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China Signals Reluctance to Rescue E.U.

December 4, 2011 by Leave a Comment

HONG KONG — The Chinese government over the weekend sought to tamp down international expectations that Beijing might use its large financial reserves to help ease the European debt crisis.

The two  government agencies that control the reserves face heavy restrictions on their use, Chinese government officials and economists said.

“The argument that China should rescue Europe does not stand, as reserves are not managed that way,”  China’s vice minister for foreign affairs, Fu Ying, said in comments that were prominently reported by the state news media over the weekend.

Ms. Fu’s comments were significant because Chinese diplomats and political leaders have been less hostile in public to the idea of helping Europe than Chinese economic policy makers, who have been strongly opposed.

In her comments, Ms. Fu conspicuously echoed some of the arguments that Chinese economic policy makers have been making for months. She noted that the $3.2 trillion in bonds, bills and cash held by the central bank as official foreign reserves represent national savings that were not easily disbursed.

“Foreign reserves are not domestic income or money that can be disposed of by the premier or finance minister,” she added, according to Xinhua, the state-run news agency. “Foreign reserves are akin to savings, and their liquidity should be ensured.”

Lou Jiwei, the chairman and chief executive of China Investment Corp., a $374 billion sovereign wealth fund that is managed independently of the foreign exchange reserves, has also tried to dampen speculation that the investment corporation might buy a lot of European bonds.

He suggested a week ago that his fund might invest in roads, bridges and other infrastructure projects in Europe, part of a broader Chinese interest in fixed assets as opposed to helping countries finance their budget deficits.

The Chinese central bank effectively borrowed the money from the Chinese public to buy the dollars, euros and other currencies that are in both funds. The central bank has forced commercial banks to transfer a fifth of their domestic deposits to it and has used that money to buy $1 billion or more a day of foreign currencies, so as to slow the appreciation of the renminbi against the dollar.

The central bank has also pressed commercial banks to buy central bank bills that pay very low rates of interest and has used the proceeds to buy dollars. These methods of financing foreign exchange reserves have left the central bank with significant domestic liabilities in renminbi to balance against whatever return it can earn on foreign bonds, making economic policy makers in particular wary of taking risks with foreign exchange reserves.

The possibility that China might buy large sums of European Union bonds has been floated repeatedly in the last year and a half by various officials from Greece, Italy and the European Union itself. These officials have sought to reassure financial markets that there will be demand for European government bonds, as a way to encourage investors to continue buying those bonds and thereby hold down the interest rates that European governments pay on their debt.

The Chinese government has mostly discouraged this speculation. But Prime Minister Wen Jiabao raised hopes in Europe in mid-September when he said that China might be prepared to lend a hand if Europe were to label China a “market economy,” a designation that would make it difficult for European companies to file anti-dumping cases against low-priced Chinese exports.

Mr. Wen did not offer details at the time on how China might help. Ms. Fu’s remarks represented some of the strongest comments by a Chinese official since then to suggest that Beijing was in no hurry to lend a hand.

In remarks at a conference held at the Foreign Ministry on Friday and then reported by the state media over the weekend, Ms. Fu did not explicitly rule out buying bonds that might be issued as part of a European bailout. She did say that China continued to view Europe as an important economic partner.

But her caution suggested that China was not eager to increase its already sizable investment in the region; the foreign reserves include an estimated $1 trillion in euro-denominated assets, and experts on the Chinese central bank believe that much of it is invested in German government bonds.

Two people close to Chinese economic policy makers said Sunday that China was particularly wary of making buying any bonds issued in connection with a European bailout as long as there were clear differences within the European Union over the shape of a bailout. Both people insisted on anonymity because they were not authorized to discuss the subject publicly.

One of the two said that China would lend large sums to Europe only if there were clear guarantees by the financially strongest European countries, particularly Germany, to take direct, individual responsibility for the repayment of that debt.

But Germany has refused to accept that liability so far. If Germany did give its own repayment guarantee, there would be such heavy demand for the bonds from the Middle East and elsewhere that Chinese money might not even be needed, the person said.

Article source: http://www.nytimes.com/2011/12/05/business/global/china-signals-reluctance-to-rescue-eu.html?partner=rss&emc=rss

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Analyst’s Longtime Skepticism on Euro Gains Traction

November 18, 2011 by Leave a Comment

“The current policy of lending plus austerity will lead to social unrest,” Mr. Connolly told investors and policy makers at a conference held this spring in Los Angeles by the Milken Institute, arguing the case that Greece, Italy, Portugal and Spain could not simply cut their way to recovery.

