profitepaper pakistantoday 12th November, 2012

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Monday, 12 November, 2012

ECB’s Weidmann urges Greek debt could go above 140 percent of honest troika report GDP in 2020, says ECB on Greece: paper Europe’s politicians seem to have already decided to continue funding Greece, European Central Bank policymaker Jens Weidmann was quoted as saying BERLIN

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AGENCIES

HE ECB Governing Council member and Bundesbank chief said international lenders must still make an “unembellished and honest” assessment of the country’s finances.

“Politicians have evidently decided to continue financing Greece,” Weidmann was quoted as saying by German newspaper Rheinishe Post.

Asked if the report of the troika of lenders the International Monetary Fund, European Commission and European Central Bank - on Greece could nonetheless be independent, Weidmann said this was problematic.

“How can you objectively assess the completion of a program, if you are too afraid of the consequences of a negative conclusion?” he said. “I am relying on the fact the troika will deliver both an unembellished and honest assessment of the situation in Greece before payments are delivered.” Weidmann said the ECB and national central banks within the euro zone had bought up a considerable amount of Greek debt and thereby become one of Greece’s biggest creditors, but could not take a haircut on that debt. “The central banks may not waive Greece’s debt, that would be a direct transfer and therefore would be tantamount to a forbidden monetary financing of a state,” he said.

ECB President Mario Draghi said earlier this week the ECB was unlikely to help Greece much further in its bailout because it was prohibited from providing direct aid. Weidmann reiterated his criticism of the ECB’s plan to buy up the debt of struggling euro zone states.

“I DID NOT THREATEN TO RESIGN”: “While strict conditionality has been agreed for the new government debt purchase program, it remains to be seen how binding this is,” he said.

“Fundamentally, monetary policy must not end up in tow of fiscal policy. Experience shows that independence is decisive for a central bank to keep monetary value stable.”

Weidmann denied reports that he had threatened to resign over the ECB’s bond-buying plans: “I did not threaten to resign. When I took on this office, I knew what to expect. What would a resignation have brought?” Asked if he felt abandoned by German Chancellor Angela Merkel, he said “no”, saying that central banks and governments had different duties and interests. Weidmann also said the euro would still exist in 10 years’ time: “I am certain of this.

Clearly there is the political will to keep the euro area as a whole.”

Weidmann dismissed the calls of some German politicians for Germany to have higher voting rights in the ECB to better reflect its share of the ECB’s risk burdens. He said these calls had grown because of increased fears over the risks the ECB was taking on but that existing rules on voting rights were designed such that ECB policymakers did not pursue national interests. “The right response is not to change voting rights but to return to a narrow definition of monetary policy.”

The Bundesbank chief said the German government’s goal to balance its budget in 2014 was sensible but could have been jeopardized by decisions made by Merkel’s centerright coalition last Monday that went “in the opposite direction”.

Greece will fail to reduce its debt burden to a manageable level by 2020 with current policies, European Central Bank policymaker Joerg Asmussen told Belgian daily De Tijd, forecasting the target set by creditors will be widely missed BRUSSELS AGENCIES

Greece’s second international bailout in March was supposed to make its debt sustainable by 2020, falling to 116.5 percent of economic output, but two elections and months of delays in agreed polices have thrown targets off course.

“Under unchanged policies, the debt in 2020 will still be somewhat higher than 140 percent of GDP according to ECB estimates,” said Asmussen, a member of the ECB executive board, in an advance copy of an interview to be published on Saturday.

With total Greek debt estimated at 175 percent of gross domestic product and forecast to rise to nearly 190 percent next year, euro zone finance ministers will meet on Monday to try to determine just how off-track Greece is and how to respond.

Disagreement over the state of Greece’s future finances threatens to further delay the next 31.5 billion euro-tranche of Greece’s second bailout, pushing it close to bankruptcy.

First estimates by inspectors from the European Commission, the European Central Bank and the International Monetary Fund show the debt would be at least 130 percent of GDP in 2020. The IMF differs from the Commission, euro zone officials have told Reuters, with the Commission more optimistic.

