Chinese investors have helped drive up the price of Bitcoin to dizzying heights. Now, the Beijing government is doing its best to drive enthusiasm for the cryto-currency back down.
The Chinese central bank warned consumers about the risks of Bitcoin and banned Chinese banks from trading the digital currency. The bank said that Chinese people could still invest in the currency, but they do so at their own risk.
Chinese regulators are the latest to issue rules for Bitcoin, as governments around the world struggle to come to terms with the anonymously-created currency's role. Authorities are stepping in to warn investors as the currency's meteoric rise in value has attracted more and more speculators and to crackdown on the illicit uses of the currency in online black markets such as Silk Road.
The announcement comes as the value of the currency has skyrocketed over the past month peaking at over $1200, according to popular Bitcoin trading site Mt. Gox. It's unclear yet what the ramifications of the announcement will be on that price, or whether traders' interest in Bitcoin will be dampened by the announcement. Some news reports Thursday pointed to the falling value of the currency as proof that investors are scared-off by China's move. Though the value was dropping at last look, Bitcoin is too volatile to attribute the drop to China's crackdown.
It's Wall Street's latest counterstrike against Washington and its attempts to rein in the financial industry after the crisis that plunged the U.S. economy into recession in 2008. And if the legal attack is successful, it could leave an opening for banks to return to some of the dangerous deals that were a Wall Street hallmark before the crash.
The trade groups, which represent U.S. and international banks, filed a lawsuit Wednesday aimed at one of the central parts of the regulatory overhaul intended to prevent another financial crisis like 2008. It's the latest step in a long campaign by global banks to push back on stricter U.S. regulation and oversight of trades done in other countries. If a judge agrees with the Wall Street groups, it could spell the end for a central plank of the law meant to curtail risky trading and make the banking system safer.
Wall Street's chief trade group, the Securities Industry and Financial Markets Association, along with two international trade groups, sued to stop the United States from regulating deals American banks do abroad. In a complaint filed Wednesday, the trade groups ask the court to "halt an unprecedented and unlawful effort" by U.S. regulators to "regulate financial activity around the world."
Regulators have beat back some of Wall Street's legal challenges, like a suit by Bloomberg LLP over other trading rules. But this suit comes at a vulnerable time. The chief regulator who pushed for the provision is about to step down. If it's shot down, it's unlikely to be passed again in the same form.
The lawsuit challenges one of the most controversial aspects of the regulatory overhaul: rules for complex contracts called derivatives. Derivatives are financial contracts linked to the value of something else, like interest rates or currency exchange rates. Companies and financial firms use the contracts to offset risk in their business or to bet on the fluctuating values. After the financial crisis, lawmakers targeted derivatives as an accelerant to the financial crisis and decided to rein in the market with regulations aimed at making it more transparent and less risky.
Derivatives brought insurance giant American International Group to its knees during the financial crisis. Too many derivatives deals souring at the same time nearly killed the insurance giant, but they also linked the failing company to lots of other firms on Wall Street, threatening to bring them all down with it. The U.S. government opted to rescue the insurer, rather than face a possible financial market collapse.
Some of those AIG derivatives deals were done in London. That's been an oft-repeated talking point for the regulator charged with writing the new derivatives rules, Commodity Futures Trading Commission Chairman Gary Gensler. Gensler has agued that if U.S. regulations don't apply to U.S. banks and hedge funds doing deals in other countries, you might as well "blow a hole out of the bottom" of the new oversight regime.
Gensler has faced pushback not only from Wall Street lobbyists, but also fellow Democrats and other U.S. regulators. But by far his most vocal critics have been European and Asian officials, who have argued that the United States is overstepping its jurisdiction. Gensler compromised with his critics in July, delaying part of the new regulatory regime, but now he faces a new challenge in court just as he is about to leave the agency at the end of the year.
A spokesman for Mr. Gensler's agency declined to comment.
U.S. and international banks, through their trade groups, are arguing that the agency is hurting global derivatives markets. The trade groups said regulators were "harming the business relationships of U.S. companies" by "dictating private parties' obligations through sudden and unpredictable regulatory fiat." Stephen O'Connor, chairman of the International Swaps and Derivatives Association, said on a conference call that the rules would be "harmful to the global economy" because non-U.S. banks will stop doing business with American ones because they don't want to get roped into the U.S. regulatory system.
The lawsuit is the latest in a series of challenges to the financial overhaul law, which have targeted rules on everything from mutual funds to the labeling of products that contain minerals from conflict-torn countries. The suits have been successful in some cases and have forced regulators to move more slowly and carefully in rolling out the new rules. But if this challenge is successful, it'll be the biggest blow yet to the regulator that has moved swiftest in completing its post-crisis rules.
Andrew Burton/Getty Images
If the West makes a deal this weekend with Iran -- one of the world's largest oil producers -- the price of crude will almost certainly fall on Monday.
But after that? Don't count on it.
"The assumption that a deal was coming had put some downward pressure on oil," said Daniel Sternoff, Director of Energy Research, at Medley Global Advisors. Sternoff said that some people in the market see a deal as an indication that the Iran sanctions could be lifted, bringing Iranian oil back to the market.
Prices of crude have fluctuated this week with the prospects of success in Geneva, where the United States is negotiating with Iran and five other countries about suspending some of the sanctions on the Iranian economy in exchange for Tehran curbing parts of its nuclear program. The price of crude oil fell in the middle of the week, but recovered to over $95 per barrel by Friday. Though oil sanctions aren't necessarily on the table in Geneva, an interim deal could raise hopes in the market that they'll be lifted in the future, which could in turn send prices lower.