“And one should not forget that of the four countries we are talking about, all have had civil wars, fascist dictatorships and revolutions. That is history,” he concluded, his voice rising above the chortles and gasps coming from the audience and the Europeans on his panel. “And that is the future if this malignant lunacy of monetary union is pursued and crushes these countries into the ground.”

Mr. Connolly has been warning for years that Europe was heading for disaster. As a European Union economist in the early 1990s, he helped design the common currency’s framework, but then he was dismissed after he expressed turncoat views. In 1998, just months before the euro’s introduction, he predicted that at least one of Europe’s weakest countries would face a rising budget deficit, a shrinking economy and a “downward spiral from which there is no escape unaided. When that happens, the country concerned will be faced with a risk of sovereign default.”

Now, as the European debt crisis that began in Greece threatens to engulf even France along with Italy and Spain, Mr. Connolly’s longstanding proposition that the foisting of a common currency upon so many disparate nations would end in ruin is getting a much wider hearing. Hedge funds looking to bet on a euro zone breakup scour his research reports for insights.

Longer-term investors who listened to his decade-long recommendations to steer clear of the bonds of Greece, Italy, Portugal and Spain are congratulating themselves for not falling into the trap that bankrupted MF Global, the investment firm run until recently by Jon S. Corzine, the former Goldman Sachs executive and New Jersey governor.

And central bankers outside the euro zone are among his most faithful readers.

In 2008, Mark Carney, the governor of the Canadian central bank, cited the British-born Mr. Connolly, along with the far more prominent Nouriel Roubini of New York University and the Harvard economist Kenneth S. Rogoff, as having been among the few who foresaw the global financial crisis. Mervyn A. King, the governor of the Bank of England, has become more vocal about the euro zone’s problems and is also a longtime follower.

Nicolas Carn, an independent research analyst and money manager who worked previously as chief investment strategist for the London-based hedge fund Odey Asset Management, is one of Mr. Connolly’s biggest fans. “Bernard has influenced me a great deal,” Mr. Carn said. “He has shaped my views on Europe and contributed significantly to my investment performance.”

To be sure, Mr. Connolly was not the only analyst who raised early warning flags about the euro project. Economists like Martin Feldstein of Harvard and Paul Krugman, a Princeton economist who writes an Op-Ed page column for The New York Times, have been longtime critics, as were many experts in Britain, which has long been skeptical of the euro. But few have gone on to devote more or less their entire professional career to exposing Europe’s monetary fault lines.

Unlike many critics of the euro, Mr. Connolly, 61, plies his trade mostly in private, eschewing cable television programs, opinion pages and policy journals.

He represents a new breed of independent analyst that has come increasingly to the fore since the financial crisis broke in 2008.

As investment banks have cut down on staff and remain constrained by their banking and government relationships, independent analysts like Mr. Connolly, who are mostly pessimistic in outlook, have become highly popular for hedge fund investors who wager large sums of money betting against the currencies, bonds and banks of countries headed for trouble.

Article source: http://www.nytimes.com/2011/11/18/business/global/the-rise-of-a-euro-doomsayer.html?partner=rss&emc=rss

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Government of France Proposes Austerity Cuts

November 8, 2011 by Leave a Comment

The measures revealed by Mr. Sarkozy’s prime minister, François Fillon, would come atop tax increases and spending cuts amounting to about $15.2 billion that were announced in August but have not yet gone into effect.

“Our country needs to roll up its sleeves,” Mr. Fillon said at a news conference announcing the new measures, which aim to achieve a total of $89 billion in savings by 2016.

Noting the depths of the debt crisis facing Greece, and the threat it now poses to Italy and Spain, the prime minister warned that “bankruptcy” for European governments was “no longer an abstract word.”

The new measures are a response to lower and more realistic estimates for economic growth and come as Mr. Sarkozy prepares for a difficult re-election campaign with a first round of voting next April.

The package of proposals presented Monday to Mr. Sarkozy’s Council of Ministers includes a plan to speed up raising the minimum retirement age to 62, from 60. The change would come in 2017, instead of 2018. In addition, taxes on France’s largest corporations — those with annual revenue exceeding about $345 million — will increase by 5 percent for the fiscal years 2012 and 2013, or until France’s public deficit returns to below 3 percent of gross domestic product.

France’s budget deficit currently is roughly 5.7 percent of G.D.P. The government has promised to shrink that figure to 4.5 percent in 2012, and to 3 percent by the end of 2013, with an eye to achieving a balanced budget by 2016.

