February 7, 2023

High & Low Finance: Deception by Derivative

But they are often weapons of mass deception.

For some derivatives, a desire for deception is the only reason they exist. That deception can allow those who own derivatives to evade taxes or accounting rules. It can allow activity that might otherwise be illegal, were it not called a derivative, or that would face regulation if it were labeled what it truly is.

Sometimes, banks use derivatives they create to help their clients deceive the public. Other times, they enable the banks to deceive those clients.

The latest revelation of deception by derivative came in Italian government documents leaked this week to two European newspapers, La Repubblica and The Financial Times. The Financial Times said it appeared that Italy had used derivatives in the 1990s to allow it to make its budget deficit seem smaller, thus enabling it to qualify for admission to the euro zone. The report said it appeared those derivatives, now restructured, might be exposing Italy to a loss of 8 billion euros ($10.4 billion).

La Repubblica noted that the director general of the Italian Treasury Department at the time, Mario Draghi, is now running the European Central Bank.

Italy’s economy minister, Fabrizio Saccomanni, said it was “absolutely baseless” to say that the country used derivatives to lie its way into the euro zone. It was simply hedging against market risks. As for the current situation, he said, “There’s been no material damage to our public finances.” He drew a distinction between realized losses and those based on market values that could change.

What seems to have happened in Italy is similar to something that we already know Greece did. Rather than borrow money — which would increase the reported budget deficit — the country entered into a derivatives contract that called for the banks to make large upfront payments in return for larger payments later from the government.

And how did that differ from a loan? Functionally, not very much, in all probability. But if you call something a derivative you can often get away with keeping it off your balance sheet — or putting it on the balance sheet in a misleading way. If the Financial Times report is right, the deal made Italy’s reported budget deficit smaller just when the country needed that to join the euro zone.

There is some evidence that Europe knew what was going on and chose to ignore it. Joining the euro was seen as more of a political event than an economic one, a symbol of European unity.

The effect of the funny accounting was similar to that of a student cheating on college entrance exams. The student may get into a university where he or she cannot compete, just as Italy and Greece find themselves in a currency bloc where their economies are at a significant disadvantage.

But while uncompetitive students can drop out, or be expelled, the euro zone rules provide that no country can leave. That fact, perhaps more than anything else, accounts for the persistence of the euro zone crisis.

Such deception by derivative is hardly new. Enron was a pioneer. It used derivatives called “prepaid forward” contracts to hide debt in a way that made corporate cash flow appear better, something the company thought was necessary to impress the bond rating agencies.

Responding to claims that his bank and Citibank had made “disguised loans” to Enron, a JPMorgan Chase executive told a Senate hearing in 2002 that “the prepaid forwards were undoubtedly financing, as all contracts are that involve prepayment features, but every financing is not a loan.” He said the bank had properly accounted for them, but “the manner in which Enron accounted for them” was of no concern to the bank. It was, instead, “a matter for Enron and its management and auditors.”

Article source: http://www.nytimes.com/2013/06/28/business/deception-by-derivative.html?partner=rss&emc=rss

State Auditor Warns That France Must Cut Spending

The Court of Auditors, France’s official accounting agency, noted that public finances had been held in check for several years through higher taxes and control of spending. But it said the policy had now reached its limits. If the European Union’s 3 percent budget deficit target is to be reached by 2015, the report said, structural spending cuts “on the order of” 13 billion euros, or $17 billion, would be needed in 2014 along with 15 billion euros of cuts in 2015.

French tax increases have brought howls of protest from businesses and higher-income taxpayers, and led to a flight of the country’swealthy to lower-tax destinations like Britain, Belgium and Switzerland.

Mr. Hollande and his finance minister, Pierre Moscovici, have already vowed that taxes will not increase further, and that their task over next few years is to cut spending. But they have been vague on how they intend to do it. And so far, Mr. Hollande has repeatedly had to revise his budget deficit targets because he was unable to meet them, even prompting Brussels to acknowledge that France would need more time. Newly gloomy economic indicators released Thursday will not make the task any easier.