Yet that view could be optimistic, Sternoff said. "Even under an interim deal, it's not like we're going to see a huge rush of Iranian oil back on the market."
At it's peak, Iran produced close to 4 million barrels of oil per day, but sanctions have reduced that close to 2.5 million barrels per day.
Amy Myers Jaffe, who studies fuel markets at the University of California Davis, said any drop in prices if there's a deal this weekend wouldn't necessarily be about "how much extra oil is going to come out from Iran."
Instead, "the real impact is in changing the market psychology and that's just much harder to predict," said Jaffe, who is the Executive Director of Energy and Sustainability at the University of California at Davis's business school. Changing that psychology would require not just a deal with the United States, Jaffe added, but improved relations with Saudi Arabia and Israel as well.
"If we start to see a resolution of the way that Iran engages in all these different domains," then that lowers the risk of conflict in Syria, Jaffe said.
Patrick Clawson, Director of Research at the Washington Institute, said a fair amount of this week's movement in oil prices around the Geneva talks is about the reduction of this "risk" premium, which is the extra amount factored into the price of oil based on the risk of conflict in the area.
"The risk of there being a conflict that imperils oil shipments from the Persian Gulf goes down and therefore oil prices go down," Clawson said.
Recently, Iranian officials and foreign oil companies, like Chevron, Total, and Royal Dutch Shell, have been talking. Some have taken that as a sign that Iran is willing to give foreign companies better terms than before, when Iran often required companies to enter into agreements with state-controlled companies. A U.S. official said Iran is losing $5 billion a month because of lost oil sales, according to the AP.
"If there's an accord that will allow foreign companies to come back to Iran, they're much more likely to be interested," Clawson said. Though he adds that oil companies have many more choices for investment these days, including in Africa and the United States.
While a broad deal could signal greater stability in the region and therefore reduce the extra "premium," actually increasing the amount of Iranian oil on the market would likely take more time. There are a lot of practical hurdles to Iran increasing output, even if sanctions are lifted.
Kamran Dadkhah, an associate professor at Northeastern University who has studied the Iranian economy, said Iran's oil industry has been left behind as technology has improved because there's been no real investment in Iran's oil fields in decades. For instance, he said, the lack of investment means Iran's oil wells aren't well maintained.
"If the sanctions are lifted and investment goes to Iran, in the long run, you will have a very, very positive effect," Dadkhah said. But, he added, the big caveat is whether Iran sticks to any deal it makes in Geneva.
Recession be damned: There are more billionaires today than there were during the global financial crisis in 2008 and 2009 -- and they're twice as rich, says a new report released Wednesday.
The Billionaire Census, jointly compiled by Swiss financial company UBS and Singapore-based firm Wealth-X, is a comprehensive survey of the world's ultrarich -- essentially a thumbnail view of their interests, assets and social networks. The report's findings are equal parts predictable (billionaires love yachts!) and intriguing (women are richer). As of 2013, there are 2,170 billionaires enjoying a collective fortune of $6.5 trillion. Over the past five years, they've increased in number by 60 percent, their combined wealth has doubled and they're more liquid than ever.
Just over the past year, billionaire wealth has increased in every region of the world, as depicted by the map below, with the biggest gains in Asia. Europe was the only region to lose billionaires (29, to be exact), but it still boasts among the richest in the world. What's more: The global population is still growing -- expected to reach 3.900 by the year 2020.
Billionaires, it seems, are taking over our world (what little of it they don't already own, anyway).With that in mind, here are some of the report's highlights, framed as your most pressing questions about the richest people on Earth.
Who are these people?
The average billionaire is a 67-year-old man worth about $3 billion -- 18 percent of which is liquid (the recent financial crisis taught him a thing or two about carrying cash). He went to Harvard, or maybe to Penn State. His passions include art, aviation, real estate, traveling, and golf -- in that order. He's married, with two children and -- though he owns four $20 million homes -- he tends to spend most of his time in the city where his business is headquartered (probably New York).
Just 13 percent of billionaires are women, but they are an enviable minority -- richer than their male counterparts by about $200 million on average.
How did they get so rich?
An astounding 60 percent of billionaires are self-made. Twenty percent have inherited their wealth (most of whom live in Europe) while another 20 percent managed to leverage inheritances into even greater fortunes. The world's "mega-billionaires," each of whom are worth upwards of $50 billion, are self-made, according to the report: Bill Gates, Carlos Slim, Amancio Ortega and Warren Buffet. Interestingly, only 17 percent of women billionaires are self-made. China boasts the highest number of self-made billionaires, at 89 percent.
Where do they live?
New York, Hong Kong, Moscow, London and Mumbai, in that order. The world's super-rich tend to congregate in wealth "hot spots." The majority live in the United States, which boasts more billionaires (515) than any other country. China has the second largest population -- and the youngest cohort -- with 157 billionaires.
Do they swim in a vault of golden coins, in the manner of Scrooge McDuck?
The report doesn't say, but it does note that billionaires spend a lot of money on luxury goods, chiefly: yachts, private jets, and art, but also antiques, clothes, jewelry and collectible cars. They also give to charity, to the tune of $32 million each over the last three years. American billionaires tend to be the most giving, with education topping favorite causes. So don't hate them completely.
The full report is here.
VALERY HACHE/AFP/Getty Images
The term "yakuza" may call to mind prostitution rings and low-brow thuggery, but Japan's modern day crime syndicates are all about white collar abuses -- investing in high finance and getting their hooks into the country's biggest banks.
