June 17, 2024

Political Economy: Silver Lining for Spain in Italian Vote

One knee-jerk reaction to the shocking Italian election was to worry about the spreading of panic to Spain. As Italian bond yields shot up last Tuesday, Madrid’s were dragged up in sympathy. These are the two troubled big beasts of the euro zone periphery, and an explosion in either of them could destroy the single currency.

But Spain probably will not catch the Italian flu. True, the risk of Madrid’s being thrown off its overhaul path has risen since the inconclusive Italian election. But Prime Minister Mariano Rajoy of Spain does not have to face the voters for nearly three years. What is more, the Italian vote may make euro zone policy makers less eager to embrace austerity and so give Spain a better chance of returning to economic growth.

Investors have already started having second thoughts. By Friday, the yield on 10-year Spanish bonds had fallen back to 5.1 percent from 5.4 percent, where they had been Tuesday. The spread between Spanish and Italian yields has shrunk to 0.3 percentage point. There is even a chance that Madrid could have lower borrowing costs than Rome in coming weeks, if the Italian political paralysis shows no sign of resolution.

There is, of course, no cause for schadenfreude in Madrid. The same factors that led to a stunning breakthrough in the Italian elections for Beppe Grillo, leader of the Five Star Movement protest party, could eventually play out in Spain, albeit in a different way. The traditional Spanish governing parties — Rajoy’s center-right Popular Party and the Socialists — are discredited by a mixture of recession, a 26 percent unemployment rate and allegations of corruption. Each has the support of about 25 percent in opinion polls, while the electorate’s trust in politicians has continued to plummet.

Spain does not have a Mr. Grillo. But it does have radical left and centrist parties, each with about 15 percent support, as well as strong nationalist movements in Catalonia and Basque Country. Unless there is an economic turnaround, nobody will have a majority in the next Parliament and the country could be harder to govern.

The good news is that there is no need for an election until late 2015. What is more, Mr. Rajoy — for all his faults as a poor communicator and slow decision maker — is a dogged reformer. Even the latest corruption allegations do not seem to have diverted him from his path.

It is still too early to talk about economic recovery. The Spanish gross domestic product shrank 1.4 percent last year and the European Commission says it will fall a similar amount this year. But the overhaul efforts are beginning to have an effect. This is most visible in the labor market, where unit labor costs fell another 3.6 percent last year.

Less expensive labor has encouraged car companies to increase production in Spain and offshore call centers to repatriate their operations from places like Latin America and Morocco. The current account deficit, which was 10 percent of gross domestic product in 2008, was virtually wiped out last year.

The overhauling of the banking system is also positive. Mr. Rajoy and his predecessor denied the problems for too long. But busted banks are well on the way to being recapitalized. Dud real estate assets are being shifted into a so-called bad bank. One can quibble about the financial engineering that has been used to keep this bank, a highly leveraged vehicle, off the government’s balance sheet and it may yet return to bite it.

But the economy is no longer plagued by zombie banks diverting their limited funding to zombie property companies. The challenge now is to get credit flowing to healthy parts of the economy.

The government is also pressing ahead with new overhauls. The most important are measures to deter early retirement and make pensions more affordable; the creation of a single market within Spain by getting rid of the barriers between the country’s 17 regions that gum up trade; and a crackdown on duplication between different levels of government.

The country’s Achilles’ heel is the poor state of its public finances. The deficit has fallen, but it was still 6.7 percent of gross domestic product last year. The European Commission says the deficit will be about the same this year before rising to 7.2 percent next year, as the supposedly temporary tax increases wear off. Debt, meanwhile, is forecast to reach 101 percent of gross domestic product by the end of next year.

The government itself is more optimistic than this. Even so, it faces a challenge in reconciling the need to put its finances on a sustainable footing with the need to get its economy growing. This is where the Italian election might help.

Spain’s European partners may be so worried that austerity might fuel populism elsewhere in the euro zone that they may cut Madrid extra slack in achieving its budget targets.

At present, Spain is supposed to cut its deficit below 3 percent of gross domestic product next year. That is impossible. It is hoping to negotiate a deal allowing the deficit to drop to, say, 4.7 percent next year and 3.4 percent the year afterward, with a figure of less than 3 percent being achieved only in 2016.

Even to get to that point, the bulk of the temporary tax increases would have to be made permanent and there would have to be some further belt-tightening. But at least the hope of growth would not be stamped out.

Provided Madrid sticks with its ambitious program of structural overhauls, its partners should agree to such a path. Spain would then see a silver lining to the Italian cloud.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/03/04/business/global/04iht-dixon04.html?partner=rss&emc=rss

India Agrees to Let In Foreign Retailers, Again

The Cabinet’s decision — after a similar proposal was withdrawn under withering criticism last year — immediately generated optimism that a government plagued by scandal was finally breaking out of the political paralysis that had stifled reforms for months.

