Monday, 30 January 2017

Trump Country Might Suffer More in a Trade War, Study Says

In World Economy News 31/01/2017

Should the U.S. get embroiled in a trade war, communities that voted for Donald Trump are likely to take a bigger hit than those that voted for Hillary Clinton, according to a study by the Brookings Institution.
Brookings measured what it called the export intensity of urban areas around the country — meaning local goods and service exports as a percentage of local GDP in 2015 — to get a picture of those places most dependent on access to the global economy. The most export-intensive places tended to be smaller cities in the Midwest and Southeast — solid Trump country — rather than the big metropolitan areas that went heavily for Mrs. Clinton.
“Trump communities are relatively more reliant on trade,” said Mark Muro, head of Brookings’s metropolitan policy program. “They are smaller communities with less flexibility” to adapt to a cutoff in trade.
“Disruption could be especially troubling for those places,” he said. Brookings said it traces exports back to the point where value is added via production, rather than where goods and services are shipped. The latter gives too much weight to big ports.
Columbus, Ind., a center of machine-making, is the most export-reliant city in the country, Brookings found. The GDP of the city of 46,000, which voted 2 to 1 for Mr. Trump, is 50.6% dependent on exports. Three other Indiana cities — Elkhart, Kokomo and Lafayette — are among the top 10 cities dependent on exports.
The work by Brookings researchers is in some ways the complement to the better-known work of economists David Autor, Gordon Hanson and David Dorn, who identified the localities most vulnerable to Chinese import competition.
Both the export-intensity analysis and the China-import-vulnerability research look at the impacts of trade on localities rather than treating trade as a single, nationwide phenomenon. The job gains and losses from trade often seem minor compared with a job market of 145 million, but changes in trade flows can impoverish or enrich individual communities, especially those that depend on one or two industries.
In some cases, small cities that are export powerhouses are also fending off Chinese competition. Decatur, Ala., a center for steel, refrigerator, chemical and rocket manufacturing, is No. 7 on the Brookings export-intensity listing, with exports accounting for 29.1% of local output. But it’s also in the top 5% of localities affected by Chinese competition.
These trade crosscurrents help explain why voters in export-dependent areas often turned out so heavily for Mr. Trump. Many voters focused on the job loss from imports rather than job gains from exports, when their communities had both.
“A lot of these small communities have maintained export specialization in the face of significant competition,” said Brookings researcher Joseph Parilla. “They have had their export base erode but are still disproportionately reliant on global markets.”
The nation’s biggest export hubs are large cities with highly diversified economies, which would make it easier for them to adapt to disruptions caused by a trade war. According to Brookings, the biggest exporters are New York, Los Angeles, Houston, Chicago, Dallas and Seattle. The think tank estimates that Mrs. Clinton carried counties accounting for 58% of the nation’s exports, compared with 42% for President Trump.
But measuring export intensity provides a very different look at the impact of trade, with smaller communities dominating the list. Places that voted for Mr. Trump had an overall export-intensity of 13%, Brookings found, compared with 10% for counties that voted for Mrs. Clinton.

Source: Dow Jones

Trump signs executive order to slash regulations

In World Economy News 31/01/2017

U.S. President Donald Trump signs an executive order cutting regulations, accompanied by small business leaders at the Oval Office of the White House in Washington U.S.
President Donald Trump signed an order on Monday that will seek to dramatically pare back federal regulations by requiring agencies to cut two existing regulations for every new rule introduced.
“This will be the biggest such act that our country has ever seen. There will be regulation, there will be control, but it will be normalized control,” Trump said as he signed the order in the Oval Office, surrounded by a group of small business owners.
Trump’s latest executive action will prepare a process for the White House to set an annual cap on the cost of new regulations, a senior official told reporters ahead of the signing.
For the rest of fiscal 2017, the cap will require that the cost of any additional regulations be completely offset by undoing existing rules, the official said on customary condition of anonymity.
Trump, a businessman turned politician, campaigned on a promise to reduce federal regulations that he said burdened American businesses.
Major regulations are typically reviewed by the White House’s Office of Management and Budget (OMB) before they are issued. That review will continue under this new measure, but agencies will also have to identify what two regulations will be repealed to offset the costs of any new rule.
The new order does not require that the repeal of the two regulations be done simultaneously with the release of additional rules, the official said.
“This vests tremendous power and responsibility in the OMB director to ensure the president’s direction in how we manage this across the government,” the official said.
Certain categories of regulations will be exempt from this new policy, including those dealing with the military and national security. The OMB director will also have the ability to waive this policy in certain instances.
Trump has tapped U.S. Representative Mick Mulvaney of South Carolina to lead the OMB.