Asmussen told De Tijd that finance ministers had to look at a range of options to help Greece, “including voluntary debt buy-back’s, lowering the interest rate on outstanding loans and asking for a higher Greek primary surplus.”

A radical strategy would be for euro zone countries, which have made loans totaling 127 billion euros to Greece under the two bailout programs, to

write off some of that.

But Asmussen said that was unlikely.

“The appetite for a second restructuring is extremely low among member states,” he said, referring to the private sector write down of Greek debt earlier this year.

He said it was still better to keep Greece within the euro zone and that the country may get two more years of financing, although there was still no agreement on how to do this.

“In the next few days, we need an agreement on further measures in Greece and additional aid from the other euro area countries to ensure debt sustainability,” he said.

WALL STREET WEEK AHEAD

‘Fiscal cliff’ blues may lead to correction Wall Street’s post-election sell-off may gather steam in the coming weeks as worries mount about the looming ‘fiscal cliff’ and technical weakness suggests a possible correction ahead NEW YORK AGENCIES

The benchmark Standard & Poor’s 500 .SPX closed below its 200-day moving average - a measure of the market’s longterm trend - on Thursday for the first time in five months, and ended below it again on Friday. More than half of the Dow components are trading below key technical levels.

“I don’t think you have to panic here, but I think you really want to be looking for the market to move lower for the next couple of months,” said Frank Gretz, market analyst and technician for Wellington Shields & Co., a brokerage in New York. “I think the next rally is the rally you want to sell.”

At the heart of the market’s worry is whether U.S. leaders can come to agreement on some $600 billion in spending cuts and tax increases that are due to kick in early next year. Some fear dramatic cutbacks could send the U.S. economy into another recession.

The prospect of higher tax rates in 2013 is driving investors to sell shares as they seek to decrease the tax impact from their positions this year and next.

“You would have thought the fiscal cliff scenarios would have been already mulled over and priced in, but they weren’t. It’s almost like the market has ADD <attention deficit disorder> and can only focus on one thing at a time,” said

Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, whose firm manages about $13 billion in assets.

The S&P 500 fell 2.4 percent for the week, its worst weekly percentage drop since June. The index is now down 6.4 percent from its intraday high for the year of 1,474.51 reached on September 14.

That drop puts the benchmark index below its 50-day moving average, but not yet into correction territory, defined as a 10 percent drop from a peak.

READING THE TECHNICAL SIGNS The S&P 500 has been trading in a range between the 50-day moving average of 1,433.50 and the 200-day moving average of 1,380.98 for about two weeks.

A significant break below that lower level could be a precursor to further weakness, analysts said.

“There’s a technical breakdown in the market that indicates further losses,” said Adam Sarhan, chief executive of Sarhan Capital in New York. “A 10 percent drop is the next big line in the sand.”

The primary driver of stock prices in coming weeks looks likely to be investor concern about the U.S. fiscal situation.

In a sign of the risks involved, comments by President Barack Obama on Friday about the upcoming negotiations caused stocks to sharply cut their gains.

The president, who defeated Republican candidate Mitt Romney in Tuesday’s U.S. election, outlined a position for

the fiscal issues on Friday that is far apart from that of his political opponents, suggesting a long battle is to come.

“If the market anticipates a resolution to the fiscal cliff or Europe or any of the other bricks in the wall of worry, we could easily take off,” Sarhan said.

Seventeen of the Dow’s 30 components are trading below both their 50-day and 200-day moving averages, while another eight are under their 50-day levels, but not their 200. Only five components - Bank of America (BAC.N), JPMorgan Chase & Co (JPM.N), Home Depot Inc (HD.N), Johnson & Johnson (JNJ.N) and Travelers Cos (TRV.N) - are above both support levels.