The challenge is to rein in public spending in a country with generous welfare and pension benefits and a bloated public sector. France’s social spending last year was among the highest in the world, at more than 30 percent of gross domestic product, according to Philippe d’Arvisenet, global chief economist at B.N.P. Paribas. “It’s getting more difficult to afford this type of generosity,” he said.

Public spending made up 56.6 percent of G.D.P. last year, the auditors found, up from 55.9 percent in 2011 — and just below the record high of 56.8 percent set in 2009. Tax receipts, meanwhile, rose to a record 45 percent of G.D.P. in 2012.

“Everyone agrees this is where the next effort has to come from,” Gilles Moëc, an economist at Deutsche Bank in London, said. Cuts on the scale suggested by the auditors are “doable,” he said, at just over 1 percent of G.D.P.

The government has essentially conceded the point in recent months, he said, but it has not provided any details about how it intends to go about doing it.

“It’s one thing to say spending cuts are necessary,” Mr. Moëc said, “and another thing altogether to flesh them out.”

Mr. d’Arvisenet noted that about 80 percent of all the progress in cutting the deficit in recent years had come from tax increases, something that he said “obviously” could not be long sustained. The French auditors’ findings are consistent with the advice of the International Monetary Fund and the European Commission, he added.

The central government in Paris has sometimes chosen to save money by reducing transfers to the provinces. Planned overhauls of the pension, family benefits and unemployment insurance systems could also help over the medium term. But there is little sign of the kind of immediate measures that would be needed to bring the deficit down to 3 percent.

The Court of Auditors said the 2013 budget deficit was likely to come in between 3.8 percent and 4.1 percent of G.D.P., as receipts of corporate and sales taxes decline and the economy shrinks. While that would mark a decline from 4.8 percent last year, it remains above the 3.7 percent for which Mr. Hollande’s government has been aiming.

France’s problems partly result from the economic downturn. The French economy contracted by 0.2 percent in both the first quarter of this year and the last quarter of 2012. Insee, the national statistics institute, predicted last week that it would shrink by 0.1 percent this year.

The government’s forecasts are still more optimistic than those of some private forecasts. Standard Poor’s estimated Thursday that the French economy would shrink by 0.3 percent this year, before returning to growth with a 0.6 percent expansion in 2014.

The jobless rate stood at 11 percent in April, according to Eurostat, the European Union’s statistical agency. Expectations that it will rise further are weighing on consumer confidence.

French household sentiment reached an all-time low in June, Insee said Thursday, with its main consumer sentiment index falling to 78, down one point from the May reading, which had itself been a record low.

France, like the other 16 euro members, is obligated by treaty to hold its deficit to around 3 percent of G.D.P. and its debt to 60 percent of G.D.P. Mr. Hollande committed to meeting the deficit target in his 2012 presidential campaign. But European officials, bowing to the inevitable, in late May gave France until 2015 to achieve it in return for action on pension and labor reforms.

Among the major euro zone economies, only Germany is currently on track to meet the E.U. budget target, with a deficit of only 0.2 percent of G.D.P. forecast for this year, according to the Organization for Economic Cooperation and Development. The United States, in contrast, is likely to record a 2013 budget deficit of 5.4 percent, the O.E.C.D. said.

Many economists argue that the deficit rules are counterproductive in an economic downturn, because cutting government spending adds to the downward pressure on demand. The mathematical logic of the deficit-to-G.D.P. equation dictates that, even when spending is unchanged, the outcome is worse if the economy shrinks.

Despite the skepticism about austerity, and recent signs of relaxation in the rhetoric, the orthodox view, championed by Chancellor Angela Merkel of Germany and her allies, continues to hold sway in Europe.

In Britain, Prime Minister David Cameron’s government on Wednesday announced 11.5 billion pounds, or $17.5 billion, more of spending cuts to be enacted over the next few years. The Office of National Statistics reported Thursday that the British economy grew by only 0.3 percent in the first quarter, a 1.2 percent annualized rate.

But that was an upward revision from the previous estimate. The office said that, contrary to earlier readings, the British economy did not slip into a “double-dip” recession last quarter of 2011 and the first quarter of 2012.