Source: Reuters (Reporting by Ayesha Rascoe; Writing by Doina Chiacu; Editing by Chizu Nomiyama and Bernadette Baum)

States’ Revenue Shortfalls Exacerbate Budget Crunch

In World Economy News 31/01/2017

Faced with weak revenue, sluggish growth and possible federal funding cuts, many governors and state lawmakers face a tough budget season.
On the revenue front, states are dealing broadly with a mix of challenges, including low energy prices and tax collections that are forecast to continue to grow slowly into the next fiscal year. Meanwhile, states also face an uncertain menu of big changes, including Republicans’ potential repeal of the Affordable Care Act and cuts to federal payrolls.
“Many cities and many states still are in a fragile position,” Virginia Gov. Terry McAuliffe, a Democrat, said during a National Governors Association meeting in Washington last week. “We have to be very, very concerned about what is going to happen next with our economy.”
The federal spending cuts known as the sequester badly hurt Virginia by cutting jobs in the Washington neighbor, Mr. McAuliffe said last week. Virginia would be further hurt by President Donald Trump’s federal hiring freeze, Mr. McAuliffe said, because the government is a major employer in his state.
States’ finances vary widely, but revenue challenges remain common. In fiscal 2016, revenue came in below forecasts in 25 states, which is the highest level since the latest recession, according to the National Association of State Budget Officers. At least 24 states face the same challenge in the current fiscal year, which runs through June in most states, the association, known as Nasbo, said in a December report.
Low oil prices are amplifying the strain by weakening tax collections in energy-producing states like Alaska and North Dakota. But the effect is much broader, with states ranging from Hawaii to Indiana and Mississippi also lagging, despite a long period of national economic recovery.
“It’s been a trend since the end of the recession,” said Nick Samuels, vice president and senior credit officer at Moody’s Investors Service. Revenue hasn’t rebounded like it normally does after downturns, he said.
The reasons are manifold, including the tilt toward job growth in lower-paying industries, he said. Moody’s in December forecast 2% to 3% in state tax revenue growth over the next 12 to 18 months, below the 4% five-year average.
“That is certainly a challenge for states at the same time they confront higher pension costs,” Mr. Samuels said.
Some states face significant fiscal challenges, including Illinois, which has a budget crisis and unfunded pension liabilities that lawmakers have yet to resolve, and Kansas, where past tax cuts opened budget holes. Louisiana’s Democratic governor last week called for a special session of the legislature for mid-February to fix that state’s budget hole.
The revenue shortfalls are modest in most cases, said John Hicks, Nasbo’s executive director. The group credited many states for beefing up rainy-day funds despite the budget challenges. General-fund collections for fiscal 2017 were on target in 16 states, while four states — Arkansas, Maine, New Hampshire and North Carolina — were running ahead of forecasts, Nasbo said in December.
Still, the revenue pressure is forcing states to cover shortfalls and make tough choices. Mr. Samuels said new budget proposals show slowing state aid for higher education. Massachusetts Gov. Charlie Baker, a Republican, vetoed a legislative pay-raise measure on Friday, calling it “fiscally irresponsible.”
Governors in New Mexico, Vermont and South Dakota addressed revenue challenges in recent addresses, citing issues including weakness in oil and gas, a shrinking workforce and lower sales-tax receipts.
Nebraska Gov. Pete Ricketts said his state missed revenue forecasts by $95 million in the latest fiscal year and are forecasting a $172 million miss for the current year, hurt by sharp declines in farm income.
“As Nebraskans, we don’t spend money we don’t have,” the Republican governor said. To contain costs, the state has curtailed travel and put on a hiring freeze for state employees.
States are also dealing with uncertainty in Washington and federal funds account for nearly one-third of state revenues, according to Pew Charitable Trusts. Medicaid, paid for by both the federal and state governments, is the second-biggest expense in most states after education, according to Pew.
With a new administration and GOP lawmakers promising to repeal the Affordable Care Act, and with uncertainty about what might replace it, states are watching closely for Medicaid-funding changes. Some Republican governors — many of states that expanded Medicaid under the health law — have warned against repealing the law until a new law is in its place.
“It’s a very big question mark” for state budget planners, Nasbo’s Mr. Hicks said. “And they know there’s nothing yet to wrap their arms around.”

Source: Dow Jones

Japan PM says next BOJ head should carry on Kuroda’s policy stance

In World Economy News 31/01/2017

Japanese Prime Minister Shinzo Abe said the next central bank governor should be someone who would carry on the policy stance taken by incumbent Haruhiko Kuroda, signalling its ultra-easy monetary policy could be sustained for years to come.
Kuroda, a former top currency diplomat hand-picked by Abe to spread-head the Bank of Japan’s efforts to end deflation, will see his five-year term expire in April next year.
“The BOJ adopted unprecedented monetary easing under Governor Kuroda, which has exerted intended effects on prices,” Abe told parliament on Monday.
“Governor Kuroda has my full trust. I hope the next governor would be someone who takes over his policy stance,” he said, while adding it was too early to debate specifics on the choice.
Abe’s remarks, rare to come so early before the selection process kicks off in full, leaves open the chance Kuroda could be reappointed for a second term, some analysts say.
“If you take (Abe’s) words literally, then there is a possibility for Kuroda to continue his role,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“It’s probably toward the end-year or at the beginning of next year that the next governor will be decided. It’s still far ahead, so you can say (Abe’s comments) are rare.”
No governor has been reappointed for a second term since the current BOJ law, which granted the bank independence from government meddling on monetary policy, took effect in 1998.
But Abe could choose to reappoint Kuroda given his solid handling of monetary policy, say some government officials with knowledge of the decision-making process.
“There are very few people who can fill Kuroda’s shoes or are even willing to do so,” said one official who spoke on condition of anonymity due to the sensitivity of the nature.
Others say a career central banker who worked closely with Kuroda, such as deputy governor Hiroshi Nakaso or senior executive Masayoshi Amamiya, may get the job, or someone outside Japan’s bureaucrat circles.
Some analysts say the task of BOJ governor, which includes frequent grillings in parliament and overseas travels, could be too demanding for Kuroda, who is already 72.
Under Kuroda, the BOJ adopted a massive asset-buying programme in 2013 as part of Abe’s “Abenomics” reflationary policy aimed at pulling Japan’s economy out of stagnation.
But more than three years of heavy money printing has failed to accelerate inflation to its 2 percent target, and the bank was forced to revamp its policy framework in September to one better suited for a long-term battle against deflation.
With its huge bond buying seen nearing its limits, whoever becomes next BOJ governor faces the huge challenge of battling subdued inflation with a dwindling policy tool-kit.
The BOJ will see a huge change in the composition of its nine-member board. Two board members critical of Kuroda’s radical policies will retire in July, while the terms of his two deputy governors will expire in March next year.