Another big negative for the market has been heavy selling of Apple (AAPL.O) shares. The stock of the world’s biggest company, ranked by market capitalization, lost 5.2 percent this week, weighing heavily on both the S&P 500 and the Nasdaq .IXIC. The stock is down 22.4 percent from its September 21 all-time intraday high of $705.07.

BIG RETAILERS’ REPORT CARDS The election and fiscal cliff concerns, which came on the heels of Superstorm Sandy and its devastating effects on many parts of the U.S. Northeast, have captured so much attention that they’ve overshadowed weakness coming from third-quarter earnings.

With results in from 449 of the S&P 500 companies, third-quarter earnings now are estimated to have declined 0.3 percent from a year ago, which is slightly better than the forecast at the start of the reporting period. Results have been especially weak on the revenue side, however, with just 38 percent of companies beating on sales, Thomson Reuters data showed.

But recent stronger economic data, including a report on Friday showing consumer sentiment at more than a fiveyear high in early November, suggests that retailers, many of which have yet to report, could be among the stronger performers this earnings period.

Next week, results are expected from such big names as Target (TGT.N), WalMart (WMT.N) and Home Depot.

Consumer discretionary companies have outperformed the broader S&P 500 in earnings, with 72 percent of the companies in that sector beating analysts’ expectations, compared with 63 percent for the S&P 500 as a whole.

Investors will be paying close attention to those results with the holiday shopping period around the corner, said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey, which oversees about $1 billion in assets. “It’s really the beginning of the Christmas sell season, and I think there’s going to be a lot of interest with the outlook for that season and how promotional companies are going to be,” Meckler said.

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Business 02 If you want to save Greece, stop lending it money

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KLAUS ADAM

HE Greek rescue program is seriously derailed. By the end of this year, the economy will be a fifth smaller than it was five years ago, and the government is forecasting another 4.5 percent decline in 2013. This figure may once again prove overly optimistic.

The collapse helps to explain the high drama involved this week, as the Greek government tries to drive through parliament a double dose of austerity in the teeth of recession, and the country’s international creditors worry over whether to give the country its next 31 billion euros ($40 billion) of life support, rather than let it default on debt repayments later this month and crash out of the euro.

Given such a desperate situation, it’s all the more surprising that Greece continues to borrow abroad at a stunning rate. The current account deficit, a measure of external borrowing for the country as a whole, was 21 billion euros in 2011, or about 10 percent of gross domestic product. While it slowed somewhat in 2012, Greek borrowing still ran at an annualized rate of 14 billion euros in the first half of the year.

The continued borrowing is often overlooked in the debates over how to rescue Greece, and it indicates that the effort to avoid default is doomed.

PERMANENT SLOWDOWN: Heavy foreign borrowing is sensible when a country is faced with a temporary fall in growth. It can help to cushion the effects on domestic consumption. But Greece is not suffering from a temporary slowdown

in the economic cycle. In a situation where the decline in activity is more permanent, large-scale borrowing to sustain consumption only increases the pain down the road. It requires cutting back consumption to fall in line with lower production levels, as well as additional reductions to service the accumulated external debt.

The paradox of a simultaneous plunge in economic activity and increased external borrowing raises the question of why Greece is borrowing at the rate it is. The answer appears to be that the Greek political system is seriously dysfunctional.

There simply is no credible plan for the long term and, certainly, none that would envisage repaying external debt.

The past weeks have shown that the ruling parties in Greece are more focused

on fighting each other than on reforms that could support economic growth and real change in the country. Prime Minister Antonis Samaras and his New Democracy party are aware of the once-in-a-lifetime opportunity they now have to marginalize their long-standing political rivals from the moderate left and to establish a new bipolar political system, in which the extreme left Syriza party features as their main opponent.

Aware of this tactic, the moderate-left parties decided to oppose sensible measures from the so-called troika — the International Monetary Fund, the European Commission and the European Central Bank — such as liberalizing the labor market and reducing public sector employment, thereby turning themselves

EuRopE’S pLAn A HAROLD JAMES Europe’s politicians nowadays are desperately looking for someone to blame for the euro crisis. Germany blames France, and vice versa. Even lawyers are getting into the act, trying to identify legal responsibility for the monetary union’s design flaws.