The measures also include an increase in the value-added tax applied to things like restaurant meals, books and public transportation. The tax, currently 5.5 percent, will rise to 7 percent.

Mr. Fillon said the measures announced Monday would be incorporated into the plan announced Aug. 24, which had yet to be put in place. They are expected to take effect between now and year’s end, he said, without specifying whether enactment would take place via executive decree or after a parliamentary debate.

The president has vowed to do everything possible to avoid a downgrade of France’s top-notch credit rating, which would significantly increase the country’s cost of borrowing. Last month, Moody’s Investors Service warned that it could lower France’s rating by January if slowing growth and the costs of supporting French and European banks hurt by Europe’s debt crisis strained the budget.

Mr. Sarkozy’s main opponent, François Hollande, a Socialist, accused the president on Monday of assembling an incoherent patchwork of hasty measures that he argued would not have been necessary had the current government acted sooner to address France’s ballooning deficits.

“The government was caught off guard by the slowdown in growth,” Mr. Hollande said in an interview published in the left-leaning daily Libération, before details of the new austerity plan were formally announced. “Let’s not forget that since the beginning of Nicolas Sarkozy’s term, 75 billion euros in tax revenues were lost due to tax breaks given to large firms and wealthy households. It would have been legitimate to recoup some of these first, given that they have yielded no tangible benefit to the real economy.”

Mr. Hollande has called for tightening existing tax breaks for corporations and wealthy individuals, as well as scrapping a plan championed by Mr. Sarkozy to lower the country’s wealth tax and exempting overtime work from social security taxes.

The government now expects the French economy to grow by only about 1 percent in 2012 — down from a previous forecast of 1.75 percent — so it had to adjust its budget to meet the deficit targets and reassure the financial markets. But some private economists cautioned that even the revised growth outlook might be too optimistic.

“Today we have no growth; we are on the brink of a recession,” Marc Touati, an economist at Assya, a French brokerage firm, told LCI Television. “‘We are not even sure to reach 1 percent growth next year.”

Mr. Fillon, the prime minister, told a news conference on Monday: “We have only one goal: to protect the French people from the serious difficulties that many European countries are now facing. Our citizens are now aware of the risks to our livelihoods and futures caused by deficits and debt.”

France’s new budget plan also calls for a freeze in the salaries paid to all members of Mr. Sarkozy’s government, as well as that of the president, until the country has achieved a balanced budget. Mr. Fillon called on the top executives of the CAC-40 index of the largest French companies to do the same.

Shortly after Mr. Sarkozy took office in 2007, the Élysée Palace authorized a 140 percent increase in the salary for the office of the French president, to about $330,000 per year, bringing it in line with that of the prime minister. The other members of the French cabinet earn just about $220,000 annually.

Article source: http://feeds.nytimes.com/click.phdo?i=f06cb5e9d3bcbfdaa90d033f2115399f

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Spain, Seeking New Revenue, to Reintroduce Wealth Tax

September 15, 2011 by Leave a Comment

MADRID — The Spanish government was planning to re-introduce a wealth tax Friday that it scrapped just three years ago, as it scrambles for ways to reduce the budget deficit and avoid becoming the next victim in the European sovereign debt crisis.

Elena Salgado, the finance minister, detailed the tax shortly after Spain pulled off a successful — if expensive — bond sale Thursday. She estimated that the tax could yield about €1.08 billion, or about $1.5 billion, in additional revenue from some 160,000 of Spain’s richest taxpayers, those with more than €700,000 in declared assets.

In 2007, the last year that the wealth tax was collected, revenue from the wealth tax reached €2.12 billion, after more than 900,000 people were charged between 0.2 percent and 2.5 percent of their declared assets.

The Spanish government removed the tax in April 2008, shortly after José Luis Rodríguez Zapatero was re-elected as prime minister. Its reintroduction is likely to be the last legislative measure taken by the Socialist government before a general election on Nov. 20.

Opinion polls indicate that Mariano Rajoy, leader of the main center-right opposition Popular Party, will defeat the Socialist candidate, Alfredo Pérez Rubalcaba, and replace Mr Zapatero as prime minister.

As it fights to regain the confidence of financial markets, Mr. Zapatero’s government has pledged to lower the budget deficit to 6 percent of gross domestic product this year, from 9.2 percent last year.

However, that target — still double the maximum that countries in the euro zone are supposed to meet — was set on the assumption that the economy would grow 1.3 percent this year. The most recent data suggests that growth will in fact fall short of 1 percent for the full year.