Source: Reuters (Additional reporting by Minami Funakoshi; Editing by Chris Gallagher and Kim Coghill)

Back to zero: Companies use 1970s budget tool to cut costs as they hunt for growth

In World Economy News 31/01/2017

The number of U.S. companies using a budgeting tool made famous in the 1970s by former U.S. President Jimmy Carter is surging as they turn their spending habits upside down to boost profits and to re-invest in their businesses.
The upswing in zero-based budgeting (ZBB) signals that a broader cross-section of U.S. companies anticipate turbulence in their revenue growth. They face more pressure on profits, too, as wages and interest rates increase, and a stronger dollar makes their products more expensive overseas.
In consumer staples, where sales growth is often capped in the low-to-mid single digits, Campbell Soup Co (CPB.N), Kellogg Co (K.N), and Oreo cookie maker Mondelez International Ltd (MDLZ.O) have already rolled out ZBB programs that promise billions of dollars in savings.
Other industries, including finance, energy and manufacturing, are now following suit. Use of ZBB in 2017 is expected to increase dramatically in the United States and around the globe, according to consulting experts. Bain & Company reported last year in a survey of 406 North American companies that 38 percent of that group would use ZBB, up from just 10 percent in 2014.
“ZBB has taken on a life of its own,” said Greg Portell, a partner at consulting firm A.T. Kearney.
A ZBB approach requires corporate managers to justify each line item of spending in their budgets, or even build their budgets from scratch. That is a departure from the typical process of using the previous year’s budget as a starting point and adjusting it based on revenue and inflation projections, for example.
It often cracks down on the size of a company’s real estate footprint, corporate travel, terms of international assignments, redundant technology and outside consultants. Employees get cut, too.
But there are risks. One is that companies focus too keenly on restraining spending and not on reinvestment that promotes new products and revenue growth.
“You continuously have to ask what are strategic costs and how can we invest behind the things that drive the highest volume,” said Jason Heinrich, a partner in Bain & Company’s Chicago office.
ZBB first gained widespread attention in the late 1970s, when Carter, as president, said he would apply the budgeting principles to federal spending. It never fully got off the ground, however, and Ronald Reagan abandoned it when he became president in 1981.
Its recent resurgence is due in part to Brazilian buyout firm 3G Capital, which used ZBB when it combined H.J. Heinz with Kraft Foods in 2015.
The combined Kraft Heinz (KHC.O) now has the best profit margins among its peers with an estimated year-over-year gross margin expansion of 258 basis points, better than twice the average among rivals, according to Morgan Stanley. Kraft Heinz’s stock sports a 2.5-point price-to-earnings-multiple premium over its peers.
3G’s success is one reason the highest adoption rate of ZBB is in the consumer staples sector, which has banked on cost cutting to offset weak sales growth. In the current fourth quarter reporting season, the consumer staples sector is on track to report profit of 6.3 percent off revenue growth of just 3.2 percent, according to Thomson Reuters data.
Contrast that with the consumer discretionary sector where sales are seen rising 5 percent but profit just 1.1 percent.
Greg Kuczynski, a consumer staples analyst at asset manager Janus Capital, said ZBB is also being used by some to head off agitation from activist shareholders or even takeovers, like the Kraft Heinz deal.
“So many of them feel threatened,” he said. “They’re desperately implementing ZBB packages.”
Now the approach is spreading to energy, finance, health care and manufacturing. Cheniere Energy Inc (LNG.A), Huntington Bancshares Inc (HBAN.O), Baxter International Inc (BAX.N) and Ford Motor Co (F.N) are some of the latest devotees.
“If a company uses zero-based budgeting, I have more confidence it can take out cost faster than peers who do not,” said Marc Scott, who helps run the $1 billion American Century All-Cap Growth Fund (TWGTX.O).
Not everyone is sold on it. It can be an uncomfortable adjustment for managers and companies have to be careful not to alienate customers and business partners, according to analysts.
The biggest risk is that companies concentrate only on cutting costs, and don’t put some of that money back to work behind businesses with the potential for growth. One unintended consequence is cutting a product’s marketing budget only to see a rival boost spending for their product and grab market share.
“It’s not so simple as some of our other competitors out there make you believe, which has been roughly translated into, ‘Let’s cut all the costs as long as we can get away with it to show you better margins for a short period of time. But I can’t promise you any growth along the way,'” Unilever (ULVR.L) Chief Executive Paul Polman told investors in November.
Even Kraft Heinz has had trouble generating consistent growth. Its organic net sales, which excludes the impact of currency fluctuations and other items, declined by 1 percent in the three-month period that ended Oct 2.
Still, the cost cutting has caught the attention of investors, particularly when companies scrap product lines that add little value.
American Century’s Scott said ZBB was a factor when he evaluated kidney dialysis provider Baxter International, which has used ZBB principles to cancel several programs that added little value.
He began building a position in late 2015 when Baxter traded below $35 a share, according to Thomson Reuters data. The fund now owns about 540,000 shares and the stock trades around $46.
“It was just another feather in their cap,” Scott said about Baxter’s use of ZBB. “It’s not a huge growth play, but we expect their profit margins to nearly double in a couple of years.”

