 75 points or 1.1 percent higher, while the Standard & Poor’s 500-stock index rose 1.3 percent, climbing above 700. The Nasdaq rose 1.6 percent.

Producers of basic materials like steel, chemicals and plastic, which could benefit from government-financed construction projects, rose in early trading in New York. Energy shares also climbed as crude oil prices rose $2.41 to $44.06 a barrel.

The morning’s gains pared two days of losses that dragged two major stock indexes to their lowest levels since 1997. On Monday, the Dow fell below 7,000, and a day later, the S.&P. 500 fell 0.6 percent to dip below 700, taking its 2009 loss to 23 percent.

In afternoon trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 2.9 percent, while the FTSE 100 index in London increased 2.7 percent. The CAC 40 in Paris was up 2.4 percent and the DAX in Frankfurt 3.3 percent.

Most Asian markets were higher, breaking a three-day losing streak. The Tokyo benchmark Nikkei 225 stock average rose 0.9 percent, while the Hang Seng index in Hong Kong rose 2.5 percent, and the Shanghai Stock Exchange composite index gained 6.1 percent.

The S&P/ASX 200 in Sydney fell 1.6 percent, after a report showed the Australian economy contracted 0.5 percent in the fourth quarter. It was the first such decline in eight years, and came as a surprise to most economists, who had been expecting the country to eke out positive growth in the period.

Investors seemed to shrug off a report by ADP Employer Services that private sector job losses increased in February. Index futures fell slightly after the report, but eventually came back. ADP said private employers cut 697,000 jobs in February compared with a revised 614,000 jobs lost in January. The January job cuts were originally reported at 522,000.

Investors were bracing for another bleak monthly unemployment report to be released on Friday. The national unemployment rate has climbed to 7.6 percent since the recession began in December 2007, and economists expect it to reach 7.9 percent for February.

Market participants were also focused on the interest rate policy meetings Thursday of the European Central Bank and the Bank of England.

The dollar gained against most major currencies. The euro fell to $1.2532 from $1.2562 late Tuesday in New York, while the British pound rose to $1.4105 from $1.4051.

Prices of most government bonds slipped. The yield on the 10-year Treasury, which moves in the opposite direction of the price, ticked up one-tenth of a percent to 2.98 percent.

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To: Sam Citron who wrote (227)3/4/2009 11:52:12 AM
From: Sam Citron
   of 264
Economy to Dominate Annual Chinese Gathering [NYT]

BEIJING — China’s national Legislature begins its tightly scripted annual meeting on Thursday with an agenda dominated by the ruling Communist Party’s two overriding concerns: riding out the global economic crisis and keeping citizens’ unhappiness with their lot from boiling over into public unrest.

In the nine-day session of the National People’s Congress, about the only suspense involves whether the government will propose to add still more stimulus spending to the $584 billion that China’s leaders already have pledged to help the slumping economy. On Wednesday, Asian and European stocks rose in part on hopes that it would.

Prime Minister Wen Jiabao is to speak early on Thursday to the 3,000-odd delegates, and is expected by many analysts to set a target for 8 percent growth of China’s gross domestic product in 2009, the same as in previous years. The government has long said that that rate is needed to hold down unemployment and the potential for social unrest. The economy logged a 9 percent rate last year, even after a sharp slowdown in the last quarter.

But a number of experts believe that a 2009 growth rate of 6.5 percent or 7 percent, meager by recent Chinese standards, is increasingly likely. Some financial analysts predicted this week that the government will propose spending vast new amounts to head off a sharper decline, although the consensus view is that new spending, if any, will be more modest.

“The government could enlarge the plan a bit,” Shen Minggao, the chief economist for Caijing, a Chinese business magazine, said in an interview. But he said that fiscal conservatives would be wary of increasing a 2009 budget deficit that already appeared to be headed for a record.

The projected deficit is widely expected to reach 950 billion yuan, or nearly $140 billion, about 3 percent of China’s GDP. The previous record deficit, about 2.6 percent of a far smaller economy, was recorded in 2002.

One certainty is that whatever is proposed will be adopted.
The delegates, the handpicked cream of the Communist Party establishment, have little taste for revolt. On Thursday, they will gather in the wedding-cake Great Hall of the People, on Tiananmen Square, for Mr. Wen’s two-and-a-half hour overview of China’s domestic and foreign-policy goals. Much of the rest of the session will be spent giving those goals ritual approval.