“This is a landmark decision in India’s economic reforms process,” said Rajan Bharti Mittal, whose retail company, Bharti Enterprises, has a joint venture with Wal-Mart.

Prime Minister Manmohan Singh said the reforms were made to spur economic growth and to attract foreign investment.

“I believe that these steps will help strengthen our growth process and generate employment in these difficult times,” he wrote on his Twitter account, appealing for public support.

However, political opponents and even some allies, decried the decision to allow in international supermarket chains, saying it would hurt small retailers and farmers.

“(It) will lead to job losses for millions of our people,” D. Raja, a Communist Party lawmaker, told the NDTV news channel.

The Cabinet also agreed to allow foreign investment in airlines and to sell stakes in state-owned companies. On Thursday, the government decided to reduce fuel subsidies and allow the price of diesel to rise, a move hailed by the business community but criticized by political allies and opponents.

The decision on retail investment Friday would allow foreign firms to own a majority stake in multi-brand retailers here for the first time. However, individual states would have the right to decide whether to let the retailers operate from their territory.

States led by the ruling Congress party would be most likely to allow them, meaning the big cities of New Delhi and Mumbai would have new shopping options.

U.S.-based Wal-Mart, British-based Tesco PLC, French-based retailer Carrefour and others have been interested in entering India, a country of 1.2 billion people where retail is the second-biggest industry behind agriculture.

Commerce Minister Anand Sharma said India badly needed the infrastructure investment that would come from these firms. Currently, about 35 to 40 percent of produce rots before it gets to the stores, he said.

Under the Cabinet decision, at least 50 percent of the foreign investment would have to be in back-end infrastructure, such as processing, distribution and storage.

“It will generate large numbers of jobs in rural India for our men and women,” Sharma said.

The government said farmers would benefit because less of their produce would rot, small retailers would become more competitive and efficient and consumers will get lower prices and better quality. The policy would also bring in badly needed inflows of investment and foreign currency.

The government had agreed on the same proposal last year but then withdrew that decision because of protests from coalition partners, a capitulation that badly damaged its credibility with international investors.

Since then, economic growth has fallen, with business leaders and analysts blaming the government’s inability to make needed reforms.

Kunal Ghosh, a spokesman for government ally Trinamool Congress, said his party continued to oppose the plan but would not say whether it would withdraw support from the coalition.

The government relaxed rules on foreign investment in the broadcast industry and in power exchanges, which provides a platform for companies to buy and sell power.

The government also agreed to sell minority stakes in its oil, copper and aluminum companies as well as its Metals and Minerals Trading Corporation.

The main opposition Bharatiya Janata Party criticized the surprise decisions.

“We consider it as a betrayal of the country, betrayal of the Parliament by this government,” said Balbir Punj, of the BJP.

The government’s decision on airline investment would allow foreign airlines to own up to 49 percent of an Indian airline. India’s airline industry has expanded enormously in recent years, but only one airline has been able to turn a consistent profit. The government-owned Air India and the private Kingfisher have both suffered from labor strife and financial problems.

Aviation Minister Ajit Singh said the decision “sends a very clear message to a sector that has been under stress.”

But it was not clear if any foreign airlines would be interested in buying a minority interest in some of India’s most struggling airlines.

The government also made a key change to its decision earlier this year to allow foreign retailers selling only a single brand to own 100 percent of their stores, a decision largely seen as aimed at bringing furniture retailer IKEA to India.

The previous decision forced the company to source 30 percent of their products from small cottage industries. Now, it can source that 30 percent from any Indian industry.


Follow Ravi Nessman on Twitter at www.twitter.com/ravinessman

Article source: http://www.nytimes.com/aponline/2012/09/14/world/asia/ap-as-india-retail.html?partner=rss&emc=rss

Stocks and Bonds: Stocks Decline a Day After Fed Sets Latest Stimulus Measure

Several factors contributed to the heightened gloom, including new signs of political paralysis in Washington, Europe’s continued failure to resolve its debt crisis and indications of economic stress in developing countries that had been strong.

While the Fed’s measures to lower interest rates could increase growth a bit, some economists worry that the scale of the problems call for more stimulus efforts globally, but other countries are not cooperating.

With investors so nervous, the markets may rebound over the next few days, as volatility and big swings of 3 and 4 percent have become more common. On Thursday a downcast mood appeared across the board. Stocks plunged about 5 percent across Europe and in Hong Kong, and more than 3 percent in the United States.

