Julian Saga, Squaring off World Economies

GREECE WINS EXTENSION DEAL WITH CONDITIONS
AFP
BRUSSELS: Europe has granted Greece a crucial four-month extension to its massive debt bailout, offering precious breathing space, but at the cost of huge concessions including a commitment to spell out reforms within two days.
The 19 Eurozone finance ministers reached the hard-won deal at tense talks pitting Greece against an angry Germany, suspicion that the new government in Athens was looking to ditch its austerity obligations. The deal is a tough climb down for Greek premier Alexis Tsipras, who swept to power in January on a pledge to tear-up Greek’s hated bailout programme.
“The meeting was intense because it was about building trust between us,” said Eurogroup head Jeroen Dijsselbloem, after the talks ended, setting out the tough conditions Athens will have to fulfil.
In exchange for the extension, Greece agreed it will submit a list of economic and other reforms by Monday to the hated “troika” of creditors for review. They will report back to Greece and decide whether or not to proceed.

Russia tryst with the western sanctions.
The rouble plunged more than 10% for the second day and recorded its worst fall since the Russian financial crisis in 1998 as confidence in the central bank evaporated after an ineffectual overnight rate hike.
The rouble opened around 10% stronger against the dollar following the overnight 650-basis-point rate hike, but it reversed gains in early trade and fell to record lows, pushing losses this year against the dollar to over 50%.
At one point, the rouble was down over 11% against the dollar dipping past 74 roubles per dollar for the first time — dragged lower by falling oil prices, increasing market panic and Western sanctions over Ukraine.
The ruble has fallen sharply in recent weeks as a result of sliding oil prices as well as the impact of Western sanctions imposed over Russia’s involvement in Ukraine. Russian sovereign dollar bonds fell and money market rates jumped. President Vladimir Putin has blamed both the slide in oil and the rouble on speculators and the West.
US stocks also opened lower amid the dramatic fall in oil prices and the ruble. US oil prices dropped again, sinking below $55 a barrel for the first time since May 2009. While a falling oil price could help countries to plug balance-ofpayments gaps, analysts warned the rout on energy markets could prompt contagion beyond energy exporters such as Russia.
Reuters

Quantitative easing(QE) and quantitative tightening(QT).

Quantitative easing(QE) and quantitative tightening(QT) are one of the few tools as options that the chiefs of the central banks around the world are weighing to defend their countries economies from financial turmoils. Everything depends basically on how Fed handles its program of tapering the QE 3. No defined schedule has been finalized except for giving hints that it may start winding its bond buying program throughout the 2013 and end it somewhere mid 2014 if things like non farm payrolls improve. Now even a hint about a possible date about this gives central bankers the world over, a severe headache. As the markets start crumbling and the investors watching things every minute rush their money to the safe heavens like US. Most of of the developing countries, already burdened with problem of their depreciating currencies will now have look for even more ways to prop up their currencies and prevent more dollars from leaving their shores.Take for example India, where the central bank has already resorted to every way to defend its currency from depreciating to any further. It has now started sucking out more than $15 billion every month from its economy in a new bond selling program in order to suck out any extra liquidity for speculators and banks to hedge against rupee.

Let’s solve the puzzles

Given the risks it poses, the returns from globalisation are over-estimated
Apoorva Javadekar

Globalisation is a broad term but it basically means two things; increased trade links and increased financial flows across borders. When globalisation started in the 1980s, the expectation was that capital would flow from rich countries to poor but efficient countries, that domestic investments will be financed less and less by domestic savings, that investors would diversify their asset portfolios globally and that countries would hedge away the country-specific economic risks. This has not materialised to the extent it should have over the last two decades.

In 1990, Robert Lucas pointed out that capital does not flow from rich to poor countries to the extent it should. After two decades we are left with two puzzles to solve: the ‘Direction Puzzle’ and the ‘Allocation Puzzle’. South Korea liberalised its capital account after the Asian crises. At that time, Korea was running a current account deficit of around 2.5% of its GDP. Though FDI inflows increased over last decade, more capital has flown out of Korea than what came in, barring 2003 and 2004 — this is the ‘Direction Puzzle’ (when capital flows in the opposite direction than predicted). The ‘Allocation Puzzle’ is that capital is not necessarily flowing to productive economies.

With globalisation, one would expect that more of the domestic investments are financed by international savings. But that is not happening. In many open economies like China, Singapore and Indonesia, the average foreign ownership is less that 30%.

The next puzzle in line is the ‘Risk Sharing Puzzle’. The idea of risk-sharing is that countries can invest abroad and borrow internationally, thereby hedging against domestic recessions. Economists found that exactly the opposite is true in data; output or GDP growth is more highly correlated than consumption growth. The mirror image of this puzzle, ‘The Home Bias Puzzle’ explains it. Even after two decades of capital markets development, investors do not diversify their portfolios globally.

The idea of risk sharing works only if your insurer does not sink with you. Recent crises have showed how recession can transmit across the borders as it did from the US to Europe. Hence, if the economic shocks are global in nature or if domestic shocks spread to other countries, opportunities to share risk are drastically reduced.

Why are these puzzles important? The way capital moves around the world is important because it can create ‘global imbalances’ — a term which refers to the massive built up of deficits by large economies and surpluses by emerging economies.