Article source: http://www.nytimes.com/2013/06/28/business/global/state-auditor-warns-that-france-must-cut-spending.html?partner=rss&emc=rss

Financial Fears Gain Credence as Unrest Shakes Turkey

This curious happenstance — where both fear that the profusion of glass towers and shopping malls now overwhelming the classic Istanbul skyline is not only ugly but unsustainable — underlies the convulsive uprising in Taksim Square.

The once soaring Turkish stock market has fallen about 9 percent in the past week, interest rates are on the rise and, crucially, after a period of strength, the currency, the lira, has lost 8 percent in recent months and 1 percent just since the protests began.

For more than two years, a very small subset of investors and economists has warned that, as with other economic booms built on a mountain of debt — like the property spikes in Japan in the 1980s and more recently in the United States, Spain, Ireland and other European countries — the one in Turkey would reach a painful end.

Until recently, their warnings were ignored.

In contrast to a Europe stagnating throughout most of the past decade, Turkey has grown at a 5 percent annual rate while keeping its public finances in check.

In fact, with a budget deficit that is below 2 percent of gross domestic product and overall public-sector debt of less than half its economic output, Turkey challenges powerhouse Germany for best-in-class status when it comes to these critical benchmarks of broad economic health.

For Prime Minister Recep Tayyip Erdogan, the political crisis he is facing seems manageable precisely because of Turkey’s economic success, which has buoyed a pious entrepreneurial class that forms the core of his constituency. As the protest movement has unfurled, few analysts have suggested Mr. Erdogan’s hold on power is in jeopardy, arguing that he maintains the support of the religious masses that propelled him to power.

But that dynamic could change quickly should the economy falter, as a growing number of analysts now say is possible.

Hundreds of billions of dollars of short-term loans have been flowing into the country from investors in search of higher yielding assets, financing the very malls and skyscrapers that have so dismayed the small but growing coalition of secular intellectuals, left-of-center political activists and a smattering of the professional classes.

What worries financial experts is that this so-called hot money can leave the country just as quickly as it arrived, touching off a currency crisis and, eventually, a collapse in the property markets that could threaten the nation’s banks.

“This is a classic credit boom, with money being thrown at Turkey, especially the banks,” said Tim Lee, an independent economist at Pi Economics in Greenwich, Conn., who has warned for years of a Turkish financial bubble. “At some point, though, you reach a moment when the music stops.”

It is perhaps too soon to say if that moment has come, but the financial jitters that have followed the protests have been noticeable, especially with regard to the wobbly lira.

Mr. Lee and other skeptics point to the currency as the ultimate barometer of how foreign investors see Turkey. The country’s two previous financial implosions, in 1993 and 2001, were largely currency disasters, set off by a stampede of fleeing investors and lenders.

Two points in particular concern them.

This year, for example, Turkey’s private sector will require $221 billion in outside financing alone, with most of it coming in short-term loans.

By normal standards, that is a heady sum, about 25 percent of Turkey’s G.D.P., and it is about the size of the economy of Greece, Turkey’s longtime rival.

Moreover, in preparation for the 100th anniversary of the founding of the Turkish republic in 1923, Mr. Erdogan’s government has unveiled a $400 billion public works program, which is more than half the size of the $770 billion Turkish economy.

Many of these grand projects will have a visible aesthetic effect on Istanbul, which is what infuriates the protesters.

Planners envision a third bridge spanning the Bosporus at a cost of $3 billion, for which ground has already been broken; $10 billion to be spent on a third airport, which would be the world’s largest; and a $2 billion outlay to create a financial center in Istanbul to compete with Dubai and London. On top of a slew of equally large projects in high-speed rail, subways, ports and other amenities, Istanbul is also seen as a leading contender to secure the 2020 Olympic Games.

The decision on the Games will be announced in September, and if Turkey wins, the building and borrowing will only speed up.

