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From: Sam Citron10/19/2009 3:38:54 PM
   of 264
 
Einhorn bets on major currency 'death spiral'
Major institutions should be broken up if necessary, Greenlight manager says
marketwatch.com

By Alistair Barr, MarketWatch

NEW YORK (MarketWatch) -- Greenlight Capital is betting on the possibility of a major currency collapse and a surge in interest rates, the hedge-fund firm's manager David Einhorn said Monday, citing ballooning government deficits in some of the world's most developed countries.

Einhorn, who warned about Lehman Brothers' frailty before it collapsed last year, also said financial institutions that are deemed as "too big to fail," such as Citigroup Inc. , should be broken up.

Greenlight has been buying physical gold this year because Einhorn is concerned that efforts to save the financial system and fuel economic recovery are undermining the value of such currencies as the U.S. dollar.

On Monday, he said Greenlight has added new trades to this investment theme, buying long-dated options on much higher interest rates in Japan and other developed regions -- effectively giving the firm the chance to make big profits from a jump in rates. The options, bought from major banks, are tied to interest rates four to five years out, Einhorn noted.

"Japan may already be past the point of no return," he said during a presentation at the Value Investing Congress in New York.

'Lehman shouldn't have existed in any size to threaten the financial system.'

Japan's debt is equal to 190% of the country's gross domestic product and its government deficit will be 10% of GDP this year, according to Einhorn.

Japan has been able to borrow money at roughly 2% a year to finance these deficits, partly because the country has many savers willing to buy low-yielding government bonds. However, some of these savers may begin spending instead as they enter retirement, Einhorn argued.

"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."

Interest rates have been very stable in Japan for years, so the options on higher rates that Greenlight bought were relatively cheap. Einhorn said the "asymmetry" of that trade was interesting: If rates were to jump suddenly in Japan, Greenlight stands to make "multiples" on its positions.

"There remains a possibility that I'm wrong, and I hope I am," he commented. But earlier in the speech he remarked: "Just because something hasn't happened before, that doesn't mean it won't."
Remedy to shore up system

Einhorn also compared potential problems in sovereign-debt markets to the financial crisis that engulfed markets last year.

When Lehman collapsed, investors reacted by dramatically increasing the cost of borrowing for rival Wall Street firms to the point where their business models were threatened, he Einhorn. The collapse of any major currency could have same impact of rerating the cost of financing governments in deficit.

Unlike Japan, the United States isn't past the point of no return, the fund manager stressed. However, he criticized financial-reform proposals pushed by Treasury Secretary Timothy Geithner, arguing they provide a government backstop for the largest institutions, entrenching them further.

No institution should be too big to fail, Einhorn contended. "The real solution is to break up anything that fails that test. Lehman shouldn't have existed in any size to threaten the financial system."

The same applies to Citigroup and Bear Stearns, which J.P. Mortgage Chase & Co. acquired, as well as American International Group Inc. and "dozens" of other firms, he said.

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From: Sam Citron10/21/2009 10:46:38 AM
   of 264
 
Rising Debt a Threat to Japanese Economy [NYT]
By HIROKO TABUCHI

TOKYO — How much debt can an industrialized country carry before the nation’s economy and its currency bow, then break?

The question looms large in the United States, as a surging budget deficit pushes government debt to nearly 98 percent of the gross domestic product. But it looms even larger in Japan.

Here, years of stimulus spending on expensive dams and roads have inflated the country’s gross public debt to twice the size of its $5 trillion economy — by far the highest debt-to-G.D.P. ratio in recent memory.

Just paying the interest on its debt consumed a fifth of Japan’s budget for 2008, compared with debt payments that compose about a tenth of the United States budget.

Yet, the finance minister, Hirohisa Fujii, suggested Tuesday that the government would sell 50 trillion yen, about $550 billion, in new bonds — or more.

“There’s no mistaking the budget deficit stems from the past year’s global recession. Now is the time to be bold and issue more deficit bonds,” Mr. Fujii told reporters at the National Press Club in Tokyo. “Those who may call this pork-barrel spending — that’s a total lie.”

For jittery investors, Japan’s rising sea of debt is the stuff of nightmares: the possibility of an eventual sovereign debt crisis, where the country would be unable to pay some holders of its bonds, or a destabilizing collapse in the value of the yen.

In the immediate term, Mr. Fujii’s remarks prompted concerns of a supply glut in bond markets, sending prices on 10-year Japanese government bonds down 0.087 yen, to 99.56 yen, and yields to their highest point in six weeks.

The Obama administration insists that it understands the risks posed by deficits and ever-increasing debt. Its critics are doubtful. But as Washington runs up a trillion-dollar deficit this year, with trillions in debt for years to come, it need look no farther than Tokyo to see how overspending can ravage an economy.

Tokyo’s new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.

“Public sector finances are spinning out of control — fast,” said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. “We believe a fiscal crisis is imminent.”

One of the lessons of Japan’s experience is that a government saddled with debt can quickly run out of room to maneuver.

“Japan will keep on selling more bonds this year and next, but that won’t work in three to five years,” said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. “If you ask me what Japan can resort to after that, my answer would be ‘not very much.’ ”

How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.

The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.

The spending initially fueled Japan’s rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.

The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.

“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.

Still, officials insist that Japan is better off than the United States by some measures.

One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America’s debt is held overseas by countries such as China and Japan.

Moreover, half of Japan’s government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.

All of this makes a sudden sell-off of government bonds unlikely, officials argue.

“The government is just borrowing from one pocket and putting it in the other,” said Toyoo Gyohten, a former top finance ministry official and a special currency adviser to Mr. Fujii. “Although the numbers appear very fearsome, we have some leeway.”

