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Euro Crisis Austerity Policies Present High Risks To World Economic Situation and Prospects 2013, UN Alert on Global outlook

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World Economic Situation and Prospects 2013 Global outlook
United Nations
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versão Portuguesa: Crise Euro Previsões Para Economia Mundial, ONU Alerta: Risco de Recessão Global Sincronizada, in UN DESA World Economic Situation and Prospects 2013

Chapter 1 Global economic outlook

Prospects for the world economy in 2013-2014

Risk of a synchronized global downturn

The world economy continues to struggle with post-crisis adjustments

Four years after the eruption of the global financial crisis, the world economy is still struggling to recover. During 2012, global economic growth has weakened further. A growing number of developed economies have fallen into a double-dip recession. Those in severe sovereign debt distress moved even deeper into recession, caught in the downward spiralling dynamics from high unemployment, weak aggregate demand compounded by fiscal austerity, high public debt burdens, and financial sector fragility. Growth in the major developing countries and economies in transition has also decelerated notably, reflecting both external vulnerabilities and domestic challenges. Most low-income countries have held up relatively well so far, but now face intensified adverse spillover effects from the slowdown in both developed and major middle-income countries. The prospects for the next two years continue to be challenging, fraught with major uncertainties and risksslanted towards the downside.

The global slowdown will put additional strains on developing countries

Conditioned on a set of assumptions in the United Nations baseline forecast (box I.1), growth of world gross product (WGP) is expected to reach 2.2 percent in 2012 and is forecast to remain well below potential at 2.4 percent in 2013 and 3.2 percent in 2014 (table I.1 and figure I.1). At this moderate pace, many economies will continue to operate below potential and will not recover the jobs lost during the Great Recession.

The slowdown is synchronized across countries of different levels of development (figure I.2). For many developing countries, the global slowdown will imply a much slower pace of poverty reduction and narrowing of fiscal space for investments in education, health, basic sanitation and other critical areas needed for accelerating the progress to achieve the Millennium Development Goals (MDGs). This holds true in particular for the least developed countries (LDCs); they remain highly vulnerable to commodity price shocks and are receiving less external financing as official development assistance (ODA) declines in the face of greater fiscal austerity in donor countries (see below).

Conditions vary greatly across LDCs, however. At one end of the spectrum, countries that went through political turmoil and transition, like Sudan and Yemen, experienced major economic adversity during 2010 and 2011, while strong growth performances continued in Bangladesh and a fair number of African LDCs (box I.2).

Weakness in developed economies underpins the global slowdown

Weaknesses in the major developed economies are at the root of continued global economic woes. Most of them, but particularly those in Europe, are dragged into a downward spiral as high unemployment, continued deleveraging by firms and households, continued banking fragility, heightened sovereign risks, fiscal tightening, and slower growth viciously feed into one another (figure I.3a).

Several European economies are already in recession. In Germany, output has also slowed significantly, while France’s economy is stagnating. A number of new policy initiatives were taken by the euro area authorities in 2012, including the Outright Monetary Transactions (OMT) programme and steps towards greater fiscal integration and coordinated financial supervision and regulation.

Thesee measures address some of the deficiencies in the original design of the Economic and Monetary Union (EMU).
Significant as they may be, however, these measures are still being counteracted by other policy stances, fiscal austerity in particular, and are not sufficient to break economies out of the vicious circle and restore output and employment growth in the short run (figure I.3b). In the baseline outlook for the euro area, GDP is expected to grow by only 0.3 percent in 2013 and 1.4 percent in 2014, a feeble recovery from a decline of 0.5 percent in 2012. Because of the dynamics of the vicious circle, the risk for a much worse scenario remains high. Economic growth in the new European Union (EU) members also decelerated during 2012, with some, including the Czech Republic, Hungary and Slovenia, falling back into recession.

Worsening external conditions are compounded by fiscal austerity measures, aggravating short-term growth prospects. In the outlook, GDP growth in these economies is expected to remain subdued at 2.0 percent in 2013 and 2.9 percent in 2014, but risks are high for a much worse performance if the situation in the euro area deteriorates further.

Table I.1

Growth of world output, 2006-2014

Annual percentage change

Table I.1	Annual percentage change
	Growth of world output, 2006-2014						Change from June 2012 forecastd
	2006-2009a	2010	2011b	2012c	2013c	2014c	2012	2013
World	1.1	4.0	2.7	2.2	2.4	3.2	-0.3	-0.7
Developed economies	-0.4	2.6	1.4	1.1	1.1	2.0	-0.1	-0.7
United States of America	-0.5	2.4	1.8	2.1	1.7	2.7	0.0	-0.6
Japan	-1.5	4.5	-0.7	1.5	0.6	0.8	-0.2	-1.5
European Union	-0.3	2.1	1.5	-0.3	0.6	1.7	-0.3	-0.6
EU-15	-0.5	2.1	1.4	-0.4	0.5	1.6	-0.3	-0.6
New EU members	2.1	2.3	3.1	1.2	2.0	2.9	-0.5	-0.8
Euro area	-0.4	2.1	1.5	-0.5	0.3	1.4	-0.2	-0.6
Other European countries	0.9	1.9	1.7	1.7	1.5	1.9	0.6	0.2
Other developed countries	1.2	2.8	2.4	2.3	2.0	3.0	0.0	-0.6
Economies in transition	2.2	4.4	4.5	3.5	3.6	4.2	-0.5	-0.6
South-Eastern Europe	1.6	0.4	1.1	-0.6	1.2	2.6	-1.2	-0.6
Commonwealth of Independent States and Georgia	2.2	4.8	4.8	3.8	3.8	4.4	-0.5	-0.6
Russian Federation	1.7	4.3	4.3	3.7	3.6	4.2	-0.7	-0.8
Developing economies	5.2	7.7	5.7	4.7	5.1	5.6	-0.6	-0.7
Africa	4.7	4.7	1.1	5.0	4.8	5.1	0.8	0.0
North Africa	4.2	4.1	-6.0	7.5	4.4	4.9	3.1	0.0
Sub-Saharan Africa	5.0	5.0	4.5	3.9	5.0	5.2	-0.2	0.0
Nigeria	6.6	7.8	7.4	6.4	6.8	7.2	0.1	0.0
South Africa	2.5	2.9	3.1	2.5	3.1	3.8	-0.3	-0.4
Others	6.3	5.5	4.4	3.9	5.5	5.3	-0.3	0.1
East and South Asia	7.1	9.0	6.8	5.5	6.0	6.3	-0.8	-0.8
East Asia	7.2	9.2	7.1	5.8	6.2	6.5	-0.7	-0.7
China	11.0	10.3	9.2	7.7	7.9	8.0	-0.6	-0.6
South Asia	6.4	8.3	5.8	4.4	5.0	5.7	-1.2	-1.1
India	7.3	9.6	6.9	5.5	6.1	6.5	-1.2	-1.1
Western Asia	2.3	6.7	6.7	3.3	3.3	4.1	-0.7	-1.1
Latin America and the Caribbean	2.5	6.0	4.3	3.1	3.9	4.4	-0.5	-0.3
South America	3.9	6.5	4.5	2.7	4.0	4.4	-0.9	-0.4
Brazil	3.6	7.5	2.7	1.3	4.0	4.4	-2.0	-0.5
Mexico and Central America	-0.1	5.4	4.0	4.0	3.9	4.6	0.6	0.0
Mexico	-0.6	5.5	3.9	3.9	3.8	4.6	0.5	-0.1
Caribbean	3.6	3.5	2.7	2.9	3.7	3.8	-0.4	-0.3
By level of development
High-income countries	-0.2	2.9	1.6	1.2	1.3	2.2
Upper middle income countries	5.3	7.4	5.8	5.1	5.4	5.8
Lower middle income countries	5.8	7.4	5.6	4.4	5.5	6.0
Low-income countries	5.9	6.6	6.0	5.7	5.9	5.9
Least developed countries	7.2	5.8	3.7	3.7	5.7	5.5	-0.4	0.0
Memorandum items
World tradee	-0.3	13.3	7.0	3.3	4.3	4.9	-0.8	-1.2
World output growth with PPP-based weights	2.3	5.0	3.7	3.0	3.3	4.0	-0.4	-0.7
	2006-2009a	2010	2011b	2012c	2013c	2014c	2012	2013
	Growth of world output, 2006-2014						Change from June 2012 forecastd

a	Average percentage change.
b	Actual or most recent estimates.
c	Forecast, based in part on Project LINK and baseline projections of the UN/DESA World Economic Forecasting Model.
d	See United Nations, World Economic Situation and Prospects as of mid-2012 (E/2012/72).
e	Includes goods and services.
Source:	UN/DESA

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Figure I.1
Growth of world gross product, 2006-2014a

Source: UN/DESA.
a Growth rate for 2012 is partially estimated.
Estimates for 2013 and 2014 are forecasts.
See “Uncertainties and risks” section for a discussion of the downside scenario and box I.3 for a discussion of the policy scenario.

Figure I.2
Growth of GDP per capita by level of development, 2000-2014

Source: UN/DESA.
a Estimates.
b United Nations
forecasts

Box I.1	Major assumptions for the baseline forecast
The forecast presented in the text is based on estimates calculated using the United Nations World Economic Forecasting Model (WEFM) and is informed by country-specific economic outlooks provided by participants in Project LINK, a network of institutions and researchers supported by the Department of Economic and Social Affairs of the United Nations. The provisional individual country forecasts submitted by country experts are adjusted based on harmonized global assumptions and the imposition of global consistency rules (especially for trade flows, measured in both volume and value) set by the WEFM. The main global assumptions are discussed below and form the core of the baseline forecast—the scenario that is assigned the highest probability of occurrence. Alternative scenarios are presented in the sections on “Uncertainties and risks” and “Policy challenges”. Those scenarios are normally assigned lower probability than the baseline forecast. Monetary policy The Federal Reserve of the United States (Fed) is assumed to keep the federal funds interest rate at the current low level of between 0.00 and 0.25 percent until mid-2015. It is assumed that the Fed will purchase agency mortgage-backed securities at a pace of $40 billion per month until the end of 2014, and will also continue its programme to extend the average maturity of its securities holdings through the end of 2012, as well as reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities. The European Central Bank (ECB) is assumed to cut the minimum bid and marginal lending facility rates by another 25 basis points, leaving the deposit rate at 0 percent. It is also assumed that the ECB will start to implement the announced new policy initiative, Outright Monetary Transactions (OMT), to purchase the government bonds of Spain and a few selected members of the euro area. The Bank of Japan (BoJ) will keep the policy interest rate at the current level (0.0-0.1 percent) and implement the Asset Purchase Program, with a ceiling of ¥91 trillion, as announced. With regard to major emerging economies, the People’s Bank of China (PBC) is expected to reduce reserve requirement rates twice in 2013 and reduce interest rates one more time in the same period. Fiscal policy In the United States, it is assumed that the 2 percent payroll tax cut and emergency unemployment insurance benefits are extended for 2013, to be phased out gradually over several years. It is also assumed that the automatic spending cuts now scheduled to begin in January 2013 will be delayed, giving more time for the new Congress and president to produce a package of spending cuts and tax increases effective in 2014. The Bush tax cuts are assumed to be extended for 2013-2014. As a result, real federal government spending on goods and services will fall about 3.0 percent in 2013 and 2014, after a fall of about 2.5 percent in the previous two years. In the euro area, fiscal policy is assumed to be focused on reducing fiscal imbalances. The majority of countries remain subject to the Excessive Deficit Procedure (EDP) under which they must submit plans to bring their fiscal deficits close to balance within a specified time frame. Typically, a minimum correction of 0.5 percent per annum is expected, and the time frames range from 2012 to 2014. The time periods for achieving these targets will be extended in the most difficult cases. It is also assumed that in the event that tensions increase in sovereign debt markets, affected euro area countries will seek assistance from the rescue fund, thus activating the new OMT programme of the ECB. It is assumed that this will allow increases in bond yields to be contained and that the policy conditionality attached to the use of OMT finance will not entail additional fiscal austerity; rather, Governments requesting funds will be pressed to fully implement already announced fiscal consolidation measures. In Japan, the newly ratified bill to increase the consumption tax rate from its current level of 5 percent to 8 percent by April 2014 and to 10 percent by October 2015 will be implemented. Real government expenditure, including investment, is assumed to decline by a small proportion in 2013-2014, mainly owing to phasing out of reconstruction spending. In China, the Government is assumed to maintain a proactive fiscal policy stance, with an increase in public investment spending on infrastructure in 2013. Exchange rates among major currencies It is assumed that during the forecasting period of 2013-2014, the euro will fl uctuate about $1.28 per euro. The Japanese yen is assumed to average about ¥80 per United States dollar, and the renminbi will average CNY6.23 per United States dollar. Oil prices Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.
Sorce:	World Economic Situation and Prospects 2013 Global outlook

Box I.1

Major assumptions for the baseline forecast

The forecast presented in the text is based on estimates calculated using the United Nations World Economic Forecasting Model (WEFM) and is informed by country-specific economic outlooks provided by participants in Project LINK, a network of institutions and researchers supported by the Department of Economic and Social Affairs of the United Nations. The provisional individual country forecasts submitted by country experts are adjusted based on harmonized global assumptions and the imposition of global consistency rules (especially for trade flows, measured in both volume and value) set by the WEFM. The main global assumptions are discussed below and form the core of the baseline forecast—the scenario that is assigned the highest probability of occurrence. Alternative scenarios are presented in the sections on “Uncertainties and risks” and “Policy challenges”. Those scenarios are normally assigned lower probability than the baseline forecast.

Monetary policy

The Federal Reserve of the United States (Fed) is assumed to keep the federal funds interest rate at the current low level of between 0.00 and 0.25 percent until mid-2015. It is assumed that the Fed will purchase agency mortgage-backed securities at a pace of $40 billion per month until the end of 2014, and will also continue its programme to extend the average maturity of its securities holdings through the end of 2012, as well as reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities.

The European Central Bank (ECB) is assumed to cut the minimum bid and marginal lending facility rates by another 25 basis points, leaving the deposit rate at 0 percent. It is also assumed that the ECB will start to implement the announced new policy initiative, Outright Monetary Transactions (OMT), to purchase the government bonds of Spain and a few selected members of the euro area. The Bank of Japan (BoJ) will keep the policy interest rate at the current level (0.0-0.1 percent) and implement the Asset Purchase Program, with a ceiling of ¥91 trillion, as announced. With regard to major emerging economies, the People’s Bank of China (PBC) is expected to reduce reserve requirement rates twice in 2013 and reduce interest rates one more time in the same period.

Fiscal policy

In the United States, it is assumed that the 2 percent payroll tax cut and emergency unemployment insurance benefits are extended for 2013, to be phased out gradually over several years. It is also assumed that the automatic spending cuts now scheduled to begin in January 2013 will be delayed, giving more time for the new Congress and president to produce a package of spending cuts and tax increases effective in 2014. The Bush tax cuts are assumed to be extended for 2013-2014. As a result, real federal government spending on goods and services will fall about 3.0 percent in 2013 and 2014, after a fall of about 2.5 percent in the previous two years. In the euro area, fiscal policy is assumed to be focused on reducing fiscal imbalances.
The majority of countries remain subject to the Excessive Deficit Procedure (EDP) under which they must submit plans to bring their fiscal deficits close to balance within a specified time frame. Typically, a minimum correction of 0.5 percent per annum is expected, and the time frames range from 2012 to 2014. The time periods for achieving these targets will be extended in the most difficult cases. It is also assumed that in the event that tensions increase in sovereign debt markets, affected euro area countries will seek assistance from the rescue fund, thus activating the new OMT programme of the ECB. It is assumed that this will allow increases in bond yields to be contained and that the policy conditionality attached to the use of OMT finance will not entail additional fiscal austerity; rather, Governments requesting funds will be pressed to fully implement already announced fiscal consolidation measures. In Japan, the newly ratified bill to increase the consumption tax rate from its current level of 5 percent to 8 percent by April 2014 and to 10 percent by October 2015 will be implemented.
Real government expenditure, including investment, is assumed to decline by a small proportion in 2013-2014, mainly owing to phasing out of reconstruction spending. In China, the Government is assumed to maintain a proactive fiscal policy stance, with an increase in public investment spending on infrastructure in 2013.

Exchange rates among major currencies

It is assumed that during the forecasting period of 2013-2014, the euro will fl uctuate about $1.28 per euro. The Japanese yen is assumed to average about ¥80 per United States dollar, and the renminbi will average CNY6.23 per United States dollar.

Oil prices

Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.

Sorce:

World Economic Situation and Prospects 2013 Global outlook

Growth in the United States will slow, with significant downside risks

The United States economy weakened notably during 2012, and growth prospects for 2013 and 2014 remain sluggish. On the up side, the beleaguered housing sector is showing some nascent signs of recovery. Further support is expected from the new round of quantitative easing (QE) recently launched by the United States Federal Reserve (Fed) whereby monetary authorities will continue to purchase mortgage-backed securities until the employment situation improves substantially. On the down side, the lingering uncertainties about the fiscal stance continue to restrain growth of business investment. External demand is also expected to remain weak. In the baseline outlook, gross domestic product (GDP) growth in the United States is forecast to decelerate to 1.7 percent in 2013 from an already anaemic pace of 2.1 percent in 2012. Risks remain high for a much bleaker scenario, emanating from the “fiscal cliff ” which would entail a drop in aggregate demand of as much as 4 percent of GDP during 2013 and 2014 (see “Uncertainties and risks” section).

Adding to the already sombre scenario are anticipated spillover effects from possible intensification of the euro area crisis, a “hard landing” of the Chinese economy and greater weakening of other major developing economies.

The need for fiscal consolidation will reduce growth in Japan

Economic growth in Japan in 2012 was up from a year ago, mainly driven by reconstruction works and recovery from the earthquake-related disasters of 2011. The Government also took measures to stimulate private consumption. Exports faced strong headwinds from the slowdown in global demand and appreciation of the yen. In the outlook, Japan’s economy is expected to slow given the phasing out of private consumption incentives combined with a new measure increasing taxes on consumption, anticipated reductions in pension benefits, and government spending cuts. These measures responded to concerns about the extremely high level of public indebtedness. The impact of the greater fiscal austerity will be mitigated by reconstruction investments, which will continue but at a slower pace.

Box I.2	Prospects for the least developed countries
The economies of the least developed countries (LDCs) are expected to rebound in 2013. GDP growth is projected to average 5.7 percent in 2013, up from 3.7 percent in 2012. However, most of the rebound is expected to come from improvements in economic conditions in Yemen and Sudan, following notable contractions of both economies in the face of political instability during 2010 and 2011. In per capita terms, GDP growth for LDCs is expected to accelerate from 1.3 percent in 2012 to 3.3 percent in 2013. While an improvement, at this rate welfare progress will remain well below the pace of 5.0 percent per annum experienced during much of the 2000s, prior to the world economic and financial crisis. Economic performance varies greatly among LDCs, however. Numerous oil exporters such as Angola and Guinea will benefit from continued solid oil prices, propelling GDP growth to more than 7 percent and 4 percent, respectively, in 2013. LDCs with a predominant agricultural sector have seen volatile economic conditions. In Gambia, for example, where agriculture provides about one third of total output, poor crop conditions caused GDP to contract by 1.0 percent in 2012. Much better harvests are expected to propel GDP growth to 6.2 percent. Such sharp swings in the overall economic performance create multiple problems for policymakers. The inherent uncertainty not only complicates the planning and design of economic policies, especially those of a longer-term nature, but it also threatens the implementation of existing policy plans owing to sudden dramatic changes in economic parameters. In addition, unforeseen crises create needs—in the form of shortterm assistance to farmers, for example—which divert scarce financial and institutional resources away from more structurally oriented policy areas. On the other hand, Ethiopia’s robust growth of the past few years is expected to come down slightly but remain strong, partly owing to its programme of developing the agricultural sector. A number of LDCs have also seen solid investment and consumption, supported by sustained inflows of worker remittances. This applies, for example, to Bangladesh, whose growth rate will continue to exceed 6.0 percent in 2013 and 2014 despite a marked slowdown in external demand. Growth of remittance inflows to Bangladesh picked up to about 20 percent year on year in the second half of 2012, following a strong rise in overseas employment earlier in the year. The outlook for LDCs entails several downside risks. A more pronounced deterioration in the global economic environment would negatively affect primary commodity exporters through falling terms of trade, while others may be affected by falling worker remittances. Falling aid flows are expected to limit external financing options for LDCs in the outlook.

Box I.2

Prospects for the least developed countries

The economies of the least developed countries (LDCs) are expected to rebound in 2013. GDP growth is projected to average 5.7 percent in 2013, up from 3.7 percent in 2012. However, most of the rebound is expected to come from improvements in economic conditions in Yemen and Sudan, following notable contractions of both economies in the face of political instability during 2010 and 2011.

In per capita terms, GDP growth for LDCs is expected to accelerate from 1.3 percent in 2012 to 3.3 percent in 2013. While an improvement, at this rate welfare progress will remain well below the pace of 5.0 percent per annum experienced during much of the 2000s, prior to the world economic and financial crisis.

Economic performance varies greatly among LDCs, however. Numerous oil exporters such as Angola and Guinea will benefit from continued solid oil prices, propelling GDP growth to more than 7 percent and 4 percent, respectively, in 2013. LDCs with a predominant agricultural sector have seen volatile economic conditions. In Gambia, for example, where agriculture provides about one third of total output, poor crop conditions caused GDP to contract by 1.0 percent in 2012.

Much better harvests are expected to propel GDP growth to 6.2 percent. Such sharp swings in the overall economic performance create multiple problems for policymakers. The inherent uncertainty not only complicates the planning and design of economic policies, especially those of a longer-term nature, but it also threatens the implementation of existing policy plans owing to sudden dramatic changes in economic parameters. In addition, unforeseen crises create needs—in the form of shortterm assistance to farmers, for example—which divert scarce financial and institutional resources away from more structurally oriented policy areas. On the other hand, Ethiopia’s robust growth of the past few years is expected to come down slightly but remain strong, partly owing to its programme of developing the agricultural sector.

A number of LDCs have also seen solid investment and consumption, supported by sustained inflows of worker remittances. This applies, for example, to Bangladesh, whose growth rate will continue to exceed 6.0 percent in 2013 and 2014 despite a marked slowdown in external demand. Growth of remittance inflows to Bangladesh picked up to about 20 percent year on year in the second half of 2012, following a strong rise in overseas employment earlier in the year.

The outlook for LDCs entails several downside risks. A more pronounced deterioration in the global economic environment would negatively affect primary commodity exporters through falling terms of trade, while others may be affected by falling worker remittances. Falling aid flows are expected to limit external financing options for LDCs in the outlook.

GDP is forecast to grow at 0.6 per cent in 2013 and 0.8 per cent in 2014, down from 1.5 per cent in 2012.

Spillover effects from developed countries and domestic issues dampen growth in developing countrie

The economic woes of the developed countries are spilling over to developing countries and economies in transition through weaker demand for their exports and heightened volatility in capital flows and commodity prices. Their problems are also home-grown, however; growth in investment spending has slowed significantly, presaging a continued deceleration of future output growth if not counteracted by additional policy measures. Several of the major developing economies that have seen fast growth in recent decades are starting to face structural bottlenecks, including fi nancing constraints faced by local governments regarding investment projects in some sectors of the economy, and overinvestment leading to excess production capacity in others, as in the case of China (see “Uncertainties and risks” section).

Figure I.3a
The vicious cycle of developed economies

Figure I.3b
Feeble policy efforts to break the vicious cycle

Source: UN/DESA

On average, economies in Africa are forecast to see a slight moderation in output growth in 2013 to 4.8 percent, down from 5.0 percent in 2012. Major factors underpinning this continued growth trajectory include the strong performance of oil-exporting countries, continued fiscal spending in infrastructure projects, and expanding economic ties with Asian economies. However, Africa remains plagued by numerous challenges, including armed confl icts in various parts of the region. Growth of income per capita will continue, but at a pace considered insufficient to achieve substantial poverty reduction.
Infrastructure shortfalls are among the major obstacles to more dynamic economic development in most economies of the region.