Source: Reuters (Reporting by Tim McLaughlin; Editing by Dan Burns and Paul Thomasch)

Modi’s ‘Think West’ strategy is taking off

In World Economy News 31/01/2017

Since Prime Minister Narendra Modi got Barack Obama, then US president, to participate as chief guest at the Republic Day parade in 2015, the invitee each year is seen to carry weight in India’s strategic calculus. This certainly was the case last week with the state visit of Sheikh Mohammed bin Zayed Al Nahyan, the crown prince of Abu Dhabi and deputy supreme commander of the United Arab Emirates (UAE) armed forces. Relations with the UAE in particular and India’s “Think West” strategy in general have been under-appreciated successes of Modi’s foreign policy.
Modi’s visit to the UAE in August 2015 was the first by an Indian prime minister in 34 years. It was reciprocated by the crown prince in February 2016 and his decision to visit again is telling of the quick progress the two countries have made in less than two years. In an effort to build “a comprehensive strategic partnership”, the first India-UAE strategic dialogue preceded the visit of the crown prince. The UAE’s pledge in 2015 to invest $75 billion in India has not seen much progress since, largely owing to structural concerns vis-à-vis India’s National Investment and Infrastructure Fund. With that problem now solved, investment flows can be expedited.
The latest joint statement also notes the desire of the two countries “to transform the buyer-seller relationship in the energy sector to one of deeper partnership focusing on investment and joint ventures in petrochemical complexes, and cooperation in joint exploration in India, the UAE and in third countries”. In a significant development, a memorandum of understanding signed between Indian Strategic Petroleum Reserves Ltd and Abu Dhabi National Oil Company (Adnoc) will enable half the capacity at the Mangaluru oil storage facility to be filled by Adnoc. The other half is filled by—also marking the success of India’s Think West strategy—Iranian oil.
The phrase Think West was used for the first time in the inaugural Raisina Dialogue (March 2016) by foreign secretary S. Jaishankar. Despite long historical ties, India’s links to the Gulf countries in the last few decades had come to be defined by the twin factors of energy imports and labour exports. New Delhi could do little to harness the interdependencies to build a more robust relationship. But that was going to change, as Jaishankar announced that “we are no longer content to be passive recipients of outcomes”. India’s landmark “Act East” policy, he added, “would be matched with ‘Think West’.”
The numbers on trade between India and the Gulf countries are impressive; with the UAE alone, trade has hit the $50 billion mark. The remittances sent by Indian labour migrants—numbering 2.6 million in the UAE and more than 7 million in the Gulf—have added to the economic relationship. But there are other structural factors at play. One, the desire of the US to cut down its global security role is timed with India’s aspiration to play a greater role in the Indian Ocean. Two, the fall in commodity prices—the recent bump notwithstanding—has driven down the logic of diversification among the oil-rich nations in West Asia. Three, the rise of religious radicalism globally and India’s ability to largely escape that ominous trend has underlined the success of India’s multicultural social fabric. And lastly, in a world reeling under the long-term negative effects of the financial crisis, India is a remarkable anchor of stability as it continues to notch up high growth numbers.
The change in attitude towards India is seen in starker terms when viewed against a longer arc of history. After India was forced to stay out of the Organization of the Islamic Conference in 1969 at Pakistan’s insistence, countries like the UAE, Saudi Arabia, Bahrain and Qatar decided to show solidarity with India after the Pakistan-sponsored terror attack in Uri in September last year. Further, the recent killing of five UAE diplomats in Afghanistan has altered the ground situation considerably from the days of Taliban rule when India and the UAE stood clearly on opposite sides of the divide.
But Modi has not achieved this transformation single-handedly. It was during Manmohan Singh’s tenure that King Abdullah bin Abdulaziz of Saudi Arabia was invited as the Republic Day chief guest, in 2006. The Delhi Declaration (2006) and Riyadh Declaration (2010) tried to breathe life into the somnolent bilateral relationship. Atal Bihari Vajpayee hosted President Mohammad Khatami of Iran at the 2003 Republic Day, and it was during that visit that the plans for India’s cooperation in building Chābahār port in Iran first came up. And before all of them, P.V. Narasimha Rao had shattered the myth that India cannot open up to Israel without harming its relationship with Islamic countries in West Asia.
However, many of the initiatives taken earlier were not followed up adequately. The Modi government has worked on correcting that shortfall and consolidated all the previous efforts into its Think West strategy. Today, New Delhi is building infrastructure in Iran while also sharing intelligence with Saudi Arabia. And while the UAE is cooperating with India on maritime security, Israel is selling arms to New Delhi. The next logical step may be for India to assume—as suggested by Talmiz Ahmad, former Indian ambassador to Saudi Arabia, Oman and the UAE—“a catalytic role in promoting an inclusive Gulf security arrangement…in concert with principal Asian countries—China, Japan, and Republic of Korea”.