Many analysts agree that during a recession, Japan, like the United States, should worry less about trying to cut debt. But they say Tokyo should at least concentrate on making sure that spending does not get out of hand.

“The government needs to stabilize the debt, first and foremost. Only then can it start setting other targets,” said Randall Jones, chief economist for Japan and Korea at the Organization for Economic Cooperation and Development.

A credible plan to pare down spending is important “to maintain public confidence in Japan’s fiscal sustainability,” said the O.E.C.D.’s economic survey of Japan for 2009.

In the long run, even Japan’s sizable assets could fall and eventually turn negative. Japan’s rapidly aging population means retirees are starting to dip into their nest eggs — just as government spending increases to cover their rising medical bills and pension payments.

The fall in public and private savings could eventually reverse Japan’s current account surplus, possibly driving up interest rates as the public and private sectors compete for funds. Higher interest rates would increase the cost of servicing the debt, and raise Japan’s risk of default.

In a worst case, Japan’s currency could suffer as more investors switch away from Japan to other assets. And if Japan were to print more money and set off inflation to reduce its debt burden, the supply of yen would shoot up, lowering the currency’s value further.

In recent months, the yen’s surge on major markets as the dollar weakened has sent a false sense of security. The currency recently touched a seven-month high of about 89 yen to the dollar before easing slightly, as near-zero interest rates in the United States prompted investors to take their money elsewhere. Many strategists expect the yen to strengthen further, at least in the short term.

“In 10 or 20 years, Japan’s current-account surplus will fall into deficit, and that will lead to a weaker yen,” said Mr. Morita at Barclays Capital. “But if investors become pessimistic about Japan before that, the yen will weaken earlier than that.”

For all the recent talk of a shift away from the dollar as the reserve currency of choice, it is the yen that is becoming increasingly irrelevant, analysts say. The yen made up 3.08 percent of foreign currency reserves in mid-2009, down from 3.29 percent the same time last year and down from 6.4 percent in 1999. In mid-2009, the dollar still accounted for almost 63 percent of global foreign reserves.

“The yen is set to enter a long decline” in both stature and value as investors lose confidence in Japan, said Hideo Kumano, chief economist at the Dai-Ichi Life Research Institute in Tokyo.

Considering the state of Japan’s finances and economy, Mr. Kumano said, the yen’s recent strength against the dollar “isn’t an affirmation of Japan — it’s the yen’s last hurrah.”

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From: Sam Citron12/7/2009 12:25:59 PM
   of 264
 
In Russia, New Times Are Reason for Debate [NYT]
By CLIFFORD J. LEVY

MOSCOW — Vadim V. Vodyanitsky runs a fish processing plant in Russia’s Far East, and one question looms over his day, as crucial as the trawler schedules or the Pacific tidal patterns. What time is it in Moscow, 5,000 miles away?

There are many ways to measure Russia’s girth, but Mr. Vodyanitsky can speak to one of the most compelling: it has 11 time zones, from the Polish border to near Alaska, a system so vast that you can get a walloping case of jet lag from a domestic flight.

The time zones, set up by the Soviets to showcase the country’s size, have long been a source of national pride, but the government is now viewing them as a liability and is considering shedding some.

In today’s economy of constant communication, it is hard to manage businesses and other affairs when one region is waking up and another is thinking about dinner. Mr. Vodyanitsky, for example, has his plant on the Kamchatka Peninsula, nine hours ahead of Moscow, and his office in Vladivostok, seven hours ahead. But his business often depends on decisions by regulatory and banking officials in the capital. “It’s extremely inconvenient getting anything done through Moscow,” he said in a telephone interview. “For any activity, we often have to wait a day, wasting a whole 24 hours.”

Mr. Vodyanitsky, 35, favors reducing the time difference between the Far East and Moscow to ease the strain on industry, but others are not so sure. In fact, the issue has blossomed in recent days into an intense debate across the country about how Russians see themselves, about how the regions should relate to the center, about how to address the age-old problem of creating a sense of unity in this land.

Governments have long tinkered with time zones for political purposes, and at the other extreme from Russia stands China. After Mao and the Communists seized power in 1949, they tried to cement control by mandating one countrywide time zone.

Everyone in China is supposed to live on Beijing time, even though the country is wide enough to have as many as four or five time zones.

Nobody is seriously promoting the idea of a single time zone for Russia, which might lead to all sorts of absurdities (breakfast in the middle of the night in the Far East). But when President Dmitri A. Medvedev suggested last month that the country should contemplate scaling back the zones, he appeared to be offering support for proposals from senior officials in the Far East to trim the system by a few hours.

Mr. Medvedev emphasized that the government had not made a decision yet. But he indicated that revamping the time zones could play an important role in the push to modernize Russia’s economy.

Gennady I. Lazarev, a prominent Vladivostok academic who is a proponent of the change, said in an interview that Russia should undertake an experiment, shifting the Far East closer to Moscow by one hour, waiting a year to allow people to adapt, then moving another hour closer. Further changes would be more drastic but should be evaluated, he said.

“If the time differences were less, then Russia would be perceived by people as a more compact, more manageable place,” said Mr. Lazarev, who is also a governing party member of the regional legislature.

Mr. Lazarev said he believed that the Far East was already two hours off what he referred to as the correct biological time — meaning the time most appropriate for the human body’s internal clock.

The current system does have a crazy-quilt feel. For example, when it is noon in Vladivostok, it is 10 a.m. just over the border in China. In Tokyo, it is 11 a.m., even though Tokyo is farther east than Vladivostok.

Still, proposals to modify the time zones have stirred deep suspicions, especially in the Far East and Siberia, where people have long resented Moscow, much the way people in places like Idaho distrust the goings-on in Washington.