Meanwhile, as the crisis has deepened, a new consensus about Europe’s monetary union has emerged.

The euro, according to this view, was devised in a fit of giddy and irresponsible optimism – or, alternatively, panic at the prospect of German hegemony over Europe – in the wake of the fall of the Berlin Wall.

Nothing could be further from the truth. The Report on economic and monetary union in the European Community, which laid out the euro blueprint, was presented in April 1989 – a time when no one (with the possible exception of some Kremlin strategists) was thinking about German reunification. Moreover, the salient issues concerning monetary unions were well understood, and remedies for the most significant obstacles were proposed at the outset.

The committee that drafted the report – now known as the Delors Report, after its chairman, Jacques Delors – was a fundamentally rather conservative group of central bankers, with even the governor of the Bank of England (BoE) signing on. Its internal debates highlighted two problems of the potential monetary union. First, the committee explicitly discussed whether the capital market would suffice to impose fiscal discipline on the currency union’s members, and agreed that a system of rules was needed. But those rules were steadily weakened, and by the early 2000’s were widely derided (including by Romano Prodi, Delors’ successor as President of the European Commission), as governments found that they could run large deficits without paying higher market interest rates.

The second problem was more serious. In the original plan for the European Central Bank, the proposed institution would have had overall supervisory and regulatory powers. Indeed, the drafters of the ECB statute produced an astonishingly far-sighted approach to banking supervision. Their 1990 version of the Maastricht Treaty’s Article 25 on Prudential Supervision included the following provisions (placed in square brackets to show that they were not completely consensual): “The ECB may formulate, interpret, and implement policies relating to the prudential supervision of credit and other financial institutions for which it is designated as competent supervisory authority.”

The demand that the ECB should be the central supervisory authority in an integrated capital market met strong resistance, above all from Germany’s Bundesbank, which worried that a

into a threat to New Democracy. The result is political deadlock and a rate of increase in debt levels that even the biggest rescue packages can’t keep up with.

Policy makers have slowly begun to recognize the unsustainability of these debt and borrowing dynamics. The IMF has been pushing the euro area to find ways to reduce Greece’s debt, but governments and the ECB, which holds about 45 billion euros of Greek bonds, have resisted any suggestion they should forgive the debt that’s owed to them.

Eventually international lenders will have to come to terms with the fact that Greece will simply not be able to repay its debt. It is quite possible that further measures, such as misguided plans to buy back Greek debt, can temporarily push

back this moment of truth. They are unlikely to buy much time so long as Greece is borrowing abroad at a rate of 14 billion to 20 billion euros a year.

END LENDING: Greece will only be truly “saved” once it manages to get along without additional borrowing. Achieving this requires that official creditors stop lending money to the current Greek elites, that official and private creditors write off the country’s debt, and that domestic economic competitiveness increases to a point where it gives a strong boost to exports.

A Greek debt default and a simultaneous euro area exit would achieve all of these goals, virtually overnight. Obviously, the adjustment would be rough and turmoil would probably prevail for a number of months, but the adjustment would take place. The current soft approach, in which international money is channeled to the ruling elites with the aim of smoothing transition to a sustainable position within the euro area, has yielded close to nothing in terms of structural economic adjustments. Instead of a smooth transition, Greece is in the midst of a disastrous collapse in output.

This unfortunate outcome must be blamed on the inability of the Greek political elites to deliver the structural economic changes that are needed. Salary cuts and tax increases alone simply cannot re-establish the competitiveness of the economy. And if true economic reform cannot be delivered, then a euro- area exit remains the only other available option.

This is a sad and unavoidable conclusion, and it follows from the simple fact that Greece cannot go on borrowing forever.