Article source: http://www.nytimes.com/2013/06/06/world/europe/financial-fears-as-street-unrest-shakes-turkey.html?partner=rss&emc=rss

Euro Zone Economy Shrinks 0.2% in First Quarter

PARIS — The euro zone economy shrank more than expected in the first three months of 2013, official data showed Wednesday, marking a sixth consecutive quarter of decline as France returned to recession and Germany marked time.

The 17-nation euro zone contracted by 0.2 percent from the last three months of 2012, Eurostat, the statistical agency of the European Union, reported from Luxembourg, less than the 0.6 percent decline recorded in the fourth quarter, but more than economists’ expectations of a 0.1 percent fall.

The economy of the overall European Union, made up of 27 nations, shrank by 0.1 percent.

Germany, with the largest economy in Europe, was almost stagnant in the first quarter, managing growth of just 0.1 percent from the prior three months, when it shrank by 0.7 percent, the Federal Statistics Office reported in Wiesbaden.

France, the second-largest economy in Europe, contracted for a second consecutive quarter, meeting the common definition of a recession. The economy shrank by 0.2 percent, the same decline as in the fourth quarter of 2012.

Britain, the third-largest E.U. economy, but not a member of the euro, last month posted 0.3 percent first-quarter growth.

Among the “peripheral” euro nations, Spain’s economy shrank by 0.5 percent, the same as Italy’s. Portugal shrank by 0.3 percent, and Cyprus’s economy, the victim of a financial sector meltdown and bailout, shrank 1.3 percent. Data on Greece were not immediately available.

More than five years after the meltdown of the U.S. housing market set off the global financial crisis, the 27-nation European Union remains in turmoil, buffeted by a lack of confidence in member states’ public finances and demands for budgetary rigor to address those concerns. Unemployment in the euro zone reached a record 12.1 percent in March, and economists do not expect the labor market to turn around before next year, at the earliest.

Despite its troubles, the E.U. market remains the world’s largest, and its weakness is doubly worrying at a time when the rest of the world is not growing strongly enough to take up the slack. Moody’s Investors Service warned Wednesday that the weakness in the euro zone, combined with the mandatory “sequestration” budget cuts in the United States, would weigh on the world economy, with growth in the Group of 20 nations this year of just 1.2 percent, picking up to 1.9 percent in 2014.

In annualized terms, the euro zone economy contracted by about 0.8 percent in the first quarter, lagging far behind the 2.5 percent growth in the United States.

Japan, which reports its first-quarter G.D.P. figure on Thursday, is expected to post an annualized figure of about 2.8 percent. China in April reported 7.7 percent first-quarter growth.

That Germany grew at all was a result of increased household consumption, Germany’s statistics agency said, as exports and investment declined. Jörg Krämer, chief economist at Commerzbank in Frankfurt, estimated in a research note that the unusually cold weather had subtracted as much as 0.2 percentage point from German growth.

Even though Germany eked out a positive figure, it was “really in contractionary territory” in the quarter, Philippe d’Arvisenet, global head of economic research at BNP Paribas, said. He said more recent data showed clear evidence of a German rebound in the second quarter.

Mr. d’Arvisenet estimated that the euro zone economy would shrink this year by about 0.5 percent, following a 0.6 percent contraction in 2012. Growth is likely to return in 2014, he said, “but probably below 1.0 percent.”

Article source: http://www.nytimes.com/2013/05/16/business/global/germany-france-economic-data.html?partner=rss&emc=rss

Fitch Puts British Debt on Review for Downgrade

LONDON — Britain’s economic troubles took a turn for the worse on Friday as Fitch Ratings came a step closer to becoming the second agency to strip the country of its triple-A investment grade.

Fitch put the debt on watch for a possible downgrade just days after the release of gloomy government economic data. The figures showed that British debt would “peak later and at a higher level than previously expected by Fitch,” the agency said on its Web site.

The change came a month after Moody’s Investors Service lowered its investment rating for British debt, knocking it to Aa1 from Aaa, saying that one of the principal factors was the very slow pace of the British recovery.

Fitch said Friday that “the persistently weak performance of U.K. growth, in part due to European growth, has increased uncertainty around the U.K.’s potential output and longer-term trend rate of growth with significant implications for public finances.”