The Far East has a weak economy and a sparse and shrinking population. Residents there often complain about the lack of federal support.

Andrei Gordeyev, 25, an illustrator in Khabarovsk, the second most populous city in the Far East, said that by raising the issue of reducing the time zones, Mr. Medvedev was “throwing dust in our eyes,” an expression that implies an attempt to impress someone with something that in truth is of little value.

“They can say, ‘Oh, we are doing this to help the economy out there,’ ” Mr. Gordeyev said. “But the reality is that if they really want to help us, there are a lot of other, more significant things that they can do.” Others worried that shifting the time closer to Moscow might assist business and government but would hurt people’s well-being, forcing them to spend more of their waking hours in the dark. That factor is already critical in winter, when at the worst there are just a handful of daylight hours.

“We have to look at this from a biological standpoint, how it is going to affect health,” said Yekaterina Degtyareva, 27, a personnel manager who lives in Novosibirsk, the most populous city in Siberia, and often travels to the Far East and Moscow. “If it is going to be a centralized, so-called totalitarian decision, then nothing good will come of it.”

In his remarks last month, Mr. Medvedev mentioned that while the 11 time zones were often portrayed as “a vivid symbol of our country’s greatness,” that notion might need to be discarded.

Perhaps not, said Elia Kabanov, 26, director of a public relations agency in Novosibirsk.

“Eleven time zones — it is an endearing feature of Russia, part of our national idea, if you would,” Mr. Kabanov said. “It is something that distinguishes us from China or the U.S.A., and something that we need to preserve for future generations.”

But Mr. Vodyanitsky, the owner of the fish processing factory in the Far East, said the situation was increasingly untenable. He said the time difference not only caused inefficiencies, but also gave rise to estrangement between parts of Russia.

He said he regularly received calls at his office in the middle of the night from people in Moscow. “They have no idea that we are seven hours ahead in Vladivostok,” he said. “And they get outraged that I don’t answer my phone. They say, ‘How come you people are not working? What are you, lazy?’ ”

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From: Sam Citron12/20/2009 8:57:43 PM
   of 264
 
As China Exports Labor, a Backlash Grows [NYT]
By EDWARD WONG
nytimes.com

TRUNG SON, Vietnam — It seemed as if this village in northern Vietnam had struck gold when a Chinese and a Japanese company arrived to jointly build a coal-fired power plant. Thousands of jobs would start flowing in, or so the residents hoped.

Four years later, the Haiphong Thermal Power Plant is nearing completion. But only a few hundred Vietnamese ever got jobs. Most of the workers were Chinese, about 1,500 at the peak. Hundreds of them are still here, toiling by day on the dusty construction site and cloistered at night in dingy dormitories.

“The Chinese workers overwhelm the Vietnamese workers here,” said Nguyen Thai Bang, 29, a Vietnamese electrician.

China, famous for its export of cheap goods, is increasingly known for shipping out cheap labor. These global migrants often work in factories or on Chinese-run construction and engineering projects, though the range of jobs is astonishing: from planting flowers in the Netherlands to doing secretarial tasks in Singapore to herding cows in Mongolia — even delivering newspapers in the Middle East.

But a backlash against them has grown. Across Asia and Africa, episodes of protest and violence against Chinese workers have flared. Vietnam and India are among the nations that have moved to impose new labor rules for foreign companies and restrict the number of Chinese workers allowed to enter, straining relations with Beijing.

In Vietnam, dissidents and intellectuals are using the issue of Chinese labor to challenge the ruling Communist Party. A lawyer sued Prime Minister Nguyen Tan Dung over his approval of a Chinese bauxite mining project, and the National Assembly is questioning top officials over Chinese contracts, unusual moves in this authoritarian state.

Chinese workers continue to follow China’s state-owned construction companies as they win bids abroad to build power plants, factories, railroads, highways, subway lines and stadiums. From January to October 2009, Chinese companies completed $58 billion of projects, a 33 percent increase over the same period in 2008, according to the Chinese Ministry of Commerce.

From Angola to Uzbekistan, Iran to Indonesia, some 740,000 Chinese workers were abroad at the end of 2008, with 58 percent sent out last year alone, the Commerce Ministry said. The number going abroad this year is on track to roughly match that rate. The workers are hired in China, either directly by Chinese enterprises or by Chinese labor agencies that place the workers; there are 500 operational licensed agencies and many illegal ones.

Chinese executives say that Chinese workers are not always less expensive, but that they tend to be more skilled and easier to manage than local workers. “Whether you’re talking about the social benefits or economic benefits to the countries receiving the workers, the countries have had very good things to say about the Chinese workers and their skills,” said Diao Chunhe, director of the China International Contractors Association, a government organization in Beijing.

But in some countries, local residents accuse the Chinese of stealing jobs, staying on illegally and isolating themselves by building bubble worlds that replicate life in China.

“There are entire Chinese villages now,” said Pham Chi Lan, former executive vice president of the Vietnam Chamber of Commerce and Industry. “We’ve never seen such a practice on projects done by companies from other countries.”

At this construction site northeast of the port city of Haiphong, an entire Chinese world has sprung up: four walled dormitory compounds, restaurants with Chinese signs advertising dumplings and fried rice, currency exchanges, so-called massage parlors — even a sign on the site itself that says “Guangxi Road,” referring to the province that most of the workers call home.

One night, eight workers in blue uniforms sat in a cramped restaurant that had been opened by a man from Guangxi at the request of the project’s main subcontractor, Guangxi Power Construction Co. Their faces were flushed from drinking Chinese rice wine. “I was sent here, and I’m fulfilling my patriotic duty,” said Lin Dengji, 52.

