Economic News

The US mega-bank JPMorgan Chase & Co loss from derivatives trading may widen to 5 billion dollars, the Wall Street Journal reported on Friday. CEO Jamie Dimon personally approved the strategy that led to the trades, without monitoring how they were executed, the newspaper said.

Priced at $38 a share, Facebook is valued at $104 billion, the biggest ever valuation by a U.S. company at the time of its offering.

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Billionaire Warren Buffett's company is making another foray into US newspapers, agreeing to buy 63 newspapers from Media General Inc for 142 million dollars.

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According to data released by the Federal Statistics Office, there was 90 percent more immigrants to Germany from Greece in 2011 compared a year ago and 52 percent more from Spain in the same period.

Overall, Germany became home to an additional 958,000 people in 2011, accounting for a 20 percent increase from 2010.

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The symbolic gesture of sacrifice and shared responsibility, the pay cut sharply contrasts with predecessor Nicolas Sarkozy’s decision to increase his pay on entering office.

After he took office in 2007, Sarkozy’s salary increased by 170 percent to 19,000 euros per month ($24,097).

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By Anoop Singh

Here’s the good news: thanks to relatively strong fundamentals and good policies,  Asian economies have coped well with the global market turbulence of recent years. Now the bad: a major financial shock—say, of type ignited by the bankruptcy of U.S. investment bank Lehman Brothers in 2008—is likely to have a substantial impact on Asia.  The reason: Asia’s increasing financial interconnectedness.

Over the past two decades—in line with the region’s growing role in the global economy—Asia’s equity markets have become increasingly sensitive to global financial developments.   More specifically, we have discovered that equity returns in Asia generally now move in tandem with those in systemic economies.  (By systemic economies, we are talking here about those countries—such as the United States and the United Kingdom which are home to major, global, financial centers such as Wall Street and the City of London.)

How do we measure that degree of financial interconnectedness?  Or put another way, how do we measure the relationship—if any—between those Asian equity returns and the performance of systemic economies?

Tracking interconnectedness

The answer: by tracking Asian financial “betas” which measure volatility and capture the impact of the systemic economies on Asian equities.

These betas describe the fluctuations of those equities in relation to the fluctuations of the benchmark–in this case, the performance of large, systemic economies. A positive beta means that the asset’s returns generally follow the market’s returns, while a negative beta means that the asset’s returns are generally unmoved by the market.

Asian financial betas have followed a modest, but steady upward trend over the past two decades.  This is easily seen in a graph showing Asian financial betas and global financial shocks.

A spike on the graph—whether it represents the bursting of the technology bubble, or more recently, the turmoil in the euro area—is mirrored by a similar spike in Asian financial betas.

An example of that increasing financial interconnectedness is the global financial shock associated with the Lehman Brothers bankruptcy which explains nearly 90 percent of the pickup in financial betas across Asia from 2002‒07 to 2008–11.

Those financial betas differ from country-to-country.  For example, East Asia (including Singapore and Hong Kong, SAR) has the highest financial betas.  That is, they tended to be more financially integrated and so mirror global ups and downs more closely, whereas countries which pursued a more gradual pace of capital market integration, such as China, generally had lower financial sensitivity to the systemic economies.

No longer insulated

But on the whole, given the now high—and increasing—financial interconnections, Asian markets will never be completely insulated against major global financial shocks.

So far, so bad.  But to be clear, this isn’t an argument for Asia’s policymakers to fold their arms and stand helpless in the face of financial globalization.  On the contrary, one of the main conclusions of our research is that macroeconomic policies matter.

The choices made by Asia’s policymakers can help determine the region’s financial betas.  For example, a lower government debt-to-GDP ratio, and a higher stock of international reserves, but up to a limit, are associated with lower financial betas.

Sound macroeconomic policy frameworks are associated with lower financial betas in Asia during both tranquil and turbulent periods and sound macroeconomic policies may yet limit the impact of major downside risks on the real economy.

UK Only Article:  standard article Issue:  Retail renaissance Fly Title:  Branches Rubric:  Bank branches, hitherto all-important, will become far less numerous—and look very different Main image:  20120519_SRD002_0.jpg A HUGE GLOWING wall blinks blue and red at the torrent of commuters as they flow up the escalators and into the halls of Orchard Road station, one of the busiest on Singapore’s transit system. As they pass the wall it spews out useful information: the weather, the latest news headlines, movements in the markets. Behind all this are the changing advertisements for Citigroup’s latest deals, on offer right by the concourse. This is a bold attempt to entice customers into a branch that looks nothing like a bank: there are no doors to keep robbers out, no counters to shelter cashiers. Instead there are massive touch-screen televisions on the outside walls and gleaming white benches with tidy rows of Apple computers. Neatly dressed assistants brandish iPads with smart black ...