Now those banks are under scrutiny following revelations that they've lent cash to gangsters. In September, authorities discovered that Japan's second-largest bank, Mizuho, had loaned more than $2 million to people affiliated with organized crime groups in Japan. (Most of the 230 loans issued were for buying cars.) The incident prompted a federal investigation of the country's three biggest banks, Mitsubishi UFJ, Mizuho and Sumitomo Mitsui Financial Group Inc.
The scandal deepened Tuesday, when one of the companies, Mitsubishi UFG, came clean about loans it made to "more than one" but less than 10 yakuza affiliates. On November 1, another bank, Shinsei, admitted to making dozens of similar loans, as well as opening bank accounts for "anti-social forces," as the yakuza are sometimes known.
Yakuza groups have sought a foothold in the financial sector for years, with varying success. In decades past, the gangs have reaped billions through extortion, drug smuggling, prostition, gambling and other illegal activities. Lately, though, their forays into banking and finance have earned them the nickname "Goldman Sachs with guns."
JIJI PRESS/AFP/Getty Images
Predictions about the potential effects on the global economy of a U.S. default have verged on the apocalyptic. This weekend, World Bank President Jim Yong Kim characterized the possibility as "disastrous" for both the developing world and developed economies, while International Monetary Fund Managing Director Christine Lagarde argued that a default "would mean massive disruption the world over." Financial leaders speculate that a failure to raise the debt ceiling could trigger higher interest rates, stalled growth, or even a global recession reminiscent of (or worse than) the one caused by the collapse of Lehman Brothers in 2008.
But not all economists are ready to jump on that bandwagon (which is not to say that they necessarily sympathize with the GOP's vocal camp of "default deniers"). Some maintain that a partial, or technical, default (meaning the government would pay some of its debts late) would be short-lived, if still potentially catastrophic. And others argue that the consequences of such a default would be much tamer than headlines suggest.
OLLI GEIBEL/AFP/Getty Images
Asian markets seemed pleased by the news, which broke Tuesday evening (or Wednesday morning, Asia time) that President Obama would nominate Janet Yellen for the position of Fed chair this afternoon. Policymakers in the region, who'd been cheering for her, spoke warmly of the selection -- mostly because the relatively dovish Yellen is seen as someone who'll be slower to roll back the easy money policies of her predecessor, giving Asia more time to prepare for the day the greenback spigot turns off.
But Yellen also has something of a special relationship with the region, which Bank of Japan Deputy Governor Hiroshi Nakaso alluded to when he told the Wall Street Journal that "we already have a relationship of mutual trust with each other." Yellen spent six years, from 2004 to 2010, as president of the Federal Reserve Bank of San Francisco, a position that involved traveling to Asia at least once a year on fact-finding missions, and brought her to countries across the region from South Korea to Vietnam to India. The reports she produced after each trip are typically brief -- and sometimes rather dry -- accounts of the state of each country's economy and the challenges it is likely to face. But they do give us an occasional hint about the likely new Fed chair's thoughts on the world's most economically dynamic region.
Europe's four-year economic collapse has left an indelible scar on the continent, and the depressing data-points documenting its decline just keep rolling in. On Thursday, a Spanish suicide help-line reported that it saw a 30-percent increase in the number of calls it fielded in 2012. With a quarter of the Spanish population and half of its youth out of work, despair is just around corner for Spaniards these days, and Thursday's numbers offer a glimpse of what has become one of the more dismal sub-plots of the eurozone recession: a marked increase in the number of suicides.
Jasper Juinen/Getty Images
In the global economy these days, there are known unknowns, unknown unknowns, and then there's the Chinese credit market.
On the heels of Federal Reserve Chairman Ben Bernanke's announcement Wednesday that the Fed is set to ease its program of large-scale bond purchases, global markets have been in turmoil, which has only been exacerbated by a sudden spike in the Shanghai interbank offer rate. That rate indicates the willingness of banks to lend to one another, and its surprising rise on Thursday has reinvigorated fears that the Chinese banking system is far more rickety than Beijing would like to let on.
The problem is that very little is known about just how much debt Chinese banks have taken on amid that country's infrastructure-fueled growth. This has resulted in fears that a massive credit bubble may be about to pop. If that's true, the results could be catastrophic.
Do investors think it's a smart move for companies to cooperate when the U.S. government asks for help collecting information on customers?
With the exception of Apple shares, which continued on the downward trajectory they've been on for the past few days, shares of most of the other companies -- the public ones, at least (sorry, no PalTalk) -- reportedly involved in National Security Agency's PRISM surveillance program were up in early trading on Friday.
At press time, shares of Google, which also owns YouTube, were up more than 9 points, or over 1 percent. Google experienced the biggest jump, but shares of Facebook, Yahoo!, Microsoft (which owns Skype), and AOL were all up slightly on Friday morning. Shares of Verizon -- which reportedly shared information with the NSA through another program -- were down slightly.
Of course, we don't know exactly what prompted investors to buy up PRISM-linked stocks this morning (the May jobs report may have pushed stocks higher, and the Dow and Nasdaq were each up roughly a percentage point at press time). The increases in share prices were by no means huge, so it's probably less that the PRISM news prompted a wave of investor enthusiasm and more that traders simply shrugged off the reports.
I'm no savvy tech investor, but my first thoughts on the business repercussions of PRISM were more along the lines of the question Slate's Matt Yglesias raised today: Are foreign countries going to be more wary of granting these companies access to their markets amid fears that they've effectively been turned into proxy spies for the U.S. government? (It's worth noting, by the way, that the companies are still vigorously denying that they're participating in the program.)
