Breakingviews

Myanmar forms centre of economic love triangle

By Wayne Arnold The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Myanmar has been thrust into the centre of an economic love triangle. The visit of U.S. Secretary of State Hillary Clinton confirms the strategic importance of the former pariah state for the United States, but also for China and India. For would-be investors, the biggest risk may simply be that Myanmar gets too popular, too quickly.

Five decades of virtual isolation haven’t been kind. Myanmar’s citizens live an average 65 years, and a third of them are in poverty. But abundant forests, gas and oil reserves, and a fledgling consumer market of 50 million people provide attractions for investors. So do legacy institutions from British colonial days, which help explain why Myanmar’s GDP grew more than 5 percent a year for the past two years, according to the Asian Development Bank. International sanctions are the immediate barrier. But Myanmar also has to prove that its military junta is history by making further reforms, releasing political prisoners and easing media restrictions. Letting opposition figurehead Aung San Suu Kyi’s National League for Democracy contest free and fair elections is one thing. Letting its members serve out their terms and contest again will be the real test.

The lack of rule of law will also be a challenge. Foreigners cannot own property or a majority stake in a local business and its currency is pegged at 100 times above the black-market rate. That’s not a deal-breaker, but Myanmar will need transparent investment and commercial laws to offer foreign capitalists adequate protection.

Most worrying is the effect of superpower politics. Myanmar sits between the two most populous nations, India and China, whose economic ascendance is causing visible tension. The United States, meanwhile, has shifted its gaze from the Middle East to Asia, posting 2,500 Marines to Australia. All three have good reasons to get Myanmar on side.

If that means openness and capital come too soon, corruption and inequitable growth could follow. Myanmar needs infrastructure more than it needs exports – it spends only 0.2 percent of GDP on healthcare; even Angola spends 10 times as much. Myanmar will have to manage its suitors cautiously if its charms are to translate into sustainable returns.

Egypt fosters false economic expectations

By Una Galani The author is a Reuters Breakingviews columinst. The opinions expressed are her own.

Egypt is fostering false economic expectations. In the post-Mubarak era, the moderate Muslim Brotherhood movement’s call for “social justice” is now popular with almost every political force running for election to the country’s new parliament. But the idea is vaguely defined, and delivering the democratic dividend – with high hopes of economic improvement among the millions of poor – will be a struggle.

The removal of Mubarak has had a short-term financial cost. GDP growth is expected to slow to 1.2 percent for the fiscal year ending June, down from an average of 6 percent since 2006. Tourism and foreign direct investment, big engines of the economy, have dried up. Foreign exchange reserves have plunged, limiting the central bank’s ability to defend the currency. Any benefits from devaluation would be offset by the impact on the cost of imports such as wheat. A sudden fall in the pound could be especially messy. And the retail-driven stock market has halved in value.

Rich Egyptians expect to bear the brunt of efforts to reign in the ballooning fiscal deficit, which is heading towards 10 percent of GDP. Income and corporate taxes may be raised from flat rates of around 20 percent. Subsidies that eat up 33 percent of the budget may also be restructured so they no longer benefit the wealthy. Capital gains and property taxes could also appear.

Even if a new government makes tough decisions and adopts a social market economy, based on free-market principles but with a safety net, the poor are likely to be disappointed in the early days. Reforms may increase government revenues but will take time to implement, and the state of public finances limits the scope for higher public spending. The minimum wage has already been lifted by 67 percent and official figures point to rising unemployment, now at 11.9 percent, although many Egyptians work in the informal economy.

People will probably feel things are getting worse before they get better, whichever party takes the lead in the new parliament. As demand falls, those factory workers that are still employed want better pay and conditions. Reform needs to be accompanied by a clearer, more realistic dialogue, around economic issues. Without that, the risks of further strikes and protests are high – and that could ultimately prompt more costly unrest.

France isn’t ready for recession

By Pierre Briançon The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

France may pay a heavy price for 37 uninterrupted years of budget deficits. Even after two significant rounds of fiscal tightening in the last three months, the government may fall short of its goal of shrinking the deficit to the euro zone-imposed limit of 3 percent by 2013. Markets are already impatient with the country’s half-hearted approach to tackling its structural primary budget deficit. They are likely to become harsher if high government bond yields across the monetary union tip the region’s economy into a recession next year.

Even without a recession, the government should adjust its plans, which assume 1 percent GDP growth in 2012. The European Commission predicts a 0.6 percent increase, at best. Ironically, euro zone heads decided at their summit last month that budget plans should be based on independent forecasts. France is missing a chance to lead by example.

A full-blown recession would make the challenge much greater. France, like all welfare states, has many “stabilisers” in its budget. Higher benefits and lower taxes help soften the economic blow, but add to the fiscal pressure. HSBC reckons that a 1 percent decline in French GDP in 2012 would increase the budget deficit from 5.8 percent of GDP in 2011 to 5.9 in 2012 – and a still too-high 5 percent in 2013.

French politicians should be preparing for the worst, but they do not seem to take the 3 percent of GDP target seriously. They are using the April presidential election to play politics rather than to face reality. Nicolas Sarkozy, the unpopular incumbent, doesn’t want to add to his latest austerity plan, and socialist contender Francois Hollande is doing everything he can to avoid mentioning painful options.