The lockstep is likely to be especially tight this year, because the government wants to present a united and confident front to a public battered by rising unemployment and falling incomes. The government estimated a month ago that 20 million of the nation’s 130 million migrant workers — the cheap-labor force that powered much of China’s construction and export booms — had lost their jobs.

A signal goal of China’s stimulus program is to ensure that the idle jobless do not become an engine of social unrest.
Protests by laid-off or cheated workers are a not-infrequent occurrence, and the government has suggested that demonstrations will increase this year.

Already, the Beijing authorities have rounded up hundreds of would-be petitioners who traveled from other cities to the capital, many hoping to present grievances personally to the National People’s Congress delegates.

But if the National People’s Congress suffers a rubber-stamp image, its deliberations remain likely to illuminate the government’s still-murky plans toward economic and social stability — and, perhaps, a bit of its political calculation as well.

Experts will be watching Wen’s proposals closely to see not only how the proposed 4 trillion yuan stimulus will be spent, but how much is actually genuinely new spending. China’s central government is allotting only about 1.2 trillion yuan , or $175 billion, of the total; the rest is supposed to come from banks, investors and local governments, whose finances are especially opaque.

Most of the money is set to go to infrastructure projects, like roads and dams, that pump money quickly into the economy. But many outside experts and some party figures are calling for more money to be spent directly on people’s basic needs, from medical care to education to poverty, and the need for more social spending is likely to be vigorously debated at the meeting.

The delegates will consider one bill that would pour 850 billion yuan, or about $124 billion, into health care reform, setting up a national health insurance program and overhauling the medical care system. But even that amount would only boost annual health care spending to about 120 yuan, or $20, per person, a sum some analysts say is too little to provide meaningful relief.

“There’s an overinvestment in infrastructure,” Mao Yushi, the respected 80-year-old head of a Beijing research organization, said in an interview this week. “Money should be directed to help small businesses, for employment and social security, for medical insurance.”

In the past, such decisions have been the exclusive purview of party leaders. As this People’s Congress convenes, there are small signs that that is slowly changing.

On Sunday, Wen went on the Internet for nearly two hours to answer questions from Web-surfing citizens, issuing his own call for the government to be more transparent in its dealings. This week, the National Development and Reform Commission — the government body that is directing much of the stimulus spending — announced that it will post details of its spending plans on the Internet.

The delegates themselves also plan to engage in Internet chats with citizens, a Congress spokesman said this week.

Chinese stocks rose the most in four months on Wednesday as investors bet that further economic stimulus measures would be announced and that a wide range of Chinese companies would benefit. The Shanghai stock market gained 6.1 percent on Wednesday.

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From: Sam Citron3/5/2009 7:36:31 AM
   of 264
China's 'Missing' Stimulus [WSJ]

While the U.S. government is being accused of socialism, China's Communist Party isn't being as socialist as some expected.

Absent from Chinese Premier Wen Jiabao's keynote speech to China's National People's Congress on Thursday was the announcement of any major new fiscal stimulus plan. Confident that one was coming, investors bid up share prices around the world in anticipation.

In retrospect, those hopes were always overdone.

Beijing's existing $585 billion stimulus plan, unveiled last November, is barely out of its wrapping: while China's capacity to absorb it fully is already in doubt.

Less than a third of the $15 billion slated for disbursement in 2008's fourth quarter was actually spent by the end of December, a government official said Wednesday. Worries that corruption in the localities will cause stimulus funds to be wasted are also leading Beijing to keep a grip on the fiscal tap.

And spending isn't all that China's offered up in defense of its economy. Banks, encouraged to lend by Beijing, have begun to do so in earnest, while specific measures to support ten different industries are in the pipeline.

The government is now waiting to see if all this is enough for Chinese economy to grow by its perennial 8% target in 2009. Meanwhile, it doesn't want to give the impression of panic by adding another major initiative before the impact of the first is clear.

One worry: Isolated green shoots of recovery could be leading to unwarranted complacency in Beijing's hierarchy. China's purchasing managers' index has risen for three months in a row, for example, but it's still in contractionary territory. Bank lending is up, but anecdotal evidence suggests some of that is flowing into stocks, or simply being hoarded.