Source: LiveMint

Fed has turned more dovish ahead of meeting, analysis finds

In World Economy News 30/01/2017

The Federal Reserve has grown more dovish in the run-up to this week’s interest-rate policy meeting, suggesting a hands-off policy on interest rates perhaps until June, according to a textual analysis of U.S. central bank communication by the data firm Prattle.
Prattle, started by a led by former Brown University economics professor Evan Schnidman, analyzes Fed speeches for clients using proprietary software that gives each Fed communication a score. The higher the score, the more hawkish it is.
Since the Fed met in mid-December, Prattle analyzed 14 speeches. The quantitative data show Fed communication has fallen ahead of this week’s meeting, Schnidman said in an interview, signaling a more dovish central bank.
Markets paid close attention to two speeches given earlier in January by Fed Chairwoman Yellen, one looking at the goals of monetary policy and the second looking at the economic outlook.
Yellen’s first speech dealt with the central bank’s strategy over the past few years and scored hawkish, according to Prattle’s analysis. But the next day’s speech, seen as more important as a signal for the future path of interest rates because it discussed the economic outlook, was dovish.
In addition to Yellen, several other Fed speakers were less hawkish than they had been in prior speeches, he added.
Based on an analysis of the data, Schnidman predicted the Fed’s policy statement this week might be less hawkish than December.
Schnidman said the Fed would have to “reverse course very quickly” if it wanted to prepare markets for a March rate increase.
Fed officials have penciled in three rate hikes this year. The market expects two moves, in June and December.
Sell the data, not the forecasts on the data
Schnidman said the idea for Prattle had its genesis while he was a graduate student at Harvard. There he studied Fed communication during the financial crisis using automated analysis.

That was a critical period, when the Fed moved away from the cryptic communication of Alan Greenspan to the press conferences of Ben Bernanke.
“The Fed has never been more verbose, never been more transparent,” Schnidman wrote in a book “How the Fed moves Markets” based on his thesis.
“Put plainly, the Fed’s words move markets and have, therefore become a vital source of economic influence for the institution,” he said.
Some on Wall Street — and now, even Bernanke himself — have even started to complain about too many speeches.
Schnidman saw that he might be able to cut through the clutter and sell forecasts based on the text analysis to investment firms.
Prattle now follows the communication of 20 central banks for its clients.
One big success for the company came in September 2015, when the Fed held interest rates steady even though many in the market were calling for a rate hike.
“We saw the actual trend was rising [getting more hawkish] but it could have to go up very, very fast” to signal a move, Schnidman said.
“As early as June, we said we don’t think they are going to hike in September.”
Another feather in their cap, he said, was a prediction that the Bank of England would not cut rates in the wake of last summer’s Brexit vote.
Prattle’s data is even being used by researchers at the San Francisco Fed to examine how communication moves financial markets.
Prattle’s success hasn’t gone unnoticed. The firm announced last week it has received $3.3 million in financing from a group led by GCM Grosvenor.
Schnidman said the company will use the funding to develop software to cover the communication of public companies.

Source: MarketWatch

Germany says expects IMF to participate in Greece’s bailout

In IMF/OECD News,World Economy News 30/01/2017

Germany believes the International Monetary Fund will participate in Greece’s bailout and it is too early to start thinking about other arrangements should the IMF bow out, a spokesman for the German finance ministry said on Monday.
The IMF said around two years ago that it would take part in Greece’s aid package, the spokesman said at a regular government news conference, and added: “Nothing has changed about that and it’s much too early to think about ‘what if'”.
He was answering a question about a report in the Bild newspaper that said Finance Minister Wolfgang Schaeuble would argue for a Greek exit from the euro zone should the IMF withdraw from the third bailout program.
Bild said it had obtained the information from sources in the ruling conservatives, which include Chancellor Angela Merkel’s Christian Democrats and their Bavaria-based allies, the Christian Social Union.
The finance ministry spokesman said IMF involvement was a prerequisite for the third bailout program.
Talks on labor reforms and fiscal issues between Greece and its official creditors – the European Stability Mechanism (ESM), the European Commission, the European Central Bank and the IMF – have dragged on for months, rekindling fears of a new crisis.
Greece has said it would welcome an IMF exit, because that might help it conclude a crucial review of its progress without adopting more austerity.
Schaeuble this month floated the idea of a new Greek bailout program without the IMF, saying the Europeans would have to enforce better conditions of any new bailout. This task would be handed to the euro zone’s bailout fund ESM, he added.
The IMF, which joined Greece’s first international bailout in 2010, when the debt crisis broke, has yet to decide whether it will fund its third bailout program.
Schaeuble has repeatedly argued that Greece would recover faster and regain competitiveness more quickly if it left the euro zone and reinstated the drachma, its former national currency.

Source: Reuters (Reporting by Joseph Nasr and Gernot Heller, editing by Larry King)

ECB to review policy in June, won’t wind down stimulus – Nowotny

In World Economy News 30/01/2017

The European Central Bank will probably first review its policy stance in June but stop short of any decision on winding down its huge economic stimulus programme, ECB rate setter Ewald Nowotny said on Monday.
His comments come amid growing calls in Germany for bringing the ECB’s 2.3 trillion euros ($2.45 trillion) bond purchases to an end as inflation there rebounds, far outpacing price growth in weaker economies such as Italy.
Nowotny said rate setters are likely to await the ECB’s June economic forecasts before reassessing their policy stance and, even then, no decision will be made about “tapering” — or gradually ending — the programme, aimed at boosting inflation in the euro zone.
“The discussion about our overall economic assessment will probably (take place) in June,” Nowotny, the Austrian central bank governor, said.
“But this is not a tapering discussion, but we will just see, we now have an inflation forecast, which assumes that the rate of inflation will increase significantly and then we will be able to better assess how this evolves.”