Such scenes can set off anxieties in Vietnam, which prides itself on resisting Chinese domination, starting with its break from Chinese rule in the 10th century. The countries fought a border war in 1979 and are still engaged in a sovereignty dispute in the South China Sea.

Vietnamese are all too aware of the economic juggernaut to their north. Vietnam had a $10 billion trade deficit with China last year. In July, a senior official in Vietnam’s Ministry of Public Security said that 35,000 Chinese workers were in Vietnam, according to Tuoi Tre, a progressive newspaper. The announcement shocked many Vietnamese.

“The Chinese economic presence in Vietnam is deeper, more far-reaching and progressing faster than people realize,” said Le Dang Doanh, an economist in Hanoi who advised the preceding prime minister.

Conflict has broken out between Vietnamese and Chinese laborers. In Thanh Hoa Province in June, a drunk Chinese worker from a cement plant traded blows with the husband of a Vietnamese shopkeeper. The Chinese man then returned with 200 co-workers, igniting a brawl, according to Vietnamese news reports.

One reason for the tensions, economists say, is that there are plenty of unemployed or underemployed people in this country of 87 million. Vietnam itself exports cheap labor; a half-million Vietnamese are working abroad, according to a newspaper published by the Vietnam General Confederation of Labor.

Populist anger erupted this year over a contract given by the Vietnamese government to the Aluminum Corporation of China to mine bauxite, one of Vietnam’s most valuable natural resources, using Chinese workers. Dissidents, intellectuals and environmental advocates protested. Gen. Vo Nguyen Giap, the 98-year-old retired military leader, wrote three open letters criticizing the Chinese presence to Vietnamese party leaders.

No other government in the world so closely resembles that of China as Vietnam’s, from the structure of the Communist Party to economic policies and media controls. Vietnamese leaders make great efforts to ensure that China-Vietnam relations appear smooth. So over the summer, the central government shut down critical blogs, detained dissidents and ordered Vietnamese newspapers to cease reporting on Chinese labor and the bauxite issue.

But in a nod to public pressure, the government also tightened visa and work permit requirements for Chinese and deported 182 Chinese laborers from a cement plant in June, saying they were working illegally.

Vietnam generally bans the import of unskilled workers from abroad and requires foreign contractors to hire its citizens to do civil works, though that rule is sometimes violated by Chinese companies — bribes can persuade officials to look the other way, Chinese executives say.

At the Haiphong power plant, the Vietnamese company that owns the project grew anxious this year about the slow pace of work. It sided with the Chinese managers in pushing government officials to allow the import of more unskilled workers.

The Chinese here are sequestered in ramshackle dorm rooms and segregated by profession: welders and electricians and crane operators.

A poem written on a wooden door testifies to the rootless nature of their lives: “We’re all people floating around in the world. We meet each other, but we never really get to know each other.”

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From: Sam Citron1/11/2010 11:24:22 PM
   of 264
 
As China Rises, Fears Grow on Whether Boom Can Endure [nyt]
By MICHAEL WINES

BEIJING — As much of the world struggles to clamber out of a serious recession, a gradual flow of economic power from West to East has turned into a flood.

New high points, it seems, are reached daily. China surged past the United States to become the world’s largest automobile market — in units, if not in dollars, figures released Monday show. It also toppled Germany as the biggest exporter of manufactured goods, according to year-end trade data. World Bank estimates suggest that China — the world’s fifth-largest economy four years ago — will shortly overtake Japan to claim the No. 2 spot.

The shift of economic gravity to China has occurred partly because growth here remained robust even as the world’s developed economies suffered the steepest drop in trade and economic output in decades.

But that did not happen by chance: China’s decisive government intervention in the economy, combined with the defiant optimism of its companies and consumers, has propelled an economy that until recently had seemed tethered to the health of its major export markets, including the United States.

Beijing’s state-run news media, indulging in a moment of self-congratulation, have hailed China’s new economic prominence as proof of national superiority.

The country’s economic miracle, the newspaper People’s Daily boasted last week, exists because its leaders — unlike those in other, unnamed nations — can make quick decisions and ensure underlings carry them out. The Great Recession, the newspaper said, has laid bare cracks in plodding Western-style capitalism.

Yet China confronts a number of challenges about its recent surge, including whether its formula for growth is sustainable, and how it will manage its increasingly strained economic relations with the outside world. Those are likely to prove challenging issues for a leadership unaccustomed to making policy under an international spotlight.

Sustaining a global-size economy is nowhere near as simple as building one, some Chinese and Western economists say. As the Chinese navigate toward a bigger role in the world financial system, they are already running into diplomatic and political headwinds.

At home, ordinary citizens and economists alike worry that the government’s decision to flood the economy with cash has created speculative bubbles — in housing, in lending — that could burst with disastrous effect. But curbing speculation requires moves, such as raising interest rates, that could crimp the sprees of investment and industrial expansion that are the main contributors to growth.

Abroad, the pressure on China to revalue its currency, the renminbi, is strengthening, and it seems sure to intensify after trade statistics released Sunday showed that China’s yearlong downturn in export growth reversed in December. Keeping the renminbi fixed at a low rate against the dollar boosts China’s exports and its economy. But increasingly, it angers its trade partners.

China once could wave off complaints about its currency policies, arguing that it was a developing nation entitled to a bit of slack from its Western customers. But with the world’s fastest-growing economy — and more than $2 trillion in foreign reserves — that argument looks increasingly untenable.

“At a time when you’ve got 10 percent unemployment in the U.S. and a very slow and gradual global recovery — and China seems to be skyrocketing — the pressure on the Chinese to change some of these policies, including the exchange-rate policy, is really going to grow this year,” said Nicholas Consonery, a China analyst at Eurasia Group, a New York-based political risk research firm.