UK Only Article:  standard article Issue:  Retail renaissance Fly Title:  Spain Rubric:  Lessons from the world’s most competitive banking market Main image:  20120519_SRD004_0.jpg BETWEEN A RANGE of arid hills and the encroaching metropolis of Madrid stands an oasis with hundreds of ancient olive trees dotted all over it. A cluster of bright, modern buildings sits alongside a green golf course in a valley. Overlooking all this is a building one floor taller than the others, with a bright silver dome under which the chairman has his office. This serene campus is home to Santander, and in some ways the Googleplex of banking. Two huge data centres—low and built like nuclear-bomb shelters—provide some of the computer networks to support a far-flung banking empire (“Brazil’s on this one, Britain on the other,” says a guide). The idea behind them is that competitive advantage in banking comes from rigorously standardising computer systems and procedures around the world and relentlessly driving ...

UK Only Article:  standard article Issue:  The Greek run Fly Title:  The B in BRICS Rubric:  Its strengths are real, but the government should worry more about its weaknesses NOT long ago, the BRICs were lionised as fast-growing superpowers-in-waiting. These days Russia is portrayed as a corrupt petrostate. India is ensnared in red tape, unable to muster the political will to break free. The mighty Chinese economy has slowed in recent weeks (see article). Even South Africa, which considers itself to be the “S” in BRICs, seems sluggish and hidebound next to the gazelles to its north. Now it is Brazil’s turn. Much is being made of Brazilian threats of huge fines and prison sentences against executives of Chevron, an American oil company, after a small leak of oil off the coast. Critics have taken to complaining about Brazil’s expensive welfare state and dependence on commodity exports. Its torpid economy ground to a halt in the middle of last year. Admittedly officials say that they deliberately cooled the economy, to drive down an overvalued currency and ...

UK Only Article:  standard article Issue:  The Greek run Fly Title:  Consumer banking Rubric:  Fusty old retail banking faces its biggest shake-up in 200 years Main image:  20120519_lcp006.jpg FINANCE has seen plenty of dramas over the years. But one thing has remained constant for a century at least: the branch banking system. Across most of Europe a handful of large banks, each with thousands of branches, stand astride their national markets. In America Depression-era legislation constrained the growth of big national banks, but at the state level the bricks-and-mortar architecture is pretty similar. While the rest of the sector innovated, expanded and collapsed, retail banking has been staid and reliable. Now an upheaval is coming, driven by technological changes—the growth of internet usage on smartphones, the rise of “big data” computer processing and the increasing willingness of customers to do complicated things online. These developments have long promised to transform the way ...

UK Only Article:  standard article Issue:  The Greek run Fly Title:  Brazil’s economy Rubric:  The economy has slowed, but there are still opportunities around Location:  SÃO PAULO Main image:  20120519_AMP003_0.jpg FOR Brazil’s government recent weeks have brought some long-awaited victories. The overvalued currency has weakened to two reais to the dollar, from its peak of 1.54 last July. At 9% the Central Bank’s policy interest rate is near to historic lows and should fall further after President Dilma Rousseff’s brave decision to cut returns on government-backed savings accounts, which had previously acted as a floor. Both developments were welcomed by manufacturers, who have been labouring under a turbocharged currency and sky-high interest rates for years. Neither, though, was enough to reverse a recent shift in mood against Brazil. Investors were initially sceptical about Brazil’s inclusion in the BRICs, the acronym ...

Gold bugs are hiding deep in their gold caves pondering why gold isn’t rallying in spite of the sharp spike in risk-off sentiment. - in Coin Week

Related: SPDR Gold Trut ETF (GLD), Newmont Mining (NEM), Goldcorp (GG), Barrick Gold (ABX)


Nouriel Roubini is an American economist. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics.

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As talks to form a coalition government collapsed in Greece, Lagarde revealed that the IMF has conducted a technical assessment of a possible Greek exit from the euro.

In an interview with a Dutch public television broadcast, she said:

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By Mauricio Villafuerte

It reads like a script for a Hollywood movie—a poor protagonist happens upon an opportunity that has the potential of bestowing riches, but an evil curse threatens to spoil it all.

Unfortunately, it’s not a movie script. The scenario plays out repeatedly in many parts of the real world all the time. For many developing countries, managing natural resources and the increased revenues they bring is a tough haul.

