Bloomberg News - G-20 Reaches for Growth as China Changes Lending Rules

IMF Managing Director Christine Lagarde

Kirill Kudryavtsev/AFP/Getty Images

Christine Lagarde, managing director of International Monetary Fund (IMF), looks at empty seats as she poses for a family photo during the G20 Finance Ministers and Central Bank Governors' meeting in Moscow on July 20, 2013.

Global finance chiefs sought to buttress the global economic recovery with pledges to avoid spooking markets as China moved to scrap a lending rule that had constrained its banks.

Group of 20 nations will pursue “carefully calibrated and clearly communicated” policy moves so that the U.S. and Japan don’t cause cross-border damage when they start rolling back stimulus, they said after a two-day meeting of finance chiefs in Moscow. They will move “more rapidly” toward market-determined exchange rate systems, following China’s internal banking change, according to a July 20 statement.

“China’s action is probably the one thing that will help markets,”Lena Komileva, chief economist at G+ Economics in London, said in a July 20 telephone interview. “Global markets are dominated by a butterfly effect. If the Fed is to change domestic policy in response to U.S. economic conditions, it’s going to have global consequences.”

The G-20 heeded calls from emerging-market countries to guard against shockwaves when U.S. growth is secure enough for the Federal Reserve to cut back on its bond buying, according to the statement. It also repeated that nations should avoid competitive currency devaluations.

Speculation about developed economies scaling back their unprecedented monetary easing has roiled emerging-market currencies and bonds since G-20 finance chiefs last met in April. The dollar fell for a second week versus most major peers.

Bernanke’s Reassurance

Fed Chairman Ben S. Bernanke said the central bank wouldn’t slow its monthly bond-buying program unless warranted by economic conditions. Policy makers also sought to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying.

Treasury 10-year yields fell 10 basis points, or 0.10 percentage point, to 2.48 percent this week in New York, Bloomberg Bond Trader data showed. This week’s drop, combined with a 16 basis-point decline the previous five days, was the biggest back-to-back decrease since the period ended Aug. 31.

A U.S. Treasury Department official said the G-20 recognized that financial-market volatility has returned to normal. The official acknowledged a lot of interest in U.S. monetary and fiscal policy, while reiterating Washington’s call to do more to help the euro region emerge from recession.

‘Proper Manner’

The improving U.S. economy means a shift in Fed policy is coming and it will need to take place “in the proper manner,” according to Indonesian Finance Minister Chatib Basri.

“The question is about the pace,” he said in an interview. “Of course we have to wait for what will happen in the next couple of months.”

Global yields surged and equities fell after Bernanke signaled the U.S. central bank may start tapering its monthly stimulus program this year. U.S. 10-year yields, which climbed 36 basis points in June, have pared increases over the past two weeks as Bernanke eased those concerns in recent appearances.

On July 18 he said it was “way too early to make any judgment” about starting tapering in September. The previous day, he said the Fed’s quantitative easing is “by no means on a preset course” and may be reduced or expanded if needed, depending on economic conditions.

“We’ve all learned something from this,” Bank of Canada Governor Stephen Poloz said. A certain amount of reaction “is inevitable. You have to be mentally prepared for that and continue to emphasize that message and be very clear.”

From South Korea to South Africa, anticipation that the Fed would soon pare back its quantitative easing efforts drew calls for coordination so as not to choke global demand.

‘Crucial Challenge’

Several countries pointed out possible negative spillover effects emerging economies may face from developed economies unwinding stimulus, South Korean Finance Minister Hyun Oh Seok said. The “crucial challenge” is how financial markets manage these signals to avoid harming emerging markets and their currencies, South African Finance Minister Pravin Gordhan said.

“We really focused on growth and employment and what is the policy mix that will help improve growth encourage and create jobs,” International Monetary Fund Managing Director Christine Lagarde said in an interview with Bloomberg Television. “Central banks share that concern.”

China eliminated the lower limit on lending rates at its financial institutions in a move to address slowing growth and expand the role of markets. The People’s Bank of China acknowledged that it was a limited step and said that freeing up deposit rates would be more important.

‘Always Beneficial’

“Removing various limitations is always beneficial,” Russian Finance Minister Anton Siluanov told reporters. “It’s an additional stimulus so that the slowing growth, including in China, we’re seeing may be halted.”