In theory, China’s growing economic clout should benefit everyone: in an interconnected world, growing trade creates jobs and money everywhere.

“China’s extremely important, no doubt about it. And over all, the more important China becomes, the better it is for the American economy,” Scott Kennedy, who heads the Research Center for Chinese Politics and Business at Indiana University, said in an interview.

That Shanghai-assembled iPod, Mr. Kennedy said, is the product of American research and design and marketing, and most of the proceeds from its sale go back into American coffers. But China’s rise also poses new risks both for Beijing and for its trading partners.

Its largely bruise-free journey through last year’s economic crisis aside, not everyone is convinced that Beijing has eliminated threats to its financial and economic health.

Hit hard by an initial drop in exports that was frighteningly steep for a leadership that has long promised and delivered fast growth, China poured $585 billion in stimulus money into its domestic economy. Officials also ordered state-run banks to increase their lending by double that amount, triggering a spree of easy money that created jobs for migrant factory workers and fueled rises in the price of assets, like stocks and real estate.

Some experts fear that too much of the stimulus money was put into unprofitable projects and bad loans that will be exposed in a few years. In that view, China’s 2009 boom, in which automakers sold nearly 14 million cars and trucks, and housing prices doubled, is really a sign of an overheated economy at risk of serious recession down the road.

Judged by the numbers, China’s economy still looks robust. In Beijing, officials said, per capita gross domestic product is expected to exceed $4,000 this year, a 10 percent jump from 2009. Last month, the value of China’s exports leaped by nearly a third over the same month in 2008 — and imports jumped 55 percent, pointing toward growth in manufacturing.

But a Chinese economic crisis, which could have been shrugged off a few years ago, would be a considerably more serious event in a world in which Beijing runs the second-largest economy.

The government appears concerned. Last week, the central bank edged up the rate on an often-watched interbank loan, the first such hike in five months. That seemed to signal concern that the economy was expanding too quickly.

Many experts see few signs of immediate danger. After all, they note, China has gone on splurges before — building too many steel mills, and too many office buildings — only to see the nation’s breakneck growth sop up the excess capacity. With nearly a billion people still clawing to advance beyond peasant status, they say, China’s growth story has many chapters ahead.

Mr. Kennedy, the Indiana University expert, said he was less certain that endless growth is such a panacea. “No one defies economic laws,” he said. “Eventually you get it, whether you want it or not.”

nytimes.com

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From: Sam Citron2/25/2010 12:46:25 PM
   of 264
 
Banks Bet Greece Defaults on Debt They Helped Hide [NYT]
By NELSON D. SCHWARTZ and ERIC DASH
nytimes.com

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.

“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.

But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.

Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.

On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.

“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”

The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.

In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.

European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.

That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.

Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.

Markit says its index is a tool for traders, rather than a market driver.

In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.

“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”

Some money managers say trading in Greek swaps alone, not the broader index, is the problem.

“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”

If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.

As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.

“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”

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From: Sam Citron6/9/2010 10:19:21 AM
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Medvedev Amasses Land for ‘Dream’ of Home Ownership (Update2)
By Anastasia Ustinova

June 9 (Bloomberg) -- President Dmitry Medvedev’s government has acquired almost 2.5 million acres, an area larger than Cyprus, to promote construction of single-family homes and move Russians out of Soviet-style apartment blocks, the official in charge of the effort said.

To achieve that goal, the government will have to change the way people think about housing, said Alexander Braverman, general director of the property fund Medvedev created in 2008 to help developers build homes.

“For a long time our people were trained to live in high- rise apartment buildings, and we have to admit openly that this habit remains,” Braverman said this week in an interview in Moscow. “We’ll have to create a program to stimulate demand, and we’ll begin this work in the near future. Call it the Russian dream. I think we can make this dream come true.”

Medvedev says ownership of single-family homes is the best way to expand Russia’s middle class, creating an engine for economic and demographic expansion. Billionaire Mikhail Gutseriev’s Mospromstroi and Alexander Lebedev’s National Housing Corp. are lining up to profit from the boom if the president succeeds in creating a market.

‘Cooped Up’ in Apartments

Seventy-seven percent of Russia’s 142 million people are “cooped up” in apartments, a legacy of Soviet policies that “excluded everything oriented toward the individual,” Medvedev said in April 2008 as he unveiled his home-building program. In the U.S., 67 percent of homes are owner-occupied, according to the Census Bureau.

At least 14 million square meters of housing will be under construction next year on land owned by the Federal Fund for the Promotion of Housing Construction Development, Braverman said. That will rise to 20 million square meters in 2012, or about 30 percent of residential construction volume.

“We think that people who have their own homes, driveways and careers are fundamentally different than those who don’t have these things,” Braverman said. “The person who has something to defend is a different kind of person.”

To overcome the legacy of Soviet collectivism, the fund plans an advertising blitz including TV, print and billboards to persuade Russians of the advantages of home ownership, he said.

Subsidized Mortgages

Medvedev’s plan looks like the “American dream” of home ownership turned upside-down, said Nadezhda Kosareva, president of the Institute of Urban Economics, a research group in Moscow.

“In the U.S. in the 1960s, the demand for homes came first and the government provided the rest, while in Russia the government is trying to push the idea from above,” she said.

Medvedev’s home-ownership drive has been hampered by mortgage rates that averaged 13.8 percent on 83.7 billion rubles ($2.6 billion) of loans since the start of the year, central bank data show.

To spur borrowing, the government is providing 11 percent home loans subsidized by the federal mortgage agency, Braverman said. Prime Minister Vladimir Putin said in February that rates are too high for many potential borrowers and the government will spend 250 billion rubles this year to reduce them.