The economies in developing Asia have weakened considerably during 2012 as the region’s growth engines, China and India, both shifted into lower gear. While a significant deceleration in exports has been a key factor for the slowdown, the effects of policy
tightening in the previous two years also linger. Domestic investment has softened markedly.

Both China and India face a number of structural challenges hampering growth (see below). India’s space for more policy stimulus seems limited. China and other countries in the region possess greater space for additional stimulus, but thus far have refrained from
using it. In the outlook, growth for East Asia is forecast to pick up mildly to 6.2 percent in 2013, from 5.8 percent estimated for 2012. GDP growth in South Asia is expected to average 5.0 percent in 2013, up from 4.4 percent of 2012, but still well below potential.

Contrasting trends are found in Western Asia. Most oil-exporting countries experienced robust growth supported by record-high oil revenues and government spending.

By contrast, economic activity weakened in oil-importing countries, burdened by higher import bills, declining external demand and shrinking policy space. As a result, oil-exporting and oil-importing economies are facing a dual track growth outlook. Meanwhile, social unrest and political instability, notably in the Syrian Arab Republic, continue to elevate the risk assessment for the entire region. On average, GDP growth in the region is expected to decelerate to 3.3 percent in 2012 and 2013, from 6.7 percent in 2011.
GDP growth in Latin America and the Caribbean decelerated notably during 2012, led by weaker export demand. In the outlook, subject to the risks of a further downturn, the baseline projection is for a return to moderate economic growth rates, led by stronger economic performance in Brazil. For the region as whole, GDP growth is forecast to average 3.9 percent in the baseline for 2013, compared to 3.1 percent in 2012.

Among economies in transition, growth in the economies of the Commonwealth of Independent States (CIS) has continued in 2012, although it moderated in the second half of the year. Firm commodity prices, especially those of oil and natural gas, held up growth among energy-exporting economies, including Kazakhstan and the Russian Federation. In contrast, growth in the Republic of Moldova and Ukraine was adversely affected by the economic crisis in the euro area. The economies of small energy-importing countries in the CIS were supported by private remittances. In the outlook, GDP for the CIS is expected to grow by 3.8 percent in 2013, the same as in 2012. The prospects for most transition economies in South-Eastern Europe in the short run remain challenging, owing to their close ties with the euro area through trade and finance. In these economies, GDP growth is expected to average 1.2 percent in 2013, a mild rebound from the recession of 2012 when economies in the subregion shrank by 0.6 percent.

Lower greenhouse gas emissions, but far cry from “low-carbon” growth

Helped by weaker global economic growth, greenhouse gases (GHGs) emitted by the Annex I countries to the Kyoto Protocol are estimated to have fallen by about 2 percent per year during 2011-2012 (see annex table A.22). This reverses the 3 percent increase in GHG emissions by these countries in 2010. Emissions fell by 6 percent in 2009 along with the fallout in GDP growth associated with the Great Recession. With the more recent decline, GHG emission reductions among Annex I countries are back on the long-run downward trend. Given the further moderation in global economic growth, emissions by these countries are expected to decline further during 2013-2014.[1] As a group, Annex I countries have already achieved the target of the Kyoto Protocol to reduce emissions by at least 5 percent from 1990 levels during the 2008-2012 commitment period. Several important individual countries, however, such as the United States and Canada, are still to meet their own national targets. At the same time, GHG emissions in many developing countries are increasing at a rapid pace, such that globally, emissions continue to climb.

The world remains far from achieving its target for CO2 equivalent concentrations

In all, the world is far from being on track to reduce emissions to the extent considered necessary for keeping carbon dioxide (CO2) equivalent concentrations to less than 450 parts per million (consistent with the target of stabilizing global warming at a 2°C temperature increase, or less, from pre-industrial levels).[2] To avoid exceeding this limit, GHG emissions would need to drop by 80 percent by mid-century. Given current trends and even with the extension of the Kyoto Protocol, this is an unachievable target.

“Greener” growth pathways need to be created now, and despite large investment costs, they would also provide opportunities for more robust short-term recovery and global rebalancing (see “Policy challenges” and chapter II on the environmental costs of expanding trade through global value chains).

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1 Projections are based on past trends in GDP growth and GHG emissions, accounting implicitly for the effects over time of policies aimed at decoupling (see notes to annex table A.22 for a description of the methodology). As far as the longer-term trends are concerned, the impact of more recent energy policy changes may not be adequately refl ected.

2 A recent study by PricewaterhouseCoopers notes that “since 2000, the rate of decarbonisation has averaged 0.8% globally, a fraction of the required reduction. From 2010 to 2011, global carbon intensity continued this trend, falling by just 0.7%. Because of this slow start, global carbon intensity now needs to be cut by an average of 5.1% a year from now to 2050…. This rate of reduction has not been achieved in any of the past 50 years”. (See PricewaterhouseCoopers LLP, “Too late for two degrees? Low carbon economy index 2012”, November 2012, pp. 2-3, available from

http://preview.thenewsmarket.com/Previews/PWC/DocumentAssets/261179_v2.pdf).

Job crisis continue

Unemployment remains high in developed economies

Unemployment remains elevated in many developed economies, with the situation in Europe being the most challenging. A double-dip recession in several European economies has taken a heavy toll on labour markets. The unemployment rate continued to climb to a record high in the euro area during 2012, up by more than one percentage point from one year ago.

Conditions are worse in Spain and Greece, where more than a quarter of the working population is without a job and more than half of the youth is unemployed. Only a few economies in the region, such as Austria, Germany, Luxembourg and the Netherlands, register low unemployment rates of about 5 percent. Unemployment rates in Central and Eastern Europe also edged up slightly in 2012, partly resulting from fiscal austerity. Japan’s unemployment rate retreated to below 5 percent. In the United States, the unemployment rate stayed above 8 percent for the most part of 2012, but dropped to just below that level from September onwards. However, the labour participation rate is at a record low, while the shares of longterm unemployment reached historic highs of 40.6 percent (jobless for 6 months or longer) and 31.4 percent (one year or longer). Long-term unemployment is also severe in the EU and Japan, where four of each ten of the unemployed have been without a job for more than one year. For the group of developed countries as a whole, the incidence of long-term unemployment (over one year) stood at more than 35 percent by July 2012, affecting about 17 million workers. Such a prolonged duration of unemployment tends to have significant, long-lasting detrimental impacts on both the individuals who have lost their jobs and on the economy as a whole. The skills of unemployed workers deteriorate commensurate with the duration of their unemployment, most likely leading to lower earnings for those individuals who are eventually able to find new jobs. At the aggregate level, the higher the proportion of workers trapped in protracted unemployment, the greater the adverse impact on the productivity of the economy in the medium to long run.

Adequate job creation should be a key policy priority in developed economies.

If economic growth stays as anaemic in developed countries as projected in the baseline forecast, employment rates will not return to pre-crisis levels until far beyond 2016 (figure I.4).

The employment situation varies across developing countries

Figure I.4
Post-recession employment recovery in the United States, euro area and developed economies, 2007 (Q1)-2011 (Q2) and projections for 2012 (Q3)-2016 (Q4)

Source: UN/DESA, based on data from ILO and IMF.

Note: The chart shows percentage changes of total employment (as a moving average) with respect to prerecession peaks. Projections (dashed lines) are based on estimates of the output elasticity of employment (Okun’s law), following a similar methodology to that of ILO, World of Work Report 2011 (Geneva).

The employment situation varies significantly across developing countries, but the common challenges are to improve the quality of employment and reduce vulnerable employment as well as confront structural unemployment issues such as high youth unemployment and gender disparities in employment—all of which are key social and economic concerns in many developing countries.

Among developing countries, the unemployment rates in most economies in East Asia and Latin America have already retreated to, or dropped below, levels seen prior to the global financial crisis. The growth moderation in late 2011 and 2012 has so far not led to a discernible rise in the unemployment rate in these two regions — a positive sign, with the caveat that a rise in the unemployment rate would usually lag in an economic downturn. If the growth slowdown continues, the unemployment rate could be expected to increase significantly. In Africa, despite relatively strong GDP growth, the employment situation remains a major problem across the region, both in terms of the level of employment and the quality of jobs that are generated. Labour conflicts also constitute a major downside risk to the economic performance of the region. Gender disparity in employment remains acute in Africa as well as in South Asia. Women are facing unemployment rates at least double those of men in some African countries, and the female labour force participation rate in India and Pakistan is much lower than that of males. Social unrest in North Africa and West Asia has been caused in part by high unemployment, especially among youth. The related disruptions in economic activity, in turn, have further pushed up unemployment rates in some countries. Among economies in transition, the unemployment rate in the Russian Federation declined to a record low of 5.2 percent in August 2012, partly as a result of increased public spending, but also because of a shrinking active population. Notable job creation has also been recorded in Kazakhstan, but the unemployment rate has increased in Ukraine as a result of tighter fiscal policy and weaker external sector.

Inflation receding worldwide, but still a concern in some developing countrie

Inflation remains subdued in most developed economies...

Inflation rates remain subdued in most developed economies. Continuing large output gaps and downward pressure on wages in many countries are keeping Inflationary expectations low. Inflation in the United States moderated over 2012, down to about 2 percent from 3.1 percent in 2011. A further moderation in headline Inflation is expected in the outlook for 2013. In the euro area, headline Inflation, as measured by the Harmonized Index of Consumer Prices (HICP), continues to be above the central bank’s target of 2 percent. Core Inflation, which does not include price changes in volatile items such as energy, food, alcohol and tobacco, has been much lower at around 1.5 percent, with no evidence of upward pressures. In the outlook, Inflation is expected to drift down slowly. Inflation in the new EU members is also expected to lessen. Deflation continues to prevail in Japan, although the central bank has raised its Inflation target to boost Inflation expectations.

... and is receding in most developing countries, although still high in som

Inflation receded in a majority of developing countries during 2012, but remains stubbornly high in some. In the outlook, higher oil prices and some country-specific supply-side constraints may continue to put upward pressure on Inflation in developing countries in 2013 and into 2014. In Africa, while Inflation moderated in many economies, the rate of Inflation is still above 10 percent in Angola, Nigeria and elsewhere. Inflation is expected to remain subdued in most of East Asia, but is still a concern for most countries in South Asia where Inflation rates were, on average, over 11 percent in 2012 and are forecast to remain above or near 10 percent in 2013 and 2014. Inflation remains low in most economies in West Asia, though it is still high (above 10 per cent) in Yemen and very high (30 percent) in the Syrian Arab Republic. The Inflation rate in Latin America and the Caribbean is expected to stay at about 6 percent.

Outlook for global commodity and financial markets

World trade slowed notably during 2012, along with weaker global output. The sovereign debt crisis and economic recession in the euro area and continued financial deleveraging in most developed economies affected capital flows to emerging markets and other developing countries, adding to uncertainty about economic prospects and enhancing market volatility. These factors, combined with spillover effects of expansionary monetary policies in developed economies, have also fueled volatility in primary commodity prices and exchange rates. Global imbalances, characterized by large savings surpluses in some economies and deficits in others, have narrowed markedly in the aftermath of the global financial crisis. However, the rebalancing has hardly been a benign process, having resulted mainly from demand deflation and weaker trade flows.

Sharp slowdown of world trade

Declining import demand in Europe dampened world trade growth in 201

After plunging by more than 10 percent in the Great Recession of 2009, world trade rebounded strongly in 2010. Since 2011, the recovery of the volume of world exports has lost momentum (figure I.5). Growth of world trade decelerated sharply during 2012, mainly owing to declining import demand in Europe, as the region entered into its second recession in three years, and anaemic aggregate demand in the United States and Japan. Developing countries and economies in transition have seen demand for their exports weaken as a result.

Figure I.5
World merchandise exports volume, January 2006-August 2012

Source: CPB Netherlands Bureau for Economic Policy Analysis, rebased by UN/DESA

The monthly trade data of different regions and countries showed a clear sequence of the weakening demand that originated in the euro area transmitting to the rest of the world. Import demand in Greece, Italy, Portugal and Spain started to decline in late 2011 and fell further during 2012, but the weakness in trade activity has spread further to the rest of Europe as well, including France and Germany. In tandem, imports of the United States and Japan also slowedsignificantly in the second half of 2012.

East Asian economies that trade significantly with the major developed countries have experienced commensurate declines in exports. For example, the Republic of Korea, and Taiwan Province of China registered considerable drops in exports during 2012. China’s exports also decelerated notably. Further down the global value chain, energy and other primary-exporting economies have seen demand for their exports weaken as well. Brazil and the Russian Federation, for instance, all registered export declines in varying degrees in the second half of 2012. Lower export earnings, compounded by domestic demand constraints have also pushed down GDP growth in many developing countries and economies in transition during 2012. This has led to flagging import demand from these economies, further slowing trade of developed countries.

At the same time, a rise in international protectionism, albeit modest, and the protracted impasse in the world multilateral trade negotiations, have also adversely affected international trade flows.[3] In the outlook for 2013 and 2014, the continued weak global growth outlook and heightened uncertainties lead to expectations that world trade will continue to expand at a rather tepid pace of 4.3 percent in volume terms in 2013 and 4.9 percent in 2014, compared to 3.3 percent in 2012 and 6.8 percent during 2005-2008.

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[3]
3 See MDG Gap Task Force Report 2012: The Global Partnership for Development—Making Rhetoric a Reality (United Nations publication, Sales No. E.12.I.5).
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Oil prices soften but risk premium remain

Oil prices fluctuated in 2012, with weaker demand off setting geopolitical risks

The price of oil fluctuated during 2012 (figure I.6); weaker global demand tended to push prices down, while heightened geopolitical risks in several oil-producing countries put upward pressure on prices. Global oil demand decelerated somewhat to 0.9 percent in 2012. Global supply was affected by sanctions imposed by the EU and the United States on Syrian and Iranian oil exports. This was compensated to a large extent, however, by the preventive increase in oil production in Saudi Arabia, the resumption of production in Libya and higher-than-expected output in North America, Latin America and the Russian Federation. Yet, spare capacity dropped to 2.8 million barrels per day (mbd), down from an average of about 4 mbd during 2006-2011.

In the outlook, world oil demand is expected to remain subdued during 2013 and 2014. Supply is expected to further expand in several oil-producing areas, including North America, the Russian Federation and Brazil, partially off set by declines in the North Sea and Central Asia. Saudi Arabia is expected to lower production, thereby increasing spare capacity.

Continued geopolitical tensions in the Middle East will likely continue to put a risk premium on prices, however. As a result, Brent oil prices are forecast to decline somewhat and fl uctuate around $105 per barrel (pb) in 2013-2014, down from an average of $110 pb in 2012.

Figure I.6
Brent oil price, January 2000-October 2012
Source: UN/DESA.

Rising food prices

Food prices increased to a record high, but will moderate in 2013

Figure I.7
Daily grain prices, January 2007-October 2012
Source: International Grains Council

Despite slowing global demand, food prices jumped to a record high in July 2012 (figure I.7). Global cereal production in 2012 is expected to fall by 2.7 percent from previous year’s record crop. The overall decrease reflects a 5.5 percent reduction in wheat, and a 2.5 percent decline in coarse grains, while the global rice crop is seen to grow by 0.7 percent above last season’s record. Severe droughts and poor weather this year in the United States, the Russian Federation, Ukraine and Kazakhstan have been the main cause of the reduced maize and wheat crops. According to the Food and Agricultural Organization (FAO), the decline would also reduce the world cereal stock-to-use ratio from 22.6 percent in 2012 to 20.6 percent in 2013, which compares with the low of 19.2 percent registered in 2007-2008.[4]

----------------------
[4] Food and Agricultural Organization of the United Nations, “World cereal production in 2012 down 2.7 percent from the 2011 record”, FAO Cereal Supply and Demand Brief, 8 November 2012, available from http://www.fao.org/worldfoodsituation/wfs-home/csdb/en/.
----------------------

The situation is not yet considered a threat to global food security, however. In the outlook, food prices will likely moderate somewhat with slowing global demand. However, given that markets are very tight, even relatively minor supply shocks may easily cause new price spikes.

Softening non-food commodity price

Metal and ore prices will remain weak as a result of subdued demand

The prices of non-oil, non-food commodities started to decline in the second quarter of 2012 as a result of the slowdown in global demand (figure I.8). The appreciation of the United States dollar has also contributed to the weakness in the prices of non-food commodities, as these prices are dollar-denominated. Prices of base metals and ores continued their downward trend until mid-2012, before rebounding somewhat towards the end of the year, mainly influenced by financial factors (see chapter II). Global demand remained weak, while new mining projects implemented over the past decade have increased global supply.

Figure I.8
Non-oil commodity prices, 2000-2014

The prices of metals and ores are likely to remain weak, as global demand is not expected to pick up quickly during 2013. Market conditions are likely to remain volatile, however.

New rounds of monetary easing by major developed economies in a context of continued financial fragility, for instance, would likely induce more speculative financial flows into commodity markets, thereby keeping prices up and bringing more volatility into the market.

Continued volatility of capital flows to emerging markets

Emerging markets will continue to experience volatile capital flows

Global financial vulnerabilities remain unabatedly high. Bank lending has remained sluggish across developed economies. Financial conditions are likely to remain very fragile over the near term because of the time it will take to implement a solution to the euro area crisis and the shadow being cast over the recovery of the United States economy by the fiscal cliff . Most emerging markets are likely to continue experiencing volatile capital flows as they have over the past few years, strongly influenced by fragility in financial markets and QE policies in developed countries (figure I.9).

For the year 2012, net private capital inflows to emerging markets —that is, selected developing countries and economies in transition—are estimated to reach about $1 trillion, down by about 10 percent from the previous year.[5] Next to ongoing deleveraging in developed countries, domestic factors specific to emerging market economies added to the downward pressure on net capital infl ows in the first half of 2012. Slower growth in China and a few other Asian economies has lowered exchange-rate adjusted rate-of-return expectations of international investors. In North Africa and the Middle East, uncertainties remain in the wake of political transformations and, in some cases, ongoing conflicts, creating an adverse environment for stronger capital infl ows. Several Latin American countries, such as Brazil, have introduced more rigorous capital account regulation to limit short-term capital inflows and mitigate capital-flow and exchange-rate volatility.

-----------------
5 Institute of International Finance, “Capital fl ows to emerging market economies”, IIF Research Note, 13 October 2012. Data referring to private capital fl ows in this section cover about 30 emerging market economies and discuss net capital infl ows separate from net outfl ows. In this sense the data diff er from those presented in chapter III, which cover all developing and transition economies and apply the “net net fl ow” concept, that is net infl ows less net outfl ows.
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Figure I.9
Net capital flows to emerging markets
Billions of dollars
Greek crisis
Irish crisis
First ECB
LRTO
Source: IMF, WEO database, October 2012.

The costs of external borrowing financing increased for developing countries and economies in transition when the crisis in the euro area escalated in mid-2012, but have since decreased and remain low in general (figure I.10).

Figure I.10
Daily yield spreads on emerging market bonds, January 2007-October 2012
percentage points
Africa
Asia
Latin America
Europe
Source: JPMorgan Chase

Net private capital inflows to emerging markets are not expected to increase by much on average in 2013, although volatility in markets would persist. New rounds of monetary easing announced by the central banks of developed countries are expected to provide some stabilizing impact on financial markets, which may help reduce risk aversion among investors. In view of the interest rate and growth differentials, investors are expected to retain interests in developing countries. At the same time, however, the continued need for deleveraging the bank system in developed countries keeps the risk of capital reversals high for emerging markets. Furthermore, uncertainties surround future growth prospects for some large developing economies (see “Uncertainties and risks” section), which could temper appetite for foreign investments in emerging markets.

Capital inflows continue to be accompanied by large scale capital outflows from emerging markets

Volatile capital infl ows continue to be accompanied by large-scale capital outfl ows from emerging markets. Emerging market economies invested $1.3 trillion abroad in 2012, mostly associated with further increases in foreign exchange reserve holdings.

Even though the degree of reserve accumulation was slightly less than in 2011, it signals continued concerns in emerging and developing country economies regarding world commodity and capital market volatility. While providing buffers against shocks and policy space to mitigate exchange-rate volatility, the massive reserve accumulation is also further weakening global demand. [6]

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[6] See, for example, the discussion in World Economic and Social Survey 2010: Retooling Global Development (United Nations publication, Sales No. E.10.II.C.1), chap V.
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Net ODA flows from member countries of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) reached $133.5 billion in 2011, up from $128.5 billion in 2010. In real terms, however, this represented a fall of 3 percent, widening the delivery gap in meeting internationally agreed aid targets to $167 billion.[7] Preliminary results from the OECD survey of donors’ forward spending plans indicate that Country Programmable Aid (CPA)—a core subset of aid that includes programmes and projects, which have predicted trends in total aid—is expected to increase by about 6 percent in 2012, mainly on account of expected increases in outfl ows of soft loans from multilateral agencies that had benefi ted from earlier fund replenishments.

However, CPA is expected to stagnate from 2013 to 2015, reflecting the delayed impact of the global economic crisis on donor country fiscal budgets.

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[7] MDG Gap Task Force Report 2012, op. cit.
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Continued exchange-rate volatility

Exchange rates between major currencies remained relatively calm in response to QE measures

A large depreciation of the euro vis-à-vis other major currencies was the defining trend in global foreign exchange markets for the first half of 2012 (figure I.11), driven by the escalation of the debt crisis in the euro area. The euro rebounded somewhat in the second half of the year after the European authorities announced some new initiatives, including the OMT programme. The exchange rates between major currencies remained relatively calm in response to announcements of the OMT and further QE by the European Central Bank (ECB) and the Fed. In the outlook, given announced monetary policies in major developed economies and their generally weak growth prospects, it is diffi cult to ascertain a clear trend in the exchange rates among the major currencies.

Figure I.11
Exchange rates of major currencies vis-à-vis the United States dollar, January 2002-October 2012
Inde:x 2, January 2002 =100
Euro
Japanese yen
Swiss franc
Source: UN/DESA, based on data from JPMorgan Chase

After a precipitous fall in late 2011, the first half of 2012 saw currencies in most developing countries and the economies in transition depreciating further against the United States dollar (figure I.12). This trend was driven by two main factors: the reduction in capital infl ows to these countries and the weaker growth prospects for these economies. Since mid-2012, the exchange rates of most of these currencies have stabilized, and some of them started to rebound after the launches of the new QE in major developed countries. In the outlook, continued implementation of the open-ended QE in major developed countries will likely increase the volatility in the exchange rates of the currencies of developing countries and the economies in transition.

Figure I.12
Exchange rates of selected developing country currencies vis-à-vis the United States dollar, January 2002-October 2012
Brazilian real
Korean won
South African rand

Source: UN/DESA, based on data from JPMorgan Chase.

No benign global rebalancing

External imbalances have fallen as a result of overall weakness in global demand

Global imbalances, which refers to the current-account imbalances across major economies, have narrowed significantly in the aftermath of the global crisis. Even if widening slightly during 2012, they remain much smaller than in the years leading up to the crisis (figure I.13). Unfortunately, this trend cannot be seen as a sign of greater global financial stability and more balanced growth. External imbalances have fallen as a result of overall weakness in global demand and the synchronized downturn in international trade rather than through more structural shifts in savings rates and demand patterns.

The United States remained the largest deficit economy, with an estimated external deficit of about $467 billion (3.1 percent of GDP) in 2012, down substantially External imbalances have fallen as a result of overall weakness in global demand from the peak of $800 billion (6 percent of GDP) registered in 2006. In mirror image, the external surpluses in China, Germany, Japan and a group of fuel-exporting countries have narrowed, albeit to varying degrees. China recorded an estimated surplus of slightly over 2 percent of GDP in 2012, a sharp decline from a high of 10 percent of GDP in 2007.

Japan is expected to register a surplus of 4 percent of GDP in 2012, also a signifi cant reduction from its peak level of 5.0 percent of GDP reached in 2007. While Germany’s surplus declined only slightly, remaining above 5 percent of GDP, the current account for the euro area as a whole turned from a deficit into a surplus of 1 percent of GDP. Large surpluses relative to GDP are still present in oil-exporting countries, reaching 20 percent of GDP or more in some of those in Western Asia.