Fed Vice Chairman Janet Yellen represented the U.S. central bank in Moscow, with Bernanke not in attendance. Brazilian Finance Minister Guido Mantega also didn’t participate, while Canadian Finance Minister Jim Flaherty was forced to spend the weekend at a hotel in the Russian capital after falling ill with a stomach flu, replaced in the talks by his deputy, Jean Boivin.

“Having a G-20 meeting at the present juncture without the chairman of the Federal Reserve is like Hamlet without the prince,” Paulo Nogueira Batista, Brazil’s executive director at the IMF, said in an interview.

‘Credible, Ambitious’

According to the final statement, G-20 nations will offer “credible, ambitious” fiscal strategies when leaders meet in St. Petersburg in September. Those strategies must be “sufficiently flexible to take into account near-term economic conditions” while also making debt levels more sustainable, according to the statement.

Germany had sought tougher language that would require medium-term budget targets and push the U.S. and Japan to follow through on previous commitments, said an official from a G-20 country. Germany in turn came under fire from the U.S. and South Korea, who pressed Europe to prioritize growth over debt-cutting measures.

The G-20 hasn’t yet decided if these targets will be binding, a second official said. Leaders will use the September summit to decide how to proceed on the fiscal strategies, said the official, who asked not to be named because the talks aren’t public.

Risks ‘Widespread’

The G-20 acknowledged that global risks aren’t confined to Europe, German Finance Minister Wolfgang Schaeuble told reporters after the meeting. The G-20 said in its final statement that the U.S. and Japanese economies are strengthening, while growth slows in emerging marketsand the euro area remains mired in recession.

“The global risks are widespread, and no longer, as in former years, only focused on the euro zone, and this view is also shared by all my colleagues,” he said.

The G-20 also endorsed the Organization for Economic Cooperation and Development’s plan for revamping global tax codes. The endorsement gives a boost to the Paris-based OECD’s efforts to prevent the largest companies from using complicated ownership structures and transfer pricing to avoid paying taxes where they do most of their business.

Schaeuble cautioned that caution is needed when considering how fast the recommendations could be phased in.

Reuters News - BRICS joint action at G20 summit may be wishful thinking

L-R) Brazil's President Dilma Rousseff, Russia's President Vladimir Putin, India's Prime Minister Manmohan Singh, China's President Hu Jintao and South African President Jacob Zuma pose for a picture after a BRICS leaders' meeting in Los Cabos June 18, 2012 file photo.

Credit: Reuters/Victor Ruiz Garcia

By Alonso Soto

BRASILIA | Fri Jul 19, 2013 1:11am EDT

(Reuters) - Plans by the world's leading emerging economies to join forces to battle the latest bout of global financial turbulence could remain on the drawing board once again at the G20 meeting in Moscow this week.

An exodus of capital from Brazil, Russia, India, China and South Africa prompted by an expected scale-back in U.S. monetary stimulus has raised fears about the health of their economies, which are already losing some of their luster.

The reversal of the "monetary tsunami" - as Brazil called the flood of cheap money from developed nations - prompted the South American nation's president, Dilma Rousseff, to phone her Chinese counterpart in June to discuss "coordinated action" to offset the sharp appreciation of the U.S. dollar.

Indeed, there are reasons for the BRICS to worry. Massive capital outflows have weakened most of their currencies, raising inflationary pressures and forcing Brazil and India to tighten liquidity at a time when their economies are underperforming.

This week's meeting of the 20 leading world economies was supposed to be the stage for the BRICS to discuss and propose joint measures to limit the fallout of a stronger greenback.

However, unlike their wealthier counterparts at the G7 group, the BRICS are still far from either coordinating monetary policy or jointly intervening in forex markets.

The BRICS surprised many by starting work on a $100 billion reserve fund and a joint development bank to reshape the global financial architecture long dominated by rich nations. These new institutions will still take some time to materialize.

Russia's Finance Minister Anton Siluanov acknowledged in an interview with Reuters that talks for measures to shield the BRICS from global headwinds are moving slowly.

Another BRICS official currently at the G20 meeting in Moscow put it more bluntly; "There are no discussions inside the BRICS about measures to battle a stronger dollar ... We just want to secure what we had agreed on previously."

Beyond promises to speed up the creation of the BRICS bank and a reserves fund, the five nations will again have little to show during the G20 meeting.

At their last summit in South Africa earlier this year, the BRICS, which make up a fifth of the global economy, disappointed many with what appeared to be lack of conviction to create the new institutions.