Medvedev insisted the homes built under the program be affordable, naming a figure of 20,000 rubles ($631) a square meter. Braverman later quoted a price of 30,000 rubles. The average May residential property price on Moscow’s secondary market was $4,406 per square meter, according to the Indicators of Property Market.

‘Terrible Need’

“There’s a terrible need for affordable housing in Russia,” said Nuri Katz, chief executive officer of Century 21 Russia. “The question is how much money the government can afford to give out to support the mortgage business.”

The government incentives aren’t likely to spur lending on a big scale, Katz said.

“It’s a simple real estate rule: Without the widespread availability of affordable mortgages, there will be no widespread availability of affordable housing,” Katz said.

Braverman’s fund has auctioned off the rights to develop 29 parcels of land nationwide, and plans 46 more this year. To attract developers, the fund guarantees it will buy as much as 35 percent of the homes built, Braverman said.

“We have no problem with demand” from developers, he said. “We strive to reduce risks on our properties, but the rate of return remains the same, so investors are interested. The enormous volume and potential of the market also makes us attractive.”

Billionaire Builders

The fund is “absolutely open” to foreign investors, Braverman said.

Mospromstroi, the builder controlled by the Gutseriev family’s BIN Group, according to Forbes magazine, won auctions to develop more than 36 hectares near Moscow. Gutseriev’s fortune is estimated at $2.2 billion by Forbes.

National Housing Corp. has 10 plants with a capacity to make 20,000 prefabricated homes a year. Even so, Lebedev says he needs state aid.

“People can’t buy houses because they don’t have enough money,” Lebedev said in an interview. “I want to lower the price to make it affordable for them, but the company has to generate profit. I can’t do it alone.”

The number of middle-class Russians, those with monthly disposable incomes of more than $1,000, fell about 48 percent last year to about 13.6 million people, or roughly 9.6 percent of the population, Vladimir Osakovsky, an economist UniCredit SpA, said on May 20. The middle class will recover to its “pre- crisis peak” in 2011 and double by 2013, according to Osakovsky.

Lebedev, whose fortune Forbes estimates at $2 billion, said he has invested more than 200 million euros ($239 million) in the factories, and is looking for partners, including the state.

The fund “would be happy to work with him, but under the general guidelines” for all developers, Braverman said. “Our basic position is that we don’t build.”

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From: Sam Citron6/10/2010 2:07:02 PM
   of 264
 
Women Prefer Men Holding State Bonds, Japan Ad Says (Update1)
By Wes Goodman and Theresa Barraclough

June 9 (Bloomberg) -- Japanese women are seeking men who invest in government bonds, according to an advertisement being run by the Ministry of Finance.

“I want my future husband to be diligent about money,” a 27-year-old woman says in an ad being run in free magazines promoting a fixed-rate, three-year note that Japan started selling last week. “Playboys are no good.” She’s one of five women featured in the page, which says “Men who hold JGBs are popular with women!!”

The ministry commissioned the ads to appeal to citizens for money at a time when record government borrowing threatens to outstrip demand. Prime Minister Naoto Kan, who took office yesterday, said he doesn’t have an instant fix to rein in the world’s largest public debt.

The government’s plan to attract marrying-age men comes after a campaign aimed at retirees started last August. That push featured Junko Kubo, a former anchor on Japan’s public broadcaster NHK, in ads placed in the backs of taxi cabs. Kubo followed Koyuki, an actress and model who in 2003 appeared in “The Last Samurai” with Tom Cruise as well as posters for government bonds.

“It strikes of desperation,” Christian Carrillo, a senior interest-rate strategist in Tokyo at Societe Generale SA said about the ad campaign. “I doubt this will be a successful strategy to attract retail investors.”

Individuals can buy government debt at local banks for 10,000 yen ($109) according to the ads. The finance ministry in 2002 hired Koushiro Matsumoto, an actor in Kabuki theater, and model Norika Fujiwara in its bond campaigns.
Japan’s government debt amounted to a record 882.9 trillion yen as of March 31, according to the Ministry of Finance. A 600 billion yen sale of 30-year bonds yesterday attracted bids for 2.25 times the amount on offer, the least since April 2004.

Biggest Market

Japan has the world’s largest bond market, followed by the U.S., based on a ranking of 35 nations by the Bank for International Settlements in Basel, Switzerland, using data through September 2009. Kan, the former finance minister, takes office facing a debt burden that has increased by almost 80 percent in a decade and it is equivalent to 180 percent of the nation’s annual economic output.


“I don’t think fiscal rehabilitation can be done overnight,” he told reporters last week.

Moody’s Investors Service rates Japan’s debt at Aa2, the third-highest investment grade, with a stable outlook. Standard & Poor’s cut the outlook on Japan’s AA grade in January, citing diminishing “flexibility” to cope with the nation’s swelling debt load.

Former Prime Minister Yukio Hatoyama’s decision to quit last week “has no credit implications, but that in itself is positive news, given reports that Japan’s ship of state is rudderless,” Thomas Byrne, senior vice president of Moody’s, wrote in a statement released June 7.

Declining Holdings

“The world is full of dirty shirts in terms of excessive debt,” Bill Gross, who runs the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said in an interview June 4.

Japanese households have started to cut their holdings of the nation’s debt. Their ownership of government securities declined to 35 trillion yen as of Dec. 31 from a record 36.7 trillion yen a year earlier, according to the Bank of Japan.

Masaaki Kaizuka, director of debt management at the Ministry of Finance, aims to change that.

The ministry started selling three-year bonds tailored for individuals on June 3, after conducting a market survey that showed pent-up demand for shorter-term securities, Kaizuka said.