Even though the revived wealth tax will be more narrowly focused than the previous one, the plan has added to tensions over fiscal strategy between the federal government and regional governments that will be collecting the wealth tax on behalf of Madrid. Economists have also questioned the benefit of such a narrow tax — it will affect about 0.7 percent of Spanish taxpayers — at a time when the euro crisis is deepening.

Some regional government controlled by the Popular Party have already declared their opposition to collecting what they consider to be a misguided wealth tax. Mr. Rajoy, however, has refused to say whether he would abolish such a tax if elected in November.

Most regional governments are expected to fall short of their budget deficit targets this year, after only eight of the country’s 17 regional governments met last year’s target. Fitch, the credit rating agency, this week lowered the ratings of five regions, warning that “considerable efforts” were still required “in the area of cost control.”

On Thursday, Spain sold €3.95 billion of bonds maturing in 2019 and 2020, just short of its target of €4 billion. The yields remained near record highs. The bond due Oct. 31, 2020 was sold at an average yield of 5.16 percent, compared with 5.2 percent when it was last sold on Feb. 17. That was also the level at which it was trading on the secondary market before the auction.

The auction attracted twice the number of bids as were accepted, a level of demand that “compared favorably to the last two Spanish auctions,” said Chiara Cremonesi, a fixed-income strategist at UniCredit. “Taking into consideration the current environment, the auction result was not too bad overall.”

Article source: http://www.nytimes.com/2011/09/16/business/global/spain-seeking-new-revenue-to-reintroduce-wealth-tax.html?partner=rss&emc=rss

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White House Expects Persistently High Unemployment

September 2, 2011 by Leave a Comment

The White House budget office forecast on Thursday that unemployment would remain at 9 percent through the 2012 presidential election year, an outlook that it said calls for the sort of the job-creating tax cuts and spending President Obama will propose next week.

The unemployment outlook for the next 16 months reflects a 9.1 percent rate this year, down slightly from the 9.3 percent forecast when President Obama made his annual budget request in February. Next year, the projected jobless rate is 9 percent, up from 8.6 percent in the February forecast.

Unemployment will not return to the 5 percent range until 2017, the budget office said, reflecting the intensity of the hangover from the most severe recession since the Great Depression.

While the budget office’s unemployment forecast for 2012 is no surprise given similar private sector projections, it amounts to the White House’s official acknowledgement of the political hurdle in Mr. Obama’s path to re-election.

The Office of Management and Budget, in its annual midyear update of the nation’s fiscal and economic picture, also said federal budget deficits would be lower for this year and next. The decline stems from spending cuts that the White House and Congress agreed to this year, in particular their August deal to find up to $2.4 trillion in reductions over a decade. The Congressional Budget Office similarly revised its fiscal forecast in its midyear report last week.

For this fiscal year, which ends Sept. 30, the budget deficit will be just over $1.3 trillion, both budget offices have projected.

That is down $329 billion, or 20 percent, from the administration’s deficit estimate at the beginning of the year, reflecting higher-than-expected revenue and lower-than expected spending. A $1.3 trillion deficit is equal to 8.8 percent of the economy, as measured by the gross domestic product, which is far above the 3 percent level that economists generally consider the maximum level desirable.

But the budget office report, released by Jacob J. Lew, Mr. Obama’s budget director, argued that the combination of savings mandated by the August deficit reduction deal and reduced spending over time in Iraq and Afghanistan, together with the expiration of the Bush-era tax cuts for high incomes, would bring the deficit to 2.2 percent of G.D.P. after a decade.

Letting the individual tax rate cuts expire for annual incomes above $250,000 as scheduled after 2012 would save more than $1 trillion through 2021, the Office of Management and Budget said — $866 billion in revenue and $166 billion in interest savings from a lower federal debt.

The importance of also realizing the separate savings called for in the budget deal is why Mr. Obama plans next Thursday to recommend “an ambitious, comprehensive and balanced deficit reduction plan,” the report said. The administration hopes to influence the special Congressional committee that was created by the deal to reach a bipartisan plan by Nov. 23, for House and Senate votes by late December.

As the Congressional Budget Office earlier emphasized, even though annual deficits are expected to decline through the decade as the economy recovers, after 2021 they will climb again because of an aging population and high health care costs that are driving up federal spending, especially for Medicare and Medicaid.

“At the same time,” the report added, “Congress must appreciate that the economy is still wrestling with the after-effects of a very severe recession.” And that, it said, is why Mr. Obama also will propose a job creation initiative for the near term, including new and previously proposed ideas for temporary tax cuts and infrastructure programs and for retraining the long-term unemployed.