Credit downgrades together with a weaker economic outlook could prompt some holders of British bonds to sell their holdings. Government bonds have benefited from the economic turmoil in the euro zone, which had made them more attractive to foreign investors.

The Fitch announcement followed a gloomy speech by George Osborne, the chancellor of the Exchequer, in Parliament on Wednesday. He said that economic conditions remained difficult and that it would take longer than expected to meet his debt-reduction target.

Citing figures from the Office for Budget Responsibility, an independent economic forecasting group, he said the British economy would grow 0.6 percent this year, half of the 1.2 percent forecast earlier. Growth next year is expected to be 1.8 percent, down from a previous estimate of 2 percent, according to the office.

Public-sector net debt as a percentage of gross domestic product would start falling only in the fiscal year ending in 2018. That is a year later than Mr. Osborne forecast in December, when he pushed the goal back to 2017 from 2016.

To help generate growth, Mr. Osborne pledged to divert some of the proceeds of a far-reaching cost-cutting program to lend to home buyers, helping them with deposits for newly built houses. He is also relying on the Bank of England to keep interest rates low for longer even as inflation continues to hover above the central bank’s 2 percent target.

Mr. Osborne is relying on the Bank of England and the housing market to help create the economic upturn he needs to meet his debt targets.

He played down the importance of the Moody’s downgrade, saying it was just another sign of how important its deficit-cutting strategy was. Moody’s decision was “disappointing news,” he said, but it also showed that “Britain cannot let up dealing with its problems” and that “if we abandon our commitment to deal with that debt problem, then our situation will get very much worse.”

Landon Thomas Jr. contributed reporting.

Article source: http://www.nytimes.com/2013/03/23/business/global/fitch-puts-british-debt-on-review-for-downgrade.html?partner=rss&emc=rss

I.M.F. Says Europe Has Made Progress in Addressing Crisis

PARIS — The European Union has made progress in addressing its financial crisis, the International Monetary Fund said Thursday, but warned that member states would have to follow through on their commitments to end uncertainty about the future of the euro and of the bloc itself.

“Significant progress has been made in recent months in laying the groundwork for strengthening the E.U.’s financial sector,” the fund said, summarizing the results of a new study, adding: “the details of the agreed frameworks need to be put in place to avoid delays in reaching consensus on key issues.”

The sovereign debt crisis, which began in late 2009 with Greece’s acknowledgement that it had been fabricating data on its public finances, has cost Europe billions of euros in lost growth and has devastated labor markets in some countries. Soaring financing costs have led Greece, Ireland and Portugal to seek bailouts. Spain and Italy had appeared to be reaching their own crisis points this year before the European Central Bank calmed the market by promising to do whatever was necessary to defend the euro.

At the national level, the response has been to cut spending and to raise taxes. At the European level, member states have begun steps toward greater integration, including through a banking union administered by the E.C.B., with common rules for large institutions. The banking plan, though receiving only lukewarm support from Britain and Sweden, appears to be going forward, at least for members of the 17-nation euro zone.

The agreement last week by European leaders on a single supervisory mechanism for banks under the E.C.B. “is a strong achievement,” the I.M.F. said. “It needs to be followed up with a structure that has as few gaps as possible,” especially with regard to harmonizing national rules with the new regulations.

Additionally, “actions toward a single resolution authority with common backstops, a deposit guarantee scheme, and a single rulebook, will also be essential,” by mid-2013 at the latest, the report found.

In an apparent criticism of European stress tests for banks that gave some institutions clean bills of health in spite of market concerns, the I.M.F. also called for stricter oversight.

“European stress testing needs to go beyond microprudential solvency, and increasingly serve to identify other vulnerabilities, such as liquidity risks and structural weaknesses,” the report said. “Confidence in the results of stress tests can be enhanced by an asset quality review, harmonized definitions of nonperforming loans, and standardized loan classification, while maintaining a high level of disclosure.”

The I.M.F. also called on Europe to take measures to separate bank risk from sovereign risk, including by making the European Stability Mechanism, the new euro zone bailout fund, able to move quickly to recapitalize banks.