‘Untouched Group’

“What we can do is try to attract an untouched group of people to find a different sort of investor,” Kaizuka said. Shorter bonds are seen as safer because they mature faster.

This campaign for JGBs was crafted by Dentsu Inc., Japan’s largest advertising company, which the ministry chose through an annual bidding process, Kaizuka said.

“Retail government bonds, which provide the peace of mind that women want, are now available in three-year maturities with a fixed rate,” the ad says.

The bonds are called “Kotei3,” meaning “Fixed3” because they mature in three years.

Japanese government securities maturing in 2013 yield 0.176 percent as of 3:26 p.m. in Tokyo, versus 1.20 percent for same- maturity debt in the U.S.

The yield turns to about 1.38 percent in Japan after accounting for falling prices in the economy. The so-called real yield in the U.S. is negative 1 percent.

Japan’s bonds handed investors a 1.32 percent gain this year, versus 3.96 percent for sovereign debt globally, according to Bank of America Merrill Lynch indexes.

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From: Sam Citron6/15/2010 10:29:48 AM
   of 264
 
The Rise of a Chinese Worker's Movement
Spurred by the Foxconn suicides, and aided by an exploding Internet, China's labor ranks are organizing for higher wages and more rights
businessweek.com

By Dexter Roberts

A nondescript Beijing suburb was recently the venue for an evening of radical politics. The New Labor Art Troupe, a performance group with a cast of laborers, ran a graphic photo of a Foxconn worker who had just killed himself. Poems were read commemorating the hard lives of migrant workers in electronics factories and on construction sites. A guitar and harmonica were hauled out and songs were sung with titles like Marginalized Life, Industrial Zone, Working Is Our Glory and Our Hell, Get Back Our Wages, and Fighting in Solidarity. Some of the hundred or so assembled migrant workers, many of them employed in small furniture factories around the capital, started crying. The evening ended with the crowd standing up for a Chinese rendition of the The Internationale, the old battle hymn of the worldwide socialist movement. "The atmosphere was militant, but there was no overt criticism of the government," says University of Hawaii political scientist Eric Harwit, who attended the two hour-plus evening performance on May 28. "They seemed really sincere that they were upset about migrant labor working conditions."

The recent Beijing performance is just one example of the rising labor activism now evident in China, activism that asserted itself in recent weeks at the factories of Foxconn and Honda Motor (HMC). It includes groups like New Labor, yet it also encompasses legal aid and other support networks at scores of universities, law firms focused on promoting worker rights, and countless migrant worker aid associations. "Civil society organizations are growing more powerful. They will push China to change," says Li Fan, director of the Beijing-based nongovernmental organization World & China Institute. Li has worked closely with labor groups as well as those pushing grassroots democracy.

The question is whether these groups can spawn a workers' movement that has the organization and mass to challenge factory owners across the country. Until a few years ago the Chinese authorities broke up sporadic workers' protests with relative ease: Local officials arrested a few ringleaders, then quickly offered concessions to the rest of the strikers to stop the unrest. Above all else, the Chinese security apparatus made sure that the leaders of labor protests in Shenzhen, Harbin, and elsewhere didn't connect with each other to form a national movement.

Today's young workers may be harder to corral. China now has 787 million mobile-phone users and 348 million Internet users—and migrant workers in their twenties are far more aware of world developments than their parents. The younger generation can follow labor actions as they unfold, whether in China's northeastern Rust Belt or southern Pearl River Delta. "They have access to information. They use their mobile phones for messaging, to send pictures and video, and to go online," says Chinese Academy of Social Sciences journalism professor Bu Wei, who is researching the use of media by migrant workers.

The more assertive workers have also benefited from a huge push by China's state-run media to popularize knowledge about the tough labor contract law promulgated in 2008. As a result, young workers know what's owed them, whether it be guarantees of double pay for overtime or safer working conditions. "Every worker is a labor lawyer by himself. They know their rights better than my HR officer," says Frank Jaeger, a German factory owner who produces cable connectors in Dongguan in Guangdong Province. Adds Harley Seyedin, president of the American Chamber of Commerce of South China: "There are Internet cafés everywhere, so the workers can get information. They are starting to ask for more. The days of cheap labor are gone."

The workers' ranks are now filled with self-starters like Xu Haitao. A 28-year-old technician in a small metal components factory in Shenzhen, Xu takes a class on labor law and worker rights every Sunday at a local migrant workers support center. "Of course, more and more workers understand their rights these days," says Xu, who surfs labor law sites regularly. "Last year I started using my own computer. Computers are not expensive anymore. I bought the pieces and constructed my own." Xu wants more workers to educate themselves. "Many capitalists and factory managers still abuse our rights," he says. "If all the workers knew the labor law—all 600 million of us—then many factory owners would go bankrupt."

These self-educated workers now have new allies in China's universities. A decade-long effort by Beijing to expand the number of students in China's universities has brought more and more of the rural population—and those with relatives and friends who still work in the factories—onto Chinese campuses. That has driven a wave of support at colleges for migrant workers, points out CASS professor Bu. Students studying law, political science, and social science are forming support groups and even provide legal aid for workers, to a degree not seen before. One of Bu's graduate students, for example, has a brother working for the Foxconn facility near Shanghai.

Many faculty members support their students' activism. "From the Foxconn tragedy, we hear screams coming from the lives of a new generation of migrant workers, warning the entire society to rethink this development model leveraged upon the sacrifice of people's basic dignity," warned an open letter dated May 19 and signed by nine sociologists from prominent schools, including Peking and Tsinghua Universities. "We call for national and local governments to implement practical measures that allow migrant workers to integrate and establish roots in the city...sharing the fruits of economic development they themselves created."