So ruling out the eventual addition of another stimulus plan would be a mistake -- if only because China still has room to do more. Even with the current plan, government debt is projected to remain under 3% of GDP this year -- a level that's surely envied by some of the world's biggest economies.

Still, China does few things hastily.
Including, as investors learned Thursday, pouring money onto a plan that's hardly had time to work.

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From: Sam Citron3/7/2009 2:24:49 AM
   of 264
Japan’s Crisis of the Mind [NYT Op-Ed]

Yokohama, Japan

RECENT events mark Japan’s return to the world’s stage, or at least so it seems. Tokyo was Secretary of State Hillary Clinton’s inaugural overseas destination. Last week, Prime Minister Taro Aso was the first foreign leader to visit the Obama White House. All this suggests that Washington sees Japan, the world’s second-largest economy, as a powerful nation. If only we saw ourselves the same way.

The truth is, Japan is a mess. Mr. Aso’s approval rate recently hit 11 percent, and his ruling Liberal Democratic Party is in open disarray. His predecessor barely lasted a year. The opposition Democratic Party of Japan just offers more of the same. This is largely because we have become a nation of bureaucrats. What passes for national policy is the sum of various ministerial interests, often conflicting or redundant, with jealously guarded turfs and budgets.

There can be no justification for all those mostly unused airports. Or for roads that lead nowhere. Or for the finance minister who appeared to be drunk at the Group of 7 meeting this month in Rome. Our problem is so deep that it sometimes seems that no political party can tame the bureaucracy and put in place a coherent national agenda.

But what most people don’t recognize is that our crisis is not political, but psychological. After our aggression — and subsequent defeat — in World War II, safety and predictability became society’s goals. Bureaucrats rose to control the details of everyday life. We became a nation with lifetime employment, a corporate system based on stable cross-holdings of shares, and a large middle-class population in which people are equal and alike.

Conservative pundits here like to speak of this equality and sameness as being cornerstones of “Japanese” tradition. Nonsense. Throughout much of its history, Japan has had social stratification and great inequality of wealth and privilege. The “egalitarian” Japan was a creature of the 1970s, with its progressive taxation, redistribution of wealth, subsidies and the dampening of competition through regulation. This all seemed to work just fine until our asset-price bubble popped in the 1990s. Today, the hemmed-in Japanese seem satisfied with the knowledge that everyone around them is equally unhappy.

Since the middle of the 19th century, our economic success has relied on the availability of outside models from which to choose. Our model for social security took inspiration from Bismarck’s Germany, state planning from the Soviet Union, public works from the Tennessee Valley Authority, automobile assembly and manufacturing from Ford. Much of Japanese innovation has involved perfecting what others have created. Sony is famous for its Walkman, but it didn’t invent the tape recorder. Japan’s rise to economic greatness was basically a game of catch-up with the advanced West.

So what happened once we caught up? Over the past two decades, the answer has largely been paralysis. Japan’s ability to imitate outside models was mistaken for progress. But if progress is defined by pursuing a vision of a desirable future, then the Japanese never progressed. What we had was a concept of order and placement, which is essentially stasis.

In the West, on the other hand, the idea of progress rests on establishing individual autonomy and liberty. In Japan, bureaucratic rule offered security and predictability — in exchange for personal freedom. The problem is that our current political leaders can’t keep their side of the bargain. Employment security can no longer be guaranteed. The national pension and health plans seem to be insolvent in the long run. People feel both insecure and unfree.

Signs of despair are everywhere. Japan has one of the highest suicide rates among rich countries. There may be as many as one million “hikikomori,” from teenagers to those in their 40s, who shut themselves in their rooms for years on end. Then there are all those “parasite singles” — or unmarried adults living with their parents. But by far our most serious problem is a declining and aging population. Given present trends, total population will likely decline from around 130 million to under 90 million in 50 years or so. By that same time, 40 percent of Japanese could be over 65.

If we want to survive as a nation, we must shed our deeply rooted resistance to immigration. Contrary to widespread prejudices in favor of keeping Japan “pure,” we desperately need to dilute our blood. Our aging nation will need millions of university-educated middle-class immigrants with high productivity, people who will put down roots and raise families, whose pride and success will be the affirmation of new Japanese values.

