El-Erian Says Sustainable Solution Needed for Greece
(Bloomberg) — Pacific Investment Management Co., the world’s biggest manager of bond funds,
won’t buy the debt of Greece until there is a sustainable solution to the nation’s fiscal crisis. Greek leaders must first make fiscal adjustments along with maintaining economic growth and employment creation, Mohamed A. El-Erian
, chief executive and co-chief investment officer of Newport Beach, California-based Pimco, said in Bloomberg Radio interview with Tom Keene
today. They must work quickly with European and International Monetary Fund officials to coordinate the response and implement an aid package, he said. “The most critical thing is for the Europeans to understand that when you allow a crisis to fester it morphs and it morphs into something much more difficult to control,” said El-Erian, a former IMF deputy director. “First and foremost, the Europeans need to understand how urgent the situation is.”
Spanish Unemployment Rate Tops 20%, Undermining Deficit Fight
(Bloomberg) Spain’s unemployment rate rose above 20 percent for the first time in more than a decade, undermining Prime Minister Jose Luis Rodriguez Zapatero’s fight to cut the euro region’s third-largest budget deficit.Spanish borrowing costs have surged in the past two weeks on concern the state will struggle to rein in the deficit. Standard & Poor’s cut the country’s credit rating on April 28, saying the government was underestimating its fiscal problems and overestimating growth prospects. Adding to public spending, Zapatero has extended benefits for the long-term unemployed. “I suspect employment will continue falling for most of the rest of this year,”“Clearly it has knock-on implications for fiscal policy.”Spain’s budget deficit was the third-largest in the euro region last year, at 11.2 percent of gross domestic product. S&P said it expects the shortfall to remain above 5 percent in 2013, the year the government has pledged to cut it to the EU’s 3 percent limit.
Why Isn’t Britain In More Trouble? – There have been various versions of the “Britain is the next Greece!” story out there; a good rundown at FT Alphaville. As they note there, however, the CDS and bond markets don’t seem to agree: So is Britain different, and why?Some of the raw budget numbers are daunting: according to Eurostat, Britain ran a primary deficit — that is, a deficit not counting interest payments — of 9.5 percent of GDP last year. That’s larger than Greece’s 8.5 percent. Against that, Britain had debt of “only” 68 percent of GDP, compared with Greece’s 115 percent. But the really big difference is in economic prospects. Britain’s recovery hasn’t been as strong as one would like — but the economy is growing, and since deflation looks unlikely thanks to the floating exchange rate, Britain can expect to see growth of several percent a year in nominal GDP. Greece, on the other hand, is in the euro straitjacket
How the Fed Will Read Latest GDP Numbers – Federal Reserve officials have made it clear in recent weeks that their decision about when to raise interest rates will depend heavily on how the economy performs vis-à-vis their forecast for growth and inflation. If growth underperforms or inflation comes in below expectations, the odds of a rate hike go down. The odds go up if the opposite happens. So what do the first quarter forecast tell us about how the economy is doing? Growth is coming in around as expected though it’s still not convincing growth. Inflation is low and has the potential to come in well below the Fed’s forecast. The Fed expects gross domestic product to grow at an annual rate between 2.8% and 3.5% this year. At 3.2%, the first quarter came in right on target. However, it is still heavily weighted toward inventory rebuilding. The Fed wants to see more sustained consumer spending and investment before being convinced the recovery is healthy and self-reinforcing.
So, yuan to fight about it?
– Does the US have a legal case against China’s exchange-rate regime? This column, which first appeared in Vox’s latest eBook, argues that any claim against China at the WTO would face substantial hurdles, and would be unlikely to add pressure on China any time soon. If a claim does go ahead, it is more likely than not to fail.
Is Geithner in SIGTARP’s Crosshairs?
– Yves Smith – A Bloomberg story today on Neil Barofsky, the head of the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, contained this explosive little item
: The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges
. We’ve been told that Barofsky is political, despite his “take no prisoners” image, and indeed, his report that criticized the New York Fed for paying out 100% of the notional value to holders of AIG credit default swaps bore that out when it bizarrely exonerated the Fed for its repeated retrades of the AIG funding
, which is of greater economic consequence than the failure to negotiate a haircut on the CDS).
– Until last week, I’d never heard of "IBGYBG." But during the Senate Permanent Subcommittee on Investigations’ eye-opening hearings into ratings agency malfeasance, former Moody’s senior credit officer Richard Michalek introduced me to it while testifying about the perverse incentives that dominated the industry. On the investment bank side, he said, bankers were looking to score the one-time fee from whatever securitization deal they were asking the agency to rate, and move on to the next deal. The incentives for the bank, Michalek said in prepared testimony, were clear: "get the deal closed, and if there’s a problem later on, it was just another case of IBGYBG–I’ll be gone, you’ll be gone."
How Obama Wimped Out –
How else to explain the refusal to include the Brown/Kauffman bill to break up banks “too big to fail?” Why were Blanche Lincoln’s tough tactics on derivatives trading dropped from the Senate bill? Whatever happened to the creation of a strong consumer protection agency, as Jack Reed, among others, proposed? Why the reluctance to reimpose Glass-Steagall protections, which worked so well for so long? And what, despite Ron Paul’s support for it, is so dangerous about opening up the Fed to a little democratic oversight? (For a menu of worthwhile reforms needed to strengthen the bill on the floor of the Senate, go here
Elizabeth Warren: GOP Reform Plan Is A Failure, Republicans Choosing Banks Over Families It’s time for senators — especially the Republicans — to square their upcoming votes on financial reform with their long-professed desire to protect families, said consumer advocate and federal bailout watchdog Elizabeth Warren on Wednesday in an interview with the Huffington Post."Everyone in Washington claims to be on the side of families and to support reform," said Warren, a member of the 2010 TIME 100 list of the world’s most influential people. "But the test is who votes to paper over problems with another regulatory system designed to fail and who votes for real Wall Street accountability even if it means that some donors will be disappointed."I’m tired of hearing politicians claim to support families and, at the same time, vote with the big banks on the most important financial reform package in generations. I’m deep-down tired of it."