Article source: http://feeds.nytimes.com/click.phdo?i=e4a714b76d2974424ee7d153c3660a0e

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Your Money: Muddying the Budget Waters With Social Security

September 1, 2011 by Leave a Comment

But for all of the difficulty lawmakers are having now, their hardest decisions may come this fall when they do battle over which government programs to cut back. And one program that has already been put on the table for discussion is Social Security, even though it has not contributed to the budget deficit.

There is no question the program needs to be tweaked so it can remain solvent for decades to come. And experts say the problem is not that difficult to solve, as long as it is dealt with relatively soon.

The proposed changes would have tinkered with one of the most beloved features of Social Security: the cost of living adjustment, which helps benefits keep pace with inflation so the elderly maintain their purchasing power. The proposed changes would link benefits to a new measure of inflation — one that is projected to rise more slowly than the current index.

“It amounts to a benefit cut,” Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, said.

The proposal, which emerged as a potential bargaining chip earlier in the budget debate, caused Social Security preservationists to cringe. And that is a big reason they argue that any changes should not be fast-tracked as part of the broader deficit debate.

If no changes are made, the program’s reserves are now projected to be exhausted in 2036, a year earlier than last year’s projection. Then the taxes collected would be enough to pay only about 75 percent of benefits through 2085, according to the latest annual report from the agency’s trustees.

The shortfall can largely be attributed to demographic shifts. The coming wave of baby boomers will strain the system, while the number of workers paying into the system is declining. On top of that, people are living longer, and the weak economy is not helping matters.

Changing the cost of living adjustment is just one of several ways to bolster Social Security’s finances. Suggestions have included gradually increasing the retirement age or raising the amount of income subject to Social Security payroll taxes.

The Obama administration’s deficit-reduction commission proposed switching to the new type of index because, members said, it would be more accurate. Unlike the current measure, it takes into account that people tend to change their buying habits when prices rise, substituting cheaper items for more expensive ones. If, for instance, the price of apples goes up, people may instead buy pears, if they are cheaper. The current index assumes that if the price of apples go up, people will just buy fewer apples.

But there is a question of whether the elderly and disabled can make the same substitutions as working people. “If you are down to paying your rent and your food, and the price of your food goes up, you probably just eat less,” Ms. Munnell said.

In addition, the slower rise in benefits would compound over time. That means the older that retirees grew, the bigger the pinch they would feel, especially people who depended heavily on the program. About 43 percent of single people and 22 percent of married couples rely on the benefits for more than 90 percent of their income, the Social Security Administration says. More than half of couples and 73 percent of singles draw more than half their income from the program.

So how much would this cost? Over the last decade or so, the “chained CPI-U” — that is the name of the new proposed index — has risen 0.3 percentage points a year less than the measure used now, according to Stephen Goss, the chief actuary at Social Security. And he expects that would continue in the future.

Consider a worker who retired at 65. After 10 years, the worker would receive 3.7 percent less in benefits than he would receive under the current system; after 20 years, 6.5 percent; and 9.2 percent after 30 years, according to Mr. Goss’s calculations. (He ran the numbers in response to a request by Representative Xavier Becerra, a Democrat from California who is the ranking member of the Ways and Means subcommittee on Social Security).

Let’s assume the retiree had a monthly benefit of $1,261, or $15,132 annually. But as he aged, his benefits would not rise as quickly as they would have under the current system. At 75, he would receive $560 less a year under the new system compared with the current one. At 85, he would receive $984 less, and, at 95, he would receive $1,394 a year less. These changes would resolve about 23 percent of the program’s current shortfall, according to Social Security’s actuaries.

But what is most irksome to some critics is that the proposed index has been called “more accurate.” It may be more accurate for the broader population, they say, but that doesn’t necessarily hold for retirees. (It would, however, save $112 billion over 10 years, according to the Congressional Budget Office).

If accuracy, and not cost savings, is the goal, they suggest further analysis of an experimental “elderly” index that accounts for the fact that older people spend a greater share of their budget on medical care. That index is estimated to increase about 0.2 percentage point more each year than the broader indexes. In fact, Ms. Munnell said that moving to the elderly index — and adding the mechanism to account for substituting cheaper items when prices rise — might make more sense.

Article source: http://feeds.nytimes.com/click.phdo?i=dbc046c5f84b35704358cf9d53acdafe

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A Closer Look at Taxes on the Rich

August 16, 2011 by Leave a Comment

With the budget deficit growing and tax rates at a 60-year low, one question will remain near the center of the political debate in the coming months: Should the federal government raise taxes on the rich?