Japan desperately needs change, and this will require risk. Risk-taking is not common among the bureaucratically controlled. You won’t find many signs on Japanese beaches saying, “Swim at your own risk. No lifeguard on duty.” If that sign were to appear, many Japanese would likely ask the authorities to tell them if it is safe to swim. This same risk aversion translates into protectionism and insularity. The ministry of agriculture, for example, wants to increase self-sufficiency in food. There is not nearly enough critical thinking and dissent in the Japanese news media.

Still, the idea that the Japanese are afraid of risk has no basis in history, for better or for worse. Remember Pearl Harbor? In fact, Japan’s passiveness today is in large measure a calculated and reasonable reaction to its behavior during the Second World War. But today, this emphasis on safety and security is long past its sell-by date.

We have run out of outside models to imitate. We must start from scratch, embracing an idea of progress that is based on innovation, ambition and dynamism. Doing so will take risk — and extraordinary leadership. But the alternative is to continue stumbling down a path of decline.

Masaru Tamamoto is a senior fellow at the World Policy Institute.

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From: Sam Citron3/10/2009 7:46:47 AM
   of 264
A closer look at the Swedish model of bank nationalization:

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From: Sam Citron3/10/2009 8:01:29 AM
   of 264
No help in sight for sinking [Swedish] krona [FT]
By Peter Garnham
Published: March 9 2009 20:00 | Last updated: March 9 2009 20:00

The Swedish krona has suffered its steepest fall since it was allowed to float in 1992 and has been the worst performing major currency during the financial crisis.

Since the collapse of Lehman Brothers last September, the krona has dropped almost 20 per cent against the euro, last week falling to a record low of SKr11.7860, and has declined 27 per cent against the dollar.

Typically, the krona performs badly when global stocks markets come under pressure. “We are talking about a relatively small, illiquid market, which investors leave quickly in case of rising risk or deteriorating sentiment,” says Antje ­Praefcke at Commerzbank.

But support for the currency has also been undermined by deteriorating conditions in Sweden’s export-driven economy, especially in the automobile sector.

Saab, the carmaker, has sought protection from its creditors and is hoping to restructure with the help of a $647m loan from the European Investment Bank. Ford wants to sell Volvo Cars and cut jobs at the company.

Swedish industrial production and new orders slumped far beyond expectations in December, while fourth quarter gross domestic product figures revealed a 4.9 per cent annualised fall.

This has heightened expectations that the Swedish central bank, which slashed interest rates by 100 basis points to 1 per cent this month, will have to cut rates again by at least a further 25bp at its next policy meeting, scheduled for April 21.

“Quantitative easing will also have to be contemplated in the course of 2009,” says Audrey Childe-Freeman at Brown Brothers Harriman.

It is not just sentiment on equity markets or worries over the economy that is driving the krona lower. The high exposure of Swedish banks to a potential collapse in the Baltic states is also adding pressure.

Ms Praefcke says the issue represents a “sword of Damocles” for the krona. “While uncertainty on the markets regarding eastern Europe as a whole remains high, the krona remains vulnerable to further losses.”

Many observers believe the Riksbank, Sweden’s central bank, has been complicit in the krona’s fall.

Dan Katzive at Credit Suisse says the current crisis is perfectly designed to derail the Swedish currency. “Perhaps most damaging to the krona, the central bank has not objected to its weakness and, indeed, has appeared to encourage it at times,” he says.

Robert Stenram, a former senior Swedish banker, says Sweden is carrying out a competitive devaluation, something that is not appreciated in the outside world. “Sweden is experiencing a currency crisis, with the Riksbank the only global central bank talking down its own currency,” he says.

While a moderate devaluation could help exporters, the recent fall in the krona risks sucking in imported inflation, which would only exacerbate Sweden’s problems, Mr Stenram says.

“There is a limit to how far a devaluation can go without damaging the country,” he says. “This is a very dangerous situation.”

So far, the Riksbank has shown little willingness to intervene to stem the krona’s fall, even verbally.

Lars Svensson, deputy governor of the Riksbank, even floated the possibility of intervening to weaken the currency in a bid to stimulate the country’s economy.

Mr Svensson has also noted that it would be possible to view an appreciation of the exchange rate as evidence that anti-deflation efforts were failing.