“Today, we really seem to be stuck in a negative spiral,” said Matthias Jasper, head of equities at WGZ Bank in Düsseldorf. “Investors just want to keep their exposure low and watch from the sidelines.”

The Standard Poor’s 500-stock index flirted with a bear market, generally a 20 percent decline from a recent peak, but recovered in the final hour and closed down 17 percent to 1129.56 from a late April high. The MSCI All-Country World Index, a grouping of 45 countries, however, fell more than 20 percent, pushing it into bear territory.

Financial markets beyond stocks also reflected growing anxiety. Commodities like oil fell, and even gold dropped sharply in price. As investors continued to seek havens, United States bond prices soared for a fifth consecutive trading session, pushing the 10-year benchmark yield to a new low of 1.72 percent.

The cost of insuring the government bonds of Western European nations against default rose to a record high. The extra yield investors demand to hold Italian government debt also rose, pointing to lingering worries about debt levels in the euro currency region. Despite steps taken last week by central banks to help banks in Europe borrow dollars, there were signs of rising borrowing costs for these institutions.

It is not only economies in the United States and Europe that are faltering. Financial markets in developing countries are showing levels of stress last seen during the financial crisis, a senior World Bank official said Thursday.

The official said that problems in the developed world increasingly were shaking the economies of developing nations, not because of a drop in trade flows or capital investment, but because a sense of gloom was spreading around the world, shaking the confidence of domestic investors.

“We are increasingly worried about the possibility of global contagion,” said the official, who shared the World Bank’s assessment of the global situation on condition of anonymity.

“At some point the global mood changes. Just like the realization that even big banks are vulnerable” shook world markets in 2008, the official said, “the idea that even the U.S. is vulnerable means that many investors have lost an anchor.”

The market downturn was set in motion on Wednesday after the Fed announced that a complete economic recovery was still years away, adding that the United States economy has “significant downside risks to the economic outlook, including strains in global financial markets.”

The Fed also announced it would buy long-term Treasury bonds and sell short-term bonds to help stimulate lending and growth.

Some analysts were disappointed the Fed did not act more forcefully and they had little faith that policy tools like lower interest rates were encouraging consumers and businesses to spend more or to start creating jobs.

“The initial and follow-up reaction from the equity market is likely the realization that the Fed has little left to offer, that Washington is a mess, and their only hope is to ‘ride it out’ over a long period of time,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

The policy conundrum is illustrated by the fact that despite lower rates people are not taking up new mortgages or refinancing existing ones. Rates on 30-year fixed mortgages dropped after the Fed’s announcement, falling to 4.05 percent from 4.21 percent on Wednesday, according to HSH.com, which publishes mortgage and consumer loan information.

But the number of new mortgage applications is running at the lowest level since August 1995, according to the Mortgage Bankers Association. Guy Cecala of Inside Mortgage Finance, which monitors mortgage activity, said the volume of new mortgages this year would probably be about $1 trillion, down from $1.5 trillion in 2010, which was already anemic.

Companies, too, are holding back on spending even though they have built cash reserves to 6 percent of their total assets, the highest level since at least 1952, according to Credit Suisse.

Matthew Saltmarsh and Binyamin Appelbaum contributed reporting.

Article source: http://www.nytimes.com/2011/09/23/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

Amid Criticism on Downgrade, S.&P. Fires Back

In an unusual Saturday conference call with reporters, senior S. P. officials insisted the ratings firm hadn’t overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating. “The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S. P.’s sovereign ratings committee.

Another S. P. official, David Beers, added that “fiscal policy, like other government policy, is fundamentally a political process.”

Administration officials at the White House and Treasury angrily criticized S. P.’s action as based on faulty budget accounting that discounted the just-enacted deal for increasing the debt limit.

The agreement set spending caps in the fiscal year that begins Oct. 1 and calls for a bipartisan Congressional “super committee” to propose more deficit reduction — for up to $2.5 trillion in combined savings over a decade.

“The bipartisan compromise on deficit reduction was an important step in the right direction,” the White House press secretary, Jay Carney, said in a statement on Saturday. “Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges.”

The ratings agency put additional pressure on the joint Congressional committee to find additional spending cuts, tax hikes or both to bring down the inexorably rising national debt. 

Still, the posturing on Capitol Hill continued.

“Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground,” Speaker John A. Boehner, an Ohio Republican, said in a statement.

Senate Majority Leader Harry Reid said the downgrade affirmed the need for the Democratic approach, which would combine spending cuts with tax increases.

The decision, he said, “shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S. P. are demanding.”

Even as the ratings agency insisted on Saturday that its move shouldn’t have come as a shock, it reverberated around the world as political and financial leaders scrambled to assess its impact on the already troubled world economy.