Figure I.13
Global imbalances, 1997-2014
Curreent, account balances as a percentage of world gross product
World Economic Situation and Prospects 2013

The larger part of the adjustment reflects demand deflation in the global economy.

In the United States, following several years of rebounding exports, both export and import demand weakened markedly in 2012. The corresponding narrowing of the saving investment gap reflects a small decline in the savings rate and significant moderation in investment demand. The household saving rate, which increased from about 2.0 percent of disposable household income before the financial crisis to about 5.0 percent in the past few years, has started to fall again to about 3.8 percent. The investment rate fell from 19.2 percent in 2007 to 16.4 percent of GDP in 2012. The government budget defi cit dropped from 10.1 percent of GDP in 2011 to 8.7 percent in 2012, mainly as a result of further cuts in government spending, not increased government revenue. In the outlook, a further narrowing of the current-account defi cit is expected in the United States in 2013 as a result of weakness caused by similar adjustments.

The decline in the external surplus of China was driven by a drop in export growth

In the surplus countries, the decline in the external surplus of China has mainly been driven by a significant drop in the growth of its exports caused by the weaker global economy, rather than a strengthening of imports pushed by domestic rebalancing.

Both exports and imports in China decelerated substantially in 2012, even as China’s exchange-rate policy has become more flexible. The Government has stepped up measures aiming to boost household consumption and rebalance the structure of the economy towards greater reliance on domestic demand, but thus far this has not resulted in any visible increase in the share consumption in GDP. The corresponding narrowing of the saving-investment ratio in Chinacame mainly from a notable slowdown in the growth of investment, rather than a reduction in saving brought on by increased consumption.

In Japan, the narrowing of its external surplus has, to some extent, reflected the strengthening of its domestic demand — including increased imports of oil related to reconstruction in the aftermath of the devastating earthquake — but also a significant slowdown in exports.

The surpluses in oil-exporting countries are of quite a different nature as these countries will need to share the wealth generated by the endowment of oil with future generations through a continued accumulation of surpluses in the foreseeable future. Yet, some studies warn of a slowdown in oil exports for the Russian Federation in the medium run.[8]

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[8]8 See Ernst & Young, “The future of Russian oil exploration: Beyond 2025”, available from http://www.ey.com/Publication/vwLUAssets/Perspectives-of-Oil-and-Gas-explorations-2011-EN/$FILE/Perspectives-of-Oil-and-Gas-explorations-2011-EN.pdf.
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In the euro area, the current-account deficits of member States in the periphery fell dramatically as a result of fiscal austerity and the severe contraction of private investment and consumption demand. Smaller current-account deficits were accompanied by large financial outflows triggered by panic in the banking sector of debt-distressed countries of the euro area. This reflects a stark reversal of the European economic integration process of past decades, when capital flowed from the core members to the peripheral members. In Germany, room remains for policies to stimulate more domestic demand so as to further narrow its external surplus.

Persistent global imbalances have induced wide imbalances in net asset and liability positions

Global imbalances persist, inducing wide imbalances in net asset and liability positions. The latest data show that the net external liability position of the United States widened to a record $4 trillion (more than 25 percent of GDP) in 2011, a significant increase from $2.5 trillion in the previous year (figure I.14). The foreign assets owned by the United States totalled about $21 trillion by the end of 2011, while assets in the United States owned by the rest of the world totalled about $25 trillion.[9] Given the trends in global financial markets in 2012 and the current-account deficit trends discussed above, the net external liability position of the United States is estimated to have increased further during 2012.

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[9]The United States acquisitions of foreign assets increased by about $484 billion during the year, but valuation adjustments lowered the value of foreign assets owned by the United States by $702 billion, mostly from decreases in prices of foreign stocks. On the other hand, foreign acquisitions of the assets in the United States increased by about $1 trillion, and valuation adjustments raised the value of foreign-owned assets in the United States by $353 billion, mostly from price increases of the United States Treasury bonds. In short, the large increase in the net external liability position of the United States during 2011 mainly refl ected a substantial change in the valuation of the assets and liability, with net fl ows accounting for a smaller part.

--------

Given current trends, the global imbalances are not expected to widen by a margin significant enough in the coming two years as to become an imminent threat to the stability of the global economy. However, the large net liability position of the United States poses a continued risk to the medium-term stability of exchange rates among major currencies, as investors and monetary authorities holding large dollar-reserve holdings may fear a strong depreciation of the dollar over time and which would accelerate such a process in possible disorderly fashion. Should the global economy fall into another recession, the imbalances could narrow further through demand deflation. It would thus seem that international policy coordination should not have the rebalancing of current-account positions as its primary focus in the short term, but rather should give priority to concerted efforts to reinvigorate the global recovery, job creation and greater policy coherence to break out of the vicious circles.

Figure I.14
Net international investment position in the United States
Billions of dollars
Source: UN/DESA, based on United States Bureau of Economic Analysis data.
Note: Data for 2009 and 2010 has been revised; data for 2011 is preliminary.
World Economic Situation and Prospects 2013
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Uncertainties and risks

The baseline outlook presented above is subject to major uncertainties and risks, mostly on the downside. The economic crisis in the euro area could continue to worsen and become more disruptive. The United States could fail to avert a fiscal cliff. The slowdown in a number of large developing countries, including China, could well deteriorate further, potentially ending in a “hard landing”. Geopolitical tensions in West Asia and elsewhere in the world might spiral out of control. Given dangerously low stock-use ratios of basic grains, world food prices may easily spike with any significant weather shock and take a toll on the more vulnerable and poorest countries in the world. The discussion in this section focuses on the likelihood of the occurrence of the first three of these risks and what impact there would be on the global economy should they materialize.

Risk of a deeper crisis in the euro area

The euro area crisis continues to be the biggest threat to global growth

The crisis in the euro area continues to loom as the largest threat to global growth. The economies in the euro area have been suffering from entanglement in a number of vicious circles. The dangerous dynamics between sovereign debt distress and banking sector fragility are deteriorating the balance sheets of both Governments and commercial banks. The fiscal austerity responses are exacerbating the economic downturn, inspiring self-defeating efforts at fiscal consolidation and pushing up debt ratios, thereby triggering further budget cuts.

As a result, the region has already fallen into another recession three years after the global Great Recession of 2009, with unemployment rates rising to record highs since the debut of the euro. The situation in Greece remains particularly dire, despite the fact that fears of an imminent exit from the monetary union have eased and Greek government bond yields have subsequently retreated from their peaks following the debt restructuring in early 2012. GDP continues to plunge, however, even after having already fallen by nearly 20 percent since 2007. Unless the troika of the EU, the ECB and the IMF relax the terms of conditionality on the target and the time span of Greek fiscal adjustment, and also provide more support, the economy will be unable to extricate itself from the present crisis any time soon.

The focus of attention shifted towards Spain in mid-2012. Spain is the fourth largest economy of the euro area, with a GDP twice the size of Greece, Ireland and Portugal combined. The country’s borrowing costs surged when the Government asked for international financing to recapitalize the banks in early June 2012. Yields on 10-year sovereign bonds peaked at 7.6 percent in late July, surpassing the level Greece, Ireland and Portugal faced when they were forced to ask for international assistance to address debt distress. Financial market contagion spread to Italy, which also has seen significant increases in sovereign borrowing costs.

These developments posed heightened systemic risks for the monetary union.

In response, the ECB announced a new OMT programme in September through which it can make potentially unlimited purchases of sovereign bonds with a maturity of three years or shorter issued by selected debt-distressed countries. The OMT programme aims to reduce borrowing costs for these countries. However, the ECB can only purchase bonds under the OMT programme if countries have applied for international assistance via both the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which comes with policy conditionality attached.

After the announcement, sovereign yields of Spain and a few other countries retreated substantially (figure I.15). In late September, Spanish authorities presented a budget that aims to cut the projected 2013 deficit by €40 billion ($51.4 billion). Government spending is to be cut by 8.9 percent, while public infrastructure spending is to drop from 1.3 percent to 0.89 percent of GDP, among other austerity measures. A recent bank stress test showed a capital shortfall of €59.3 billion for Spanish banks. It will be feasible to repair this with the €100 billion in European aid the Spanish Government has already requested for recapitalization of its banks.

The OMT programme of the ECB could significantly reduce debt refi nancing costs, but uncertainties remain

The OMT programme initiated by the ECB, if implemented as planned, potentially could significantly reduce debt refinancing costs for Spain and debt-distressed euro area countries. Uncertainties remain, however, on a number of issues unfolding in the future. For example, the agreement made earlier by euro area leaders to directly recapitalize Spanish banks without increasing the country’s sovereign debt was considered to be a key initiative to effectively short-circuit the vicious feedback between sovereign debt and bank fragility. Subsequently, however, some euro area member countries have voiced a somewhat different interpretation in that the direct bank recapitalization would work only for banks getting into trouble in the future, not for those being rescued under the current programme for Spain. If this interpretation would hold in practice, Spain’s government deficit would be much higher than originally projected and could trigger severe additional fiscal adjustment.

Figure I.15
Yields on two-year government bonds of selected euro area countries, January 2010-October 2012
Percentage points
Germany
Greece (right-hand scale)
Ireland
Portugal
Spain
Source: JPMorgan Chase.
World Economic Situation and Prospects 2013
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Question remains as to whether Spain actually needs such deep budget cuts.

In contrast with Greece, some analysts argue that Spain’s woes started in the private sector as the housing bubble burst, drastically reducing government tax revenue and prompting a rescue of banks. Before that, the Government had relatively low debt levels and a modest deficit. From this perspective, fiscal austerity would not address the root cause of the problem in Spain, but only exacerbate the economic downturn and cause more unemployment.

The announced policy initiatives seem to be insufficient to break the downward spiral

In any case, even if the policy initiatives announced to date are implemented as planned, they seem to be insufficient to break the downward spiral many euro area members face in the short run and inadequate to boost a solid growth in the medium run.

Given all the uncertainties and risks, a number of researchers have already studied the scenarios and economic ramifications of the possible exit of some euro area members.[10] The pessimistic scenario, discussed further below, does not assume any break-up of the euro area or the exit of any of its members, however. The real implications of such an event are extremely difficult to gauge because of the large amount of financial market uncertainty that would arise and the complex, but as yet unknown, set of institutional rearrangements that would result.

[10] Global Insight estimates that an exit of Greece would come with substantial international spillover effects. It estimates that the simulated output loss for the United States could be as much as 2.5 percent, pushing the economy into recession in 2013. (See IHS Global Insight, “US Executive Summary”, November 2012). Oxford Economics (“Central banks take out additional insurance”, Global Scenario Service, September 2012) estimates that an exit of Greece in the third quarter of 2013 would lower euro area GDP by 3.5 percent and WGP would drop 1.3 percent below the baseline for 2014.

In a fuller euro area break-up with Greece, Portugal, Ireland, Spain, Italy, and Cyprus exiting in the first quarter of 2014, Oxford Economics estimates output losses could be as high as 10 percent and those for the world as a whole would also be commensurately higher.

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Instead, the downside scenario presented below looks at possibility of a much deeper recession in the euro area than delineated in the baseline. The further downturn could be caused by a delayed implementation of the OMT programme and other support measures for those members in need. Delays could occur through political difficulties in reaching agreement between the countries in need of assistance and the troika of EU, ECB and IMF, and/or much larger detrimental effects of the fiscal austerity programmes and more difficulties in structural adjustments than anticipated in the baseline forecast.[11]

[11] More specifically, the scenario of a deeper euro crisis presented in table I.2 below assumes further fiscal tightening in the debt-distressed countries and no use of the OMT programme. As a result, bond yields and borrowing costs increase, while consumer and business confidence drop further, affecting private consumption and investment demand.

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Uncertainties about the “fiscal cliff ” in the United States

The United States may see major changes in government spending and tax policy at the end of 2012

Unless Congress can reach an agreement to avert it, the United States will face a sharp change in its government spending and tax policy at the end of 2012. Because of the potentially severe implications, it has been coined the “fiscal cliff ”. The tax cuts endorsed during the Administration of George W. Bush worth $280 billion per year (often referred to as the “Bush tax cuts”), the 2 percentage point payroll tax reduction worth $125 billion, and the emergency unemployment compensation worth $40 billion introduced during the first term of the Obama Administration, were all designed to expire at the end of 2012. More specifi cally, the expiration of the Bush tax cuts would imply an increase in income tax rates across all income levels by about 5 percentage points in 2013. Among the other changes associated with the expiration of Bush tax cuts are the phasing out of the reduction in the Federal Child Tax Credit and an increase in the maximum tax rate for long-term capital gains by about 5 percentage points. The expiration of the 2-percentage point reduction in employee payroll taxes would imply a decline in aggregate disposable income by about $125 billion. Moreover, the expiration of emergency unemployment compensation, which was first passed into law in 2008 and has been extended in the past four years, would imply a reduction in consumption spending by about $40 billion.[12] On the expenditure side, automatic budget cuts will be activated, cutting expenditure by $98 billion.[13] Together these actions amount to a downward adjustment in aggregate demand of no less than 4 percent of GDP.

[12] For more details, see JPMorgan Chase Bank NA, “The US fiscal cliff : an update and a downgrade”, Economic Research Note, 18 October 2012, available from https://mm.jpmorgan.com/EmailPubServlet?h=c7s2j110&doc=GPS-965096-0.pdf; and Joseph Brusuelas, “Fiscal cliff ”, Bloomberg Brief, 25 September 2012, available from http://www.bloombergbriefs.com/files/2012-9-25-Fiscal-Cliff-Special-Issue.pdf.

[13] These automatic cuts are specifi ed in the Budget Control Act which was adopted as a result of the failure of the Joint Select Committee on Defi cit Reduction (the so-called “Supercommittee”) to reach an agreement in 2011 as to how to bring the budget defi cit down to sustainable levels over the next ten years.

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The risk was still clear and present in the immediate aftermath of the November 6 presidential and congressional elections in the United States. In the worst case, political gridlock would prevent Congress from reaching any agreement, leading to a full-scale drop in government spending by about $98 billion and substantial hikes in taxes amounting to $450 billion in 2013. It is reasonable to assume that after realizing the costs to the economy, policymakers will feel compelled to reach an agreement on reinstating those tax reduction measures and on ceasing the automatic spending cuts in the second half of 2013.

A hard landing of some large developing economies

Growth slowed noticeably during 2012 in a number of large developing economies, such as Brazil, China and India, which all enjoyed a long period of rapid growth prior to the global financial crisis and managed to recover quickly at a robust pace in 2010. For example, growth in Brazil dropped from a peak of 7.5 percent in 2010 to an estimated 1.3 percent in 2012;
in China, from 10.4 percent to 7.7 percent; and in India, from 8.9 percent to 5.5 percent.

Given the uncertainties about their external demand and various domestic growth challenges, risks of further and larger-than-expected declines in the growth of these economies are not trivial. In this section, China is used as an example to illustrate such risks and their implications for these economies and for the rest of the world.

China has seen a slowdown in exports and investment

China’s exports continued to slow during 2012, owing to weak demand in major developed economies. For 2012 as whole, real exports for China may register growth of about 5-6 percent, compared to an average growth of about 20 percent in the past 10 years. Meanwhile, growth in investment, which contributed to more than 50 percent of GDP growth in the past decades, has been decelerating. Growth in nominal fixed investment has declined from 25 percent a year ago to 20 percent currently. As fixed investment accounts for almost 50 percent of GDP, this deceleration alone will reduce GDP growth by 2.5 percentage points. Compared with 2009, when China’s exports dropped by more than 10 percent, it appears that the present deceleration in GDP growth comes mainly on account of domestic demand.

The slowdown in investment growth in China has been driven primarily by two factors. First, the Government has adopted policies to control the risk of asset price bubbles in the housing sector, including requirements for larger down payments and limits on the number of housing units people can buy. Real estate investment, which accounts for about 25 percent of total fixed investment, increased by 15 percent in the first half of 2012, but the pace of growth was down from 33 percent recorded a year ago. Acquisition of land for home construction has been declining at an annualized pace of about 20 percent since the beginning of 2012. Because this is a key source of revenue for local governments in China, their fiscal space has been heavily reduced. Slower real estate investment growth also has considerable damaging effects on supplying industries.

Second, the central Government has become more cautious about fiscal stimulus.

Most of the 2009-2010 large-scale fiscal stimulus package, costing about 4 trillion yuan, was used for infrastructure investment and formed an important driver of economic growth in those years. However, after it was phased out in 2011, increasing concerns have been expressed in China over unintended side effects created by the stimulus and vast excess production capacity emerging in some industrial sectors. The Government seems set to put more effort into restructuring the economy, rather than trying to create more aggregate demand stimulus. This is based on the assumption that a rebalancing of the economy through an increase in the share of household consumption in GDP could compensate for a decline in the investment rate and a slowdown in exports. It assumes that with such rebalancing the economy could still grow at a robust pace of 7.5 percent (which is the official growth target for 2012). However, thus far it has proven difficult to boost consumption in the short run and, moreover, industrial restructuring and future GDP growth would require making substantial new investments today.

Furthermore, local governments have been facing financing constraints in the implementation of new projects. Fixed investment projects managed by local governments account for more than 90 percent of total fixed investment in value terms. The financing constraints have emerged because of less revenue from land sales and lack of bank lending as the banks await positive signals from the central Government.

In the downside scenario, it is assumed that growth in China would slow to about 5 percent

Because of these factors, there are substantial risks for much lower GDP growth in China. The downside scenario presented below assumes a slowdown in growth to about 5 percent per year, particularly if fixed investment growth decelerates further, subtracting another 5-10 percentage points per year in 2013-2014. Other assumptions for this alternative scenario for the Chinese economy include the central Government maintaining the tightening measures in the housing sector and no fiscal stimulus.

Risk of a double-dip global recession

Table I.2 summarizes the global economic consequences of the three scenarios discussed above, based on simulations using the United Nations World Economic Forecasting Model.

A deepening of the euro crisis would cause a loss of global output of more than 9 percent

The euro crisis scenario focuses on the relatively high risk of deeper fiscal cuts in the debt-distressed countries. For reasons mentioned above, the much worse case, but, for now, less likely scenario of a break-up of the monetary union is not considered here.

More specifically, in this first scenario, Greece, Italy, Portugal and Spain are expected to take further austerity measures in 2013, with deeper cuts than assumed in the baseline. As a result, the estimated output losses in these economies would be between 1 and 2 percentage points in 2013. The deeper recession is assumed to spread to other economies through trade channels and, more importantly, through greater financial uncertainty as confidence in the euro and prospects for recovery erodes further. As a result, the economy of the euro area would shrink by 0.9 percent compared with the baseline forecast for 2013, thus further deepening the euro area recession that set in throughout 2012. During 2013-2015, the cumulative output loss for the euro area as a whole would amount to 3.3 percent. The further weakening in the euro area would spill over to the rest of the world and the cumulative loss of global output would amount to 1.1 percentage points. The other developed economies, such as the United States and Japan, would all suffer notable losses. The deepening of the euro crisis would cost developing countries about 0.5 percent of GDP on average.

The fiscal cliff would have an even larger impact

In the fiscal cliff scenario, world economic growth would slow to 1.2 percent in 2013, compared to 2.4 percent in the baseline. The cumulative output loss between 2013 and 2015 would be 2.5 percentage points. The United States economy would enter into recession and Japan and the EU would also be severely affected, with output losses of about 2 percentage points during 2013-2015. Mexico and Central America would be hardest hit among developing countries, losing about 3.0 percentage points owing to close economic ties with the United States. East Asian economies would see cumulative output losses of about 1.6 percentage points.

A hard landing of the Chinese economy would also have a visible impact on the world economy

A hard landing of the Chinese economy, with GDP growth slowing to 5 percent in 2013, would also have a visible impact on the world economy. China accounts for about 8 percent of WGP and 10 percent of world trade. Compared with the baseline forecast, a 3 percentage point deceleration in the pace of growth of the Chinese economy would cause a cumulative global output loss of 1.5 percentage points during 2013-2015.
Given its close economic ties with China, Japan would be most affected, suffering a GDP loss of 1.6 percentage points. GDP of the United States and the EU would drop by 0.7 and 0.6 percentage points, respectively, over 2013-2015 compared with the baseline.

Much of their output losses would be caused by lower exports of capital goods to China.

Table I.2

Downside scenarios for the world economy

Percentage deviation from baseline GDP level

Table I.2	Output loss (-)

	Deeper euro area crisis			United States fiscal cliff			Hardlanding in China			Three scenarios combined
	2013	2014	2015	2013	2014	2015	2013	2014	2015	2013	2014	2015
World	-0.3	-0.7	-1.1	-1.2	-2.1	-2.5	-0.4	-1.0	-1.5	-2.2	-4.3	-5.9
Developed economies	-0.4	-0.9	-1.5	-1.7	-2.7	-3.2	-0.1	-0.4	-0.8	-2.5	-4.7	-6.4
United States of America	-0.1	-0.4	-0.8	-3.8	-5.2	-5.3	-0.1	-0.3	-0.7	-4.1	-6.3	-7.3
Japan	-0.2	-0.4	-0.6	-0.6	-1.2	-2.1	-0.4	-0.9	-1.6	-1.7	-3.5	-5.8
European Union	-0.7	-1.8	-2.7	-0.5	-1.2	-1.9	-0.1	-0.3	-0.6	-1.6	-4.1	-6.5
EU-15	-0.7	-1.8	-2.8	-0.5	-1.2	-2.0	-0.1	-0.3	-0.6	-1.6	-4.2	-6.7
New EU members	-0.6	-1.1	-1.3	-0.2	-0.6	-1.1	-0.1	-0.3	-0.6	-1.4	-2.8	-3.7
Euro area	-0.9	-2.1	-3.3	-0.5	-1.2	-1.8	-0.1	-0.3	-0.6	-1.7	-4.6	-7.3
Other European countries	-0.4	-0.9	-1.2	-0.2	-0.8	-1.4	-0.1	-0.3	-0.7	-1.1	-2.8	-4.2
Other developed economies	-0.1	-0.2	-0.3	-0.6	-1.3	-1.7	-0.1	-0.3	-0.7	-0.8	-2.0	-3.0
Economies in transition	-0.3	-0.5	-0.6	-0.2	-0.5	-0.7	-0.1	-0.3	-0.6	-0.9	-1.8	-2.4
South-Eastern Europe	-0.5	-0.8	-0.9	-0.1	-0.4	-0.7	0.0	-0.2	-0.3	-1.1	-1.9	-2.4
Commonwealth of Independent States and Georgia	-0.3	-0.5	-0.6	-0.2	-0.5	-0.8	-0.1	-0.4	-0.7	-0.9	-1.8	-2.4
Russian Federation	-0.3	-0.5	-0.6	-0.2	-0.5	-0.8	-0.1	-0.4	-0.7	-0.8	-1.8	-2.4
Developing economies	-0.2	-0.3	-0.5	-0.3	-0.9	-1.3	-1.1	-2.3	-3.0	-1.7	-3.7	-5.1
Africa	-0.5	-0.5	-0.6	-0.6	-1.0	-1.0	-0.4	-0.8	-1.1	-1.8	-2.5	-2.9
North Africa	-0.9	-0.8	-0.9	-0.9	-1.2	-1.1	-0.2	-0.4	-0.7	-2.7	-2.9	-3.1
Sub-Saharan Africa	-0.3	-0.3	-0.4	-0.5	-0.9	-0.9	-0.5	-0.9	-1.3	-1.5	-2.3	-2.8
Nigeria	-0.4	-0.5	-0.7	-1.1	-1.8	-1.7	-0.1	-0.4	-0.7	-1.8	-3.0	-3.5
South Africa	-0.3	-0.2	-0.3	-0.3	-0.5	-0.5	-1.1	-1.8	-2.3	-1.9	-2.6	-3.2
Others	-0.3	-0.3	-0.4	-0.4	-0.7	-0.8	-0.2	-0.6	-0.9	-1.1	-1.8	-2.3
East and South Asia	-0.1	-0.3	-0.5	-0.3	-0.9	-1.4	-1.6	-3.3	-4.2	-2.2	-4.8	-6.4
East Asia	-0.2	-0.4	-0.6	-0.3	-1.0	-1.6	-2.0	-3.9	-4.9	-2.6	-5.6	-7.4
China	-0.2	-0.4	-0.7	-0.4	-1.1	-1.8	-3.0	-5.7	-6.8	-3.7	-7.6	-9.6
South Asia	-0.1	-0.2	-0.3	-0.1	-0.4	-0.5	-0.3	-0.8	-1.5	-0.6	-1.5	-2.5
India	-0.1	-0.2	-0.2	-0.1	-0.4	-0.5	-0.1	-0.3	-0.5	-0.4	-0.9	-1.4
Western Asia	-0.1	-0.2	-0.3	-0.2	-0.5	-0.7	-0.1	-0.3	-0.6	-0.6	-1.2	-1.9
Latin America and the Caribbean	-0.2	-0.3	-0.4	-0.5	-1.2	-1.7	-0.4	-0.9	-1.5	-1.0	-2.5	-3.7
South America	-0.1	-0.2	-0.3	-0.2	-0.6	-0.9	-0.4	-1.0	-1.6	-0.8	-2.0	-3.1
Brazil	-0.1	-0.2	-0.3	-0.1	-0.4	-0.7	-0.4	-1.1	-1.7	-0.8	-1.9	-2.9
Mexico and Central America	-0.3	-0.4	-0.6	-1.0	-2.6	-3.2	-0.5	-0.9	-1.4	-1.4	-3.7	-5.2
Mexico	-0.3	-0.4	-0.6	-1.0	-2.7	-3.4	-0.5	-1.0	-1.5	-1.4	-3.9	-5.5
Caribbean	-0.1	-0.2	-0.4	-0.5	-1.2	-1.6	0.0	-0.1	-0.3	-0.7	-1.7	-2.5
Least developed countries	-0.2	-0.3	-0.4	-0.3	-0.6	-0.8	-0.2	-0.5	-0.7	-0.8	-1.6	-2.1

a	See section on "Uncertainties and risks" for assumptions for these scenarios.
Source:	UN/DESA. World Economic Situation and Prospects 2013

Developing Asia would also feel the consequences through trade channels, especially as it experiences decreased demand for intermediate products in the context of global value chains (see chapter II for further discussion). Economies in Latin America, Africa and Western Asia would be most impacted by lower demand for primary commodities, losing about 1 percent of their aggregate income.