“The clear message from the Riksbank is one of minimal concern ... an apparent preference not to see this depreciation reversed,” says Mr Katzive.

The authorities expect the krona’s weakness to be temporary and for it to appreciate once the worst of the crisis is over, partly because Sweden has a stable surplus in foreign trade.

But last week, Svante Öberg, first deputy governor of the Riksbank, admitted there was a risk that the krona’s weakness could be more prolonged. “This would lead to exports strengthening and imports slowing down, but at the same time provide an inflationary impulse... This may be an advantage in the short term, as economic activity is now weak and inflation is low,” he said.

“But in the longer term, a currency that fluctuates substantially can be a problem. It increases uncertainty.”

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From: Sam Citron3/10/2009 8:13:26 AM
   of 264
Subprime Europe [NYT Op-Ed]
Published: March 7, 2009

THE 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression. Last week, when I read about the brewing European banking crisis, I suddenly began to dread that history might be repeating itself.

You might think that my worries are a bit late. After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse. Well, believe it or not, Europe’s current crisis is scarier. For while losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the continent’s problems are politically harder to solve, and their consequences may prove to be much worse.

Much as in our subprime mess, Eastern Europe’s problems began with easy credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the ready availability of international credit. In recent years countries like Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent of their gross domestic product from abroad. By 2008, 13 countries that were once part of the Soviet empire had accumulated a collective debt to foreign banks or in foreign currencies of more than $1 trillion. Some of the money went into investment, much of it into consumption or real estate.

When the music stopped last year and banks retrenched, the flow of new capital to Eastern Europe came to an abrupt halt, and then reversed direction. This credit crunch hit the region just as its main export markets in Western Europe were going into free fall. Moreover, with so much of the debt denominated in foreign currencies, everyone in Eastern Europe has been scrambling to get their hands on foreign exchange and local currencies have collapsed.

Most of the Eastern European debt is held by Western European banks. It also turned out that some of the biggest lenders to Eastern Europe were Austrian and Italian banks — for example, loans by Austrian banks to Eastern European countries are almost equivalent to 70 percent of Austria’s G.D.P. Now, Italy and Austria can’t afford to bail out even their own banks.

The debt crisis in Eastern Europe is much more than an economic problem. The wrenching decline in the standard of living caused by this crisis is provoking social unrest. American subprime borrowers who have had their houses foreclosed on are not — at least not yet — rioting in the streets. Workers in Eastern Europe are. The roots of democracy in the region are not deep and the specter of right-wing nationalism remains a threat.

So what is to be done? The potential approaches essentially mirror those that have been attempted in response to America’s subprime problem.

The first approach is to deal with the short-run liquidity problem. In the same way that the Federal Reserve expanded its own lending last year to compensate for the collapse in private lending, the International Monetary Fund is providing funds to Eastern Europe, and Hungary has proposed that the European Central Bank lend to borrowers who use non-euro assets as collateral. But given the state of the rest of the world, Eastern Europe will not be able to export its way out of its troubles in the immediate future.

The debts of many Eastern European countries and some banks will have to be written off. Ultimately, as in the case of the American subprime debts, taxpayers will have to foot the bill. But which taxpayers? The taxpayers of Austria and Italy certainly can’t. So the burden will have to fall on the rich countries of Europe, especially Germany and France.

There are two approaches to taxpayer-financed bailouts. The first is to go case by case. This is being proposed by the Germans. The problem here, as we discovered after the Bear Stearns rescue last March, is that the case-by-case approach does nothing to establish confidence in the system and prevent contagion.

The best choice would be a fund that provides bailout money and a protective umbrella to banks and countries, even those that don’t seem to need it now. Hungary has proposed the creation of such a fund with roughly $240 billion at its disposal. Though the proposal has already been rejected by stronger European economies, the American experience of last year in which the Treasury finally had to ask Congress for $700 billion for a similar fund suggests that this is where Europe will end up.

The response of the American government to the financial crisis has been criticized for being too slow and inadequate. But at least we have a federal budget, the national cohesion and the political machinery to get New Yorkers and Midwesterners to pay for the mistakes of homeowners in California and Florida, or to bail out a bank based in North Carolina. There is no such mechanism in Europe. It is going to require leadership of the highest order from officials in Germany and France to persuade their thrifty and prudent taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners.