And it said the potential cost to the public from bank failures could be reduced by creating banking authorities with the power to impose “bail-ins” on banks — in effect forcing bondholders to share losses in the event of a failure.

Article source: http://www.nytimes.com/2012/12/21/business/global/imf-says-europe-has-made-progress-in-addressing-crisis.html?partner=rss&emc=rss

Economix Blog: Casey B. Mulligan: Was Qaddafi Overpaid?


Casey B. Mulligan is an economics professor at the University of Chicago.

By most measures, the former dictator Muammar el-Qaddafi looks to have been overpaid, even as dictators go.

Today’s Economist

Perspectives from expert contributors.

Colonel Qaddafi’s wealth had recently been estimated in the tens of billions. But it now looks as though he could have been worth more than $200 billion.

Obviously, $200 billion, or even $10 billion, is a lot for wealth for one person. But $200 billion is but a fraction of Libya’s national wealth. Its proven oil reserves alone total 46 billion barrels. If those barrels were valued at $100 each, the oil reserves alone would be $4.6 trillion, or 23 times Colonel Qaddafi’s wealth.

In my research on dictators and their public finances, I estimate that, on average, dictators were taking about 3 percent of their nations’ incomes in the form of excessive taxation. Judging from Colonel Qaddafi’s share of Libya’s national wealth, that’s about what he was taking.

Dictators typically spend a lot on the military in order to protect themselves from people who might want to take their lucrative jobs, which itself is a sure sign that a dictator is overpaid. Led by Colonel Qaddafi, Libya’s government spent more of the nation’s income on the military than the average dictatorship does. Libya also spent less of its national income on social security than the typical dictatorship does, although perhaps a bit more than an economically and demographically similar democratic country would.

Colonel Qaddafi’s regime was known to torture and execute its political enemies. So it’s clear that the citizens of Libya were sacrificing too much for their leaders.

What’s less clear is whether the next leaders of Libya will take less or offer better services for the citizens of Libya. Egypt’s experience since Hosni Mubarak shows that the overthrow of a longtime dictator does not by itself bring freedom or democracy. Libya has much more in oil riches than Egypt, and political opponents in Libya are likely to find that wealth worth a violent fight.

Let’s hope that a long, bloody Libyan civil war does not make Colonel Qaddafi’s “fees” for his longtime leadership look cheap.

Article source: http://feeds.nytimes.com/click.phdo?i=2b256c07d951e3e45b2cc8beeca5cd3e

Far-Off Region Piles More Debt on Portugal

But while he has managed over the past three decades to turn the islands from a poverty-stricken outpost in the North Atlantic into one of the country’s wealthiest regions, progress has come at a high price — one that is only now becoming clear.

Last month, the Portuguese Finance Ministry ordered an investigation of Madeira’s accounts after unearthing what it called “a grave irregularity” — €1.1 billion, or $1.5 billion, of debt that had been accumulated since 2008 but not accounted for.

The discovery of yet more debt — equal to 0.3 percent of Portugal’s gross domestic product — complicates life for the national government as it struggles to meet financial targets agreed to last May with international creditors in return for a €78 billion bailout.

Furthermore, the debt scandal provides investors with alarming evidence that governments in Portugal and other ailing euro economies are still struggling simply to calculate the extent of the damage to public finances from wayward regional governments and other local forces that are hard to control.

Similar problems have surfaced in Greece as well as in Spanish regions like Castilla-La Mancha, where a recently elected government accused its predecessor of understating its deficit and not accounting for €2 billion of unpaid bills to service providers.

“Madeira has become a major embarrassment for Portugal, and I believe that more undisclosed debt will come out,” said Michael Blandy, chairman of Blandy Group, one of Madeira’s largest companies, whose assets range from wines to hotels and also include a newspaper that has been critical of Mr. Jardim.

Indeed, Madeira’s debt estimates continue to creep up. On Friday, Vítor Gaspar, the Portuguese finance minister, announced that Madeira’s debt had reached €6.3 billion by the end of the first half, contradicting a recent figure of €5.8 billion from the local authorities.