But maybe investors know something I don't. Massive subsidies in the pipeline to help fund Google Glass?
The world of anti-austerians is abuzz (and maybe somewhat gleeful?) this afternoon about news that a paper by Carmen Reinhart and Kenneth Rogoff -- the paper for those policymakers looking for serious academic work to back up their proposals for debt-slashing cutbacks -- has some serious issues (Josh Keating summarizes those problems on his War of Ideas blog here)
Why is this causing such a stir? One of the conclusions of the paper is that when countries hit a debt-to-GDP ratio of 90 percent, they reach a tipping point after which they'll start experiencing serious growth slowdowns. It's a conclusion that many have found either important or useful, depending on your level of cynicism.
Take a look at some of the ways Reinhart and Rogoff -- and their conclusions -- have been marshaled in the austerity vs. Keynesianism debate that has dominated much of the post-financial crisis discussion about fiscal policy:
This House Budget Committee response to President Obama's budget proposal from just a few days ago cites R&R by name before going on:
Instead of taking steps to reduce the excessive burden of debt, the President's budget, even if fully implemented, never reduces gross federal debt below the important 90 percent threshold.
Olli Rehn, European Commission vice president on Economic and Monetary Affairs and the Euro (and noted austerity champion) pulls out the R&R 90-percent rule in this February call for continued "fiscal consolidation":
It is widely acknowledged, based on serious academic research, that when public debt levels rise above 90% they tend to have a negative impact on economic dynamism, which translates into low growth for many years.
Sen. Tom Coburn (R-OK), in this excerpt from his book, rhapsodizes about a briefing Reinhart and Rogoff gave before a group of forty senators:
"Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it was not risky to hit the 90 percent threshold, we would expect a higher incidence."
"Thank you for your depressing presentation," Senator Dick Durbin, D-Ill., said in closing, to self-conscious laughter around the room."
These are just a few examples that turned up from a quick search in English -- who knows what a search in Italian, Greek, or German would yield.
We here at Foreign Policy had been preparing for the day Cyprus's banks reopened by collecting pictures of bank runs from around the world -- on the chance that this morning we'd wake up to long lines of frantic depositors.
But with headlines like "Euro Rises Amid Cyprus Calm" and "All Is Calm as Cyprus Banks Re-Open After 12 Days," that idea has sort of fizzled out. (Come back to this space next time there really is a bank run, though, for some great pictures!)
So instead, we present you with this: a Cyprus so calm that a man feels comfortable standing in front of a bank with a parrot on his head.
Yiannis Kourtoglou/AFP/Getty Images
Israeli Defense Minister and former Prime Minister Ehud Barak can now add another title to his resume: real estate mogul. On Sunday, it was reported that Barak had sold his notoriously luxurious Tel Aviv apartment in the Akirov Towers, a five-room compound on the 31st floor whose amenities include a gym, outdoor pool, spa, and breathtaking views, for $7 million. In 2003, he paid a mere $3.87 million for the 450-square-foot space.
Naturally, Barak took to Facebook to explain his decision:
"My wife Nili and I decided that the sale was inevitable faced with the recognition that this place of residence created a sense of alienation and detachment from vast sectors of the public."
In true Ehud Barak fashion, the apartment was sold to a foreign company. The veteran kibbutznik, who was raised in a 12-by-9 foot room with no running water or toilets and described his childhood as "happy" and "warm," entered the private sector after stepping down from a failed premiership in 2001. His business ventures included oil shale rock in Jordan, a stint as president of Satcom Systems, Ltd., a mobile communications company with ties to repressive African regimes, a post on the advisory board of venture capital firm Tamir Fishman & Co., and a network of parking lots in Istanbul (which failed). All of these expeditions, though, were peas and carrots compared to his passion for working with international hedge funds. According to son-in-law Zvi Lotenberg, "the bulk of Barak's activity takes place abroad, for a number of the world's largest hedge funds and investment firms, whose names he declined to reveal."
Barak may maintain that he has been transparent regarding his business transactions, and that he has paid his taxes, but in 2006 he put away some money in a favorite tax haven, using "an account of 38 million Japanese yen (the equivalent of $380,000) in the Cayman Islands branch of Mizrahi-Tefahot Bank as collateral to obtain a loan from the bank."
Compared with the corrupt financial escapades of Israeli leaders like former prime minister Ehud Olmert, this is pretty vanilla, but there are certainly more than enough former government officials with extensive tastes in the world. Prince Bandar bin Sultan, the former Saudi ambassador to the United States, built the 95-acre estate of Hala Ranch in 1991 just miles from Aspen, which was the "most expensive single-family residential property in the nation on the market" when it was listed for $135 million in 2007. Former British prime minister Tony Blair bought a house in London's posh and swanky Connaught Square for 3.5 million pounds. When Jacques Chirac stepped down from the French presidency in May 2007, he rented an apartment overlooking the Seine on Paris' Quai Voltaire. What makes Barak notable is that he's still on the government payroll.
So where will Barak end up next? Perhaps the David Promenade? Or maybe he'll downsize to this four-bedroom stunner on Atzuk Beach? Wherever he ends up, the next home for this cigar-chomping pol promises to be far from the kibbutz.
Should an American lead the European Central Bank? That's what Sylvain Broyer proposes in the German newspaper Die Zeit. The original's in German, but I've translated a portion:
I believe that the best candidate to follow Jean-Claude Trichet would be an American. It's no doubt true that we have talented minds in Europe that have the necessary competence. But the challenges that await the future president of the European Central Bank demand a fundamental change in how we think about the essence of the monetary union...