It is difficult to ascertain the probability of these three risks materializing simultaneously.

However, considering the magnitude of the global consequences of each of these events separately, if these events were to occur at the same time, thereby reinforcing each other, the global economy would fall into another Great Recession.

Policy challenges

Current macroeconomic policy stances

Most developed countries have adopted a combination of fiscal austerity and expansionary monetary policies

Weakening economic growth and policy uncertainties cast a shadow over the global economic outlook. As indicated, most developed countries have adopted a combination of fiscal austerity and expansionary monetary policies, aiming to reduce public debt and lower debt refinancing costs in order to break away from the vicious dynamics between sovereign debt and banking sector fragility. These policy measures were expected to calm financial markets and restore consumer and investor confidence. Supported by structural reforms of entitlement programmes, labour markets and business regulation, the improved environment is expected to help restore economic growth and reduce unemployment. However, reducing debt stocks is proving to be much more challenging than policymakers expected.

Public debt rollover requirements remain very high and continue to expose fiscal balances to the whims of financial markets. Helped by the QE policies of central banks, borrowing costs have been contained and are elevated only for a subset of debt-distressed euro area countries. While the QE programmes have helped lower long-term interest rates, their impact on economic growth will be rather limited at this stage of the recovery.

An additional problem is that fiscal consolidation efforts of most developed countries rely more on spending retrenchment than improving revenue collection. The former tends to be more detrimental to economic growth in the short run, particularly when the economy is in a downward cycle.[14] In many developed countries, public investment is being cut more severely than any other item, which may also prove costly to medium-term growth. In most cases, spending cuts also involve entitlement reforms, which immediately weaken automatic stabilizers in the short run by curtailing pension benefits, shortening the length of unemployment benefit schemes and/or shifting more of the burden of healthcare costs to households. Moreover, the fiscal austerity measures have been found to induce greater inequality in the short run.[15] The impact tends to be stronger when unemployment effects are higher, when there is no compensation for the cost of entitlement reform to lower- and middle-income groups, and when revenue increases are pursued through increases in sales or value-added tax rates. Rising inequality by itself tends to weaken the recovery, as lower-income groups tend to have higher spending pro-pensities. thus The distributional impact of spending and revenue measuresshould be a concern to macroeconomic policymakers. In short, downside risks for developed countries remain extremely high, because the present policy stances are, on balance, not supportive of growth and job creation, and thus fail to definitively break out of the vicious circle.

[14] See World Economic Situation and Prospects 2012 (United Nations publication, Sales No. E.12. II.C.2), box I.3.
[15] International Monetary Fund, Fiscal Monitor: Taking stock—A progress report on fiscal adjustment (Washington, D.C., October 2012).
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Most developing countries and economies in transition have relatively stronger fiscal positions. Some have opted to put fiscal consolidation on hold in the face of global economic weakening. Fiscal deficits may rise in most low-income countries that have slowing government revenue from commodity exports and the growing weight of food and energy subsidies. Concerns are also mounting in developing countries about the possible adverse effects of QE on the financial and macroeconomic stability of their economies through increased volatility in international prices of commodities, capital fl ows and exchange rates. Such concerns underlie the further accumulation of reserves and justify maintaining capital controls. Facing a slowdown in growth and Inflation, central banks in many developing countries and economies in transition have eased monetary policy during 2012. In the outlook, further monetary easing will be likely in many of these countries, except for those with persistently high Inflation, such as South Asia and Africa.

The need for more forceful and concerted action

Given the looming uncertainties and downside risks discussed in the previous section, current policy stances seem to fall well short of what is needed to prevent the global economy from slipping into another recession. More forceful and concerted actions should be considered.

Policy uncertainties should be addressed immediately and a different approach must be taken

First, the policy uncertainties associated with the three key risks discussed in the downward scenario need to be addressed immediately through shifts in approach and greater consideration of international spillover effects of national policies. In the euro area, the piecemeal approach to dealing with the debt crises of individual countries of the past two years should be replaced by a more comprehensive and integrated approach, so as to address the systemic crisis of the monetary union and mitigate the key risks for the stability of the global economy. While individual countries may still need to confront issues in their domestic economic structures and institutions, crucial collective efforts are needed to close the institutional gaps and mend the pervasive deficiencies of the EMU, including through laying solid foundations for fiscal and banking unions. Although important steps in this direction are being taken or considered, the present state of affairs requires much swifter and more forceful action. Only when concrete actions are taken that will restore confidence in the union can other more technical policy measures be put in place to deal with such issues as how to resolve debt overhang and how to break the linkage between sovereign risk and bank fragility. Policymakers in the United States should prevent a sudden and severe contraction in fiscal policy—the so-called fiscal cliff —and overcome the political gridlock that was still present at the end of 2012. As holds for the EU, the global ramifications of failing to do so should be considered. It is only feasible to work out the current debt problems over the long run, and a fiscal consolidation plan will be credible only when rooted in an explicit strategy of economic growth and jobs creation. The major developing countries facing the risk of hard landings of their economies should engage in stronger countercyclical policy stances aligned with measures to address structural problems over the medium term. China, for instance, possesses ample policy space for a much stronger push to rebalance its economy towards domestic demand, including through increased government spending on public services such as health care, education and social security—all of which will help lower precautionary household savings and increase consumption, thus reducing dependence on external demand.

Fiscal policy should become more countercyclical, more supportive of jobs creation and more equitable

Second, more specifically, fiscal policy should become more countercyclical, more supportive of jobs creation and more equitable. The present focus on fiscal consolidation in the short run, especially among developed countries, has proven to be counterproductive and to cause more protracted debt adjustment. The focus needs to shift in a number of different directions:

As a starting point, a first priority of fiscal adjustment should be to provide more direct support to output and employment growth by boosting aggregate demand and, at the same time, spread out plans for achieving fiscal sustainability over the medium-to-long term. Introducing cyclically adjusted or structural budget targets will allow for keeping a countercyclical stance while aiming for fiscal sustainability over the medium term.

Fiscal multipliers tend to be more forceful during a downturn, but can be strengthened further by shifting budget priorities to growth-enhancing spending, undoing cuts in public investment and expanding subsidies on hiring (which may be targeted towards new labour entrants and the long unemployed) as well as enhancing public work programmes and employment schemes. On the tax side, reducing taxes on labour and changing tax codes to reduce labour income tax wedges for youth, women, and older workers are options that provide short-term boosts to employment as well as labour supply.

The distributional consequences of fiscal policies should be duly considered, not only for equity reasons, but also because of their implications for growth and employment generation. As indicated, rising inequality tends to have a dampening effect on aggregate demand and hence on economic growth. Shifting spending priorities to enhance employment effects will help avoid such an outcome, as much as would maintaining an adequate degree of progressivity in taxation and access to social benefits. Many middle- and lowincome countries may wish to reconsider across-the-board subsidies on food and fuel; these tend to come with a heavy fiscal cost, while the benefits may accrue most to higher-income groups. Better targeting would provide more effective income protection to the poor at potentially much lower fiscal cost.

Economic recovery can be strengthened in the short and longer run by promoting green growth through fiscal incentives and investments in infrastructure and new technologies. Lessons can be learned from several developing countries, such as the Republic of Korea, which have successfully provided economic stimulus through green infrastructure investment and energy-saving incentives. This has been found to generate strong employment effects, suggesting that investing in green growth can be a win-win solution. Moreover, these measures are imperative to substantially accelerating reductions in greenhouse gas emissions—an essential step in combating climate change. Developing countries also stand to gain, provided they obtain technological and financial support to adopt the still higher-cost clean energy technologies without jeopardizing economic development prospects.

Global financial market instability needs to be attacked at its root causes

Third, global financial market instability needs to be attacked at its roots. This challenge is twofold. First, greater synergy must be found between monetary and fiscal stimulus. Continuation of expansionary monetary policies among developed countries will be needed, but negative spillover effects into capital-flow and exchange-rate volatility must be contained. This will require reaching agreement at the international level on the magnitude, speed and timing of QE policies within a broader framework of targets to redress the global imbalances. The second part of the challenge is to accelerate regulatory reforms of the financial sector. This will be essential in order to avoid the systemic risks and excessive risk-taking that have led to the low-growth trap and financial fragility in developed countries and high capital flow volatility for developing countries. Steps have been proposed in some national jurisdictions, but implementation is lagging behind.

Moreover, insufficient coordination between national bodies appears to result in a regulatory patchwork. Global financial stability is unlikely to be achieved in the absence of a comprehensive, binding and internationally coordinated framework. This is needed to limit regulatory arbitrage, which includes shifting high-risk activities from more to less strictly regulated environments. Among other measures, such a framework should include strict limits on positions that financial investors can take in commodity futures and derivatives markets — measures that may also help stem volatility in capital flows and commodity prices.

Sufficient resources need to be made available to developing countries

Fourth, sufficient resources must be available to developing countries, especially and those possessing limited fiscal spacefacing large development needs. These resources will be needed to accelerate progress towards the achievement of the MDGs and for investments in sustainable and resilient growth, especially for the LDCs. has Fiscal austerity among donor countriesalso affected aid budgets, as seen in the decline of ODA in real terms in 2011. Further declines may be expected in the outlook. Apart from delivering on existing aid commitments, donor countries should consider mechanisms to delink aid flows from their business cycles so as to prevent delivery shortfalls in times of crisis when the need for development aid is most urgent. In this regard, internationally agreed taxes (such as airline levies, currency transaction taxes or carbon taxes), along with the possibility of leveraging idle special drawing rights (SDRs) for development finance could be considered, as suggested in a recent United Nations report.[16]
[16] World Economic and Social Survey 2012: In Search of New Development Finance (United Nations publication, Sales No. E.12.II.C.1).
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A jobs creation and green growth-oriented agenda as outlined above is compatible with medium-term reduction of public debt ratios and benign global rebalancing, as shown in a scenario of internationally concerted policies simulated using the United Nations Global Policy Model (GPM).[17] With continued existing policies, but assuming no major deepening of the euro crisis, growth of WGP would average, at best, about 3 percent per year on average, far from sufficient to deal with the jobs crisis or bring down public debt ratios. The alternative scenario, based on the agenda outlined above, includes a shift in fiscal policies away from austerity and towards more job creation through, inter alia, more spending on infrastructure; energy efficiency, social programmes and tax and subsidy measures to stimulate private investment projects in these areas; continued expansionary monetary policies aligned with stronger capital account regulation to stem capital flow volatility; and enhanced development assistance to the poorest nations. The GPM simulations show that under such a policy scenario, WGP would grow at an average rate of 4.5 percent between 2013 and 2017, public debt-to-GDP ratios would stabilize and start falling from 2016 or earlier. Employment levels in major developed countries would gradually increase and return to pre-crises levels in absolute terms by 2014 and by 2017 after accounting for labour force growth. The employment recovery thus would come much sooner than in the baseline, although remaining protracted even with the suggested internationally concerted strategy for growth and jobs. An additional 33 million jobs per year on average would be created in developing and transition economies between 2013 and 2017 (see box I.3).

[17] The scenario is an update of the ones presented in World Economic Situation and Prospects 2012, op. cit., pp. 33-36; and United Nations Economic and Social Council, “World economic situation and prospects as of mid-2012 (E/2012/72).

Box I.3	An internationally coordinated strategy for jobs and growth
An alternative policy scenario based on the recommendations in this chapter has been created using the United Nations Global Policy Model (GPM). The key finding is that such a scenario would avoid a widespread double-dip recession; instead, it would allow for a benign rebalancing of the global economy. Job losses caused by the global financial crisis would see recovery and a shift towards more sustainable fiscal balances and debt levels would begin, setting the global economy on a more sustained (and sustainable) path to growth. The key differences with the baseline policy assumptions are that: Policies, especially those in developed economies, shift away from premature fiscal austerity and towards a more countercyclical stance, thereby supporting aggregate demand in the short run. This is done cautiously, however. Public spending is allowed to grow, but more slowly than GDP. As tax revenues grow in response to overall income growth, budget deficits narrow and debt-to-GDP ratios decline over time. In all countries, Governments enhance public spending on social and physical infrastructure and public investment as well as expanding fiscal incentives for private investors promoting “green” growth (including through greater energy efficiency and clean energy generation). This also applies to developing countries where most additional public spending is directed to infrastructure investment, including capacity in sustainable agriculture and renewable energy. Green growth investments are generally perceived to have greater job creation effects than existing “brown” technologies. This is also assumed to be the case in the GPM. Industrial policy incentives implemented by developing countries are assumed to be supportive of economic diversification and reduced dependence on commodity exports. Central banks and other financial regulators in developed countries further step up action to prevent soaring interest rates on sovereign bonds and accelerate regulatory action that reduces bank fragility and helps commercial lending to grow again. The policy scenario further assumes that these national policies are part of an internationally concerted strategy. Policy coordination would ensure that there is sufficient aggregate fiscal stimulus in the short run, while differentiating stimulus across countries in accordance with available fiscal and other macroeconomic policy space (based on initial levels of indebtedness, sovereign borrowing costs and size of external surplus). Furthermore, it is assumed that monetary policy action is better coordinated internationally to prevent the strategy underlying the alternative scenario from being disrupted by excessive exchange-rate and capital fl ow volatility. Through concerted efforts, developing countries (low-income countries, in particular), are provided with adequate access to offi cial development assistance and other external fi nancing to complement domestic resources for fi nancing new investments in infrastructure and sustainable energy and agriculture. Figure A: Employment levels of selected countries or country groups (a) Europe, Japan and other developed economies (b) United States (c) Transition and developing economies Baseline Coordinated strategy for jobs and growth Figure B: GDP growth rates of selected countries or country groups Percentage (a) Europe, Japan and other developed economies (b) United States (c) Transition and developing economies Baseline Coordinated strategy for jobs and growth
	Source: UN/DESA Global Policy Model ( http://www.un.org/esa/policy/publications/ungpm.html).

Box I.3

An internationally coordinated strategy for jobs and growth

An alternative policy scenario based on the recommendations in this chapter has been created using the United Nations Global Policy Model (GPM). The key finding is that such a scenario would avoid a widespread double-dip recession; instead, it would allow for a benign rebalancing of the global economy. Job losses caused by the global financial crisis would see recovery and a shift towards more sustainable fiscal balances and debt levels would begin, setting the global economy on a more sustained (and sustainable) path to growth.

The key differences with the baseline policy assumptions are that:

Policies, especially those in developed economies, shift away from premature fiscal austerity and towards a more countercyclical stance, thereby supporting aggregate demand in the short run. This is done cautiously, however. Public spending is allowed to grow, but more slowly than GDP. As tax revenues grow in response to overall income growth, budget deficits narrow and debt-to-GDP ratios decline over time.

In all countries, Governments enhance public spending on social and physical infrastructure and public investment as well as expanding fiscal incentives for private investors promoting “green” growth (including through greater energy efficiency and clean energy generation). This also applies to developing countries where most additional public spending is directed to infrastructure investment, including capacity in sustainable agriculture and renewable energy. Green growth investments are generally perceived to have greater job creation effects than existing “brown” technologies. This is also assumed to be the case in the GPM.

Industrial policy incentives implemented by developing countries are assumed to be supportive of economic diversification and reduced dependence on commodity exports.

Central banks and other financial regulators in developed countries further step up action to prevent soaring interest rates on sovereign bonds and accelerate regulatory action that reduces bank fragility and helps commercial lending to grow again.

The policy scenario further assumes that these national policies are part of an internationally concerted strategy. Policy coordination would ensure that there is sufficient aggregate fiscal stimulus in the short run, while differentiating stimulus across countries in accordance with available fiscal and other macroeconomic policy space (based on initial levels of indebtedness, sovereign borrowing costs and size of external surplus).

Furthermore, it is assumed that monetary policy action is better coordinated internationally to prevent the strategy underlying the alternative scenario from being disrupted by excessive exchange-rate and capital fl ow volatility. Through concerted efforts, developing countries (low-income countries, in particular), are provided with adequate access to offi cial development assistance and other external fi nancing to complement domestic resources for fi nancing new investments in infrastructure and sustainable energy and agriculture.

Figure A: Employment levels of selected countries or country groups
(a) Europe, Japan and other developed economies
(b) United States
(c) Transition and developing economies
Baseline
Coordinated strategy for jobs and growth
Figure B: GDP growth rates of selected countries or country groups
Percentage
(a) Europe, Japan and other developed economies
(b) United States
(c) Transition and developing economies
Baseline
Coordinated strategy for jobs and growth

Source: UN/DESA Global
Policy Model ( http://www.un.org/esa/policy/publications/ungpm.html).

Under these assumptions, growth of world gross product would accelerate to about 4.5 percent per year, with both developed and developing economies accelerating output growth by between 1 and 2 percentage points compared with the baseline (see figures A and B). Shortly after the new policies are in place, the jobs defi cit caused by the global financial crisis of 2008-2009 would start to close, especially in the developed countries. Employment levels in major developed countries would gradually increase and return to pre-crisis levels in absolute terms by 2014, and by 2017 after accounting for labour force growth. The employment recovery would thus come much sooner than in the baseline, although it would remain protracted, even with the suggested internationally concerted strategy for growth and jobs. An additional 33 million jobs per year on average would be created in developing and transition economies between 2013 and 2017.

The simulation also shows that more rapid recovery of growth and employment helps to stabilize public debts. After an initial increase, government defi cits would quickly decrease, stabilizing public debt ratios in the medium term and reducing them thereafter (see Appendix table). As countries with an external surplus apply more fiscal stimulus, private investment and consumption would increase, leading to higher imports and a reduction of global current account imbalances.
With investments targeting higher energy efficiency and production of renewable energy, world energy prices would stabilize on lower levels over the medium run. Meanwhile, investment in sustainable agricultural production would allow meeting a growing demand for food and stabilize world food prices.

Source: UN/DESA Global Policy Model ( http://www.un.org/esa/policy/publications/ungpm.html).

Figure A: Employment levels of selected countries or country groups
Index: 2008=100
(a) Europe, Japan and other developed economies
(b) United States
(c) Transition and developing economies
China and India
CIS, and other developing
Baseline
Coordinated strategy for jobs and growth
Global economic outlook

Figure B: GDP growth rates of selected countries or country groups
Percentage
(a) Europe, Japan and other developed economies
(b) United States
(c) Transition and developing economies
Baseline
Coordinated strategy for jobs and growth
Global economic outlook

Appendix
An internationally coordinated strategy for jobs and growth, 2012-2017


	2012	2013	2014	2015	2016	2017
GDP Growth (percentage)
United States	2.1	3.1	3.8	4.0	4.0	3.9
Europe	-0.2	2.9	3.8	3.7	3.6	3.7
Japan and other developed countries	2.0	2.4	2.5	2.5	2.6	2.7
China and India	7.3	9.0	9.3	9.0	8.3	8.5
CIS and Western Asia (major oil exporters)	3.7	3.3	3.6	3.5	3.7	3.8
Other developing countries	3.3	4.7	5.6	5.5	5.5	5.6
Employment created above the baseline (millions)
United States	0.0	2.1	3.8	5.0	6.3	5.7
Europe	0.0	3.0	4.9	5.1	5.2	4.8
Japan and other developed countries	0.0	1.1	1.7	2.0	2.4	2.6
China and India	0.0	11.3	15.0	18.3	21.7	10.8
CIS and Western Asia (major oil exporters)	0.0	2.3	3.9	5.4	6.8	6.5
Other developing countries	0.0	7.9	13.2	17.7	21.7	2.5
Growth of government spending (constant prices, percentage per annum)
United States	-2.4	-0.7	2.1	4.2	4.2	3.5
Europe	-1.6	1.6	1.6	0.7	0.9	1.6
Japan and other developed countries	0.9	1.7	2.2	-0.6	2.6	2.9
China and India	8.5	9.0	8.9	8.9	8.9	8.9
CIS and Western Asia (major oil exporters)	4.0	4.9	4.8	4.7	4.7	4.6
Other developing countries	4.8	6.8	6.8	6.8	6.7	6.7
Growth of private investment (constant prices, percentage per annum)
United States	5.2	11.2	11.6	10.5	10.0	6.3
Europe	-0.7	4.0	7.2	6.4	5.8	6.8
Japan and other developed countries	2.6	4.6	3.3	3.1	3.4	2.8
China and India	5.3	8.6	8.1	7.6	5.6	5.4
CIS and Western Asia (major oil exporters)	8.5	3.5	3.2	1.8	3.9	3.8
Other developing countries	4.7	5.0	6.4	6.9	7.6	7.8
Net government financial surplus (percentage of GDP)
United States	-11.0	-8.5	-6.9	-6.0	-5.4	-4.9
Europe	-7.2	-6.0	-4.9	-3.8	-2.9	-2.3
Japan and other developed countries	-7.9	-7.1	-6.6	-5.5	-5.3	-5.1
China and India	-3.3	-2.5	-1.8	-1.3	-1.2	-1.2
CIS and Western Asia (major oil exporters)	0.1	-0.1	-0.2	-0.1	-0.1	-0.1
Other developing countries	-3.1	-2.4	-1.7	-1.3	-1.0	-0.8
Net private sector financial surplus (percentage of GDP)
United States	8.5	5.7	3.8	2.5	1.6	0.8
Europe	8.3	7.5	6.6	5.5	4.6	3.9
Japan and other developed countries	7.1	6.5	6.3	5.7	5.7	6.0
China and India	4.0	2.8	2.2	1.9	2.3	2.5
CIS and Western Asia (major oil exporters)	5.4	4.8	3.9	3.5	2.9	2.6
Other developing countries	2.4	2.0	1.5	1.3	1.1	1.0
Current account deficit (percentage of GDP)
United States	-2.6	-2.9	-3.1	-3.5	-3.9	-4.1
Europe	1.1	1.5	1.7	1.7	1.7	1.7
Japan and other developed countries	-0.8	-0.6	-0.2	0.1	0.5	0.8
China and India	0.6	0.3	0.4	0.6	1.1	1.4
CIS and Western Asia (major oil exporters)	5.4	4.8	3.7	3.4	2.8	2.4
Other developing countries	-0.7	-0.4	-0.2	0.0	0.1	0.2
Government debt (percentage of GDP)
United States	76.4	75.9	73.6	70.6	67.0	63.1
Europe	74.5	73.6	72.1	70.5	67.4	64.9
Japan and other developed countries	138.3	136.0	133.0	129.7	127.0	125.1
China and India	23.8	22.5	20.1	18.0	17.3	16.9
CIS and Western Asia (major oil exporters)	40.5	42.8	45.5	47.4	49.1	50.2
Other developing countries	36.6	36.6	36.3	36.0	35.9	35.9
Memo:
Growth of Gross World Product at market rate (percentage)	2.3	3.8	4.5	4.5	4.5	4.6
Growth of Gross World Product at ppp rate (percentage)	3.1	4.6	5.2	5.2	5.1	5.2
Global creation of employment above baseline (millions)	0.0	27.8	42.6	53.6	64.1	32.9
Average employment creation in developing countries above baseline (millions)	0.0	21.5	32.2	41.4	50.3	19.8
Growth of exports of good and services (percentage)	3.2	5.9	5.6	6.0	5.0	5.0
Real world price of energy (index)	1.4	1.5	1.4	1.5	1.5	1.5
Real world price of food & primary commodities (index)	1.2	1.2	1.3	1.3	1.4	1.4
Real world price of manufactures (index)	1.0	1.0	1.0	1.0	1.0	1.0

Source

Source: UN/DESA Global Policy Model, available from

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Definition of 'Bush Tax Cuts'

A series of temporary income tax relief measures enacted by President George W. Bush in 2001 and 2003. The tax cuts lowered federal income tax rates for everyone, decreased the marriage penalty, lowered capital gains taxes, lowered the tax rate on dividend income, increased the child tax credit from $500 to $1,000 per child, eliminated the phaseout on personal exemptions for higher-income taxpayers and eliminated the phaseout on itemized deductions and eliminated the estate tax.