International creditors have expressed dismay at such disclosures. Olli Rehn, the European commissioner for monetary affairs, called Madeira’s unaccounted-for debt “less-than-a-welcome surprise.” Moody’s, the credit rating agency, recently downgraded Madeira’s long-term debt to B3 from B1 because of “bad governance and management and poor budget performance.”

With Madeira’s election nearing, opposition politicians like Maximiano Martins, the Socialist Party leader here, claim Madeira is on the brink of default. Mr Martins, an economist by training, provided his own, even higher estimate of Madeira’s debt — €7.3 billion — with additional liabilities in the form of guarantees given to help local government-controlled companies issue more debt.

In addition, he said the government was about 1,000 days behind in paying some health service providers.

Mr. Jardim, a Social Democrat, has accused his opponents of overstating Madeira’s budgetary problems ahead of the election to knock him from power. He told supporters last week that while his government needed to plug a financial “hole,” the challenge could not be compared to the “crater” that the national government was confronting.

Lisbon has not accused Mr. Jardim or any other official of corruption. In an attempt to reassure creditors, Mr. Gaspar, the finance minister, called Madeira “an isolated case” of accounting malpractice. Still, the government in Lisbon is preparing a financial rescue for Madeira, due to be revealed after the election Sunday.

But critics claim that Mr. Jardim and his associates failed to rein in spending partly because, after 33 years in power, the division has been completely blurred between political and business interests in Madeira.

“The politicians pass laws in our Parliament in the morning and then do business among themselves in the afternoon,” Mr. Blandy charged.

Mr. Jardim’s popularity grew along with Madeira’s economy, as he used its status as an autonomous region to tap into extensive subsidies from Lisbon and the European Union.

Until Portugal’s return to democracy, Madeira lagged far behind the Portuguese mainland, with an economic output per person that was 40 percent of the national average, and an infant mortality rate of 36 percent.

“Some people lived in caves here,” said João Machado, Madeira’s regional tax director.

By 2008, however, Madeira’s 250,000 residents lived in Portugal’s second-wealthiest region, after Lisbon, according to the National Statistics Institute.

Article source: http://www.nytimes.com/2011/10/04/business/global/far-off-region-piles-more-debt-on-portugal.html?partner=rss&emc=rss

Euro Zone Finance Ministers Press Greece to Meet Aid Targets

The most immediate issue facing the ministers, who are meeting in Luxembourg, is the disbursement of an €8 billion, or $10.6 billion, installment of aid, without which Greece could default on its debt within weeks — an outcome with potentially disastrous consequences for the euro zone.

The meeting Monday had originally been scheduled to approve the disbursement, part of a €110 billion rescue program for Greece agreed to in May 2010. But continuing doubts about Greece’s ability to push through harsh structural changes have led to tense discussions with officials from the so-called troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund.

Representatives of those institutions, now visiting Athens, have yet to make a recommendation to release the money, and no decision is expected this week.

“What we want the Greeks to do is what they said they were going to do,” said one euro zone diplomat in Luxembourg, who was not authorized to speak publicly.

The finance ministers also discussed expanding the firepower of the currency’s rescue fund by leveraging the €440 billion zone bailout fund. Finland’s demand for collateral in exchange for loans to Greece, which is another obstacle to a resolution of the crisis, was also on the agenda.

Athens announced Sunday that its 2011 budget deficit was projected to be 8.5 percent of gross domestic product, down from a projected 10.5 percent last year but shy of the 7.6 percent target set by international lenders.

The government, which on Sunday also adopted a draft austerity budget for 2012, attributed the gap to the deepening economic downturn but said it was on course to improve its public finances.

Evangelos Venizelos, the Greek finance Minister, said his country was taking “all the necessary difficult measures in order to fulfill its obligations towards its institutional partners.”

“The new budget, the budget for the new year, is very ambitious,” he added. “Our target is to present for the first time, after many years, a primary surplus of €3.2 billion.”