The next ECB-President has to show the willingness to act as a lender of last resort for overly indebted member states...That recognition of the essence of a monetary union is rare in today's Europe, but belongs to the mainstream on the other side of the Atlantic.
Nice try, Sylvain. You might have a point about the ECB's philosophic mismatch for the current moment -- but in case you haven't noticed, we've got plenty of trouble trying to filling out the ranks of our own monetary institutions, what with the Senate filibuster holding things up. I know our out-of-work central bankers look like they're just standing around, but they're actually all under serious consideration for the three vacancies on at the Federal Reserve. (Except for Greenspan -- you can have Greenspan.)
A court case in India might could give a whole new meaning to the phrase "masters of the universe":
Can Hindu deities have demat accounts to enable them transact in shares and debentures on the stock market?
The Bombay High Court will decide the issue after a religious trust filed a petition challenging the decision of National Securities Depository Ltd (NSDL) to refuse it permission for opening demat accounts in the names of five Hindu deities.
The deities of the Sangli-based trust "Ganpati Panchayatam Sansthan" are Lord Ganesh, Chintamaneshwardev, Chintamaneshwaridevi, Suryanarayandev and Laxminarayandev. The trust, belonging to the Patwardhan family, the erstwhile royals of Sangli, had obtained PAN cards in the names of deities in 2008.
In Inida, a "demat account" is one in which shares are held in electronic form rather than in certificates, which seems appropriate for metaphysical beings. If Lord Ganesh and co. do win their case, I know the perfect banker for them.
Hat tip: Marginal Revolution
Germaphobic consumers can take heart here in the United States, where dollar bill circulation is fairly short-lived -- only about 20 months of wallet-hopping before the Federal Reserve pulls the plug , destroying on average about 7,000 tons of over-the-hill greenbacks each year. In Zimbabwe, however , where U.S bills are much preferred to the country's own collapsed currency, a day in the life of a dollar is not quite so hygienic. If you're thumbing through a wad of cash in Harare, chances are you won't be able to appreciate the satisfying sound or unmistakable scent of crisp, fresh-from-the-ATM bills: most U.S. bank notes continue changing hands in Zimbabwe for years on end, only slipping out of circulation once they've truly gone to pieces (when Scotch tape can no longer work its magic).
The delicacy of these "well-seasoned" bills isn't worst of Zimbabweans' concerns: their dirtiness is an even bigger problem. Indeed, among the country's poorest, underwear and shoes often serve as the most convenient "wallets." But Zimbabweans have found a simple way to combat the grime: they've started literally laundering their money. The most diligent cleaners recommend washing the flimsy bills by hand, then hanging them out to dry (bills are often pinned to clotheslines alongside more conventional linens). In a pinch, however, a time-saving machine wash will also do the trick. Experts do warn against giving bills high-class treatment: one trip to the drycleaner's and George Washington's face may well lose its authentic green pallor...
Alex Wong/Getty Images
As most of the attention has focused on Europe's PIIGS economies, debt-laden Hungary has, for a few weeks now, been the dark-horse candidate for the next European economy to collapse. This week, the country's new government seems to have been doing everything in its power to reinforce that view:
On Thursday, Lajos Kosa, deputy chairman of the governing Fidesz party, said Hungary was facing a Greece-like financial meltdown. And former Fidesz finance minister Mihaly Varga said the deficit could reach 7-7.5 percent of GDP, about twice as much as planned for 2010 by the previous government.
While Hungary isn't part of the euro, the default fears have weighed on on the euro, which fell to a four-year low of $1.20 today.
The Prime Minister's spokesman described Kosa's characterization as "no exaggeration," though added, not particularly convincingly that ""The government is ready to avoid the Greek path."
The thing is, the actual situation in Hungary doesn't seem quite as dire as the government's gloomy assessment:
Some analysts said the politicians' statements seemed exaggerated, as Hungary's public debt of 78 percent of GDP was high but well below Greek levels.
"Any comparison with the situation in Greece is a little misplaced," Capital Economic's Shearing said, noting that Hungary's short-term debts, those which needed to be repaid to foreign creditors within the next year, equaled just 2.4 percent of GDP.
Is it possible that that the Hungarian government is trying to make the economy sound worse that it is? They would certainly have the incentive. Promising tax cuts, Fidesz won parliamentary elections in a landslide in April, unseating a Socialist governing that had instituted painful austerity measures in order to restore investor confidence. FT's Alphaville notes:
Market observers are struggling with trying to determine the extent to which the announcements may be a result of political manuevering to back away from campaign pledges to reduce taxes all the way to concerns that there may be a similar credibility gap to Greece regarding past budget numbers.
It's certainly not out of the question that the Socialists were engaging in some creative accounting. Concealing the true state of the economy is becoming something of a tradition in Hungarian politics. In 2006, former Socialist Prime Minsiter Ferenc Gyurcsany was caght on tape telling members of his party that he had concealed the true state of the economy in order to win an election, saying, "Evidently, we lied throughout the last year-and-a-half, two years. It was totally clear that what we are saying is not true."
A recent Pew survey found that an astounding 77 percent of Hungarians describe themselves as "not satisfied" with democracy. That number's becoming a little easier to understand.
Goldman Sachs may have taken a lot of heat lately, but they may have done themselves a great favor by releasing their 2010 World Cup Research Report earlier this month. Running a little over 70 pages, it's a remarkably in-depth summary of each country in this year's finals, including football prowess, economic state, and political situation. Furthermore, it provides a primer on the potential hosts of the 2018 and 2022 World Cups, and, unsurprisingly but more than interesting, an examination of economic growth and decline vis-a-vis the international football teams of respective countries.