Investopedia explanation for 'Bush Tax Cuts'

Because the tax cuts were in place for so many years, they began to feel permanent rather than temporary, and taxpayers and politicians raised a major outcry as their expiration date approached. Those who wanted to let the tax cuts expire as scheduled argued that the government needed the extra tax revenue in the face of massive its budget deficits. Those who wanted to extend the tax cuts or make them permanent argued that because taxes reduce economic growth and stifle entrepreneurship and incentives to work, effectively increasing taxes during a recession was a bad idea

UN Report Alert: Euro Sovereign Debt Crisis, Fiscal Austerity Progams And Unemployment Push World To Deeper Recession, in World Economic Situation and Prospects 2013 Global outlook

Mon, 28 Jan 2013 19:21:00 -0800

Europe’s debt crisis reverberations continue to depress the region, saysUN Report World Economic Situation and Prospects 2013

The level of uncertainty stemming from the euro area crisis is having a strong negative impact across the region

Geneva, 17 January: The euro area is in recession and the Gross Domestic Product (GDP) of the region is expected to reach only 0.3 per cent in 2013, strengthening marginally to 1.4 per cent in 2014, said the United Nations in the annual report, World Economic Situation and Prospects (WESP) 2013.

Versão Portuguesa: Austeridade Fiscal do Euro Aumenta Risco de Nova Recessão da Economia Global, Alerta Relatório da ONU World Economic Situation and Prospects 2013 Global outlook

The full WESP report, launched by UN, says the euro area sovereign debt crisis and attendant fiscal austerity programs remain the dominant forces depressing growth in the region. This, coupled with slowing external demand and high oil prices, threatens bleak prospects in the outlook. WESP says the euro area economy witnessed successive negative quarterly rates of GDP growth in the second and third quarters—a technical recession—and with a further sharp drop estimated for the fourth quarter, GDP is expected to decline by 0.5 per cent in 2012.

The report warns that Western Europe’s current economic policies do not address key short-term issues of restoring growth in the region or how to put the crisis countries on a more probable path to fiscal sustainability.

At least five economies are now in recession, with very poor prospects going forward. Italy’s GDP is expected to decline by 2.4 per cent in 2012 and 0.3 per cent in 2013 and Spain’s by 1.6 per cent and 1.4 per cent, respectively. The other countries in recession are Cyprus, Greece and Portugal.

The WESP report says not all economies are equally affected, for instance, Germany’s economy has slowed substantially and is expected to grow by only 0.8 per cent in 2012 after 3.0 per cent in 2011, and will see only a marginal rise to 1.0 per cent in 2013. France narrowly averted recession with a slight up-tick in GDP growth in the third quarter. Output growth is expected to reach only 0.1 per cent for 2012 as a whole and 0.3 per cent in 2013. Outside of the euro area, the economy of the United Kingdom of Great Britain and Northern Ireland exited recession in the third quarter, boosted by the Olympic Games, but nonetheless GDP is expected to contract by 0.3 per cent for 2012. In the baseline forecast, only a slight rebound to 1.2 per cent is expected for 2013, as exports pick up (aided by a depreciation of the currency) and domestic demand solidifies.

Consumption is expected to remain weak in the outlook, but with significant differences across the region. Austerity programmes depress consumption but vary in intensity across countries. The level of uncertainty stemming from the ebbs and flows of the euro area crisis is having a more uniform impact across the region, as consumer confidence, which had been improving earlier in the year, has since declined sharply.

Investment spending also remains weak in the region with little prospect for a sustained upturn given weak demand, and elevated uncertainty from the sovereign debt crisis. In the crisis countries funding conditions remain extremely tight, as banking systems remain under tremendous pressure. Housing investment remains a major drag to activity in some countries, particularly those that experienced a housing bubble and subsequent collapse, such as Spain and the United Kingdom.

Unemployment

The unemployment rate in the euro area climbed to 11.6 per cent in September, up 1.3 percentage points from one year ago. Significant regional differences remain. In Spain and Greece, unemployment is above 25 per cent and in Portugal 15.7 per cent—all countries subject to harsh austerity programmes. At the other extreme are Austria, Germany, Luxembourg and the Netherlands where rates of unemployment are nearer to 5 per cent. Yet, given the only marginal pick up in activity expected from mid-2013 and into 2014, all countries are expected to see at least some increase in unemployment in 2013 before gradually coming down, with an estimated average of 11.3 per cent in the euro area in 2012, 11.8 per cent in 2013 and 11.6 in 2014.

Fiscal policy in the region continues to be focused on reducing fiscal imbalances.

Government budget deficits of euro area members declined on average from 6.0 per cent of GDP in 2010 to 4.1 per cent of GDP in 2011 and further to near 3.0 per cent in 2012.

WESP warns that the sovereign debt crisis could flare up significantly, impacting on bank solvency and depressing confidence. Governments may be forced to make up for growth shortfalls by introducing new austerity measures. Oil prices could surge again. On the positive side, external demand, particularly from east Asia and perhaps the United States, may pick up earlier and with more vigour than anticipated, giving a boost to exports and investment. Tensions may subside in the region following more convincing implementation of already announced packages of policy measures, which would boost confidence.

The new EU members

The tenuous economic recovery that emerged in the new European Union member States in 2010 has continued to weaken throughout 2012. Although some countries of the region, such as the Baltic States and Poland, started the year with solid first quarter economic results, the ongoing troubles in the euro area, which still remains the major export market for the region and the biggest source of foreign direct investment, has led to a visible deterioration of the region’s current economic prospects. Some of the new EU members, such as the Czech Republic, Hungary and Slovenia, saw negative annual economic growth. Most of the fiscal space the new EU members possessed has been exhausted and some countries, such as Poland, face constitutional limits on the size of public debt. Aggregate GDP of the new EU members expanded by 1.2 per cent in 2012 and growth will accelerate to a still moderate rate of 2.0 per cent in 2013 amid numerous uncertainties and risks.

The biggest economy, Poland, is relatively sheltered from the euro area troubles, having a smaller export-to-GDP ratio compared with its regional peers and exhibiting extensive trade ties with the Russian Federation. Cooling domestic demand and the need for fiscal consolidation slowed the economy in the second half of the year, with annual growth expected to be below 3 per cent in 2012 and in 2013. The economies of the Baltic States may grow at around 3 per cent in 2013. Bulgaria and Romania may face additional risks as they have stronger trade, finance and investment links with Greece and Italy.

WESP warns that a protracted recession in the EU-15, which would delay the recovery of foreign direct investment, remains the biggest risk faced by the new EU members.

Other downside risks include the inability to prevent a sharp cut in cross-border lending and an excessively negative impact of fiscal tightening.

South-Eastern Europe

Real economic activity in South-eastern Europe in 2012 remained below that achieved in 2008 before the onset of global financial crisis. After a very weak recovery in 2010 and 2011 the region’s growth turned negative in 2012, and is forecast to remain below trend in 2013, due to weakness in both external and internal demand. In 2012 spring floods and summer droughts and forest fires destroyed crops, especially corn and potatoes, and physical infrastructure throughout the region. The major risks to the forecast are to the downside as the region’s strong financial, trade and remittances linkages with some of the most troubled countries of the European Union, such as Greece and Italy, make it quite vulnerable should there be a further deterioration in the eurozone. FDI inflows into these economies remains depressed at about half their levels prior to the crisis. This decline in investment is an important factor in explaining not only their current low growth and high unemployment but also their fairly weak medium to long run growth prospects. The aggregate GDP of South-eastern Europe declined by 0.6 percent in 2012, and is forecast to recover only modestly, by 1.2 per cent in 2013.

Europe: rates of growth of real GDP, 2009-2014

PIB EUROPA	Crescimento do PIB Europeu 2009-2014
PIB EUROPA	2009	2010	2011	2012a	2013b	2014b
Western Europe	-4.2	2.1	1.5	-0.2	0.6	1.7
European Union	-4.3	2.1	1.5	-0.3	0.6	1.7
Austria	-3.8	2.1	2.7	0.8	1.3	2.0
Belgium	-2.8	2.4	1.8	-0.3	0.5	1.5
Bulgaria	-5.5	0.4	1.7	1.0	2.3	3.5
Cyprus	-1.9	1.1	0.5	-1.2	0.5	1.3
Czech Republic	-4.5	2.5	1.7	-0.9	1.1	2.0
Denmark	-5.8	1.3	0.8	1.1	1.2	1.3
Estonia	-14.1	3.3	8.3	3.0	3.0	3.5
Finland	-8.5	3.3	2.7	1.5	1.2	1.6
France	-3.1	1.7	1.7	0.1	0.3	1.1
Germany	-5.1	4.2	3.0	0.8	1.0	1.8
Greece	-3.3	-3.5	-6.9	-6.1	-1.8	0.6
Hungary	-6.8	1.3	1.6	-1.0	0.6	2.2
Ireland	-5.5	-0.8	1.4	0.5	1.7	2.4
Italy	-5.5	1.8	0.4	-2.4	-0.3	1.4
Latvia	-17.7	-0.9	5.5	4.0	4.0	4.0
Lithuania	-14.8	1.5	5.9	3.0	3.0	3.0
Luxembourg	-4.1	2.9	1.7	-0.1	0.9	2.0
Malta	-2.7	2.3	2.1	-0.7	1.1	1.8
Netherlands	-3.7	1.6	1.0	-0.5	0.7	1.4
Poland	1.6	3.9	4.3	2.6	2.6	3.5
Portugal	-2.9	1.4	-1.7	-3.2	-2.2	0.2
Romania	-6.6	-1.6	2.5	1.0	2.3	3.0
Slovakia	-4.9	4.4	3.2	2.4	2.0	2.6
Slovenia	-7.8	1.2	0.6	-2.0	0.5	2.2
Spain	-3.7	-0.3	0.4	-1.6	-1.4	0.8
Sweden	-5.0	6.6	3.9	1.7	1.8	2.8
United Kingdom	-4.0	1.8	0.9	-0.3	1.2	2.3
EU-15	-4.4	2.1	1.4	-0.4	0.5	1.6
New EU member States	-3.6	2.3	3.1	1.2	2.0	2.9
Euro area	-4.4	2.1	1.5	-0.5	0.3	1.4
Other Western Europe	-1.9	1.9	1.7	1.7	1.5	1.9
Iceland	-6.6	-4.0	2.6	2.6	2.7	2.6
Norway	-1.7	0.7	1.4	3.5	2.2	2.4
Switzerland	-1.9	3.0	1.9	0.3	0.8	1.4
South-Eastern Europe	-4.3	0.4	1.1	-0.6	1.2	2.6
Albania	3.3	3.9	2.0	1.5	2.5	3.0
Bosnia and Herzegovina	-2.9	0.7	1.7	0.2	1.0	2.1
Croatia	-6.9	-1.4	0.0	-1.3	0.8	2.5
Montenegro	-3.5	1.0	1.6	-1.0	1.3	2.8
Serbia	-5.7	2.5	3.2	0.4	1.5	3.0
The former Yoguslav Republic of Macedonia	-0.9	2.9	3.0	1.0	2.3	2.5
Source:		UN/DESA, based on data of the United Nations Statistics Division and individual national sources.
Note:	a	Partly estimated.
	b	Baseline scenario forecasts, based in part on Project LINK and the UN/DESA World Economic Forecasting Model.

Developed economies: unemployment rates,a, b 2004–2014

Developed economies: unemployment rates,a, b 2004–2014
Table A.7	Percentage of labour force
Table A.7	2004	2005	2006	2007	2008	2009	2010	2011	2012 (c)	2013 (d)	2014 (d)
Developed economies	7.2	6.9	6.3	5.8	6.1	8.4	8.8	8.5	8.6	8.7	8.5
United States	5.5	5.1	4.6	4.6	5.8	9.3	9.6	9.0	8.1	7.7	7.3
Canada	7.2	6.8	6.3	6.0	6.1	8.3	8.0	7.5	7.4	7.4	7.1
Japan	4.7	4.4	4.1	3.8	4.0	5.1	5.1	4.6	4.7	5.1	5.0
Australia	5.4	5.0	4.8	4.4	4.2	5.6	5.2	5.1	5.4	5.5	5.7
New Zealand	4.1	3.8	3.9	3.7	4.2	6.1	6.5	6.5	6.5	6.2	5.8
European Union	9.2	9.0	8.3	7.2	7.0	9.0	9.6	9.6	10.4	10.9	10.6
EU-15	8.3	8.3	7.8	7.1	7.2	9.1	9.6	9.6	10.6	11.1	10.9
Austria	5.0	5.2	4.8	4.4	3.8	4.8	4.4	4.1	4.4	4.6	4.6
Belgium	8.4	8.4	8.3	7.5	7.0	7.9	8.3	7.2	7.4	7.6	7.2
Denmark	5.5	4.8	3.9	3.8	3.4	6.1	7.4	7.6	7.9	8.1	7.8
Finland	8.8	8.4	7.7	6.9	6.4	8.2	8.4	7.8	7.7	7.6	7.5
France	9.3	9.3	9.3	8.4	7.8	9.5	9.7	9.6	10.4	10.9	10.7
Germany	10.5	11.3	10.3	8.7	7.5	7.8	7.1	6.0	5.5	5.6	5.8
Greece	10.5	9.9	8.9	8.3	7.7	9.5	12.6	17.7	24.0	26.2	27.7
Ireland	4.5	4.4	4.5	4.6	6.3	11.9	13.7	14.4	14.9	14.5	13.8
Italy	8.0	7.7	6.8	6.1	6.7	7.8	8.4	8.4	10.6	11.5	11.3
Luxembourg	5.0	4.6	4.6	4.2	4.9	5.1	4.6	4.8	5.4	6.4	6.4
Netherlands	5.1	5.3	4.3	3.6	3.1	3.7	4.5	4.5	5.2	5.7	5.8
Portugal	6.8	7.7	7.8	8.1	7.7	9.6	11.0	12.9	15.6 (F)	18.2	15.9
Spain	10.9	9.2	8.5	8.3	11.3	18.0	20.1	21.6	24.8 (G)	26.2	25.2
Sweden	7.4	7.6	7.0	6.1	6.2	8.3	8.4	7.5	7.6	7.9	7.7
United Kingdom	4.7	4.8	5.4	5.3	5.7	7.6	7.8	8.0	8.1	8.4	8.3
New EU member States	12.8	11.9	10.0	7.7	6.5	8.4	9.8	9.6	9.9	10.2	9.6
Bulgaria	12.0	10.1	9.0	6.9	5.6	6.8	10.2	11.0	11.7	11.2	10.3
Cyprus	4.7	5.5	4.7	4.1	3.8	5.5	6.4	7.9	12.1	12.9	13.2
Czech Republic	8.3	7.9	7.1	5.3	4.4	6.7	7.1	6.9	7.5	8.3	7.7
Estonia	10.0	7.9	5.9	4.6	5.4	13.8	16.8	12.3	11.4	10.9	9.5
Hungary	6.1	7.2	7.5	7.4	7.8	10.0	11.1	10.8	11.2	10.4	9.9
Latvia	9.9	8.9	6.8	6.0	7.5	17.1	18.6	15.4	16.0	15.3	14.7
Lithuania	11.3	8.3	5.6	4.3	5.8	13.7	17.8	15.3	15.5	14.9	14.5
Malta	7.2	7.3	6.9	6.5	6.0	6.9	6.9	6.5	6.3	6.3	6.2
Poland	19.0	17.8	13.9	9.6	7.1	8.2	9.6	9.8	10.0	11.0	10.1
Romania	7.7	7.2	7.3	6.4	5.8	6.9	7.3	7.3	7.1	6.9	6.7
Slovakia	18.4	16.4	13.5	11.2	9.6	12.1	14.5	12.6	13.9	13.8	13.7
Slovenia	6.3	6.5	6.0	4.9	4.4	5.9	7.3	7.3	8.1	8.8	8.5
Other Europe	4.3	4.3	3.7	3.2	3.1	3.9	4.2	3.8	3.1	3.6	3.6
Iceland (e)	3.1	2.6	2.9	2.3	3.0	7.2	7.6	7.1	6.6	6.2	5.9
Norway	4.3	4.5	3.4	2.5	2.6	3.2	3.6	3.2	3.0	3.2	3.1
Switzerland	4.3	4.3	3.9	3.6	3.3	4.3	4.4	3.9	3.0	3.7	3.7
Memorandum items
Major developed economies	6.4	6.2	5.8	5.5	5.9	8.1	8.2	7.7	7.5	7.5	7.3
Euro area	9.2	9.2	8.5	7.6	7.6	9.6	10.1	10.1	11.3	11.8	11.6
Source:	UN/DESA, based on data of the OECD and Eurostat. UN/DESA. Annex tables World Economic Situation and Prospects 2013
a	Unemployment data are standardized by the OECD and Eurostat for comparability among countries and over time, in conformity with the definitions of the International Labour Organization (see OECD, Standardized Unemployment Rates: Sources and Methods (Paris, 1985)).
b	Data for country groups are weighted averages, where labour force is used for weights.
c	Partly estimated.
d	Baseline scenario forecasts, based in part on Project LINK and the UN/DESA World Economic Forecasting Model.
e	Not standardized.
F	Acording to latest IMF data [IMF Executive Board Concludes 2012 Article IV Consultation with Portugal Public Information Notice (PIN) No. 13/07 January 18, 2013 ], portuguese unemployment edging up to about 16¼ percent in recent months
G	Spain - 6000.000 Unemployed

Euro Crisis Austerity Policies Present High Risks To World Economic Situation and Prospects 2013, UN Alert on Global outlook

Global economic outlook Prospects for the world economy in 2013-2014 Risk of a synchronized global downturn

Prospects Of World Economic
Riscs
Executive Summary: Arabic, Chinese, English, French, Russian, Spanish
WESP 2013:
Table of Contents
(58 KB) Chapter I
(1.28 MB) Chapter II
(1.03 MB) Chapter III
(542 KB) Chapter IV
(758 KB) Country classification
(144 KB) Annex tables
(562 KB) Download full report
(4.78 MB) Global press releases: Chinese, English, French, Russian, Spanish
Regional press releases: Africa: English, French
CIS: English, Russian
East Asia: Chinese, English
Europe: English, French
Latin America and the Caribbean: English, Spanish
South Asia: English
Western Asia: Arabic, English

Source: World Economic Situation and Prospects

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World Economic Situation and Prospects 2013

Truth About Global Economic Conspiracy Crash For Bailout's! Banks Mafia Scam Involving: Goldman Sachs, Deutsche Bank, Moodys, Standard Poors; Read Report: WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse, From The US Senate Investigation

Fri, 14 Dec 2012 08:22:00 -0800

A two-year investigation into the causes of the financial crisis has culminated in the US Senate publishing a 639 page report damning major financial institutions and regulatory bodies. Citing a wealth of internal documents and private communications ‘Wall Street and The Financial Crisis: Anatomy of a Financial Collapse’ details an array of reckless business activities which left the global economy in disarray and poor countries to disaster.

Versão Portuguesa Portuguese Version:
Máfia Económica Global! "Wall Street e a Crise Financeira: Anatomia do Colapso Financeiro" Culpa Bancos, Moodys, Standard Poors, Goldman Sachs, Deutsche Bank, Supervisão e Desregulação dos Mercados! Relatório Elaborado Pela Comissão de Investigação do Senado dos EUA Desmonta A Conspiração; Acorda e Levanta-te Portugal, Espanha, Itália, Grécia; Os Banqueiros Que Paguem A Crise Que Criaram!

Introdution
About Wall Street and the Financial Crisis: Anatomy of a Financial Collapse Report
Study Development and Target
Opinion Of Senator Carl Levin, Committee on Homeland Security and Governmental Affairs Chairman
Levin-Coburn Report Content
Major Causes Of the Financial Crisis
Report findings

Report Proves What Some Call "Conspiracy Teories"
High Risk Lending: Case Study of Washington Mutual Bank
Regulatory Failures: Case Study of the Office of Thrift Supervision
Inflated Credit Ratings: Case Study of Moody’s and Standard & Poor’s
Investment Bank Abuses: Case Study of Goldman Sachs and Deutsche Bank
Goldman Sachs

13,9 Biliões de Dólares Americanos Num Fundo de Apostas Contra Os Clientes
Goldman Sachs:Strategy: Bet Against Clientes
Case Of Hudson 1 CDO
Case Of Timberwolf CDO
Case Of Abacus CDO

Deutsche Bank

PIGS and Craps on a CDO “Ponzi Scheme.” Operation
CDO Machine
$8 billion Edge Fund Against $102 Billion RMBS Portfolio

Conclusão Sobre o Papel dos Bancos Na Crise

Report recommendations

Recommendations on high risk lending

Ensure “Qualified Mortgages” Are Low Risk
Require Meaningful Risk Retention.
Safeguard Against High Risk Products
Require Greater Reserves for Negative Amortization Loans
Safeguard Bank Investment Portfolios

Recommendations on regulatory failures

Complete OTS Dismantling
Strengthen Enforcement
Strengthen CAMELS Ratings
Evaluate Impacts of High Risk Lending

Recommendations on inflated credit ratings

Rank Credit Rating Agencies by Accuracy
Help Investors Hold CRAs Accountable
Strengthen CRA Operations
Ensure CRAs Recognize Risk
Strengthen Disclosure
Reduce Ratings Reliance

Recommendations on investment bank abuses

Review Structured Finance Transactions
Narrow Proprietary Trading Exceptions
Design Strong Conflict of Interest Prohibitions
Study Bank Use of Structured Finance

Critical Auto-Análisis by a Moodys Director
Tables

Deutsche Bank Total Annual CDO Issuance 2000-2009
Tabela S&P Evaluates Deutsche Bank Gemstone VII Ratings by Tranche

A Crise dos EUA Torna-se Global Via Offshore

Deutsche Bank Cayman Offshore
Goldman Sachs OffShore

Reports

Report WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse
Documentation Suport Report

Autores Responsáveis
Extra: The Official Bankster Dictionary

About Wall Street and the Financial Crisis: Anatomy of a Financial Collapse Report

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse is a report issued on April 13, 2011 by the United States Senate Permanent Subcommittee on Investigations. The 639 page report was issued under the chairmanship of Senators Carl Levin and Tom Coburn, and is colloquially known as the Levin-Coburn Report.