Warren E. Buffett, the billionaire investor known as the Oracle of Omaha, pushed the issue to the forefront this week by urging members of the new Congressional supercommittee on deficit reduction to stop “coddling” him and other affluent Americans and raise their taxes.

In an opinion article in The New York Times on Monday, Mr. Buffett said he paid just under $7 million in federal payroll and income taxes last year, about 17 percent of his income, a lower percentage than anyone else in his office.

Echoing comments he has made in the past, he called on Congress to make the tax system more fair by rolling back the so-called Bush tax cuts on people who earn more than $1 million a year and on income from capital gains and dividends. He would also close the loophole allowing hedge fund managers to be taxed at a lower rate.

Whatever the political viability, his proposal would put a significant dent in the nation’s budget shortfall. Based on projections by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury, the tax increase on all three fronts would generate as much as $500 billion in new revenue over the next decade — about a third of what the Congressional committee is supposed to cut from the deficit.

“It’s not going to solve the long-term budget shortfall all by itself,” said Eric Toder, an economist at the nonpartisan Tax Policy Center. “The only way to do that is to have broader tax increases or reduce entitlements. But it could be an important piece of the puzzle.”

Because of Mr. Buffett’s high visibility and wealth — Forbes estimates his net worth at $50 billion, making him the world’s third-richest person — his comments brought a torrent of reaction. President Obama, who has fought unsuccessfully to increase taxes on the nation’s highest earners, cheered Mr. Buffett’s remarks during his Midwestern bus tour on Monday, saying that it was only fair that the spending cuts be balanced by tax increases on the wealthy.

Conservative bloggers and commentators brushed aside the proposals as grandstanding or as a gimmick to usher in a middle-class tax increase, and Pat Buchanan, a commentator on CNN, suggested that Mr. Buffett visit the section of the Internal Revenue Service Web site that accepts donations.

Republicans have been united in their opposition to tax increases, and gave Mr. Buffett’s proposals a chilly reception. All six Republican members on the committee have taken a no-tax pledge. Representative Kevin Brady, a member of the Ways and Means Committee and a Texas Republican, flatly rejected Mr. Buffett’s ideas.

“This is not a serious solution for deficit control or getting this dismal economy on its feet,” Mr. Brady said. “Economic growth does not follow a tax increase. So as much as I respect Mr. Buffett, his proposal fails on virtually every level.”

Despite the intense antitax sentiment that has helped the rise of the Tea Party movement since Mr. Obama took office, tax rates in the United States are at their lowest level since Harry Truman was president.

In 1950, the top income bracket had a 91 percent rate; today it is 35 percent. Mr. Buffett called for two new tax brackets for high earners — for income above $1 million a year and another above $10 million. While Mr. Buffett’s proposal did not suggest a rate, the Tax Policy Center has estimated that a 50 percent tax rate on income over $1 million would raise $48 billion over the next decade.

But one of the biggest factors reducing the comparatively low tax rates on investment income is the 15 percent for dividends, capital gains and “carried interest,” the money paid to hedge fund managers and private equity investors. Eliminating the carried interest provision alone would raise $21 billion over 10 years, according to the Congressional Budget Office.

And restoring capital gains and dividend rates to the levels before the Bush tax cuts — when capital gains were taxed at a top rate of 20 percent and dividends were treated as ordinary income — would bring the Treasury an additional $340 billion over the next decade.

Any of those measures would face intense lobbying and a battle in Congress. Indeed, Democrats were unable to roll back the carried interest tax break or the Bush tax cuts on the wealthy even when they controlled both houses of Congress. But with the prospect of severe spending cuts and another round of bitter deficit negotiations in Washington, proposals like Mr. Buffett’s call to raise taxes on the affluent are likely to become an increasingly urgent part of the discussion.

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French Economy Ground to Halt in 2nd Quarter

August 12, 2011 by Leave a Comment

PARIS — The French economy ground to a halt in the second quarter, the government reported Friday, posing a challenge to President Nicolas Sarkozy as France grapples with the growing costs of managing Europe’s debt crisis.

The French slowdown comes as growth stalls in a number of other countries across Europe. The continent’s biggest economy, Germany, is also likely to feel the impact as France, its largest trading partner, pulls back on imports.

“What worries us is that the core euro area countries were the ones carrying the growth” for Europe, Jens Sondergaard, a senior European economist at Nomura, which cut its forecast for German growth after the French economy’s poor showing. “And now you suddenly have flat growth in one of them, and that in itself is worrying.”