Some of the most noteworthy things to take away: like most of the speculation has focused on, the report predicts a European-hosted cup in 2018, and a return to the U.S. in 2022. (Also included are bid pitches from Russia, England, and the U.S.) Interestingly, this is what it says about the U.S. bid:
The sport has taken roots in the USA and the market is quickly becoming one of FIFA’s most important. They already pay one of the largest television rights fees to FIFA of any country. However, the perception is still otherwise.
For U.S. soccer fans, that perception is extremely frustrating. It is somewhat accurate: for a team that has qualified for the last six World Cups (granted, a Foreign Policy* staff team could probably qualify for the finals out of the Confederation of North, Central American, and Caribbean Association Football -- CONCACAF), interest would appear to be lower than warranted. (Six out of six is, by the way, quite impressive: England, France, and the Netherlands can't claim that streak.)
But that's changing. Go to many bars in the District on Saturday or Sunday morning, and you'll see European football -- usually the English Premier League -- on the TV. From my own observations (be wary of perception bias), the sport with the most jerseys worn on the streets of Northern Virginia and D.C. is soccer, by far. Moreover, 24.5 million Americans play football, the second most (behind China's 26.2 million) in the world. Since 1994, there has been a dramatic increase in the number of U.S. soccer fans, but among casual or non-fans, there still remains an idea that soccer is not an "American" sport. (It should also be noted that the U.S. Women's team is the dominant global powerhouse.)
UEFA's (Union of European Football Associations) selection of the 2012 Euro Cup host proved prescient, as well. Picking in 2007, Poland won the rights to host the tournament (OK, co-host with Ukraine, but since then UEFA has suggested Poland be the sole host, which the Poles have graciously declined to accept). Poland, however, was the only bid country that hasn't suffered economic decline since -- and yes, Greece was the first bid country eliminated.
Other notable findings: the Growth Environment Scores (a Goldman-devised figure of sustainable economic growth and productivity) of respective countries loosely correlate to soccer performance, but a much stronger connection exists between the improvement of economic conditions and national soccer teams. (Algeria, which did not qualify for the 2006 finals in Germany, posted the highest GES improvement among developing countries over the last four years.) The report also argues that success is partially dependent on the number of males aged 18-34 in countries, and provides a UN chart with predictions for 2050. If the claim is accurate, the Nigerian Super Eagles are going to be really, really good in a few decades.
Lastly, Goldman offers their own predictions of the semi-finals (I won't spoil, though I will say it's what my predictions are as well), and lists the probability (with their metrics) that each country will become World Cup champions.
It's lengthy, but an extremely interesting read, and provides the best rundown of the Cup to come that I've seen. Check it out.
*No matter what anyone says, I'd play right wing.
GIANLUIGI GUERCIA/AFP/Getty Images
Granted, this is the Guardian, quoting, El Pais, quoting anonymous sources, quoting Jose Luis Rodriguez Zapatero, quoting Nicolas Sarkozy, but it still has to raise some eybrows at the European Central Bank:
The startling threat was made at a Brussels summit of EU leaders last Friday, at which the deal to bail out Greece was agreed, according to a report in El País newspaper quoting Spanish Prime Minister José Luis Rodríguez Zapatero. Zapatero revealed details of the French threat at a closed-doors meeting of leaders from his Spanish Socialist Party on Wednesday.
Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro," according to one source cited by El País. "Sarkozy went as far as banging his fist on the table and threatening to leave the euro," said one unnamed Socialist leader who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."
A different source who was at the meeting with Zapatero told El País that "France, Italy and Spain formed a common front against Germany, and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."
El País also quotes Sarkozy as having said, according to another of those who met Zapatero, that "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense".
The euro fell to an 18-month low against the dollar today.
It seems like just yesterday that we were asking ourselves if the United States was Rome. In light of the financial collapse in the other great cradle of Mediterranean civilization, the New York Times' David Leonhardt poses the inevitable follow-up question:
It’s easy to look at the protesters and the politicians in Greece -- and at the other European countries with huge debts -- and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.
Yet in the back of your mind comes a nagging question: how different, really, is the United States?
The U.S.'s national debt, Leonhardt notes, is projected to rise to 140 percent of GDP within the next twenty years -- Greece's is 115 percent today.
Elsewhere at the Times, Paul Krugman questions the credibility of that long-range projection and argues that the U.S. shouldn't worry:
Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.
About that eurozone: in a phenomenally awkward bit of timing, Estonia happened to be trying to join it today, and succeeded. Other countries like Poland and Bulgaria, however, are having second thoughts. Greece's current predicament, and the looming crises in Spain, Portugal, and elsewhere, have offered a cautionary tale. The Associated Press looks at the divergent experiences of Hungary and Romania, which are members of the European Union but not the eurozone, and Greece, which is in both: When the IMF bailed out Hungary and Romania in 2009, the countries were able to make the necessary adjustments quickly, if painfully, by letting their currencies fall. Greece, however, can't, and is now looking at far harsher, more drawn-out austerity measures attached to its 110 billion euro bailout.
What's a girl to do when she's not a living goddess anymore? Apparently aim for a career in finance:
Chanira Bajracharya, 15, has been the Kumari or “living goddess” of Patan, an ancient town south of Kathmandu, for nine years, blessing devotees at the temple and riding in decorated chariots 18 times a year during Hindu and Buddhist festivals.