Courtesy Bloomberg

CORPORATE CORNER

role in maintaining financial stability might undermine the Bank’s ability to focus on price stability as the primary goal of monetary policy. There was also bureaucratic resistance from existing regulators. Most important, supervision suggested some potential responsibility to recapitalize problematic banks, and thus involved a fiscal cost.

The most energetic actor behind the early thinking on banking supervision was a BoE official, Brian Quinn. But his credibility was sapped in the wake of criticism of the BoE’s handling of the collapse in 1991 of the Bank of Credit and Commerce International – an episode that anticipated later issues in managing the failure of large, cross-border institutions.

A legal vestige of the original plan may offer an easy path to a greater ECB supervisory role today. According to Article 25 of the Maastricht Treaty, the ECB may “offer advice to and be consulted by” the Commission or the Council on the scope and implementation of legislation relating to prudential supervision.

When that phrase was inserted in the Treaty, it appeared as if the hurdles to effective European banking supervision could hardly be set higher. The ECB was not given overall supervisory and regulatory powers.

And, until the outbreak of the financial crisis in 20072008 highlighted the connections between financial and fiscal health, no one considered that a problem.

They do now. Nevertheless, fiscal rules and common banking supervision are still regarded in many quarters as an illegitimate encroachment on member states’ sovereignty. After all, the European Union has avoided becoming a focus of heated contestation precisely because it never got much of a share of what Europeans produced (its budget, at just over 1% of the EU’s GDP, has barely changed in relative terms for the past 40 years).

It was the member states that did politics and budgets.

Delors had a different vision. At the time of his report, he concluded that the European budget would amount to some 3% of GDP – identical to the peacetime US federal budget’s share of GDP during the country’s first stage of monetary union, in the nineteenth century.

Moreover, as in Europe today, when Alexander Hamilton proposed a central banking system, the Bank of the United States, alongside consolidation of states’ Revolutionary War debt into federal debt, the implementation of his sensible plan was imperfect. In the American case, the principles of federal finance were not worked out until the Civil War, and the Federal Reserve System was established even later, coming only in 1913.

Europeans can learn from the United States and implement a fundamentally sound plan. But they must also recognize that political backlashes and setbacks are inevitable – and thus that the road from vision to reality may be longer than expected.

Courtesy Project Syndicate

PIA to operate weekly flight from Madinah MADINAH: Pakistan International Airlines (PIA) is planning to operate a direct weekly flight from Madinah to Lahore from the next Umrah season. This was stated by the District Sales Manager of PIA in Madinah, Shahid Hussain, while talking to the visiting Pakistani media team here on Saturday. He said that a direct flight from Madinah to Peshawar is also planned subject to availability of aircraft.

Currently PIA is operating three flights in a week from Madinah to Pakistan; these are: Madinah-Karachi; Madinah-Karachi-Multan and Madinah-Islamabad. Shahid informed that the Madinah office became online from last year and since then the revenue has increased considerably. It was about 16 million Riyals when the Madinah station was off line which enhanced to 20 million Riyals in 2011. Shahid further pointed out that the revenue of PIA’s Madinah Station was 20. 43

million last year whereas the revenue till October this year has enhanced to 22 million while the target for the year has been set at 26 million Riyals.

KArAChI: Salim Abbas Jilani, Chairman SSGC making a presentation entitled “Project Management in Balochistan” at PMI-KPC’s Symposium held on 10th Nov. 2012 in a local hotel.

Also seen in the picture Zuhair Siddiqui, MD (3rd from r) and Yusuf J. Ansari (2nd from r), Sr. General Manager (Management Services) of SSGC.

KArAChI: Begum Salma Ahmed founder President WCCI and Vice President FPCCI, and newly elected president kousar Junejo, cutting cake to celebrate 10th Anniversary of (WCCI) at federation house other honorable members also present on the Occasion.

KArAChI: Qamar Zaman Kaira, Federal Minister for Information and Broadcasting, addressing a book launching ceremony in memory of late PPP MNA Fauzia Wahab.

Monday, 12 November, 2012