BRICS officials have shrugged off criticism saying that it takes time to build solid institutions. Some analysts point to disagreements inside the widely-diverse group as the cause for the delay. The reserves pool is expected to be formally launched at a BRICS summit in Brazil next year and the bank could take years to start lending money.

Brazil, one of driving forces behind the projects, did not send its finance minister to the G20 this week so he could focus on domestic problems instead.

BRICS STARDOM FADES

The group, which traces its origins from a term coined by a Goldman Sachs banker in a 2001 research note, has emerged as a possible counter balance to the hegemony of the United States,Japan and Europe on the global economic stage.

Until recently the group provided the main engines of growth for a global economy rattled by back-to-back crises in the developed world. The BRICS are now seeing their own economies fade somewhat.

In its latest health check of the world economy, the International Monetary Fund warned that the BRICS economies are running into speed bumps. The IMF cut its 2013 growth estimate for Russiato 2.5 percent from 3.4 percent and sees Brazil growing also 2.5 percent. Three years ago Brazil grew 7.5 percent.

That slowdown could further dim BRICS' hopes of joining forces to influence the global economy, analysts say.

"The BRICS will only persevere as a group ... if these countries continue to grow," said Marcos Troyjo, a former Brazilian diplomat who is co-director of Columbia University's BRICLab in New York.

"Because individually the situation in each of the BRICS countries is different the amount of coordinated efforts that can actually come to fruition is very thin."

Expectations of a withdrawal of U.S. monetary stimulus has further deteriorated their economies, sparking a sell-off in emerging-market markets as investors return in mass to safe-haven assets.

Emerging market stocks are down more than 9 percent this year - with Brazilian stocks losing a whopping 21 percent. The South African rand, India's rupee and the Brazilian real have been some of the world's worst performing currencies this year with losses reaching nearly 15 percent.

Not all their economic woes can be blamed of dwindling global liquidity.

Most BRICS failed to make the structural reforms needed to shield their economies after a decade of cheap money, gushing foreign investment and high commodity prices.

"There were some mistakes made along the way. We are not yet at a stage where the BRICS can change the fate of the world economy together," said a BRICS diplomat posted in Brazil. "But we are showing that we are on the way there."

Bloomberg News - China’s Treasuries Holdings Hit Record as Investors Sell

China Treasuries Holdings Hit Record as Private Investors Sell

Tomohiro Ohsumi/Bloomberg

China stayed the biggest foreign owner of Treasuries as its holdings increased by $25.2 billion to $1.316 trillion, according to Treasury Department data released today.

China’s holdings of U.S. Treasuries (BUSY) rose to a record in May even as net selling by private foreign investors in notes and bonds reached an all-time high, government data showed.

China stayed the biggest foreign owner of Treasuries as its holdings increased by $25.2 billion to $1.316 trillion, according to Treasury Department data released yesterday in Washington. Japan, the second-largest holder, cut its holdings to $1.11 trillion. The net long-term portfolio investment outflow was $27.2 billion after a revised decline of $21.8 billion the prior month.
The yield on the 10-year Treasury note reached a two-month high in May as speculation the Federal Reserve may consider tapering its unprecedented bond-purchase program crimped demand for the securities at the same time the Standard & Poor’s 500 Index increased to a record. China has increased its holdings of long-term U.S. government debt in seven of the past eight months of available figures.
“Foreign central banks found the levels and the opportunity to buy Treasuries more attractive than private accounts,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The month of May was characterized by a sharp sell-off,” so “some overseas markets were taking advantage of some higher-yielding Treasuries to add some additional duration exposure.”
U.S. residents bought a net $27.2 billion in foreign long-term securities, while non-government investors abroad were net sellers of a record $29 billion of Treasury bonds and notes, the report showed.

Official Purchases

Net buying by official entities of long-term Treasuries totaled $40.3 billion, according to the report, leaving net Treasury purchases for the month of $11.3 billion after factoring in private net selling, according to the data.
The yield on the 10-year Treasury note is 2.53 percent late yesterday in New York, up from 1.63 percent on May 1.
The S&P 500 Index rose 2.1 percent in May, the seventh straight monthly advance, before falling 1.5 percent last month. Investors in U.S. Treasuries lost 1.94 percent in May, the biggest monthly drop in data going back to 2010, according to Bloomberg World Bond Indexes.
The Bloomberg U.S. Dollar Index, a gauge of the greenback’s value against 10 major currencies weighted by liquidity and trade flows, rose 2.7 percent.
Including short-term securities such as stock swaps, the total cross-border inflow was $56.4 billion in May, compared with a $28.3 billion gain the prior month, the report showed.