It may be a long summer for Chinese officials trying to contain this unrest. On June 3 more than 20 women workers were detained when police tried to shut down a two-week strike at a formerly state-owned cotton mill in Pingdingshan, Henan. Thousands of workers had stopped operating the looms to express their anger at their factory's privatization and to demand higher wages, reports the Hong Kong-based China Labour Bulletin. Although workers are back on the line at the Honda transmission plant that strikers had shut down, their language is anything but conciliatory. "We call all workers to maintain a high degree of unity and not to allow the capitalists to divide us," the Honda workers declared in a statement released on June 3. "We are not simply struggling for the rights of 1,800 workers, but for the rights of workers across the whole country." On June 7, another Honda plant in China went on strike.

The bottom line: A new, savvier, and more militant generation of workers may start to form a genuine labor movement in China.

Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief.

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From: Sam Citron6/16/2010 9:37:20 AM
   of 264
 
France and Spain Proceed With Austerity Plans
June 16, 2010, 6:29 am
dealbook.blogs.nytimes.com

The French government proposed a series of measures Wednesday to rein in the budget deficit, including raising the retirement age by two years and increasing income taxes on the rich, Matthew Saltmarsh reports in The New York Times.

Spain also was set to announce contentious plans to shake up its labor market Wednesday, as countries across the euro area respond to investor fears about public finances.

In France, the minimum age for retirement will be lifted gradually by 2018 to 62 from the current 60, the minister for labor, Eric Woerth, told reporters. The government had considered raising the age to 63.

“It looks like a major step forward,” said Jean-Michel Six, chief European economist at Standard & Poor’s. He said the announcement appeared to be a compromise between the demands of investors for deep budget cuts and the need to retain a sense of social equality.

France has been slower than other European countries like Spain, Portugal and Britain to announce fundamental budget changes, partly reflecting the fact that its budget deficit is lower, while investor demand has kept the interest rates that France pays on its debt low relative to most euro-zone countries.

“Working longer is inevitable,” Mr. Woerth said. “All our European partners have done this by working longer. We cannot avoid joining this movement.”

Increasing the minimum age of retirement “respects the fundamental principals of justice,” he said, “an effort must be made by all the French and not just one group.”

The long-awaited shakeup of the French pay-as-you-go pension system included extending the number of years of work required to qualify for a full pension to 41.5 years in 2020 from 41 years in 2012.

The age at which workers who have not made full contributions can receive a pension without penalties will rise gradually to 67 in 2023 from 65 in 2018. Civil servants, who now pay 7.85 percent of their salary in pension contributions, will see their deductions rise to the 10.55 percent paid by private sector employees by 2020.

The government is seeking to hold on to its top-notch credit rating by showing it is serious about reining in spending and borrowing.

The pension system alone is forecast to have a deficit of €32 billion, or $39 billion, this year. That figure would have surged without any changes.

The retirements proposals will save nearly €19 billion in 2018 and should bring the pension system back into credit that year, while the tax increases will bring in €3.7 billion next year, the government said.

President Nicolas Sarkozy, whose rating in opinion polls has been tumbling, “decided to take the cautious approach and spread the reforms over several years to make them less painful,” Mr Six said.

Mr. Sarkozy hopes the changes will demonstrate progress toward cutting the national debt — 78 percent of gross domestic product last year — and enable France to hold onto its AAA sovereign debt rating.

There was a muted reaction to the announcement in financial markets; the yield on the benchmark 10-year French government bond was unchanged around midday Wednesday, while the CAC-40 index in Paris was up 0.3 percent in line with other European markets.

The changes are likely to meet stiff resistance from public sector unions and political opponents of the center-right government.

Leaks of the government’s plans have already sparked angry reactions from the opposition Socialist party and labor unions, which demonstrated against the proposed measures before they were announced and confirmed this week a call for a day of demonstrations and strikes by private and public workers June 24.

Mr. Woerth said he remained “open to discussion” with unions and others affected.

The plan is expected to be debated by lawmakers in September.

In Spain, Prime Minister José Luis Rodríguez Zapatero is facing intense opposition to his economic program. He was to present a plan to improve the labor market Wednesday.

Wary investors have sent Spanish borrowing costs up in recent days, after the Socialist-led government failed to win union backing for measures that it says are crucial for resurrecting the economy and allaying concerns about Spain’s public finances.

The Spanish prime minister is seeking to ease rules allowing lay-offs by employers in economic difficulty, while discouraging an over-reliance on temporary hiring to trim the 20 percent jobless rate, which is the highest in the euro zone.

Employers have said that the proposals do not go far enough, while unions have called for a general strike, although it might not occur until September.

The French government also announced a series of fiscal measures including an increase in income tax on high earners; the top rate would rise to 41 percent from 40 percent to be applied on earnings over €69,783.

In addition, companies would have to pay higher social charges to cover employees medical and unemployment coverage; some tax loopholes would be closed; a tax on home sales will edge up; higher taxes will be applied on stock options and dividends; and taxes on capital gains and investment income will rise slightly.

The shake-up is expected to be the last major legislative change of Mr. Sarkozy’s current five-year term, which expires in 2012.

“He’ll now focus on politics before the election,” Mr. Six of S&P said.

France has forecast a budget deficit of 8 percent of gross domestic product this year and has committed bring the deficit under 3 percent by 2013. Spain, which is in a worse situation, aims to cut its deficit to 9.3 percent of G.D.P. this year and 6 percent in 2011.

Other EU countries have responded to the problem of funding their aging populations already. Britain has announced plans to raise the retirement age to 68 from 65 starting 2044. Germany has agreed to increase the retirement age in steps to 67 from 65 by 2029.

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