China, the largest foreign holder of United States debt, said on Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the S. P. downgrade.

While Europeans had girded for a possible downgrade, the news that S. P. had actually yanked the United States’ AAA rating was nonetheless received with a degree of alarm in the corridors of power across the Continent. Finance Minister François Baroin of France questioned the move Saturday, noting that the figures used by S. P. didn’t match those of the Treasury, and overstated the federal debt by about $2 trillion.

Mr. Baroin said he found it curious that neither Moody’s nor Fitch, the two other major ratings agencies, had reached a similar conclusion. Moody’s has said it was keeping its AAA rating on the nation’s debt, but that it might still lower it.

“We have total confidence in the solidity of the American economy,” Mr. Baroin said in an interview on French radio. Nonetheless, he added, the decision confirms that the world’s most developed economies are confronted with the same urgent priorities: to lift growth and reduce public and private debt.

Jackie Calmes, Binyamin Appelbaum, Louise Story, Julie Creswell, Liz Alderman, Jack Ewing and David Barboza contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=16c9a7254b7ed34588b8e68fa6bccf9c

Stocks Plunge on Fears of Global Turmoil

With a steep decline of around 5 percent in the United States on Thursday, stocks have now fallen nearly 11 percent in two weeks. Markets have been plunging as investors sought safer havens for their money — including Treasury bonds, which some had been avoiding during the debate over extending the nation’s debt ceiling.

Sparking the drop was an unsuccessful effort by the European Central Bank to reassure the markets, which instead ended up spooking investors. The bank intervened with a show of support to buy bonds of some smaller countries, but not Italy and Spain, whose mounting troubles have come into the spotlight.  This was taken as a sign that the recent rescue packages by Europe could soon be overwhelmed by the huge debt burdens in those two countries.

Investors were further unnerved by a candid remark by José Manuel Barroso, the European Commission president, who seemed to confirm fears about the sense of political paralysis. Rather than play down the problems, as European officials have done since the debt crisis began last year, he said, “Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.”

With investors in the United States already focusing anew on fragile economic growth and high unemployment, waves of selling of stocks began in Europe and continued throughout the day in the United States. Analysts said the market still might have further to fall, as investors reassess the dimming economic prospects. In the short run, attention will be focused on critical unemployment numbers for July to be released on Friday morning. And some in the markets are already questioning whether  the Federal Reserve has done enough to mend the economy and whether it could soon take further steps to stimulate growth.

On Thursday, more than 14 billion shares changed hands, the heaviest selling in more than a year. In addition to being unnerved by weaker economic data reported in recent days, investors appeared to lose their optimism about the strength of corporate profits that had driven increases in the stock market in the first half of this year.

At the close, the Standard Poor’s 500-stock index was down 60.27 points, or 4.78 percent, to 1,200.07. The Dow Jones industrial average was off 512.76 points, or 4.31 percent, to 11,383.68, and the Nasdaq was down 136.68, or 5.08 percent, to 2,556.39.

The S. P. 500 has now fallen 10.7 percent from 1,345 on July 22, underlining the new negative investment sentiment about the economy and about Europe.

“We are now in correction mode,” said Sam Stovall, chief investment strategist at Standard Poor’s. “We could have another couple of weeks to go before it bottoms.”

The last time the market was in a correction was last summer, when it fell 16 percent before recovering.

Analysts said credit markets were still healthy and the United States was now stronger than just a few years ago so that a repeat of the financial crisis was unlikely.

“There is a huge difference — during the financial crisis the banking sector broke down. Right now it’s a crisis of confidence based on weak economies but the banking sector is not broken,” said Reena Aggarwal, professor of finance at Georgetown University.

The Vix, which measures the implied volatility of options on the S. P. 500 index, and is called the fear index by traders, spiked on Thursday, though it is still much lower than during the depths of the financial crisis in 2008.

Washington’s reaction to the market’s tumble was muted. The Treasury Department said it did not plan to issue any statements or provide officials to comment.

“Markets go up and down,” said the White House spokesman, Jay Carney. “We obviously are monitoring the situation in Europe closely.”

As the prospects for economic growth dimmed, several commodities, including oil, silver and palladium, fell by more than 5 percent, perhaps producing some good news for consumers.

With oil prices dropping below $87 a barrel, wiping out the rise caused by unrest in the Middle East and North Africa earlier in the year, drivers can expect sharply lower gasoline prices  just in time for the Labor Day weekend and back-to-school shopping.

Reporting was contributed by Nelson D. Schwartz, Clifford Krauss, Mark Landler, Motoko Rich and Bettina Wassener.

Article source: http://feeds.nytimes.com/click.phdo?i=19e201b35b1ec607bc985c8bfb521578