BBC News - 'Brexit': IEA offers prize for UK exit plan from EU

The Institute of Economic Affairs (IEA) has announced that it is holding a competition to find the best plan for a UK exit from the European Union.

The IEA Brexit prize is denominated in euros, not pounds

The free-market think tank said it would award its Brexit Prize to whoever came up with the best blueprint for the UK after the EU, covering the country's withdrawal and post-exit repositioning.

The winning entry will be awarded 100,000 euros (£86,525).

The IEA said it was time to look at how the UK might fare without the EU.

It said: "We need to give serious consideration to how the UK could have a free and prosperous economy outside the EU, given that exit is a serious possibility after the next election."

Entrants, who can be individuals or corporate bodies, are invited to submit a 2,000-word outline proposal by 16 September. The authors of about 20 of those entries will be given four months to produce a more detailed version.

The nine judges include former Chancellor of the Exchequer Lord Lawson, who wrote a newspaper article in May calling for the UK to leave the EU.

Another judge is economist Roger Bootle, founder of Capital Economics, who won last year's £250,000 Wolfson Economics prize awarded for the best plan for dealing with member states leaving the eurozone.

Lord Lawson said he welcomed the IEA's initiative, adding: "Now that we have been promised an in-out referendum on Britain and the EU in 2017, it is essential that this momentous decision is preceded by a well-informed debate. The winning entries in this competition will be an important contribution to that process."

BBC News - Africa's economy 'seeing fastest growth'

Africa's economy is growing faster than any other continent, according to the African Development Bank (AfDB).

Middle income countries now account for nearly half of African states

A new report from the AfDB said one-third of Africa's countries have GDP growth rates of more than 6%.

The costs of starting a business have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved.

The continent's middle class is growing rapidly - around 350 million Africans now earn between $2 and $20 a day.

The share of the population living below the poverty line in Africa has fallen from 51% in 2005 to 39% in 2012.

Africa's collective gross domestic product (GDP) per capita reached $953 last year, while the number of middle income countries on the continent rose to 26, out of a total of 54.

The AfDB's Annual Development Effectiveness Report said the growth was largely driven by the private sector, thanks to improved economic governance and a better business climate on the continent.

"This progress has brought increased levels of trade and investment, with the annual rate of foreign investment increasing fivefold since 2000. For the future, improvements in such areas as access to finance and quality of infrastructure should help improve Africa's global competitiveness," the report said.

Infrastructure

The AfDB points to the increase in regional economic co-operation and intra-African trade as being the drivers of growth in the future.

However, the AfDB said inadequate infrastructure development remained a "major constraint" to the continent's economic growth.

"Africa currently invests just 4% of its collective GDP in infrastructure, compared with China's 14%," the bank's report said.

"While sustainable infrastructure entails significant up-front investments, it will prove cost-effective in the longer term."

Despite the improving picture overall, the AfDB cautioned that substantial differences in incomes remained.

"The challenge will be to address continuing inequality so that all Africans, including those living in isolated rural communities, deprived neighbourhoods, and fragile states are able to benefit from this economic growth," it said.

BBC News - Bank of Japan sees modest recovery in economy

The Bank of Japan (BoJ) has said the country's economy is "starting to recover modestly".

Bank of Japan governor Haruhiko Kuroda is pumping cash into the economy

The upbeat assessment of the economy came as the BoJ left its huge monetary easing programme unchanged.

It is the first time the BoJ has described the world's third-largest economy as being on the path towards expansion in more than two years.

The bank is to stick to its plan of pumping more than 60tn yen ($606bn; £402bn) a year into the economy.

The programme is known as "Abenomics'' after Prime Minister Shinzo Abe, who took office late last year.

The BoJ has been flagging up steady improvements in the economy for the past six months, but Thursday's announcement is the first to point to a broad recovery.

"With regard to the outlook, Japan's economy is expected to recover moderately on the back of the resilience in domestic demand and the pick-up in overseas economies," the BoJ said in a statement.

Bloomberg News - EU Unveils Bank-Failure Plan in Face of German Opposition

Jock Fistick/Bloomberg

Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws.

The European Union’s executive arm is heading for a showdown with Germany over its blueprint for shuttering or restructuring failing banks, a plan intended to complement the European Central Bank’s oversight of lenders.

Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws.

“I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty,” Schaeuble said yesterday. “We have to stick to the given legal basis, as otherwise we risk major turbulence.”