The Great Depression was largely caused by a failure of intellectual will. In other words, the men in charge simply did not understand how the economy worked. Now, it is the failure of political will that could lead to economic cataclysm. Nowhere is this danger more real than in Europe.

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From: Sam Citron3/10/2009 8:26:30 AM
   of 264
China prices fall for first time in six years [FT]
By Jamil Anderlini in Beijing
Published: March 10 2009 04:05 | Last updated: March 10 2009 06:17

Chinese consumer prices in February fell for the first time in more than six years with the benchmark consumer price index falling 1.6 per cent from a year earlier, down from a 1 per cent rise in January.

The drop marked the tenth consecutive month of moderating price rises and compares with an 11-year record rise in the CPI of 8.7 per cent last February, when food and energy prices were soaring.

Beijing has targeted headline inflation of 4 per cent this year but many analysts say the government will struggle to meet that target and will have to act quickly if it is to avoid a period of prolonged deflation.

“The government must find new growth drivers to replace exports and housing or face the risk of a ‘W-shaped’ recovery and a more durable deflation problem,” said Ben Simpfendorfer, an economist with RBS in Hong Kong.

The fall in consumer prices was matched by a 4.5 per cent decline in the producer price index, its third consecutive month in deflationary territory and a faster decline than the 3.3 per cent fall in January.

China’s National Bureau of Statistics took the unusual step on Tuesday of issuing a statement explaining that it is too early to say deflation has taken hold in China and the drops in CPI and PPI were largely down to falling raw material prices and holiday-related distortions.

“Recent downward pressure on prices in China are very obvious but there is a big difference between our current situation and typical deflation,” Yi Gang, vice-governor of the central bank, said in state media reports.

China is likely to lower the amount of money it requires banks to hold on deposit with the central bank and can also reduce benchmark interest rates, analysts said. China’s benchmark one-year lending rate is currently set at 5.31 per cent and the required reserve ratio for banks is 13.5-14.5 per cent.

The government also plans to raise its minimum purchase prices for grains and accelerate pricing reform for power and refined oil products, which could provide a counterweight to deflationary pressures.

Falling food prices were a large contributor to the dip in CPI last month, with a drop of 1.9 per cent.

Chinese urban property prices fell by 1.2 per cent in February from a year earlier, the government said on Tuesday, the steepest decline since official records began in 2005.

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From: Sam Citron3/20/2009 1:58:16 PM
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Kuwait Cancels Refinery Contracts [WSJ]

Kuwait National Petroleum Co. has canceled more than $10 billion in contracts for a refinery project, including $2.1 billion in remaining value to Fluor Corp., amid the slump in fuel prices and the project's burgeoning cost.

Share of Fluor, which reported the cancellation of its contract Friday, fell 3.6% to $37.42 in premarket trading as the move will cut the company's backlog as of Dec. 31 by some 6%.

Four South Korean companies earlier said the state-run Kuwaiti oil firm canceled $8.36 billion in refinery orders awarded them in May.

The $15 billion refinery project appeared in limbo earlier this week days after it was reported that Kuwait's former prime minister had ordered its cancellation in a further sign that political chaos in the state was taking its toll. Both the project's sponsor, KNPC, and the international contractors building the refinery said earlier this week they were unaware the project had been scrapped.

Kuwait's ruler dissolved Parliament Wednesday and called for fresh elections, a move that could end weeks of a political deadlock that has stalled an economic bailout program for the Gulf nation's banks.

The project came under increased scrutiny last year after opposition members of Parliament alleged that KNPC's contract awards didn't comply with the tender procedures set out by Kuwait's Central Tenders Committee, which handles all public sector contracts. The project was subsequently referred to the State Audit Bureau, the country's accounting watchdog.

The project's scrapping comes three months after Kuwait's Parliament forced state-owned Petrochemical Industries Co. to pull out of a planned $18 billion joint-venture deal with U.S. chemicals giant Dow Chemical Co.

Fluor had approximately 300 employees performing engineering work on the al-Zour project. The refinery was to have been Kuwait's fourth, handling 615,000 barrels a day of crude, with the intent of producing low-sulfur fuel oil for the country's power plants from 2012.

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