Now, with her time as living goddess drawing to a close — the young virgin deities retire on reaching puberty — Bajracharya is contemplating a career in banking if she makes grades good enough to study commerce or accounting.
Last week she became the first living goddess ever to take the school leaving certificate examination, which was administered to her in her temple, which is housed in her home.
“I want to study commerce or accounting and be engaged in the banking sector,” she told Reuters in a rare interview, dressed in her ceremonial costumes, her eyes rimmed in black kohl and a third eye painted in the middle of her forehead.
Despite the attention, being a goddess doesn't sound like much fun. Bajracharya isn't allowed to attend school or mingle with other children and says she has no friends her age. She receives only about $20 a month for her services. A Nepalese Supreme Court order in 2008 forced the temple to provide the Kumaris with education and medical care.
Hopefully Bajracharya makes it through school and into the career of her choice. She's certainly earned it and the global banking sector could use a little divine intervention these days.
PRAKASH MATHEMA/AFP/Getty Images
Bad news from the World Trade Organization: Global trade crashed a whopping 12 percent last year, around 20 percent more than anticipated and the most since the end of World War II.
Pascal Lamy, the head of the WTO, used the occasion to call for the resumption of the Doha trade talks, which fell apart in 2008 and which he described as "imperative." Just yesterday, U.S. President Barack Obama promised to complete them, with unnamed officials saying the White House wants it to happen this year. But then again, Doha would need to be approved by these guys...
Two weeks ago, European leaders tapped Germany to lead a bailout of Greece. Since then -- sturm und drang and chaos. Germans are infuriated over everything from Greece's hiring of Wall Street firms to hide its debt to the country's retirement age (in Germany, 67, in Greece, 61). In turn, Greeks have accused German papers of racism and western European leaders of paternalism.
Yesterday, a 60,000-person strike shut down Athens and turned violent, Theodoros Pangalos, the deputy prime minister of Greece, brought history into it. In an interview with BBC radio, he invoked the 1941 Nazi invasion of Greece, which caused an estimated 300,000 deaths:
[The Nazis] took away the Greek gold that was at the Bank of Greece, they took away the Greek money and they never gave it back. This is an issue that has to be faced sometime in the future. I don't say they have to give back the money necessarily but they have at least to say "thanks."And they shouldn't complain so much about stealing and not being very specific about economic dealings.
All in all, I can't see anyone benefiting from this diplomatic low blow. The Greeks don't want German help, and the Germans don't want to have to give it to them. But, the alternative is mass unemployment and emigration, deep cuts to social services, and a prolonged depression. As I understand it, even moderate austerity measures combined with very high taxes on the rich, the Greek populist proposal, simply will not work. And, just as an aside, I'll go ahead and guess that Angela Merkel saying "Thanks for the gold!" would not go down well in Athens at all.
Milos Bicanski/Getty Images
If I weren't Annie in Washington, but were, say, Anthea in Athens, I'd consider moving right about now. The Greek economy is cratering. Unemployment is skyrocketing. Taxes are rising. Social services are being slashed. Greece's participation in the European Union means that I can move and get a job anywhere in it, without a visa. So, I'd figure -- I'm young, childless, and college-educated. I'll try my prospects in Strasbourg for a couple years.
The problem is: I'm useful to the Greek economy. I work hard and pay taxes, but don't use much in the way of social services like healthcare. I do spend plenty of my income on things like clothes and food, though, and might even open a business if given the chance. Alas, it seems, I am leaving Greece by the thousands.
I used Eurostat to make this chart of the growth changes in the Greek population, broken down by age group. Blue bands are growing and red are shrinking. Eurostat only had data up until 2009, but I imagine we will see trends accelerate in 2010, with a veritable exodus of young members of the work force. On one hand, this might leave jobs for other workers and therefore lower unemployment somewhat. On the other, the trend just does not bode well for the Greek economy.
This weekend, the New York Times reported that Greece, in the midst of a massive economic crisis, had none other than Wall Street giant Goldman Sachs help it keep its books in the black with some creative financial maneuvers, such as selling away the rights to future lottery earnings.
[Greece] engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November...a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills.
The story is a bit less fantastic than it seems at first blush. First, Felix Salmon notes, the world has known about the investment banks' advising the Greek government for the better part of a decade. In 2003, Nick Dunbar of Risk Magazine published a long piece on the giant swap deals Goldman was engineering for Athens.
Second, Greece is hardly alone in papering over or effectively doctoring its stats. The New York Times article notes that Italy partakes in similar banker-confabulated deals and implies that others do too. France pulled a similar 9 billion euro debt maneuver, revealed in 2006. China cooks its books to boost its GDP numbers. Name any of a dozen developing nations (Zimbabwe springs to mind) and someone will have plausibly accused it of lying with statistics.
But, of course, Greece is no Zimbabwe. The ousted Greek government knew better than to amp up the creative accounting as its economy was tanking. It made a bad situation worse, imperiled Greek livelihoods, hurt its partners in the eurozone, and possibly even destabilized the euro itself.
What I can't figure out is how much the Eurocrats and eurozone finance ministers knew about these deals. The European Monetary Union has bureaucrats aplenty to keep track of the eurozone economies and prudential measures to prevent countries from over-extending themselves, debt-wise. Is the issue that they didn't know enough -- or that they didn't act?
At the Financial Times, Harvard professor Martin Feldstein argues for letting Greece take a holiday from the euro, allowing it to devalue its currency and ease its severe economic woes. It's a nice idea, but a bit pie in the sky. Barry Eichengreen explains why:
The insurmountable obstacle to exit [is] procedural. Reintroducing the national currency would require essentially all contracts -- including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else - to be redenominated in the domestic currency. The legislature could pass a law requiring banks, firms, households and governments to redenominate their contracts in this manner. But in a democracy this decision would have to be preceded by very extensive discussion.