Study Development and Target

After conducting “over 150 interviews and depositions, consulting with dozens of government, academic, and private sector experts” found that “the crisis was not a natural disaster, but the result of high risk, complex financial products, undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”

Opinion Of Senator Carl Levin, Committee on Homeland Security and Governmental Affairs Chairman

In an interview, Senator Levin noted that:

“The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest.”

Levin-Coburn Report Content

By the end of their two year investigation, the staff amassed 56 million pages of memos, documents, prospectuses and e-mails. The report, which contains 2,800 footnotes and references thousands of internal documents focused on four major areas of concern regarding the failure of the financial system: high risk mortgage lending, failure of regulators to stop such practices, inflated credit ratings, and abuses of the system by investment banks. The Report also issued several recommendations for future action regarding each of these categories.

Major Causes Of the Financial Crisis

The report focuses on what it states are the four major causes of the financial crisis, and begins by concentrating on the impact made by high risk mortgage lenders, using Washington Mutual Bank (WaMu) as an example. Beginning in 2004, WaMu embarked upon a lending strategy emphasising high risk loans. At the same time, the bank was engaged in a host of questionable lending practices including steering borrowers form conventional mortgages toward higher risk products and accepting loan applications without verifying the borrower’s income. The same apened with Deutsche Bank and Goldman Sachs managing the Edge Funds.

In April 2010, the Subcommittee held four hearings examining four root causes of the financial crisis. Using case studies detailed in thousands of pages of documents released at the hearings, the Subcommittee presented and examined evidence showing how high risk lending by U.S. financial institutions; regulatory failures; inflated credit ratings; and high risk,poor quality financial products designed and sold by some investment banks, contributed to the financial crisis.

Report findings

The Report found that the four causative aspects of the crisis were all interconnected in facilitating the risky practices that ultimately led to the collapse of the global financial system. Lenders sold and securitized high risk and complex home loans while practicing subpar underwriting, preying on unqualified buyers to maximize profits. The credit rating agencies granted these securities safe investment ratings, which facilitated their sale to investors around the globe. Federal securities regulators failed to execute their duty to ensure safe and sound lending and risk management by lenders and investment banks. Investment banks engineered and promoted complex and poor quality financial products composed of these high risk home loans. They allowed investors to use credit default swaps to bet on the failure of these financial products, and in cases disregarded conflicts of interest by themselves betting against products they marketed and sold to their own clients. The collusion of these four institutions led to the rise of a massive bubble of securities based on high risk home loans. When the unqualified buyers finally defaulted on their mortgages, the entire global financial system incurred massive losses.

Report Proves What Some Call "Conspiracy Teories"

When we read that experts” found that “the crisis was not a natural disaster, but the result of high risk, complex financial products, undisclosed conflicts of interest; and the failure of regulators, the payment of credit rating agencies, and the market itself to rein in the excesses of Wall Street.”,we can say that what some call Conspiracy Teories, are in fact conspiracy.

High Risk Lending: Case Study of Washington Mutual Bank

Through a case study of Washington Mutual Bank (WaMu), the Report found that in 2006, WaMu began pursuing high risk loans to pursue higher profits. A year later, these mortgages began to fail, along with the mortgage-backed securities the bank offered. As shareholders lost confidence, stock prices fell and the bank suffered a liquidity crisis. The Office of Thrift Supervision, the chief regulator of WaMu, placed the bank under receivership of the Federal Deposit Insurance Corporation (FDIC), who then sold the bank to JPMorgan. If the sale had not gone through, the toxic assets held by WaMu would have exhausted the FDIC’s insurance fund completely.
The report found that WaMu sold high risk Option Adjustable-Rate Mortgages (Option ARMs) in bulk, specifically to the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). WaMu often sold these loans to unqualified buyers and would attract buyers with short term “teaser” rates that would skyrocket later on in the term. The Report found that WaMu and other big banks were inclined to make these risky sales because the higher risk loans and mortgage backed securities sold for higher prices on Wall Street. These lenders, however, simply passed the risk on to investors rather than absorbing them themselves.

Regulatory Failures: Case Study of the Office of Thrift Supervision

The Office of Thrift Supervision (OTS) was cited in the Report as a major culprit in financial collapse, for their “failure to stop the unsafe and unsound practices that led to the demise of Washington Mutual” While OTS identified over 500 deficiencies at WaMu, they did not take any regulatory action against the bank. OTS repeatedly requested corrective action, but the bank never followed through on their promises. The Report also cites the regulatory culture within OTS as an issue that exacerbated the lack of oversight. OTS consistently referred to the banks it oversaw as its “constituents.” They favored asking banks to correct problems rather than enforcing regulation, even though the banks rarely followed through on the agreements.

Inflated Credit Ratings: Case Study of Moody’s and Standard & Poor’s

The case study of Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s Financial Services LLC (S&P) exposed a combination of inaccurate readings and conflicts of interest within the credit rating agency community. Due to a lack of regulation, agencies were able to place quantity over quality in rating of securities. Credit rating agencies were paid by Wall Street firms for their rating service. If credit rating agencies were to issue anything less than a AAA rating, they could be run out of business by the Wall Street firms they depended on. In the years leading up to the 2008 crisis, Moody’s and S&P rated tens of thousands of U.S. residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). They regularly inflated the ratings, giving AAA grade ratings to the majority of RMBS and CDO securities, even though many were based off high risk home loans. In 2006, the high risk home loans began to fail, yet Moody’s and S&P continued, for 6 months, to issue AAA ratings to the same quality securities. After the CDOs and RMBS securities that consisted of these home loans began to incur losses, the rating agencies turned around and quickly began to downgrade the high risk securities. Now saturated with toxic and unmarketable assets, and the RMBS and CDO securities market collapsed. Traditionally, AAA rated securities had less than a 1% probability of default. In 2007, the majority of RMBS and CDO securities with AAA ratings suffered losses. 90% of AAA ratings given to subprime RMBS securities originated in 2006 and 2007 were later downgraded to junk status by credit rating agencies.

Investment Bank Abuses: Case Study of Goldman Sachs and Deutsche Bank

The Report cites investment banks as a major player in the lead up to the crisis, and uses a case study of two leading participants in the U.S. mortgage market, Goldman Sachs and Deutsche Bank. The case study found that from 2004 to 2008, banks focused their efforts heavily on RMBS and CDO securities, complex and high risk financial products that they could bundle and sell to investors who did not necessarily know the composition of the product. Financial institutions issued $2.5 trillion in RMBS and $1.4 trillion in CDO securities. They created large trading desks that dealt strictly in RMBS and CDO securities. More alarmingly, their trading desks began to take out insurance policies against the RMBS and CDO securities, allowing them to wager on the fall in value of their own asset. They acted in many instances as an intermediary between two opposing parties who wished to bet on either side of the future value of a security. This practice led to a blatant conflict of interest in the securities market, as the banks used “net short” positions, in which they wagered on the fall of a security, to profit off the failure of a security they had sold to their own client.

The studies show how the credit default swaps that allowed investors and banks themselves to place bets on either side of the performance of a security further intensified market risk. Finally, they show that the unscrupulous trading techniques at the banks led to “dramatic losses in the case of Deutsche Bank and undisclosed conflicts of interest in the case of Goldman Sachs.”

Goldman Sachs

The case study of Goldman Sachs exemplifies this conflict of interest. They underwrote about $100 billion in RMBS and CDO securities in 2006 and 2007. They saw their securities were defaulting, and instead of warning investors to stay away from those products, they began developing a short position that would allow them to profit off of the inevitable collapse of the mortgage market. They amassed a $13.9 billion net short, and made $3.7 billion in profit in 2007 from the decline of the mortgage market. They sold RMBS and CDO securities to their own clients without notifying them of their conflict, that they had a multi-billion dollar short against that same product. The case study further examines four CDOs sold by Goldman known as Hudson 1, Anderson, Timberwolf, and Abacus 2007-AC1. The study found that Goldman would sometimes take risky assets they held in their inventory and dump them into these CDOs. They knowingly included low-value and poor quality assets in them, and in three of the CDOs, they had taken a short position against the CDO. Goldman sold their own toxic assets to their clients, then proceeded to bet against them, without ever notifying anyone about their conflict of interest.

Case Of Hudson 1 CDO

In the case of Hudson 1, Goldman took a 100% short against the $2 billion CDO, and then sold the CDO to their clients. The security soon lost value, and while their clients lost their investments, Goldman made $1.7 billion.

Case Of Timberwolf CDO

In the Timberwolf CDO, Goldman sold the securities above book value to their clients, then soon dropped the price after the sale, causing their clients to incur quick losses. The Timberwolf security lost 80% of its value within 5 months and is worthless today.

Case Of Abacus CDO

In the case of the Abacus CDO, Goldman did not take a short position, but allowed Paulson & Co. Inc., a hedge fund with relations to former Treasury Secretary and Goldman executive Henry Paulson, to select the assets included in the CDO. Goldman marketed and sold the security to their clients, never disclosing the role of Paulson & Co. Inc. in the asset selection process or the fact that the CDO was designed to lose value in the first place. Today, the Abacus securities are worthless, while the Paulson hedge fund made about $3 billion.

Deutsche Bank

The Deutsche case study Report focuses on the bank’s top CDO trader,

PIGS and Craps on a CDO “Ponzi Scheme.” Operation

Greg Lippmann. He warned colleagues that the RMBS and CDO securities were “crap” and “pigs” and could make money taking shorts against them. He predicted the securities would lose value and called the financial industry’s CDO operation as a “ponzi scheme.”

CDO Machine

Deutsche Bank took out a $5 billion short position against the RMBS market from 2005 to 2007, earning a profit of $1.5 billion. The case studies of these two investment firms also show that even as mortgage delinquencies increased in 2008, the banks continued to heavily market CDOs and RMBS securities to their clients. The banks knew that if they were to stop their “CDO machine” that was churning out record profits and record executive bonuses, the firms would have to cut back on their excesses and close their CDO desks.

$8 billion Edge Fund Against $102 Billion RMBS Portfolio

Deutsche Bank’s RMBS Group in New York, for example, built up a $102 billion portfolio of RMBS and CDO securities, while the portfolio at an affiliated hedge fund (usualy used to bet agains the product), Winchester Capital, exceeded $8 billion.

Banks Role in The Economic Crisis

The Report found that the investment banks were “the driving force” behind the risk-laden CDO and RMBS market’s expansion in the U.S. financial system, and the banks were a major cause of the crisis itself.

Report recommendations

Recommendations on high risk lending

Ensure “Qualified Mortgages” Are Low Risk

Federal regulators should use their regulatory authority to ensure that all mortgages deemed to be “qualified residential mortgages” have a low risk of delinquency or default.

Require Meaningful Risk Retention

Federal regulators should issue a strong risk retention requirement under Section 941 by requiring the retention of not less than a 5% credit risk in each, or a representative sample of, an asset backed securitization’s tranches, and by barring a hedging offset for a reasonable but limited period of time.

Safeguard Against High Risk Products

Federal banking regulators should safeguard taxpayer dollars by requiring banks with high risk structured finance products, including complex products with little or no reliable performance data, to meet conservative loss reserve, liquidity, and capital requirements.

Require Greater Reserves for Negative Amortization Loans

Federal banking regulators should use their regulatory authority to require banks issuing negatively amortizing loans that allow borrowers to defer payments of interest and principal, to maintain more conservative loss, liquidity, and capital reserves.

Safeguard Bank Investment Portfolios

Federal banking regulators should use the Section 620 banking activities study to identify high risk structured finance products and impose a reasonable limit on the amount of such high risk products that can be included in a bank’s investment portfolio.

Recommendations on regulatory failures

Complete OTS Dismantling

The Office of the Comptroller of the Currency (OCC) should complete the dismantling of the Office of Thrift Supervision (OTS), despite attempts by some OTS officials to preserve the agency’s identity and influence within the OCC.

Strengthen Enforcement

Federal banking regulators should conduct a review of their major financial institutions to identify those with ongoing, serious deficiencies, and review their enforcement approach to those institutions to eliminate any policy of deference to bank management, inflated CAMELS ratings, or use of short term profits to excuse high risk activities.

Strengthen CAMELS Ratings

Federal banking regulators should undertake a comprehensive review of the CAMELS ratings system to produce ratings that signal whether an institution is expected operate in a safe and sound manner over a specified period of time, asset quality ratings that reflect embedded risks rather than short term profits, management ratings that reflect any ongoing failure to correct identified deficiencies, and composite ratings that discourage systemic risks.

Evaluate Impacts of High Risk Lending

The Financial Stability Oversight Council should undertake a study to identify high risk lending practices at financial institutions, and evaluate the nature and significance of the impacts that these practices may have on U.S. financial systems as a whole.

Recommendations on inflated credit ratings

Rank Credit Rating Agencies by Accuracy

The SEC should use its regulatory authority to rank the Nationally Recognized Statistical Rating Organizations in terms of performance, in particular the accuracy of their ratings.

Help Investors Hold CRAs Accountable

The SEC should use its regulatory authority to facilitate the ability of investors to hold credit rating agencies accountable in civil lawsuits for inflated credit ratings, when a credit rating agency knowingly or recklessly fails to conduct a reasonable investigation of the rated security.14

Strengthen CRA Operations

The SEC should use its inspection, examination, and regulatory authority to ensure credit rating agencies institute internal controls, credit rating methodologies, and employee conflict of interest safeguards that advance rating accuracy.

Ensure CRAs Recognize Risk

The SEC should use its inspection, examination, and regulatory authority to ensure credit rating agencies assign higher risk to financial instruments whose performance cannot be reliably predicted due to their novelty or complexity, or that rely on assets from parties with a record for issuing poor quality assets.

Strengthen Disclosure

The SEC should exercise its authority under the new Section 78o-7(s) of Title 15 to ensure that the credit rating agencies complete the required new ratings forms by the end of the year and that the new forms provide comprehensible, consistent, and useful ratings information to investors, including by testing the proposed forms with actual investors.

Reduce Ratings Reliance

Federal regulators should reduce the federal government’s reliance on privately issued credit ratings.

Recommendations on investment bank abuses

Review Structured Finance Transactions

Federal regulators should review the RMBS, CDO, CDS, and ABX activities described in this Report to identify any violations of law and to examine ways to strengthen existing regulatory prohibitions against abusive practices involving structured finance products.

Narrow Proprietary Trading Exceptions

To ensure a meaningful ban on proprietary trading under Section 619, any exceptions to that ban, such as for marketmaking or risk-mitigating hedging activities, should be strictly limited in the implementing regulations to activities that serve clients or reduce risk.

Design Strong Conflict of Interest Prohibitions

Regulators implementing the conflict of interest prohibitions in Sections 619 and 621 should consider the types of conflicts of interest in the Goldman Sachs case study, as identified in Chapter VI(C)(6) of this Report.

Study Bank Use of Structured Finance

Regulators conducting the banking activities study under Section 620 should consider the role of federally insured banks in designing, marketing, and investing in structured finance products with risks that cannot be reliably measured and naked credit default swaps or synthetic financial instruments.

Moody’s managing director critical self analysis

Looking back after the first shock of the crisis, one Moody’s managing director offered this critical self analysis:

“Why didn’t we envision that credit would tighten after being loose, and housing prices would fall after rising, after all most economic events are cyclical and bubbles inevitably burst. Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both.””

Deutsche Bank Total Annual CDO Issuance 2000-2009
Year	Total CDO Issuance ($ in billions)
2000	67.99
2001	78.45
2002	83.07
2003	86.63
2004	157.82
2005	251.27
2006	520.64
2007	481.60
2008	61.89
2009	4.34

Gemstone VII Ratings by Tranche
Tranche	Initial Rating: Date	1st Downgrade: Date	2nd Downgrade: Date	3rd Downgrade: Date
Class A-1a	AAA: March 15, 2007	A+: Feb. 5, 2008	BB+: July 11, 2008	CC: August 19, 2009
Class A-1b	AAA: March 15, 2007	B-: Feb. 5, 2008	CC: July 11, 2008	n/a
Class A-2	AAA: March 15, 2007	AA-: Nov. 21, 2007	CCC-: Feb. 5, 2008	CC: July 11, 2008
Class B	AA: March 15, 2007	BBB: Nov. 21, 2007	CC: Feb. 5, 2008	n/a
Class C	A: March 15, 2007	B-: Nov. 21, 2007	CC: Feb. 5, 2008	n/a
Class D	BBB: March 15, 2007	CCC Nov. 21, 2007	CC: Feb. 5, 2008	n/a
Class E	BB+: March 15, 2007	CCC: Nov. 21, 2007	CC: Feb. 5, 2008	n/a
Preference Shares	Not rated
Source:	S&P

The Crisis Goes Global on Offshore

When we read this report and look to the financial crisis timeline, then we can say that when the prosecuter starts the investigations, the banksters spread the American Toxics and the crisis globaly:
First Iceland, people reject it, then Ireland, Greece, Portugal, Spain, Italy, Chipre, and a lot more to come until people do the same as Iceland.

Deutsche Bank Cayman Island Offshore

To issue the CDO securities, Deutsche Bank established an offshore corporation in the Cayman Islands called Gemstone CDO VII, Ltd.1357 To administer the corporation, Deutsche Bank appointed its Cayman Island affiliate, Deutsche Bank Cayman, which is a licensed trust company.1358 As administrator, Deutsche Bank Cayman provided Gemstone 7 with the administrative services needed to operate the CDO securitization, including but not limited to, providing office facilities and secretarial staff, maintaining the books and records required by Cayman law, naming at least two Cayman directors, and acting as the Share Registrar for Gemstone shares.

HBK’s Long Investment in Gemstone. HBK routinely purchased the equity tranche,1360 also known as the residual interest, in all of its Gemstone deals, including Gemstone7.1361 HBK told investors in its sales presentation that “HBK has retained 100% of the equity from CDO transactions resulting in strong alignment of interests between HBK and investors.”1362 According to Kevin Jenks, HBK’s collateral manager, HBK had a “buy and hold” approach to all of its Gemstone CDOs.1363 HBK also told the Subcommittee that it participated in Gemstone 7 with “the objective of obtaining long exposure to the CDO’s collateral, on a leveraged basis, through ownership of the Residual interest.”

HBK deals were known for containing above average concentrations of BB or lower rated assets, but HBK prided itself on its ability to run in-depth analysis and accurate stress tests on assets it selected for its CDOs.1365 HBK expected to receive a 15% return on its investment in the equity tranche.1366 In its investor presentation, HBK stated: “The firm strives to provide superior risk-adjusted rates of return with relatively low volatility and relatively low correlation to most major market indices.”1367 HBK’s presentation also claimed that, as of January 2007, it had only three downgrades in its asset backed security portfolio, and that its upgrade to downgrade ratio was 23 to 3.1368 Investor M&T Bank, who later purchased Gemstone 7 securities, told the Subcommittee that it had relied on HBK’s assertions when choosing what it thought was an investment with “minimal risk.”

Goldman Sachs OffShore

In addition, Goldman typically established a domestic and an offshore corporation to act as the nominal owners of the securitization’s incoming cash, assets, and collateral securities; to serve as the actual issuers of the securities; and to perform certain administrative services. Goldman also established arrangements for the servicing of any underlying mortgages. In some CDOs, Goldman or its affiliate provided additional services as well, acting in such roles as the collateral securities selection agent, the collateral put provider, or the liquidation agent charged with selling impaired assets. Goldman also used its global sales force to market its securities to investors around the world, typically selling Goldman-issued CDO securities through a private placement and RMBS securities through a public offering.

In late 2006, when subprime residential mortgages began to incur higher than expected rates of delinquency, fraud, and default, and its inventory of mortgage related assets began to lose value, Goldman took a number of actions. It sold the mortgage related assets in its inventory; returned poor quality loans to the lenders from which they were purchased and demanded repayment; limited new RMBS securitizations; sold or securitized the assets in its RMBS warehouse accounts; limited new CDO securitizations to transactions already in the pipeline; and sold assets from discontinued CDOs.

Throughout this process, Goldman made a concerted effort to sell securities from the CDO and RMBS securitizations it had originated, even when those securities included or referenced poor quality assets and began losing value. Many of the CDO and RMBS securities that Goldman sold to its clients incurred substantial losses. The widespread losses caused by CDO and RMBS securities originated by investment banks are a key cause of the financial crisis that affected the global financial system in 2007 and 2008.

WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse

Suport Documentation Report

United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Committee on Homeland Security and Governmental Affairs

Carl Levin, Chairman

Tom Coburn, Ranking Minority Member

WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse

MAJORITY AND MINORITY STAFF REPORT

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

April 13, 2011

SENATOR TOM COBURN, M.D.

Ranking Minority Member

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

ELISE J. BEAN

Staff Director and Chief Counsel

ROBERT L. ROACH

Counsel and Chief Investigator

LAURA E. STUBER

Counsel

ZACHARY I. SCHRAM

Counsel

DANIEL J. GOSHORN

Counsel

DAVID H. KATZ

Counsel

ALLISON F. MURPHY

Counsel

ADAM C. HENDERSON

Professional Staff Member

PAULINE E. CALANDE

SEC Detailee

MICHAEL J. MARTINEAU

DOJ Detailee

CHRISTOPHER J. BARKLEY

Staff Director to the Minority

ANTHONY G. COTTO

Counsel to the Minority

KEITH B. ASHDOWN

Chief Investigator to the Minority

JUSTIN J. ROOD

Senior Investigator to the Minority

VANESSA CAREIRO

Law Clerk

BRITTANY CLEMENT

Law Clerk

DAVID DeBARROS

Law Clerk

ERIN HELLING

Law Clerk

HELENA MAN

Law Clerk

JOSHUA NIMMO

Intern

ROBERT PECKERMAN

Intern

TANVI ZAVERI

Law Clerk

MARY D. ROBERTSON

Chief Clerk

From Facebook

The Official Bankster Dictionary

European Central Bank = JP Morgan Banksters Cartel

European Union - Rockfeller Massonic Order

US Federal Reserve = European controlled private bank.

Central Bank = Counterfeiting Ring Leader

Nobel Prize Winning Economists = Banking Shill Propaganda Puppets, by and large, awarded with Ivy League tenure, that a 3rd-grader well schooled in monetary truths can generally discredit.

Criminal Underworld Currency Counterfeiters = Competitors that must be arrested and jailed.

Savings Account = Devaluation Account, Cash Advance for Gambling Division

Gambling = Banking Primary Business Line

Fraud = Banking Secondary Business Line

Las Vegas, Macau, Atlantic City = Model for running business operations.

Inflation = Currency Devaluation through anti-free market manipulation of interest rates.

Fractional Reserve System = Fractional Expansion Citizen Bankruptcy System, BSE (Biggest Scam Ever)

Futures Markets = Manipulation Casino, SkyNet Three-Card Monte Scam

Pablo Escobar, Joaquín ‘El Chapo’ Guzmán, The Ochoa Hermanos, Yakuza = Cash Cows

El Subcomandante Marcos aka Delegado Zero = Anti-poverty activist that must be wacked and shut up

Independent Media = Terrorist

Mass Media = Allies

Allen Stanford, Bernie Madoff = Occasional Patsies and Necessary Fall Guys to appease the public’s ire at us.

Stock Markets = Manipulation Casino, SkyNet Three-Card Monte Scam

Commercial Investment Firm Rating of “Buy” and Hold” = Contrarian Indicator to SELL!

Commercial Investment Firm Rating of “Sell” = Contrarian Indicator to “BUY!”

Barbarous Relic = USD, Euro, Yen

Beta = Empty Statistic meant to impress naïve investors

Insider Trading = Mechanism we can utilize to build wealth and remain immune from proesecution but for which we will send common peasants to jail.

Diplomatic Immunity = Not a United Nations privilege but a privilege given to all of us to commit as much fraud and crime as possible without the slightest hint of ever being sent to jail.

Loan = Usury

Credit Card = Debt accumulation card

USD, Euro, Yen, etc. = Fantasy Digital Idea made real by banksters to control humanity

Women’s Liberation Movement = Expansion of Tax Base from only men to men AND women

Income Taxes = Wealth Transfer from citizens to owners of central banks.

Gold = Bankster Kryptonite

Silver = Bankster Kryptonite

Truth = Banker Kyrptonite

Rising Gold & Silver Prices = Hated situation that makes it difficult to manipulate asset prices and that must therefore be controlled.