Source: Reuters (Writing By Francesco Canepa in Frankfurt)

EU watchdog calls for EU bad bank to tackle soured loans

In World Economy News 30/01/2017

The European Union should create a publicly-funded asset management company to scoop up some of a trillion euro mountain of bad loans that has become a brake on economic growth, the bloc’s banking watchdog said on Monday.
A decade since the start of a financial crisis that forced taxpayers to bail out lenders, the European Banking Authority (EBA) said dealing with so-called non-performing loans or NPLs was “urgent and actionable”.
Italian banks account for 276 billion euros ($295 billion) of the bloc’s bad loans, by far the largest of any EU banking sector, but 10 EU states have an average bad loan ratio of 10 percent, well above the low single-digit figures seen in the United States and elsewhere.
In a speech in Luxembourg on Monday, EBA Chairman Andrea Enria sketched out how banks could sell some of their bad loans to a new, pan-EU “asset management company” or AMC.
So far, the sale of NPLs has been hampered by the lack of a proper market for bad loans, which has resulted in too low prices for NPLs, discouraging banks from offloading them.
Under the plan, loans would be priced at “real economic value” – an assessed rather than a market price – and the AMC, a concept similar to a “bad bank”, would have about three years to sell on the loans at that real economic value.
“If that value is not achieved, the bank must take the full market price hit,” Enria said, adding EU rules on bank resolutions, known as bail-in rules, would apply if state aid was required to recapitalise ailing banks, hitting their creditors.
Support from the public sector would, however, be needed to launch the bad bank and who would pay is not clear yet.
“Some sort of state intervention to help start this process is useful,” Enria said, urging the deployment of public resources to create an efficient secondary market for NPLs that could attract private capital.
Klaus Regling, who heads the European Stability Mechanism, the euro zone’s bailout fund, welcomed Enria’s proposal and confirmed state support would be required.
Regling said the new entity should have a target of acquiring up to 250 billion euros of NPLs from EU banks.
The EBA’s plan does not envisage the sharing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recapitalisation were needed, the bill would be footed only by the bank’s creditors and the home state of the lender.
Germany, the EU’s largest economy, has long opposed plans to share bank risks, fearing its taxpayers would end up paying for bank rescues in other countries.
The EBA’s plan would complement European Central Bank pressure on euro zone banks to sell their NPLs and a European Commission proposal to amend national insolvency regimes.
While the ratio of bad loans to total loans fell slightly in the third quarter of last year to 5.4 percent, EU banks were still slower than their U.S. rivals in tackling soured loans.
There is some good news for the bloc’s banks, Enria said.
Average core equity capital buffers at banks across the 28-country bloc continue to rise, and reached 13.6 percent of risk-weighted assets by the third quarter of last year when all requirements are also factored in, well above regulatory minimums.

Source: Reuters (By Francesco Guarascio and Huw Jones, Editing by Mark Potter)

Belt and Road Initiative to reshape world economy, expert says

In World Economy News 30/01/2017

China’s Belt and Road Initiative can greatly benefit the world and significantly reshape the global economic development if certain risks are addressed, Jean-Pierre Lehmann, an expert on the international economy, said at a conference.
The Belt and Road Initiative, proposed by China in 2013, aims to build a trade and infrastructure network connecting Asia with Europe and Africa along the ancient Silk Road trade routes. It has won support from over 100 countries and international organizations.
In his speech, Lehmann, who is also the founder of the Evian Group, said the initiative, involving 2.5 trillion U.S. dollars and infusing 1.75 percent surplus into the world’s gross domestic product (GDP), could bring huge economic benefits, if some challenges, like the new-asset quality and social unrest in some of the areas within the network, are overcome.
Reminding that “the narrative of the 21st century will be written in Asia by the Asians, and above all, by China as a regional and global power,” Lehmann said that “China is already the main market for many countries, from Brazil to France … there are Chinese interests across the world, from Seattle to Djibouti.”
China’s global dimension is already obvious, he suggested. “The Asian Infrastructure Investment Bank (AIIB), set up in 2016, attracted even the U.S. allies, and Obama failed to prevent them from joining the AIIB. China already set up 110 economic zones in 50 countries. In Xi’an (a city in China’s northwest), the Summit of the Silk Road gathered 500 participants from 52 countries,” he said.
Some 25 percent of the world economic growth comes from China, the expert said, adding that by 2030, China will become a high-income economy with strong harmonious relations and driven by creativity and power of ideas. “The Chinese economy was made by muscle, but now it’s getting more with the brain, but many do not understand this!”
The world depends on China and China depends on the world, Lehmann said.
Deng Xiaoping, the late Chinese leader who initiated the reform and opening-up policies, said that China cannot develop in isolation from the rest of the world. Three decades later, the world cannot do without China, the expert pointed out.
Lehmann also suggested there is strong competition when it comes to doing business with China. “Often, many countries seem to have the same competitive advantages, but you should keep up the discussion and build relations for business with the Chinese.”
“In January 2017, the first freight train from Yiwu (in eastern China) to London became operational and Xi Jinping was the first Chinese president to come to Davos, this is staggering! We already speak of Eurasia. Things happen at an amazingly rapid pace,” Lehmann said.
Whereas “China’s foreign policy could reshape a good part of the world’s economy,” Lehmann said we should not conclude from this that China wants to be the hegemon.