News that France’s gross domestic product fell unexpectedly to zero from April to June capped a tumultuous week in which Mr. Sarkozy interrupted his vacation to fight concerns that the country might lose its AAA credit rating if it cannot bring down a high debt and deficit.

The government also closed ranks to protect French banks after they slumped on rumors over their health. It imposed a 15-day ban on short-selling starting Friday, and opened an investigation into the market turbulence.

Although the French finance minister, Francois Baroin, pledged Friday that France would cut the budget deficit despite the gloomy growth report, a cooler economy could make it harder. It means the French government might need to resort to even to deeper budget cuts if it is to meet its target of paring its deficit to 5.7 percent this year.

French growth had been on a more positive trajectory — first-quarter growth, although only 0.9 percent, was the economy’s best quarterly showing in five years.

But consumers pulled back on spending in the second quarter, especially after the expiration of a cash-for-clunkers program the government had used to stoke new car sales.

While the government stuck to its optimistic forecast of 2 percent growth for the whole year, French shoppers seem inclined to remain prudent.

“People are anticipating future difficulties, not necessarily because of austerity yet, but because everything from gas to food is expensive,” Thomas Richard, a consultant at Kurt Salmon, said as he passed by a Monoprix grocery store in a leafy suburb of Paris. “They are paying more attention to their spending.”

While few people think France can come under market attack the way Italy and Spain have recently, they acknowledge the country can’t stay immune from the troubles of their euro-zone neighbors.

“The government does a lot, and we must leave time for programs to be put in place,” said a bank teller who would only give her first name, Isabelle. “But France is intertwined with Portugal, Ireland, Greece and even the United States, which have been hit. So we are waiting for a slowdown.”

The French economy is far more dependent on domestic demand than Germany, with its strong export sector. Unemployment in France remains high at 9.2 percent, while joblessness among youth, a particularly sensitive problem, is 22.8 percent.

Mr. Baroin played down the figures Friday, saying slower growth was expected after a faster run in the first quarter. But he acknowledged on French radio that the government would need to reduce the deficit with savings that “won’t hurt the most vulnerable in the economy.”

The International Monetary Fund said in a recent report that it expected France to experience a “robust” recovery over the next two years, despite plans to further consolidate its finances. In a sign things were calming for the moment, the yield on the French 10-year bond fell below 3 percent on Friday, and the spread with German bunds — considered the safest in Europe — shrank to 63.1 percentage points, after spiking at 89 points last week.

But there is a big risk that growth and exports would weaken if the economies of France’s major trading partners did not revive, the I.M.F. said. Any major downturn in the Spanish and Italian economies in particular would post a “significant” problem for French growth, the fund added.

What is more, because France has high public debt, and its banks are significantly exposed to weak southern European countries, the risks to growth would become bigger if the euro crisis is not stemmed, the fund said.

The deficit is expected to fall to 5.7 percent of gross domestic product this year, the I.M.F. said, while the ratio of debt to gross domestic product will be 85.3 percent — a source of concern among investors who have started targeting Spain, Italy and any country with high debt and low growth, no matter what their stature.

Mr. Sarkozy this week instructed his ministers to find ways to cut the deficit and debt, which are the highest of any AAA country. Still, Mr. Sondergaard cautioned against looking too darkly at France’s fiscal position. The ratings agencies reaffirmed France’s AAA rating this week, and the budget situation in France “is considerably better than other countries, not just in the euro area but around the globe,” he said.

Article source: http://www.nytimes.com/2011/08/13/business/global/french-economy-ground-to-halt-in-second-quarter.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Economix: Podcast: Debt Crises, Jobs, Gold and Hulu

July 23, 2011 by Leave a Comment

Sovereign debt crises continue to simmer on both sides of the Atlantic, but there was some progress, in Europe, at least.

In Brussels, European leaders revealed the rough outlines of at least a short-term resolution of the Greek debt crisis, Floyd Norris says in the new Weekend Business podcast. The plan involves a 109 billion euro ($157 billion) rescue package for Greece, and would force many investors in Greek debt to accept some losses on their bonds. But whether it can contain the contagion that has threatened the financial system in Europe and elsewhere is anyone’s guess.

In Washington, negotiators face an Aug. 2 deadline for raising the federal debt ceiling. Republicans in Congress have insisted that such action be coupled with spending cuts that would pare the budget deficit. President Obama said that the talks reached an impasse on Friday, but talks were expected to resume over the weekend. In a conversation on the podcast, Robert Shiller, the Yale economist, says that budget cutting is so much in vogue right now that we are in danger of neglecting the millions of people who remain without work, two years after the start of an economic recovery.