Lies & Deception = Bankster Standard M.O.

Free Markets = Fairytale story like Santa Claus, Easter Bunny and Tooth Fairy to be taught in business schools worldwide.

Drug Lords and Underground Crime Syndicates = Provider of global banking liquidity and huge year-end bonuses

Parasite = Favorite insect

Capitalism = Dead system that was killed by Central Banking but false scapegoat we can blame when we cause economic crashes and despair

Miscellaneous Charges = Small Monthly Charges to siphon off money from bank accounts that customers will never notice or complain about

Computer = Vehicle to rig all stock markets and commodity markets with HFT programs that execute trades not possible if executed by humans and if executed in a clear and transparent market.

Boom = Unsustainable price distortions caused by interest-rate manipulation and market rigging.

Bust = Opportunity to make money twice as quickly as in a boom!

Market Crash = Engineered event to ensure the peasants will never accumulate enough wealth to rebel against us.

Rising Markets on Mondays or Tuesdays into OpEx Fridays: Ruse to sucker more people to go long in order to fleece them by the time Friday arrives.

Declining Markets on Mondays or Tuesdays into OpEx Fridays: Ruse to sucker more people to go short in order to fleece them by the time Friday arrives.

Presidents and PMs = Best puppet and marionette allies to be rewarded handsomely after they leave office (see Tony Blair and the current POTUS)

Superior Judges, SCOTUS = Made Men

War = Double Bonus! Opportunity to devalue money at faster rate than during peace time and opportunity to accumulate more wealth from interest charged on war appropriations.

Universities, Colleges and MBA programs = Re-education camps to indoctrinate students into fairytales of non-existent free markets, non-existent capitalism, and lies about how stock markets, real estate markets and economic cycles really work. Alternative meaning = best mechanism to bury young adults in a mountain of debt before their work life even begins so we can control them.

Economic Journals and University Tenure = Carrot dangled in front of economic professors to ensure that they repeat to the world the “official” party line.

Key Economic Indicators = False manipulated statistics designed to dumb down citizens into believing economy is recovering even as we increase their economic suffering

Ben Bernarnke = Shakespearean clown.

Conspiracy = Best Word to Discredit Truth about the global monetary system when the truth somehow escapes our censorship algorithms and makes it to the mainstream media we control.

Machiavelli = Role Model

Ivy League Schools = Indoctrination Camps for media representatives and professors we will send to brainwash other global regions into believing our propaganda

CNBC = The Cartoon Network.

Goldman Sachs = Rookie Farm Camp for global criminal banking syndicate.

World Bank & IMF = Banks used by Western countries to impose crushing debt on developing nations to stunt their growth.

Bailout = Transfer of Wealth from citizens to us.

TBTF = Lie used to ensure we can perpetuate fraud and to pass legislation that would never pass under normal circumstances unless we use the TBTF threat.

Quantitative Easing = Currency Devaluation.

Fiat Currency = Worst Possible Idea

Propaganda = Daily Financial News Feed

ATM Machine = Only banking invention in the last century that has improved peoples’ lives instead of making them worse.

Debt Forgiveness = PsyOps Term that makes it appear we are being benificient towards humanity when in reality, the amount of debt forgiveness probably could not equal the amount of money we have stolen from humanity through inflation, currency devaluation, income taxes, and other unjust taxes meant to transfer wealth to us.

Compartamentalization = Process to keep good people working as cogs in the machine within the banking industry ignorant of the fact that they are inflicting massive harm upon society.

Sound Money = Bankster Extinction Level Event. End of modern day immoral banking thievery system and event that would necessitate bankers having to find real jobs to earn wealth instead of merely building wealth by transferring wealth from everyone else to themselves. Also known as physical gold, physical silver, and the medium that allows citizens to call the banksters’ bluff in their monetary devaluation scheme and that allows citizens to fight back against corrupt banksters.

http://hsgac.senate.gov/public/_files/Financial_Crisis/FN1462-1576.pdf

http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/FinancialCrisisReport.pdf?attempt=2

European Revolution Portugal, Spain, Greece, Italy, Ireland: Southern Europe Must Revolt Against Price Stability; That Depends A Future of Prosperity Or Deep Depression"; Christopher T. Mahoney Ex-Vice President Moody's

Fri, 12 Oct 2012 07:38:00 -0700

Southern Europe Must Revolt Against Price Stability
It’s time for a revolution in the eurozone; the time for polite discussion has ended. What is at stake is not a percent or two of economic growth in the South, but rather the difference between a future of prosperity and a future of depression. The mindless happy talk of unity, solidarity and an ever closer union is now irrelevant and in bad taste. People are eating out of trash bins, and an entire generation is living on the dole.

European Central Bank Governors Meeting; Mario Draghi Goldman Sachs Trilateral Bilderberg Bankster Boy ECB President Press Conference Transcript by Christopher T. Mahoney Ex-Vice President Moody's

Article traslated in portuguese - Artigo traduzido em português

Christopher T. Mahoney, ex-vice presidente da agência Moody's diz que os países do Sul da Europa deve revoltar-se contra a política de estabilização de preços defendida pelo Conselho de Governadores do Banco Central Europeu

If the South continues to permit the North to administer the poisonous medicine of monetary deflation and fiscal austerity, it will suffer needlessly for years. Yes, we all know that the ECB was modeled after the Bundesbank and part of the deal for Germany was that the euro would be as strong as the mark. But that was then, and this is now.

The eurozone is a multinational republic in which no country, no matter how high its credit rating, can act as hegemon. Germany has just two votes on the ECB’s governing council, not control and not a veto. Germany is just another member of the union, and the Bundesbank is just another regional branch of the Eurosystem. The ECB treaty was not intended as a suicide pact, and it can be interpreted liberally enough to permit what has to be done. If the constitutional court objects, then Germany can exit. She can’t force anyone else to.

The revolution must be led by France, Italy and Spain. They have already acted together at the last summit, when Monti refused to adjourn until Merkel made major concessions (since rescinded) about bank bailouts. These three men, Hollande, Monti and Rajoy, must form the nucleus of a bloc within the eurozone that demands open-ended QE until eurozone nominal growth rises to the mid-single-digits, and stays there.

First of all, there may already be enough votes on the governing council to ram QE through the Berlin Wall. Failing that, the bloc can refuse further austerity and threaten exit unless the ECB capitulates. Sadly, Mario Draghi is a cipher in all this, having sworn allegiance to the single mandate in order to get Merkel’s approval as president. He cannot lead the rebellion, nor would it be appropriate for him to do so.

What I am advocating is a public break with the Bundesbank and its ideological satellites, and a categorical rejection of minimal nominal growth and fiscal retrenchment. The Southern Bloc must demand nominal growth targeting, unsterilized bond-buying, and an end to self-strangulation by austerity. Those policies have been tried and they have failed for two years.

The South cannot balance its budget without inflation, nominal growth, and rising nominal government revenue. Structural reform is nice but at this stage quite irrelevant. Budget cuts and labor market reforms are not and must not be a prerequisite for nominal growth. Those are shibboleths unrelated to medium-term growth, and they would be much easier to implement in the context of growth.

Before this heart-rending tragedy is over the South will revolt, but probably when it is too late. The time is now, before Spain and Italy are forced to drink the Troika’s strychnine and arsenic. France, as a continental leader with market credibility, must lead this effort. Germany and its allies will think twice before going mano a mano with France.

The cost to the creditor powers will be higher inflation and a decline in value of their claims on the South, but that must occur one way or another. Inflation is much preferable to repudiation, which is the only other viable alternative.

Maybe it would be more prudent to conduct this revolt in private, but my sense is that it can only work as a public ultimatum. Europe successfully stared down Russia on many occasions during the cold war; she can do the same with Germany today.

Christopher T. Mahoney Profile

Mahoney Blog Capitalism And Fredom: Southern Europe Must Revolt Against Price Stability

European Central Bank Governors Meeting; Mario Draghi Goldman Sachs Trilateral Bilderberg Bankster Boy ECB President Press Conference Transcript by Christopher T. Mahoney Ex-Vice President Moody's

Fri, 12 Oct 2012 07:38:00 -0700

Transcript Of Draghi's Press Conference: For the convenience of readers, Christopher T. Mahoney Ex-Vice President Moody's, have cleaned up the ECB's transcript of Draghi's Goldman Sachs European Central Bank President press conference, which followed the monthly meeting of the governing council.

Transcript in Portuguese: Transcrição da Conferência de Imprensa do Concelho de Governadores do Banco Central Europeu em Mario Draghi defende a política de estabilização de preços

Christopher T. Mahoney, ex-vice presidente da agência Moody's diz que os países do Sul da Europa deve revoltar-se contra a política de estabilização de preços defendida pelo Conselho de Governadores do Banco Central Europeu

Introductory statement to the press conference and subsequent Q&A

Mario Draghi, President of the ECB,

Slovenia, 4 October 2012

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Kranjec for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2% throughout 2012, but then to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon.

Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term.

Economic growth in the euro area is expected to remain weak, with ongoing tensions in some euro area financial markets and high uncertainty still weighing on confidence and sentiment.

Our decisions as regards Outright Monetary Transactions (OMTs) have helped to alleviate such tensions over the past few weeks, thereby reducing concerns about the materialisation of destructive scenarios. It is now essential that governments continue to implement the necessary steps to reduce both fiscal and structural imbalances and proceed with financial sector restructuring measures.

The Governing Council remains firmly committed to preserving the singleness of its monetary policy and to ensuring the proper transmission of the policy stance to the real economy throughout the euro area. OMTs will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat again what I have said in past months: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

We are ready to undertake OMTs, once all the prerequisites are in place. As we said last month, the Governing Council will consider entering into OMTs to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected. We would exit from OMTs once their objectives have been achieved or when there is a failure to comply with a programme. OMTs would not take place while a given programme is under review and would resume after the review period once programme compliance has been assured.

Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP contracted by 0.2%, quarter on quarter, in the second quarter of 2012, following flat growth in the previous quarter. Economic indicators, in particular survey results, confirm the continuation of weak economic activity in the third quarter of 2012, in an environment characterised by high uncertainty. We expect the euro area economy to remain weak in the near term and to recover only very gradually thereafter.

The growth momentum is supported by our standard and non-standard monetary policy measures, but is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.

The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to ongoing tensions in several euro area financial markets and the potential spillover to the euro area real economy. These risks should be contained by effective action by all policy-makers in the euro area.

Euro area annual HICP inflation was 2.7% in September 2012, according to Eurostat’s flash estimate, compared with 2.6% in the previous month. This is higher than expected and mainly reflects past increases in indirect taxes and euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could remain at elevated levels, before declining to below 2% again in the course of next year.

Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate. Current levels of inflation should thus remain transitory and not give rise to second-round effects. We will continue to monitor closely further developments in costs, wages and prices.

Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation. The main downside risks relate to the impact of weaker than expected growth in the euro area, in the event of a renewed intensification of financial market tensions, and its effects on the domestic components of inflation. If not contained by effective action by all policy-makers in the euro area, such intensification has the potential to affect the balance of risks on the downside.

Turning to the monetary analysis, recent data confirm the subdued underlying pace of monetary expansion. In August the annual growth rate of M3 decreased to 2.9%, from 3.6% in July. While this decline was mainly due to a base effect, monthly inflows were also relatively contained. Conversely, strong monthly inflows into overnight deposits contributed to a further increase in the annual rate of growth of M1 to 5.1% in August, compared with 4.5% in July. This increase reflects a continuing high preference for liquidity in an environment of low interest rates and high uncertainty.

The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) declined in August to -0.2% (from 0.1% in July), reflecting a decrease in the annual rate of growth of loans to non-financial corporations to -0.5%, from -0.2% in July. By contrast, the annual growth of loans to households remained unchanged, at 1.0%, in August. To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. At the same time, in a number of euro area countries, the segmentation of financial markets and capital constraints for banks restrict credit supply.

The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels, thereby contributing to an adequate transmission of monetary policy to the financing conditions of the non-financial sectors in the different countries of the euro area. It is thus essential that the resilience of banks continues to be strengthened where needed.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

Other economic policy areas need to make substantial contributions to ensure a further stabilisation of financial markets and an improvement in the outlook for growth. As regards fiscal policies, euro area countries are progressing with consolidation. It is crucial that efforts are maintained to restore sound fiscal positions, in line with the commitments under the Stability and Growth Pact and the 2012 European Semester recommendations. A rapid implementation of the fiscal compact will also play a major role in strengthening confidence in the soundness of public finances.

At the same time, structural reforms are as essential as fiscal consolidation efforts and measures to improve the functioning of the financial sector. In the countries most strongly affected by the crisis, noticeable progress is being made in the correction of unit labour cost and current account developments. Decisive product and labour market reforms will further improve the competitiveness of these countries and their capacity to adjust.

Finally, it is essential to push ahead with European institution-building. The ECB welcomes the Commission proposal of 12 September 2012 for a single supervisory mechanism (SSM) involving the ECB, to be established through a Council regulation on the basis of Article 127(6) of the Treaty. The Governing Council considers an SSM to be one of the fundamental pillars of a financial union and one of the main building blocks towards a genuine Economic and Monetary Union.

We will formally issue a legal opinion in which we will, in particular, take into account the following principles: a clear and robust separation between supervisory decision-making and monetary policy; appropriate accountability channels; a decentralisation of tasks within the SSM; an effective supervisory framework ensuring coherent oversight of the euro area banking system; and full compatibility with the Single Market framework, including the role and prerogatives of the European Banking Authority. As the Commission proposal sets out an ambitious transition schedule towards the SSM, the ECB has started preparatory work so as to be able to implement the provisions of the Council regulation as soon as it enters into force.

We are now at your disposal for questions.
_____________________________________________________________

Question:
Two short questions, Mr Draghi. The first one: you mentioned downside risks to the economy again. Have there been any discussions today about a possible rate cut in the months to come?
And the second one on Spain: do you find Spanish bond yields appropriate at the moment or are they still hampering your monetary policy transmission?

Draghi:
On the first question the answer is no and on the second question, I will not comment.
But let me say one thing I forgot; Marko will answer questions about Slovenia today, so you will have to ask him about Slovenia.

Question:
Mr Draghi, was the decision to leave rates unchanged unanimous? That is the first question.
And the second is: what do you think about publishing the minutes much sooner than 30 years after the respective meetings?

Draghi:
On the first question, I would say that there was no discussion. So it was a unanimous decision about interest rates.

On the second question, clearly there have been statements by several Governing Council members and by myself showing an open mind with regard to this point; but it is a complex process and we are actually thinking about how to proceed. There are pros and cons. What you have to keep in mind is that the ECB is already a very transparent institution; just think about this press conference every month. There are also hearings in Parliament, interviews, speeches… I think that there are some benefits, as far as communication is concerned, to having greater transparency. At the same time, we have to evaluate and assess what this means in our specific context, the European context, which is different from that of the United States and the United Kingdom.

Question:
Mr Draghi, last month when you announced the OMTs, you said that matters were now effectively in the hands of governments. How concerned are you by the way that governments have responded? Some finance ministers have suggested that the ESM might not be covering legacy bank debts for instance, and Spain has still not applied for a bailout.
And my second question is on Greece: how would the ECB feel about rescheduling the repayments on the Greek bonds? Would that qualify as monetary financing?

Draghi:
On the second question, the answer is yes, it would qualify as monetary financing. We have said several times that any voluntary restructuring of our holdings would be monetary financing.

On the first question, I could say that today we are ready with our OMTs. We have a fully effective backstop mechanism in place, once all the prerequisites are in place as well. Governments have made substantial progress on a variety of fronts, both in what I call “vulnerable countries” and in countries that are under a full IMF programme. You can actually see this progress across the board as far as fiscal consolidation, structural reforms and also repairing some of the flaws of the banking sector are concerned. So, at this point, it is really up to the governments to decide what they want to do. The mechanism is in place.

Now to your question about the ESM: we will have to assess exactly what it means, and I do not want to prejudge the technical discussion that will take place. But we have to remember that this is not a matter for the ECB, it is a matter for the governments concerned; it is governments’ money, it is taxpayers’ money. So, they will have to discuss and take a stance on exactly what is meant by legacy assets.

Question:
Back to the OMT, you mentioned that there are steps that need to happen before the ECB would activate it. It is in the governments’ hands. Does that weaken the effectiveness of the OMT because you make yourselves part of the political process, which can be time-consuming and complicated?

And my second question is on the continued rise in youth unemployment in Europe and anti-austerity protests. How concerned are you about unemployment, youth unemployment and is austerity making the problem worse? Thank you.

Draghi:
The first question is about conditionality. We view conditionality as an essential part of the activation of the OMT. I have made this point since the very beginning. Conditionality will actually have several roles. First of all it will reduce the moral hazard by governments. The second role it will have is that it protects the independence of the ECB. Without conditionality you would certainly have what people call fiscal dominance. With conditionality the independence of the ECB is protected. There is also a third angle to this. You can look at conditionality as a way to create credit enhancement on the bonds of the country that is actually the object of conditionality. So, it is an incentive to pursue the right economic policies, which have benefits for all parties concerned. Now, there are going to be, and rightly so, some political processes, but look at this from another angle. You know that one of the conditions is the signing of a memorandum of understanding with the Eurogroup. Once you have that, you have unanimity. And you have the whole of Europe that is supporting this programme politically. By itself, this is an extremely forceful ingredient in the programme.

The second question was about youth unemployment. We completely share the concerns of the situation. And, as a matter of fact, in independent speeches several members of the Governing Council have raised the issue of high unemployment and especially focused on youth, on the young part of the population. It is an incredible waste of resources and it will have to be addressed and it can be addressed by properly reforming the labour market so as to decrease the dual nature the labour markets have taken, I would say in the last seven to ten years, in some European countries. The challenge, of course, is to address the dual nature of the labour market, while keeping it flexible overall.

Question:
Would a rate cut even be conceivable at the moment given that the transmission mechanism is broken and would there be any point in conducting such a thing until the OMT has been used or there has been a sustainable and significant drop in the bond yields of the countries that have distressed bond markets? Or is that an over-emphasis of the way you see this broken transmission mechanism?

And my second question. We are in Slovenia, at the spot where George W. Bush had his first ever summit with Vladimir Putin, after which Bush said he looked into Putin’s eyes and could see his soul and knew this was a man he could do business with. I was wondering if there was any such moment today between you and Mr Weidmann?

Draghi:
I would like to know from you who is Putin and who is George W. Bush?
Question:
I leave that to you.

Draghi:
On the first question, in a sense it is a purely hypothetical question. But it can be addressed by saying that non-standard monetary policy measures are being designed and implemented when the standard ones are not fully effective. Otherwise, we would simply stay with the standard policy measures. So, in a sense, this answers your question.

Question:
Can you carry on using standard measures at the same time as having to deploy non-standard ones?

Draghi:
Well, we have to see if we can repair the monetary policy transmission channels. We do not speculate on future changes in interest rates. I think that the Governing Council has assessed that the price level and the rate of change of prices is in line with medium-term price stability, according to our definition. So, that is the assessment we made about the interest rate and, as I said, there was no discussion.
But to answer your second question, while I do not want to comment on individual positions, of course, I can say that the discussion was very constructive across the board.
Question:
Mr Draghi, you keep encouraging banks to repair their balance sheets. Do you think that they should be able to use ESM funds for that, for their existing problems as well?
And my second question regards Spain: do you think that precautionary credit lines for Spain should be sufficient to solve Spanish financial problems?

Draghi:
On the first question: when I said there has been significant progress, I included the repair of bank balance sheets. The statement the President of the European Banking Authority (EBA) gave yesterday, when he presented the figures on the recapitalisation that has taken place so far, was reassuring in this respect. So, the capitalisation gap that was rather large until two years ago has been reduced significantly by the euro area/ European banks.
On Spain: it is one example where significant progress has been made. Significant challenges remain ahead as well, but the progress made on the front of fiscal consolidation, structural reforms (with the announcement of a very large reform programme), and on the front of the banking sector, with the conclusion of the stress test, is really remarkable if you think of just how many measures have been announced, legislated and implemented in such a short period of time.

Question:
Mr Draghi, just to follow up on that question. Does that mean that it would be enough for Spain to continue on its reform progress for the ECB to start buying bonds or would Spain actually have to commit to much harsher reforms for you to intervene?
And my second question would be: about a year ago, you said in a similar press conference that you would make periodic checks on whether you are in sync with the tradition of the Bundesbank or whether you are deviating from it. I was wondering what your assessment is today, whether you are in sync, or how close are you?

Draghi:
On the second point, I can answer right away that if the tradition of the Bundesbank was to ensure price stability, the ECB is fully in sync with that tradition.
On the first question, there is a tendency to identify conditionality with harsh conditions, as you said. Conditions do not necessarily need to be punitive. Actually, many of the conditions are related to structural reforms, which have social costs, but also great social benefits. And if the reforms are well designed, the latter are going to be greater than the former. So, whether this is enough is up to the Spanish Government to decide. It is for the other euro area governments to decide whether the programmes suffice – you know what the conditions are, you know that it is necessary to submit a request for an EFSF/ESM programme. We would actively seek the IMF’s involvement in the process. Having said that, we now have a mechanism in place that is a fully effective backstop if such a request comes and if the assessment of the Governing Council regarding the monetary policy transmission channels allows action to be taken.

Question:
I was wondering whether you could explain your thinking with regard to Portugal, because Portugal does look as if it has fulfilled the prerequisites for the OMT to work. So, why hasn’t the European Central Bank bought Portuguese debt on the secondary market?
And then one other question, because we are in Slovenia: the Slovenian Government is going ahead with the setting up of an institution to take over the non-performing loans from the banks in return for providing them with government bonds. Will those government bonds be eligible as collateral if the banks present them?

Draghi:
Portugal is an example of the significant progress that I have hinted at before, of the very, very significant progress that has been achieved. Moreover, the overall situation, politically speaking, is a strong situation. Obviously, we also fully share the concerns that have been expressed about the difficult social situation, but the reform agenda is firmly in place. The OMT would not apply to countries that are under a full adjustment programme until – and that is what I believe I said last time – until full market access, complete market access has been obtained. And this is because the OMT is not a replacement for a lack of primary market access. By the way, on this front, among several pieces of positive news that we have had in the last few days, we had one piece on Portugal, namely that, yesterday, for the first time, a three-year bond was issued, which is not complete market access, but it marks the beginning of complete market access, so that it is actually a reassuring bit of news.

Kranjec:
On Slovenia, you are right. The Parliament has adopted a law on the agency that will try to carve out bad assets from the banks. But the precise modalities for the eligibility of these bonds has not been decided yet, so that I am not able to tell you whether this would be acceptable or not. I can only tell you that the pool of collateral that is available to Slovenian banks at the moment is sufficient and that it is not an urgent matter. I understand that it will be elaborated in further steps on this law.

Question:
Have you seen any signs that the pure announcement of the OMT framework has affected the easing of credit conditions in the weak countries?
And my second question is, have you discussed what could be a good measure to decide what is an acceptable level of financial fragmentation and what is an unacceptable level?

Draghi:
On the first question, the answer is yes.

Question:
Sorry, because the figures of today, the August figures, show that especially in Spain it is getting worse.