EU leaders last month reiterated their support for setting up the resolution mechanism as an integral part of a planned banking union, without specifying how it should work. At issue is how much authority the new European entity would possess, and what recourse national governments would have to dispute its decisions.

“From a political point of view, the conferral of a power to wind up banks on the commission is arguably the greatest transfer of sovereignty in the history of the EU and points towards a fiscal, as well as economic and monetary, union,” Alexandria Carr, a lawyer in the London office of Mayer Brown, said by e-mail.

Rapid Progress

A draft outline of the EU plan, seen by Bloomberg News, would make the commission responsible for deciding whether action is needed to stabilize or wind down a failing bank, and would also involve the establishment of a cross-border resolution fund financed by the banking industry.

Both the commission and the ECB have urged rapid progress toward a centralized system to bolster confidence in the bloc’s banks and break the financial link between lenders and sovereigns. The project has also received support from other euro nations, including France and Italy.

The plan will address a “fragmentation” in bank oversight and an absence of effective decision-making processes that was revealed during the financial crisis, Barnier said in an interview, citing the dismemberment of Dexia SA as an example of authorities having to “improvise” a solution.

The proposal, which will target the euro area and other nations that sign their banks up for ECB supervision, require approval by governments and the European Parliament before it takes effect.

‘Significant Legal Risk’

Germany has repeatedly urged the EU to embark on treaty changes to ease its path to banking union, arguing that the bloc’s current rulebook limits the powers that can be handed to central authorities. It has sought to build support behind an alternative blueprint for a network of national resolution authorities.

A central authority that is ultimately backed by the taxpayer “would imply significant legal risk both in terms of European law and constitutional law,” according to a discussion paper circulated by the German government in March.

Other nations have rejected the need for up-front treaty changes, warning that they would cause unacceptable delays.

The commission’s plan has been designed to prevent decisions about the commitment of national taxpayer money being taken out of national hands, Barnier said.

‘Exceptional Cases’

“The text states explicitly that the resolution board would not, in any scenario, be allowed to commit a member state’s public money without its agreement,” he said. “We are talking here about very exceptional cases, as all our rules are aimed at avoiding taxpayer contributions.”

Under the commission’s plan, a bank resolution board, involving national regulators, would assess whether a bank’s finances have deteriorated to the point where intervention is needed, and if so make a recommendation to the commission to initiate resolution.

The board would decide what action should be taken, such as creditor writedowns or asset transfers, and issue instructions to national regulators.

Finance ministers and European Parliament lawmakers began negotiations this month on a related EU law that sets out how forced creditor losses at failing banks should be undertaken.

“From a legal point of view, it is dubious whether the EU’s existing legal architecture is sufficient to support the commission being given such a power or the establishment of what is effectively debt mutualization in the shape of a resolution fund,” Carr said. “And from a practical point of view, it is far from clear how such a mechanism, which would inevitably bring the commission into conflict with the views of national resolution authorities, would work.”

Bank Levies

The single bank resolution fund, which could be tapped to cover restructuring costs at failing banks, would be built up through levies on the banking industry, with individual banks’ contributions linked to the riskiness of their activities. The fund would over time replace national-level backstops and would have the ability to borrow from the market.

Nations are split over how far EU-level measures should be taken to break the bank-sovereign link. Governments in the strongest fiscal position have argued that responsibility needs to fall mainly on national shoulders, with limited access to common backstops, while also trying to reassure investors that the euro area will preserve financial stability.

Lehman Brothers

The haggling is a far cry from 2008, when banks in the biggest European countries, as well as the U.S., required bailouts following the collapse of Lehman Brothers Holdings Inc.

In a single day, Oct. 13, 2008, France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.7 trillion) to guarantee bank loans and take stakes in lenders.

The Dutch government still owns ABN Amro Group NV and only this year took over SNS Reaal NV (SR). Germany established a 500 billion-euro fund to guarantee bank debt. Taxpayers extended aid to Commerzbank AG, Bayerische Landesbank (BLGZ), HSH Nordbank AG, Hypo Real Estate Holding AG (HRX), IKB Deutsche Industriebank AG (IKB) and WestLB AG.

Michael Meister, the deputy caucus leader of Chancellor Angela Merkel’s party in the German parliament, said earlier this month that lawmakers would resist any attempt to set up a common bank resolution fund.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;Rebecca Christie in Brussels at rchristie4@bloomberg.net