Cue the extensive literature on the “resource curse” and the lack of consensus on how to run fiscal policy and manage budgets in resource-rich countries.

In some respects, this is like the “all-too-similar” sequel, because the tribulations associated with how to best manage natural resources, such as oil, minerals, and gas, seem to endure so that resource-rich developing countries are never quite free of them.

The “resource curse” and fiscal policy

High commodity prices and the discovery of new reserves offer the potential for much needed revenue in many developing countries—revenues that should help promote economic and social development, build human capital, and reduce infrastructure gaps in resource-rich countries. In a new study, my co-authors and I look at how to manage fiscal policy to achieve those goals while avoiding previous pitfalls.

The design of fiscal policy frameworks for resource-rich developing countries is beset by trade-offs and tensions. In fact, the volatility, uncertainty, and exhaustibility of revenues earned from resources have to be taken into account when formulating a scaling up of public spending.

• How to ensure short-term macroeconomic and fiscal stability?
• How to achieve long-term fiscal sustainability and adequate savings for future generations while allocating sufficient resources to meet development needs?
• How to address absorption capacity constraints that could limit the quality and effectiveness of scaled-up spending?

These are important questions that many politicians, policymakers, and economists face in such countries.

Recent academic and empirical work has enhanced the debate on this issue. On the one hand, such work has brought to the fore the need to avoid rigid policy formulations that would force countries with substantial development needs to keep the consumption of their resource wealth at a constant level over time (that is, borrowing at the beginning, saving when income is high, and lowering the rate of saving as income tapers off).

While persuasive, such work hasn’t offered practical approaches to managing fiscal policy in those countries and overemphasizes the role of resource funds, for example.

So, how could fiscal frameworks for resource-rich countries be made more flexible in practice? In our study, we analyze this question from a practitioner’s perspective, proposing specific options to effectively anchor fiscal policy while allowing for a sustainable scaling up of spending in the context of increased resource revenue.

In laying out the options, our study emphasizes that there is not a “one size fits all” approach since each country has its own set of economic and institutional circumstances to balance, such as resource revenue dependency, how long the reserves will last, and the country’s development needs. Furthermore, the large volatility of revenues earned from natural resources and the difficulty to predict those swings would call for prudence and gradualism in scaling up spending and for flexible fiscal rules to adapt to new information and changing circumstances.

Seven principles

Accordingly, we propose the following principles to guide the formulation of fiscal policy frameworks in resource-rich developing countries:

• The framework should reflect country-specific characteristics like revenue dependency and volatility as well as how long the resource revenue stream is expected to last—all of which may change over time.
• It should ensure the sustainability of fiscal policy. Depending on how many years the natural resource is expected to last before it is depleted, benchmarks of sustainability can be derived from simple constant consumption approaches—particularly for countries with short-lasting reserves—or from a broader focus on stabilizing government net wealth (not now, but over the long run).
• Policymakers can choose alternative fiscal anchors, either primarily addressing fiscal sustainability concerns (for example, permanently constant non-oil balance deficit rules) or focusing more on short-term demand management (such as a price-based or structural balance rule). Country characteristics should guide the choice of the appropriate fiscal anchor (see table below).
• Frameworks should be sufficiently flexible to enable the scaling up of growth-enhancing expenditure (for example, public investment to tackle existing infrastructure gaps), especially in low-income countries.
• In countries with large absorption constraints, the pace of scaling up may have to be gradual, while public financial management systems are reinforced and domestic supply constraints softened.
•  The volatility and uncertainty of resource revenue is critical for the design of fiscal frameworks, and having sufficient precautionary fiscal buffers is critical. A strong revenue forecasting framework needs to be developed and spending plans framed in a medium-term perspective.
•  The credibility and transparency of the framework can be supported by a well-designed natural resource fund. But the fund cannot be a substitute for an appropriate policy framework nor a panacea that obviates the need to strengthen overall fiscal management capacity. Funds need to be fully integrated with the budget and the fiscal framework.

The complete framework would comprise three elements:

1. Fiscal policy indicators–the best analytical measures of the actual stance of fiscal policy.
2. Fiscal sustainability benchmarks–provide a way to assess fiscal policy with a longer-term perspective.
3. Fiscal policy anchors–the rules or guidelines that would better fit resource-rich countries and their specific characteristics.

The table below illustrates the more appropriate rules possible along two specific dimensions: the horizon of their resource reserves and the relative scarcity of capital.

In the words of Jim O’Neill, chairman of Goldman Sachs Asset Management, India has turned out to be the “biggest disappointment” of the BRIC nations.

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