As Mr. Shiller writes in the Economic View column in Sunday Business, fiscal stimulus is an excellent remedy for a weak economy, but it does not appear to be within the realm of political possibility right now. Therefore he recommends balancing spending and taxing, and focusing on programs that will create jobs. The government, he says, need not get larger. It could function as a kind of investment banker, soliciting ideas from the private sector, and providing funding for projects that seem most worthwhile.

In the Strategies column in Sunday Business, I discuss the impact of the financial crises on the price and status of gold. While it is still well below its inflation-adjusted peak, set in early 1980, gold crossed the $1,600-an-ounce threshold last week for the first time. And a political movement to restore the gold standard has begun to stir once again — more so, perhaps, than at any time since the days of supply-side economics early in the Reagan administration. In the podcast, I discuss the possibility that this political revival might signal another peak for gold.

And in a separate podcast conversation, David Gillen and Brian Stelter talk about Hulu, the online video site sponsored by major television networks. As Mr. Stelter writes on the cover of Sunday Business, Hulu may be helping to define the future of television.

You can find specific segments of the podcast at these junctures: Floyd Norris (34:00); news summary (24:19); Hulu (21:35); Robert Shiller (14:13); gold (5:24); the week ahead (2:40).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Article source: http://feeds.nytimes.com/click.phdo?i=bc7898337fb618b9042f57e2890b98a0

Filed Under: Economy News Tagged With: , ,

Greek Leader Irked by Speculation on Debt

May 7, 2011 by Leave a Comment

But even as Greece and the European Union denied the reports and sought to calm nervous markets, other European officials acknowledged that the country needed its loans adjusted after new figures showed a deep recession and higher-than-forecast fiscal debt.

Instead of a projected budget deficit of 9.4 percent of gross domestic product in 2010, the Greek deficit was 10.5 percent, despite some harsh austerity measures, in part because the economy shrank faster than expected.

The new wave of concern about Greece will reverberate, and will probably complicate coalition negotiations for a new government in Finland, and affect the Portuguese election next month.

The anxiety is another sign that the European Union’s efforts to save the euro by propping up countries that can no longer borrow freely from the market are hardly finished. Greece, Ireland and now Portugal have gone to the union for large loans to protect them from investors demanding high yields, to allow them to pay interest on their debts and to create time for them to restructure their economies. But skeptics believe that in the end, Greece and Ireland will have to restructure their debt — paying back less than face value.

Even after the austerity and adjustment program, Greece will face loans of more than 150 percent of gross domestic product, a debt mountain that many think is unsustainable, even with better tax collection and economic growth.

Mr. Papandreou, European finance ministers and others on Saturday denied any thought of restructuring Greece’s debt, let alone having Greece exit the euro, which would allow it to devalue. And quitting the euro is considered enormously complicated and even self-defeating by numerous economists, since Greek debt is denominated in euros.

“I call on everyone, inside and outside Greece, in the E.U. in particular, to leave Greece in peace to do its job,” Mr. Papandreou said on Saturday. “Greece is doing its job.”

Officials of the European Commission, the European Central Bank and the International Monetary Fund are in Greece assessing the state of the economy to report to finance ministers meeting in Brussels on May 16 and 17, said a spokesman for the economic affairs commissioner, Olli Rehn.

The spokesman, Amadeu Altafaj, denied that a meeting Friday evening of some key finance ministers in Luxembourg was any sort of “ ‘crisis meeting on Greece,’ as presented in some press reports,” in particular Spiegel Online. The meeting, he said, was “informal,” but Greece was clearly a major topic of discussion and Greece’s finance minister, George Papaconstantinou, was asked to attend. He repeated that “debt restructuring is not an option on the table,” given that “its effects could be extremely negative for the country and for the euro area as a whole.”

Afterward, Jean-Claude Juncker of Luxembourg, who leads the group of euro zone finance ministers, said the Greek program “does need a further adjustment” that would be discussed in mid-May.

What is likely is a kind of soft restructuring, in which Greece will be given more time to pay its loans. Major bondholders — which include French, German and Greek banks, as well as the European Central Bank — could agree to exchange their debt for securities with longer maturities and even a lower interest rate rather than face the possibility of getting back only a percentage of their loans. That would make it less likely that the countries involved have to go to their taxpayers and ask for more money to prop up national banks, which would be deeply unpopular, especially in Germany.

Greece was given a 110 billion euro bailout last year, whose terms were already eased by the European Union in the spring.

Article source: http://www.nytimes.com/2011/05/08/business/global/08greece.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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