Draghi:
There was a substantial, significant improvement all across financial markets and then there was a correction. If we take a snapshot now with respect to the beginning of August we see that the various interest rate spreads are still at a level way below where they were in July. We see one comforting piece of news, as I said before, about Portugal, having issued the first three-year bond. The second piece of good news actually concerns Spain, that Spain has completed almost 90% of its funding programme for the sovereign. There has been sizeable issuance by corporations and banks since then and, something that is dear to our eyes and we always look at: TARGET2 balances (or imbalances) have stabilised. All in all, the effect has been positive. There have been sizeable inflows of bank deposits in Italy. Spain’s recourse to central bank financing has gone down in the last month. Not bad, but at the same time we also have to express a note of caution. First of all, volatility is still relatively high and, secondly, governments will have to persevere in their reform action on all fronts: fiscal consolidation, structural reforms, the banking sector and more generally the financial market sector.
What is an acceptable level of fragmentation? Well, it is hard to say. But certainly when you see two subsidiaries of the same company located in two different countries and paying completely different interest rates for their borrowing, when you see exactly the same individual borrower, say a young couple that wants to buy a flat, and paying a completely different interest rate on mortgages, then you start asking yourself, maybe there is a problem here. Then you look around and you see that credit flows are normal in one part of the euro area, are non-existent in another part, falling and have been falling precipitously in yet another part. When you see that you have widespread credit rationing in some parts of the euro area, when you see that there is a very strange correlation between the movements in the exchange rates and the interest rates; namely that the exchange rate appreciates when the interest rates go down, and vice versa. When you see that the bid-ask spreads reveal a profound lack of liquidity in certain markets, when you see that levels of volatility are abnormally high and when you see that you have the inversion of the yield curves all of a sudden, which then disappears right after an announcement, then you say that you have a reasonable and possibly unacceptable level of fragmentation in the euro area. But the issue is really that the level of fragmentation becomes unacceptable when the singleness of the monetary policy in the euro area is being put into question. Because that is the time when we cannot achieve our primary objective, namely maintaining price stability in the medium term across the euro area.
Question:
I would like to return to the question of bad banks. The ECB had some concerns regarding the establishment of this agency or bank and I would like to ask you,
Mr. Draghi, whether this remark still stands or you support this, let’s say, resolution for Slovenia?
And the second question is, what are your recommendations for Slovenia regarding fiscal consolidation? Do you think that Slovenia needs a bailout?

Draghi:
I think Marko will respond best to both questions, but by and large let me say that we agree with the overall assessment of the IMF.

Kranjec:
Just to say a few sentences. The ECB made an assessment of the law that was adopted and we understood it in a sense that the view was that the agency, the government and the central bank should cooperate closely in deciding how to make the banking sector more resilient.
As to the second question regarding the bailout, I think it is much too early to say anything about it. All macroeconomic indicators at the moment point to the fact that if a country adopts decisive stabilisation measures in fiscal consolidation, in labour markets, in pension reforms and of course in the banking sector, it will not need to apply for a programme, but in the end, as the President also said, in many countries that is primarily a political decision. The central bank cannot operate in an environment which is inherently unstable from a macroeconomic point of view.

Question:
As a member of the Slovenian press, my question is rather similar. The decision on the OMT programme has contributed enormously to calming the situation in the markets. However, the yields on Slovenian government bonds remain rather high and surpass the yields of the Spanish government bonds. What do you believe are the factors that could calm this situation, which is very worrisome for Slovenian citizens?

Kranjec:
The spreads that you have noticed in the markets in our opinion do not reflect the fundamentals. You should take into consideration that the capital markets for Slovenian paper are very shallow, the transactions are rare and one cannot judge the underlying fundamentals from two or three transactions. We believe that with the adoption of the stabilisation measures that I mentioned before, spreads will go down and I understand – no I do not only understand, you can verify yourself – that spreads have gone down. With the adoption of further measures I believe that spreads will go down as they have done in other euro area countries.

Question:
Two questions. The first one: How concerned are you that if the OMT programme actually comes into action it might rearrange the yield curve and denaturalise the yield curve, as it were and frontload the short-end of the maturity spectrum?
The second one is on the OMT per se: If the OMT is a purely monetary measure for repairing the dysfunction of a fragmented market, how can you set political preconditions? Is it not a little bit like the local fire brigade telling me “ I can only turn on the water if you show me that you have a roof improvement programme”?

Draghi:
On the first point, we will certainly monitor the strategic response of the issuers to our programme. The OMT is not meant to induce a strategic response in favour of issuing short terms.. So this will be monitored. By the way, I think, and that is my purely personal perception, that all of the countries that may need an OMT have now reached, after many years of a difficult, very difficult process, reasonable maturities, reasonable durations in their stock of public debt. It is very unlikely they will change these durations in favour of a short-term issuance. First, because they have market access. It is not that they do not have market access. These countries do have market access. So there is no reason really to change the duration, and you know there are not only pros if you change the duration, you also have some serious cons. So all in all, I think it is unlikely. In any event the ECB will closely monitor this possible strategic response by issuers.
As to the second point, I think it is just the other way around. I think I did say something about this last time we had this press conference. When the OMT was designed, we had the perception and the evidence that there were tail risks in the euro area, namely that there was a bad equilibrium for certain countries in certain markets. It means that expectations were self-perpetuating and in the end would create disruptive scenarios. So then it is opportune for the policy-maker, which in this case is the ECB, to step in with a programme. At the same time, we should not forget how these countries got into a bad equilibrium to begin with, namely with bad policies, or in some cases no policies at all for a long period of time, while the rest of the world was changing completely. So the first conclusion was that any monetary policy would have no effect if the other policies did not change. That is why conditionality is so important. Eventually, as I said at the beginning, it is what makes the monetary policy effective and it is what protects the independence of the ECB. So I would not buy the example you have given, I think it is really an integral part of this.

Question:
Are you comfortable with the current situation in which Spain – and even Germany – has doubts about the rescue? Or did you expect a more rapid reaction from the political side?
And second, do you think that Spain has the possibility to resolve its crisis without European aid?

Draghi:
Unfortunately, I cannot comment on either of the questions, because stopping this process is very much a decision that is entirely in the hands of governments. As I have said over and over again, I think that through the OMT programme, the ECB has done everything possible and it could certainly create an environment which is conducive to reforms because it could remove what we call the redenomination risk. So, it could remove tail risks but ultimately, the initiative is in the hands of governments.

Question:
You spoke several times about risks and now redenomination risks. Yields have calmed down since your announcement in July and then your further announcement. How much of these risks have been removed and do you think it is just a temporary effect which will be reversed in the event that the OMT programme is not applied?
And second, as you made OMTs dependent on a request and the governments seem to be extremely reluctant to make such a request, and given that the monetary policy transmission mechanism is still broken, have you thought about any other solution that you could apply in this event?

Draghi:
Well, on the second question: for the time being, no. I think we have the sense that it was a very important decision which has many dimensions. We had to cope with all of these and it is now in place. We are ready and we have a fully effective backstop mechanism in place. Now it is really in the hands of governments and, as I said many times, the ECB cannot replace the action of governments.

With regard to whether the level of interest rates reflects redenomination risks, as I said before, we are considering a variety of indicators here, one of which is the interest rates and then we are also considering those I mentioned, namely the bid-ask spreads, liquidity, the shape of the yield curves and volatility. So there are a variety of indicators which will certainly inform our monetary policy assessment.

Question:
With regard to the recapitalisation of banks through the ESM, do you see any possible way out and if so, what is it?
And second, the markets are already discussing the point at which you could intervene in the markets in the event that Spain or another country asks for aid. Do you have a particular target or target range?

Draghi:
On the second question, the answer is no. As I just said, we are looking at a variety of indicators. And we will look at all of them because we have to carry out monetary policy assessment. What is the degree of disruption to our monetary policy transmission channels? That is simply a question we have to answer.
On the first question, as I said before, it really is very much in the hands of governments. They took the initiative a year and a half ago to create the ESM. Now that it is about to enter into force, there are certain limitations that are being brought to the table. There is going to be a political discussion and frankly, it would not be right for the ECB to prejudge the outcome of this discussion, nor to express views on it.

Question:
I would like to ask you a question on the supervision of banks: how do you plan to ensure that the two tasks to be performed by the ECB will be separated? In Germany at least, there are still important people who have many concerns about this potential conflict of interest. Jens Weidmann recently raised these concerns in an interview, so what would be your response?

Draghi:
I think there are very important concerns that we are addressing by means of a proper internal organisation. The proposal doesn’t give us much of an option on this. I think one of the principles I stated at the very beginning of this discussion was that, if in the end the ECB is involved in the single supervisory mechanism, we have to make sure we have an organisation which de facto assures the separation of monetary policy from supervision. And this can be done by fully delegating the task to the Supervisory Board. Fortunately, the Commission’s proposal does foresee the possibility of the Governing Council delegating all the supervisory tasks to the Supervisory Board. So, the management and internal organisational means are there. I believe it can be achieved.

http://capitalismandfredom.blogspot.pt/2012/10/transcript-of-draghis-press-conference.html#links

Living Europe’s Nightmare

NEW YORK – Losing a long war is always hard to accept. Hemmed in by the Americans and the Russians in the final days of World War II, Hitler convinced himself that he had two armies in reserve to mount a counter-attack and win the war. Meanwhile, having lost the entire Pacific, Japan’s Imperial Cabinet believed that no enemy could set foot upon the country’s sacred soil. When the truth is unimaginable, human psychology finds an alternative reality in which to dwell.

That describes the global situation today. The entire planet seems to be in denial about what is about to occur in the eurozone. Pundits keep expecting Germany to pull a rabbit out of the hat and flood the continent with Eurobonds, or that Mario Draghi will mount a coup at the European Central Bank and buy up every deadbeat country’s bonds.

Either could happen, but both are extremely unlikely. Germany cannot guarantee the eurozone’s debt without control over the eurozone, which no one has offered, and Northern Europe will not permit the ECB to be hijacked by “Club Med” and turned into a charity organization. It is not just a matter of politics; it is also – as the Germans keep pointing out – a matter of law.

Europe has a Plan A, whereby each country would reform its economy, recapitalize its banks, and balance its budget. But Plan A is not working: its intended participants, most notably France, are rejecting it, and there is an emerging southern European consensus that austerity is not the solution.

Greece’s recent election has put it in the anti-austerity vanguard. Italy and Spain (which does not have enough money to bail out its banking system), have similarly called for an end to austerity, and Ireland will be voting on it soon. All have lost access to the bond market, and Portugal is so far beyond hope that its sovereign debt is trading for cents on the euro.

There is no well-thought-out plan for the orderly exit of the eurozone’s insolvent countries. There are no safeguards, no plans, no roadmap – nothing. The Maastricht Treaty, like the United States Constitution, did not provide for an exit mechanism. So, instead of realism and emergency planning, we get denial and more happy talk. But, just because something is “unthinkable” doesn’t mean that it can’t happen.

In fact, it already is happening. Greece is rapidly running out of money; its residents are withdrawing their deposits and have stopped paying their taxes and utility bills. Even if the country can stay afloat until the June 17 election, a disorderly eurozone exit, default, and currency redenomination will follow. Greece will be dependent upon foreign aid for essential imports such as petroleum and food. Civil order will be difficult to maintain, and the army may be forced to step in (again).

Once Greece goes, runs on bank deposits are likely to follow in Spain and Italy. There is nothing to stop Spanish and Italian depositors from wiring their euros from their local bank to one in Switzerland, Norway, or New York. At that point, the only thing still standing between the eurozone and financial chaos will be the ECB, which could buy government bonds and fund the bank runs. The scale of such an operation would be enormous, and would expose the ECB to huge credit risk. But it could, in principle, step in – if Northern Europe permitted.

If the ECB does not step in, Italy and Spain, too, will be forced to exit the eurozone, default on their euro-denominated sovereign and bank obligations, and redenominate into national currency. Massive losses would be imposed on the global financial system. Given the opacity of banks’ exposures, creditors would be unable to discriminate between the solvent and the insolvent (as was the case in September 2008).

The US banks most likely to be affected by such a scenario would be the globalists: Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, and Morgan Stanley. They would require a rescue package similar to the US Troubled Asset Relief Program, created after Lehman Brothers’ collapse in 2008. The US can afford a second TARP, but it would require Congressional legislation, which is not guaranteed (though the US Federal Reserve can, of course, keep the system funded no matter what).

Massive wealth destruction, combined with global financial chaos, would pose a challenge to monetary policymakers worldwide. Central banks would be tasked with preventing deflation, implying a major round of quantitative easing. But, since banks are the transmission mechanism for monetary stimulus, this presupposes functioning banking systems. Each country would need to restore confidence in its banks’ solvency, which would most likely require a blanket bank guarantee and a recapitalization scheme (such as TARP).

The US financial system can withstand any shock, because the US can print the money that it needs. The Fed can maintain nominal prices, nominal wages, and growth if it acts heroically, as it did in 2008. The stock market will react negatively to the level of uncertainty caused by the collapse of the European financial system (as it did in 1931), and the dollar, yen, and gold should benefit. The fate of the British pound and Swiss franc is impossible to say; they could benefit as safe havens, but their banks are highly exposed to the eurozone.

It is bad enough that the world is utterly unprepared for the future that can be foreseen. The unanticipated financial, economic, and political consequences of the coming crisis could be even worse.

Em Português:

Reunião do Conselho de Governadores do Banco Central Europeu: Transcrição Conferência de Imprensa do Presidente do BCE Mario Draghi Goldman Sachs; Transcrito Por Christopher T. Mahoney Ex-Vice Presidente Moodys

European Economic Crisis: "Living Europe’s Nightmare"; When The Truth is Unimaginable, Human Psychology Finds An Alternative Reality: The Entire Planet Seems To Be In Denial About What Is About To Occur In The Eurozone"; Christopher T. Mahoney Ex-Vice President Moody's

Fri, 12 Oct 2012 07:38:00 -0700

Living Europe’s Nightmare by Christopher T. Mahoney
Christopher T. Mahoney is a former Vice Chairman of Moody’s.
See Christopher T. Mahoney Full profile

NEW YORK – Losing a long war is always hard to accept. Hemmed in by the Americans and the Russians in the final days of World War II, Hitler convinced himself that he had two armies in reserve to mount a counter-attack and win the war. Meanwhile, having lost the entire Pacific, Japan’s Imperial Cabinet believed that no enemy could set foot upon the country’s sacred soil. When the truth is unimaginable, human psychology finds an alternative reality in which to dwell.

That describes the global situation today. The entire planet seems to be in denial about what is about to occur in the eurozone. Pundits keep expecting Germany to pull a rabbit out of the hat and flood the continent with Eurobonds, or that Mario Draghi will mount a coup at the European Central Bank and buy up every deadbeat country’s bonds.

Either could happen, but both are extremely unlikely. Germany cannot guarantee the eurozone’s debt without control over the eurozone, which no one has offered, and Northern Europe will not permit the ECB to be hijacked by “Club Med” and turned into a charity organization. It is not just a matter of politics; it is also – as the Germans keep pointing out – a matter of law.

Europe has a Plan A, whereby each country would reform its economy, recapitalize its banks, and balance its budget. But Plan A is not working: its intended participants, most notably France, are rejecting it, and there is an emerging southern European consensus that austerity is not the solution.

Greece’s recent election has put it in the anti-austerity vanguard. Italy and Spain (which does not have enough money to bail out its banking system), have similarly called for an end to austerity, and Ireland will be voting on it soon. All have lost access to the bond market, and Portugal is so far beyond hope that its sovereign debt is trading for cents on the euro.

There is no well-thought-out plan for the orderly exit of the eurozone’s insolvent countries. There are no safeguards, no plans, no roadmap – nothing. The Maastricht Treaty, like the United States Constitution, did not provide for an exit mechanism. So, instead of realism and emergency planning, we get denial and more happy talk. But, just because something is “unthinkable” doesn’t mean that it can’t happen.

In fact, it already is happening. Greece is rapidly running out of money; its residents are withdrawing their deposits and have stopped paying their taxes and utility bills. Even if the country can stay afloat until the June 17 election, a disorderly eurozone exit, default, and currency redenomination will follow. Greece will be dependent upon foreign aid for essential imports such as petroleum and food. Civil order will be difficult to maintain, and the army may be forced to step in (again).

Once Greece goes, runs on bank deposits are likely to follow in Spain and Italy. There is nothing to stop Spanish and Italian depositors from wiring their euros from their local bank to one in Switzerland, Norway, or New York. At that point, the only thing still standing between the eurozone and financial chaos will be the ECB, which could buy government bonds and fund the bank runs. The scale of such an operation would be enormous, and would expose the ECB to huge credit risk. But it could, in principle, step in – if Northern Europe permitted.

If the ECB does not step in, Italy and Spain, too, will be forced to exit the eurozone, default on their euro-denominated sovereign and bank obligations, and redenominate into national currency. Massive losses would be imposed on the global financial system. Given the opacity of banks’ exposures, creditors would be unable to discriminate between the solvent and the insolvent (as was the case in September 2008).

The US banks most likely to be affected by such a scenario would be the globalists: Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, and Morgan Stanley. They would require a rescue package similar to the US Troubled Asset Relief Program, created after Lehman Brothers’ collapse in 2008. The US can afford a second TARP, but it would require Congressional legislation, which is not guaranteed (though the US Federal Reserve can, of course, keep the system funded no matter what).

Massive wealth destruction, combined with global financial chaos, would pose a challenge to monetary policymakers worldwide. Central banks would be tasked with preventing deflation, implying a major round of quantitative easing. But, since banks are the transmission mechanism for monetary stimulus, this presupposes functioning banking systems. Each country would need to restore confidence in its banks’ solvency, which would most likely require a blanket bank guarantee and a recapitalization scheme (such as TARP).

The US financial system can withstand any shock, because the US can print the money that it needs. The Fed can maintain nominal prices, nominal wages, and growth if it acts heroically, as it did in 2008. The stock market will react negatively to the level of uncertainty caused by the collapse of the European financial system (as it did in 1931), and the dollar, yen, and gold should benefit. The fate of the British pound and Swiss franc is impossible to say; they could benefit as safe havens, but their banks are highly exposed to the eurozone.

It is bad enough that the world is utterly unprepared for the future that can be foreseen. The unanticipated financial, economic, and political consequences of the coming crisis could be even worse.

http://www.project-syndicate.org/commentary/living-europe-s-nightmare

About World Financial Corporations People Profile: Christopher T. Mahoney Moody's Investors Service, Inc Vice-Chairman of the Board And N-Viro International Corporation Vice President

Fri, 12 Oct 2012 07:36:00 -0700

Christopher T. Mahoney is retired from Moody's in 2007 after 30 years on Wall Street. My core expertise and experience is in the analysis of banks and sovereigns, with a "minor" in corporate credit. Christopher T. Mahoney says he is a student of the markets with a generally libertarian bent except with respect to financial regulation where "I am a hawk, and monetary policy, where I am a dove."

Christopher T. Mahoney consider himself to be an expert on the subject of "too big to fail".

Disclaimer: Blog content. All the contents of the Blog, except for comments, constitute the opinion of the Author, and the Author alone. The Author is not an investment advisor, and you should never substitute information from this Blog for information obtained from an SEC licensed investment advisor. Do not take my views as investment advice. The content of this Blog is not intended to cause harm,

Disagreeing with the content of the Blog does not constitute sufficient ground for you to ask the author to remove or modify any parts of this Blog.

About The Autor
	Christopher T. Mahoney
	Christopher T. Mahoney is a former Vice Chairman of Moody’s. Perfil de Christopher T. Mahoney em Português
Sex	Male
Indústria	Banca
Ocupação	retired rating agency executive
Local	Wellsville, Pennsylvania, Estados Unidos
	mahoneyct@gmail.com
	http://www.project-syndicate.org/contributor/christopher-t--mahoney
	The Union of Concerned Jack Russells
	http://concernedjackrussells.blogspot.com/
	Thermidor
	http://thethermidoreanreaction.blogspot.com/
	Capitalism and Freedom
	http://capitalismandfredom.blogspot.com/ https://www.facebook.com/projectsyndicate http://www.corporationwiki.com/New-York/New-York/christopher-t-mahoney/47791014.aspx http://www.corporationwiki.com/Ohio/Toledo/christopher-t-mahoney-P5470425.aspx
Introdução	I retired from Moody's in 2007 after 30 years on Wall Street. My core expertise and experience is in the analysis of banks and sovereigns, with a "minor" in corporate credit. I am a student of the markets with a generally libertarian bent except with respect to financial regulation where I am a hawk, and monetary policy, where I am a dove. I consider myself to be an expert on the subject of "too big to fail". Disclaimer: Blog content. All the contents of the Blog, except for comments, constitute the opinion of the Author, and the Author alone. The Author is not an investment advisor, and you should never substitute information from this Blog for information obtained from an SEC licensed investment advisor. Do not take my views as investment advice. The content of this Blog is not intended to cause harm, but if you have any concerns about the contents of this Blog, please contact me at mahoneyct@gmail.com. Disagreeing with the content of the Blog does not constitute sufficient ground for you to ask the author to remove or modify any parts of this Blog.

European Revolution Portugal, Spain, Greece, Italy, Ireland: Southern Europe Must Revolt Against Price Stability"; Christopher T. Mahoney Ex-Vice President Moody's

European Economic Crisis: "Living Europe’s Nightmare"; When The Truth is Unimaginable, Human Psychology Finds An Alternative Reality: The Entire Planet Seems To Be In Denial About What Is About To Occur In The Eurozone"; Christopher T. Mahoney Ex-Vice President Moody's

European Central Bank Governors Meeting; Mario Draghi Goldman Sachs Trilateral Bilderberg Bankster Boy ECB President Press Conference Transcript by Christopher T. Mahoney Ex-Vice President Moody's

A Fistful of Euros

Berkeley economist Barry Eichengreen

Credit Writedowns

David Beckworth's blog

EconomicPic Data

Federal Reserve Economic Data (FRED)

Foreign Dispatches

FRB: Debt growth by sector

Gains, Pains & Capital

Greg Mankiw's blog

John Mauldin's Thoughts from the frontline

My Christopher T. Mahoney blog on Seeking Alpha

My Christopher T. Mahoney page on Project Syndicate

My Christopher T. Mahoney page on Seeking Alpha

Real Time Economics (WSJ)

Rebecca Wilder's "News N Economics"

Scott Sumner: The Money Illusion

Shadowstats: What the Fed doesn't report

Stanford economist Ronald McKinnon

Thaler's Corner (Erwan Mahe)

The Testosterone Pit

Vincent Truglia's blog

WSJ: Real Time Brussels

Zero Hedge

Moody's Investors Service, Inc

Moody's Investors Service, Inc has a location in New York, NY. Active officers include Brian Clarkson, Karl Armani, Michael Hurle, Christopher T Mahoney, Alex Monereau, Richard Nelson, Frank Santiago, Jay Marte and Roxanne E Parker. The company's line of business includes Credit Reporting Services.

Website: www.moodyseurope.com
direct dial: (212) 553-0300
Category: Credit Reporting ServicesCredit reporting services
A.K.A.: Moody's;
Source: Dun & Bradstreet last refreshed 11/12/2011

Updated 11/12/2011 - This profile of Moody's Investors Service, Inc was created using data from Dun & Bradstreet

Corporatio Wiki Connections

Brian Clarkson
President
Chief Operating Officer

Karl Armani
Associate Vice-President
Manager

Michael Hurle
Managing Director

Christopher T Mahoney
Vice-Chairman of the Board

Alex Monereau
Unix Systems Administrator

Richard Nelson
Avp Dir Tech Supp

Frank Santiago
Manager Mis Operatio

Jay Marte
Telecomm Specialist

Roxanne E Parker
Treasurer
President

--

N-Viro International Corporation

J Patrick Nicholson
John R Kolpien
Timothy R Kasmoch

Christopher T Mahoney is associated with N-Viro International Corporation with the role of Vice President. Christopher T Mahoney has 3 known relationships including J Patrick Nicholson, John R Kolpien and Timothy R Kasmoch and is located in Toledo, OH.
Source: Florida Department of State last refreshed 5/17/2012

Updated 5/19/2012 - This profile of N-Viro International Corporation was created using data from Dun & Bradstreet and Florida Department of State

N-Viro International Corporation has a location in Toledo, OH. Active officers include J Patrick Nicholson, John R Kolpien, Christopher T Mahoney and Timothy R Kasmoch. The company's line of business includes Licensor of A Process to Treat and Recycle Wastewater Sludges and Other Bio-Organic Wastes.

direct dial: (419) 535-6374
Category: Licensor of A Process to Treat and Recycle Wastewater Sludges and Other Bio-Organic Wastes, Sanitary ServicesPatent buying, licensing, leasing
Stock Symbols: NVIC on Over-the-counter (OTC)
Filings: Foreign for Profit Corporation (FL - Inactive)
Sources: Dun & Bradstreet last refreshed 5/19/2012
Florida Department of State last refreshed 5/19/2012

Florida N-Viro Management, Limited Liability Company

J Patrick Nicholson
President
Chairman
Director
John R Kolpien
CFO
Chairman
Christopher T Mahoney
Vice President
Timothy R Kasmoch
Chief Executive Officer