Source: Xinhua

CEOs Face Uneasy Test of Doing Business Under Trump

In World Economy News 30/01/2017

President Donald Trump vowed to end business as usual in Washington. Global companies are now learning just what that means.
What began before his inauguration, with attempts to cajole corporations like Toyota Motor Corp. into keeping jobs in the U.S. with critical tweets, is now escalating into a crucial test for business leaders trying to maintain the cross-border flows of people and goods that underpin commerce in the 21st century.
Trump’s Friday signing of an executive order barring the citizens of seven Muslim-majority countries from entering the U.S., on the heels of his war of words with Mexico over trade, alarmed executives from big employers including General Electric Co., Google Inc. and Microsoft Corp. A chaotic weekend of protests, emergency court hearings and White House rebuttals left executives with a tricky choice: speak out and risk drawing fire from an outspoken president, or stay silent and face criticism from employees and activists.
GE Chief Executive Officer Jeff Immelt’s response underscored the delicate balance business will have to strike. “We have many employees from the named countries and we do business all over the region,” he said in an internal e-mail. While he called those staff “critical to our success,” he avoided direct criticism of Trump’s policy. GE “will continue to make our voice heard with the new administration and congress and reiterate the importance of this issue,” he said.
Confusion Reigned

Trump’s order shut the door to nationals of Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen -– including refugees, visiting scholars and, at least temporarily, even permanent American residents who happened to be abroad for work or holidays. Confusion reigned in the first 48 hours of its implementation, with border agents and airlines unsure how to interpret the rules.
The decision, termed a “Muslim ban” by critics, fulfills a campaign promise that even Trump allies had suggested shouldn’t be taken literally, signaling the White House’s new occupant is committed to at least some of his most controversial pledges.
“We would never think this would become any kind of an issue,” Ludwig Willisch, chief executive officer of North American operations at Bayerische Motoren Werke AG, said at an automotive conference on Saturday. “This country is a melting pot, freedom of speech, everybody gets together and creates this great country. So, we were not prepared for this kind of thing.”
Criticism from pockets of corporate America, which was matched by statements from the leaders of Germany, France, and Canada, stood in stark contrast to the warm words toward Trump just a week ago. Executives at the World Economic Forum’s annual meeting in Switzerland, including AT&T Inc.’s Randall Stephenson and JPMorgan Chase & Co.’s Jamie Dimon, praised Trump’s promises to overhaul corporate taxes and invest in infrastructure. Optimists suggested he would quietly drop pledges to tear up trade deals and reconsider defense commitments to allies.
Trump has “had this extraordinary honeymoon where Wall Street has kind of discounted all the negative aspects,” Richard Fenning, the CEO of consultancy Control Risks, told Bloomberg Television. As companies react to the migrant ban, “perhaps that honeymoon is starting to be over,” he said.
The about-face was epitomized by Tesla Motors Inc. founder Elon Musk; last week he praised Trump’s nominee for secretary of state, former Exxon Mobil Corp. CEO Rex Tillerson, as a potentially “excellent” pick. On Sunday, Musk tweeted that migrants “don’t deserve to be rejected” and asked his 6.89 million Twitter followers to read the immigration order and suggest changes.
On the other hand, U.S. auto companies, whose home state of Michigan has a large Arab community, have yet to make their views known. Wall Street has also largely stayed out of the fray.
At some of its biggest banks, executives said they were struggling to understand whether the order will ultimately apply to employees who work in the U.S. with green cards or legal work permits. If it doesn’t hit visa holders, few major companies’ employees will be affected, according to one executive who asked not to be identified because he wasn’t authorized to comment. On Sunday, JPMorgan said it was working to assist affected staff.
Starbucks Corp. CEO Howard Schultz said Trump’s move left him with “deep concern, a heavy heart and a resolute promise.” The coffee chain will redouble efforts to hire as many as 10,000 refugees over five years in 75 countries, he wrote in a note to employees Sunday.
Reaction was sharpest from the technology industry, with Twitter awash in reminders that Apple Inc.’s late co-founder, Steve Jobs, was the son of a Syrian immigrant. Among the first to speak out was Google CEO Sundar Pichai, himself an immigrant from India, who called the policy “painful.” Another India-born CEO, Microsoft Corp.’s Satya Nadella, took to LinkedIn to highlight “the positive impact that immigration has on our company, for the country, for the world.”
Trump should expect sustained challenges from the tech industry in particular, said Ian Bremmer, CEO of political consultancy Eurasia Group, because it differs significantly with him on issues from net neutrality to immigration. “While most every CEO wants to just ‘get back to business’ after Trump’s election, that’s going to prove much harder” for technology leaders, he said. “There’s going to be a fight.”
Compounding business leaders’ unease was the order’s confused implementation, which included unclear directives on how border agents should treat lawful permanent residents, and contradictory statements about how it would affect those who hold passports from two countries — for example, a dual citizen of Iran and the U.K.
For now, lawyers are advising such individuals not to travel to the U.S., or to stay put if they already live there. The new rules came into force with no transition period, leaving carriers like Emirates and American Airlines Group Inc. unsure what to do with passengers booked to fly to U.S. airports, or already in the air.
“We are committed to protecting our people and will provide whatever support is necessary to protect them and their families,” Michael Roth, CEO of advertising firm Interpublic Group of Cos., wrote in an e-mail.