Elena Salgado, the Spanish finance minister, said Monday that she supported the idea of leveraging the euro bailout fund, the European Financial Stability Facility. She said she was not advocating a larger fund, but “more flexibility and more capacity.” That message was echoed Monday by George Osborne, the British chancellor of the Exchequer. “The euro zone’s financial fund needs maximum firepower,” Mr. Osborne said at a Conservative Party conference in Manchester.

“The euro zone needs to strengthen its banks,” he said. “And the euro zone needs to end all the speculation, decide what they’re going to do with Greece, and then stick to that decision.”

“The time to resolve the crisis is now,” Mr. Osborne continued. He is due to join the other European finance ministers in Luxembourg on Tuesday. “They’ve got to get out and fix their roof, even though it’s already pouring with rain.”

Article source: http://www.nytimes.com/2011/10/04/business/global/euro-zone-finance-ministers-press-greece-to-meet-aid-targets.html?partner=rss&emc=rss

G-8 Nations Pledge New Aid to Arab Spring Economies

MARSEILLE, France — With economies crumbling in the countries that touched off the Arab Spring, leaders of the Group of 8 industrialized nations on Saturday pledged $38 billion in new aid to help underpin the region’s transition to democracy, amid complaints that hardly any money from a $20 billion aid package promised in May has materialized.

In a statement following hours of meetings that included officials from Kuwait, Qatar, Saudi Arabia, Turkey and the United Arab Emirates, the G-8 acknowledged that the uprisings that swept the region were now giving way to social pressures that needed to be urgently addressed, particularly among the rising ranks of unemployed young people.

“The immediate challenge for these countries is to fulfill people’s expectations while preserving macroeconomic stability,” the group said, pointing to increasingly strained public finances and a surge in the price of food, gas and other raw materials as a source of discontent.

In a bid to bring all countries moving toward democracy in the region under its umbrella, the G-8 also had Libya sit at the table for the first time. Representatives of the Libyan national transition council participated in the discussions, and a new government would eventually receive aid to help stabilize the nation’s economy, the French finance minister, François Baroin, said.

Libya was also admitted as a member of the International Monetary Fund after its board recognized the transition council as the nation’s new government, the managing director, Christine Lagarde, said. “Libya is now formally represented at the I.M.F.,” she said. “The fund will be able to help Libya with technical assistance, contribute to its macroeconomic framework or give loans and support as needed.”

The I.M.F. will send a team to Libya “as soon as security is appropriate,” she added.

Despite those efforts, delays in delivering some $20 billion in aid that the Group of 8 pledged to Egypt and Tunisia in May could itself complicate the transition to democracy. At the time, officials compared the uprisings to the fall of the Berlin Wall, and said that Western leaders’ main aim was to ensure that instability did not undermine the process of political reform.

But four months later, Tunisia has not received any of the money promised, Jalloul Ayed, the country’s finance minister, told The Financial Times this week. Egypt has received only $500 million, that nation’s finance minister told the paper. Neither minister commented during the G-8 meetings.

The economic challenge has grown particularly severe in Egypt since the fall of President Hosni Mubarak. Revenue from tourism, a pillar of the economy, has plunged, while foreign investment has virtually dried up.

Tunisia has been plagued by similar problems since an uprising in January forced President Zine el-Abidine Ben Ali to leave the country. Mr. Ayed, the finance minister, said earlier this month that the economy would grow only about 1 percent this year, compared with an estimated 3.7 percent last year.

Mr. Baroin did not address the suggestion that the G-8’s pledges were more talk than action, except to say that the various mechanisms for disbursement take time. He offered few specifics, but said the pledge for a fresh $38 billion in financial assistance — this time also including Jordan and Morocco as well as Egypt and Tunisia — would take the form of loans, bilateral aid and debt forgiveness from countries and a slew of multinational financial institutions.

These funds — should they come — would be channeled mainly toward job creation for young people in the Middle East and North Africa, who have watched dreams of new opportunities dry up following the uprisings.

The European Bank for Reconstruction and Development will expand its current role of lending to former Communist countries and start actively participating in lending to Arab countries trying to establish democracies.

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