And for it to be executed smoothly, it would have to be accompanied by detailed planning. Computers will have to be reprogrammed. Vending machines will have to be modified. Payment machines will have to be serviced to prevent motorists from being trapped in subterranean parking garages. Notes and coins will have to be positioned around the country. One need only recall the extensive planning that preceded the introduction of the physical euro.
The introduction of the euro did require extensive planning -- and extensive costs, costs Greece might not want to pay for. Let's do a bit of back of the envelope math. When the eurozone adopted the physical currency, in 2002, the French bank BNC Paribas calculated the price tag for the switch at 160 to 180 billion euros -- 188 to 212 billion euros today. Greece is about 2.5 percent of the eurozone economy -- so the government might be looking at something like a 4.7 to 5.3 billion euro cost.
That is not much. In fact, it is so little Greece might be able to afford it; the government already needs to borrow 53 billion euros to service its debt this year. But that doesn't include the dramatic cost to businesses, individuals, and banks, or the political and plenary trouble of executing such a maneuver. Alas, Feldstein's is a nice idea, but not one I see working.
ARIS MESSINIS/AFP/Getty Images
Barack Obama is catching some heat for saying that he doesn't "begrudge" the bonuses paid to Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase chief Jamie Dimon ($9 and $17 million, respectively). I don't see what the fuss is all about. It's fairly simple: Good executives deserve to be well compensated for their work, while bad ones -- like Stanley O'Neal, who scored himself a $160 million golden parachute even as his firm, Merrill Lynch, was putting up huge losses -- do not. Obama might consider clarifying his remarks by borrowing from some old speeches of his: "I'm not against all bonus. Just dumb ones."
The key to encouraging good banker behavior is putting in place a compensation system that doesn't reward CEOs for taking dangerous risks to the financial system as a whole. Tying executive pay to long-term performance, not short-term stock boosts, would be a good start. Requiring so-called clawback provisions that put CEOs on the hook for losses, and not just gains, would be another wise move. And it would greatly help matters if CEOs of big financial firms were no longer able to stock their boards with cronies who let them do whatever they want.
To my mind, though, the most important reform would be to raise the amount of capital that banks are required to keep on their books. The reason "Wall Street CEOs gone wild" became such a huge problem, requiring massive government intervention, was that their institutions were too highly leveraged and couldn't cover their losses. If you get this reform right, many of the smaller problems -- including CEO pay -- become less dangerous to the economy as a whole.
UPDATE: Wow, I see that the blogosphere has now gone crazy reacting to the original Obama interview, and the White House is trying to walk it back. Even Paul Krugman is unloading on the prez. Twice. Krugman's chief complaint is that Obama said, "like most of the American people, [I] don’t begrudge people success or wealth. That’s part of the free market system." Krugman: "but this wasn’t about free markets, this is an industry that survives only thanks to taxpayer backing." Fair enough, but I think what Obama meant is pretty clear: Blankfein and Dimon are the best of the lot, and they came out of this mess big winners.
Via FP contributor Ashby Monk, here's an interesting story from Bloomberg News that hasn't gotten much attention. It seems that Russia tried to use its vast financial holdings and conspire with China to create "economic disruptions" in the United States in 2008. An astonishing scoop, if true.
The source of the tale is Hank Paulson, the former U.S. Treasury secretary whose memoir, On the Brink, is coming out soon.
The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities.
China rejected the idea, according to Paulson, and the Russians are denying the story. Monk, an expert on sovereign wealth funds, comments:
If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.
I thought that calendar 2009 was a good year for my thinking activities; taking stock I thought I had satisfied my new year commitment to not be late once, satisfied my ancient Mediterranean avoidance of vulgar work (called "laziness" in modern days by philistines and modern slaves), brought down my "work" activities to under 3 hours a week, while (of course) increasing my income, reduced boring exercise while increasing my fitness, never uttered the word "I am busy" (meaning I was in control of my life), drank good wine, etc. I had spent minimal time with philistines and businessmen, blew away a few heads of state and ministers of finance because I despise bureaucrats & journalists & find them both boring and intellectually inferior to my friends Dupire, Douady, the philosophers & philosophasters, etc. You know you are free when you prefer to turn down invitations by the glorious to accepting them --the first step towards withdrawal and seclusion. I did more raw thinking, pure abstract thinking than ever before, except perhaps in childhood as I had no soccer mum so I could lounge and meditate. I figured out mathematically why nature could not have an animal larger than an elephant, why size is a handicap in complex systems, the "too big WILL fail", etc. but all these seemed childplay. For I never thought that I would see in front of me the result of my life with disastrous consequences for LOGIC, EPISTEMOLOGY, DECISION THEORY, STATISTICAL INFERENCE. Thanks to my friend Raphael Douady who lets me borrow his brain, his intelligence, and his mathematical erudition --he has more mathematical culture than anyone in modern times, except perhaps for his late father Adrien Douady. 16 years of conversations with Raphael ... Only he could bring up cylindrical (even spherical) Brownian motion, Sobolev space, etc. into normally bland discourses. All it took is a long conversation in Raphael's kitchen last November. Now I feel I did something deep.
(Hat tip: Paul Kedrosky)
Sean Gallup/Getty Images for Burda Media
Passport, FP’s flagship blog, brings you news and hidden angles on the biggest stories of the day, as well as insights and under-the-radar gems from around the world.