Source: Bloomberg

Trump’s Tax Plan Could Preserve Millions in Savings for His Businesses

In World Economy News 30/01/2017

President Donald Trump’s tax-overhaul proposal could preserve millions of dollars in savings for companies controlled by his family.
Companies that are part of the Trump Organization pay more than $20 million a year in interest on their debts, according to a Wall Street Journal analysis of financial disclosures and other public information about the companies’ outstanding loans and their interest rates.
Under current tax law, those interest payments can be deducted from a taxpayer’s total taxable income, reducing the amounts owed to the government.
The Journal’s estimate of $20 million is conservative, meaning Mr. Trump’s or his companies’ tax savings from being able to deduct interest payments from taxable income might be higher.
Congressional Republicans have proposed changes to the tax code that would end that deduction for businesses. That proposal is regarded in Washington as the likely starting point for negotiations in the most serious effort in many years to revamp the tax system.
In that scenario, based on the Journal’s analysis, Trump Organization’s taxable income could increase by more than $20 million, which might add millions of dollars a year to its tax bill.
Although it isn’t known how much Mr. Trump or Trump Organization pays in taxes, or at what rate, $20 million taxed at a 40% personal income rate would translate into about $8 million in potential additional tax liability. (According to a letter from his tax lawyers, Mr. Trump’s businesses operate “almost exclusively” through partnerships and sole proprietorships, which aren’t subject to the corporate tax rate.)
The tax-overhaul plan from Mr. Trump, who once described himself as the “king of debt,” would preserve the ability of most companies — including real-estate developers, such as Trump Organization — to lower their tax liabilities via heavy debt loads. His plan would limit the use of interest deductions only for some manufacturers.
Many businesses support the debt interest deduction. They argue that interest payments constitute a normal business expense and that making them tax deductible encourages many companies to make investments with borrowed money that otherwise would be prohibitively expensive. Others argue, though, that the tax perk distorts the economy by favoring debt over equity.
“There’s a clear conflict between his personal finances and his presidential role,” said Daniel Shaviro, a professor of tax law at New York University. “His own tax policies would be good for his financial interests.”
The White House referred questions to Trump Organization, which didn’t respond to repeated requests for comment.
Mr. Trump this month said he has transferred control of his business organization to a trust to be run by his two adult sons. It isn’t clear how the transfer might affect his taxes. Mr. Trump hasn’t identified the beneficiaries of the trust or said whether he will retake control of his businesses after he leaves office.
The exact size of the potential tax savings to Mr. Trump and his family business are impossible to calculate. That largely reflects the opacity surrounding the new president’s finances, in addition to the uncertain details of any final legislation.
Every major-party presidential candidate since 1976 had released his or her tax returns. The disclosures are meant in part to assuage concerns that White House policy is being used for personal gain. The tradition goes back to Richard Nixon, who as president released four years of returns in 1973 during the Watergate scandal.
Mr. Trump broke with that tradition, saying he would only release his tax returns after the conclusion of what he described as an ongoing Internal Revenue Service audit.
The congressional tax plan also would affect Trump Organization’s ability to gradually write off the costs of buying, or in some cases upgrading, properties over periods as long as 39 years — a practice known as depreciation. “Put simply, depreciation permits you to pay lower taxes on your earnings,” Mr. Trump wrote in his book “The Art of the Deal.”
“I love depreciation,” he said in the second presidential debate last October.
The House plan would eliminate the use of depreciation for businesses, including real-estate companies. Instead, developers would be able to write off the cost of buying a property, excluding land, against income in the year in which the purchase occurs.
It isn’t clear if this change would benefit Trump Organization. There are no public records of how much it benefits each year from depreciation or other tax breaks widely used in real estate.
“Historically, these types of potential conflicts for presidents have been addressed through transparency,” said Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center. “The president produces his tax return so the American public can see what benefits the president is deriving…and can judge for themselves.”
The Journal’s $20 million tally excludes interest of at least $4.4 million a year on a loan of more than $50 million that one Trump business made to another Trump business in 2012. What little public information there is about the loan underscores why it is so hard to calculate the effects Mr. Trump’s policies could have on his family’s finances.
The loan was issued by an entity called Chicago Unit Acquisition LLC, which Mr. Trump personally owned, according to a financial disclosure form he filed last year with the government. The loan was for the Trump International Hotel & Tower Chicago, a 92-story glass skyscraper, the fourth tallest in the U.S. and a recent gathering point for anti-Trump protesters.
Mr. Trump’s disclosure form doesn’t state the loan’s exact size, purpose, structure, due date or even which company is the recipient. The form simply describes it as a “springing loan” of more than $50 million, related to the Chicago tower, and with an interest rate of the prime rate plus 5 percentage points — equal to a total of about 8% at the time. That is the highest interest rate of any loan Mr. Trump has reported.
Searches of public records in Cook County, Ill., related to the land underlying the Chicago project, conducted for the Journal by Greater Illinois Title Co., found no reference to Chicago Unit Acquisition. And a search conducted for the Journal by legal search firm Capitol Services Inc. of financing statements, which lenders typically file to record their interests in nonland property, found no record of a creditor named Chicago Unit Acquisition.
The Journal contacted more than 10 tax, legal and real-estate experts about the Chicago loan. The consensus was that the lack of details about the loan’s terms, size and structure makes it difficult to gauge the personal effects on Mr. Trump if tax laws were changed to no longer allow interest on real-estate debt to be tax deductible.
“Was the loan structured this way for tax reasons or to hide the source of the money or because there’s some other financial benefit to it?” said Lawrence Noble, general counsel at the nonpartisan Campaign Legal Center in Washington. “We just don’t know.”

Source: Dow Jones