After the Asian crises in 1997, emerging economies like China and South Korea invested their current account surplus in safe assets in the developed world. This kept the interest rates in the US well below where they would have been and that in turn led to the house and asset price bubble from 2003 till the crisis in 2007. This shows that capital movements play an important role in global economy. In addition, if consumption risk cannot be shared effectively, then the major motivation for globalisation is at stake. Hence, the gains to globalisation may not be as high as perceived by many in the light of the risks it poses, unless bottlenecks which create the puzzles are removed.

Apoorva Javadekar is a doctoral student in economics at Boston University.

Austerity v/s Quantitative Easing around the world.
Saurabh Taneja

As we move on around the world we see basically two sort of financial policies being implemented i.e. either austerity of quantitative easing.These two policies are diametrically opposite to each other in nature but are being pursued by different governments across different countries. The 2008-09 financial crisis had adverse effect on the economies of almost all of the countries of the world but its interesting to know that how they are trying by various ways to get back to normalcy.
United States of America.
The US resorted to the situation by implementing 'Quantitative Easing' programs or in other words 'Bond Buying' programs. Under the leadership of Ben Bernanke, Fed went to a high speed bond buying program which flushed ample liquidity in the economy helping it to somewhat overcome spiraling downward growth. Initially, it went on buying bonds intermittently but eventually it took up a plan of continuously buying bonds worth $85 billion per month until there were improvement in the employment levels.The program is eventually showing success.

Japan
Japan too resorted to extreme levels of quantitative easing under the name of 'Abenomics'; named based on the present Japanese prime minister Shinzo Abe. Under this program it decided to reflate the recession riddled economy by infusing $ 210
billion. The bank of Japan also doubled its inflation target to 2%.

Europe
A strict austerity policy is being followed throughout the entire Europe.The recession hit countries are doing every bit to mange their huge fiscal deficits. Almost all economies including France,Italy,Greece and Spain have contracted since the great recession. Only Germany has somehow managed to grow its economy by only a 0.10 percentage.

China
The World Bank has cut its growth forecast for China amid warnings of slower but more stable global growth over the coming months.The bank now expects the China to grow 7.7% in 2013, down from its earlier projection of 8.4%. Over the past few decades China has relied heavily on exports and government-led investment to boost its economy.However, a slowdown in key markets such as the US and Europe has seen a decline in demand for Chinese exports, prompting concerns whether China can sustain its high growth rate.

India
A consistently falling rupee and high inflation is giving sleepless nights to the coalition government in an election bound year. Foreign institution/investors could could cherish this movement as the policy makers are doing everything on earth to prop up the falling rupee. More and more sectors are being opened up to foreign institution/investors in order to bring in fresh investments to rein the ever widening fiscal deficit. Telecom,Insurance and Aviation being the major ones. Central banks are too wary to loosen up the interest rates for the fear of inflation which is already high. Growth is taking a backseat with the high interest rates deterring industrialist from expanding as well as consumers from spending.

Irene Mia, Economist Regional Director for Latin America, spoke at the ANDI conference in Cartagena, Colombia yesterday. Irene emailed through a photo of Cartegna

Key points from her presentation:

- China will grow at 8% this year
- Panama, Peru and Chile among top performers in the region, with annual average rates of 4.7%-6.2% for 2013-17
- After slowing sharply to est. 3.8% in 2012, Colombia's GDP growth will speed up in 2013-17 (to an annual average of 4.6%)
- Trade between Latam and China expanded by 51.2% in 2010 (vs. 31% and 22% increase in Latam trade with EU and US
- Mexico and Brazil to grow at annual avg of 3.7% & 3.6% respectively, lower than Colombia (4.6%)

US FED KEEPS STIMULUS AS ECONOMY SHRINKS A TAD

The Federal Reserve left in place its monthly $85 billion bond-buying stimulus plan, arguing support was needed to lower unemployment even as it indicated a recent stall in US economic growth was likely temporary.

A report showed the economy contracted in the fourth quarter as inventory investment slowed and government spending plunged. Analysts said superstorm Sandy, which slammed into a large swath of the US East Coast in late October, also disrupted the recovery.

The US central bank repeated a pledge to keep purchasing securities until the outlook for employment “improves substantially.”

A report is expected to show the US jobless rate remained stuck at 7.8% for a third straight month in January. The Fed repeated that it would keep overnight rates near zero until unemployment rate hits 6.5%, as long as inflation does not threaten to exceed 2.5%.

RBS FINED $612 MN, SETTLES LIBOR PROBE

LONDON: State-rescued Royal Bank of Scotland said it will pay fines totalling $612 million to US and British regulators to settle allegations of Libor interest rate rigging.
RBS, which is 81%-owned by the British government, said it has agreed to pay the equivalent of £391 million to regulators, becoming the third bank to admit its part in the Libor affair after Barclays and UBS.
The investigations uncovered “wrongdoing” by 21 employees, predominantly in relation to the setting of the bank’s yen and Swiss franc Libor submissions between October 2006 to November 2010, the bank said.
RBS added it had been fined $325 million by the US Commodity Futures Trading Commission, $150 million by the US Department of Justice (DoJ) and £87.5 million by Britain’s Financial Services Authority.