Both men say they want to keep the country’s triple-A rating; its loss would add up to three billion euros a year to the interest bill, according the chief of the French government’s debt agency. Voters and investors should force the contenders to explain exactly what type of rigor they are thinking about – if only to find out that they aren’t thinking at all.

Investors start to notice Germany is in euro zone

By Edward Hadas The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By the standards of the euro zone, Germany is still a safe haven. But as the area as a whole keeps looking less safe, investors are starting to notice that, for all its strengths, Germany does lie within it.

On Wednesday, a German government bond offering was badly undersubscribed – bids were accepted for only 61 percent of the 6 billion euro issue. The norm is more like 90 percent. The bonds that were sold yielded a still comfortably low 1.98 percent. But that was 10 basis points more than the day’s low, and yields climbed another nine basis points later. By afternoon, the German paper yielded 24 basis points more than comparable U.S. debt. Just a week ago the gap was similar but in the opposite direction.

This is far from a sign of total panic. Even so, the trend is hard to deny and easy to explain. Investors are taking money out of the euro zone. The European Central Bank reported that non-euro area investors were net sellers of 52 billion euros of member government bonds in the third quarter, having bought 130 billion euros’ worth in the second. German Bunds may be the safest European holdings, but as fear mounts they too begin to look unnecessarily risky.

The objective of shunning everything euro-related is to stay out of the way of a possible euro collapse. Never mind that the exodus makes that collapse more likely: when investors want out, they run first and ask complicated questions later, if ever. And Germany would suffer from a splintering of the euro. While the country would eventually be an economic success with its own currency, a disorderly euro breakup would trash both the financial system and the export business of the zone’s leading creditor nation and exporter.

European authorities have already missed many opportunities to calm investors down with relatively mild measures. One remaining possible move – resisted so far by Berlin – is for the euro zone to collectively guarantee bonds issued by member nations. Even that would, in theory, dilute Germany’s strong credit a bit. But a disintegration of the euro zone would be far worse. The weak Bund auction is a signal for the region’s politicians and central bankers to stop squabbling.

Fed’s stress-test revamp brings good and bad news

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

There’s good and bad news in the U.S. Federal Reserve’s decision to expand the scope of its annual stress tests of the nation’s top banks. Given the deteriorating economic picture, submitting the 31 largest lenders to even more awful scenarios than in the previous two years makes sense. So does putting the European exposures of the top six banks under the microscope. But the Fed’s latest move will leave many on both sides of the Atlantic unhappy.

Start with the U.S. angle. The Fed is expanding its stress test beyond the 19 largest banks to include another 12 with $50 billion of assets or more. Considering that several mid-sized banks landed in trouble in the last crisis, bringing them into the fold is overdue.

The Fed is making all 31 banks run some pretty depressing numbers through their models: an 8 percent shrinkage in GDP, the Dow Jones Industrial Average halving to 5,700 points by the middle of next year, and an unemployment rate rising above 13 percent by 2013. The six largest banks must demonstrate they can also withstand a euro zone crash that whacks European governments and financial institutions.

The test probably means few, if any, banks will be allowed to raise dividends or buy back more stock next year. But it’s the Fed’s job to ensure they’re not squandering capital. And the tests ought to make it much harder to cast aspersions on the creditworthiness of any bank that passes.

But the process will take time. Banks have until January to file their results, and based on this year’s exercise, results aren’t likely to be known until April. By that time, the U.S. and European meltdowns that the Fed’s scenarios imagine could be underway. Pity the bank that is told to raise capital in such an environment.

Meanwhile, Europe looks set to suffer even more. By protecting its own, the Fed may inadvertently spark a bout of enforced financial nationalism. U.S. banks are already reining in their exposure to the euro zone. But the mere fact that the Fed is increasing scrutiny of their exposures could accelerate the withdrawal. That increases the risk that the stress scenario becomes reality.

Italy shakes off the Berlusconi stigma

By Pierre Briançon The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

France and Germany are going out of their way to show how the change of Italian prime minister has changed the way they treat Italy. The Nov. 24 three-way meeting between Angela Merkel, Nicolas Sarkozy and Mario Monti seems mostly designed to demonstrate that Rome is back in the top troika, after months of conflicts over the reforms needed to get Italy out of its funk. The fresh diplomatic context doesn’t solve Italy’s problems. But it will help strengthen Monti at home, as he tries to push through difficult reforms.

Paris and Berlin are now keen on restoring Italy’s European prestige by associating it with the quest for solutions to the debt crisis – instead of considering it as the most worrying problem. Berlusconi’s shenanigans and bravado had made his country the object of scorn. Now there’s hope where there was contempt.

Monti, of course, will mostly implement a reform programme outlined by his predecessor, who had come under unprecedented pressure from the European Central Bank. And his so-called “technocratic” government lacks members with the political clout required to ensure that the most difficult reforms are steered through the minefield of a divided and unruly Parliament. Furthermore, there is no substantive indication that Italy has a credible timetable for implementing the most ambitious reforms. Little wonder that benchmark yields on Italian bonds have increased since Monti became prime minister – rising by some 50 basis points, to around 7 percent, on 10-year maturity.

Still, the conspicuous Franco-German embrace should be a boost for Monti. By welcoming Italy back into the core of the euro zone, instead of treating it like an embarrassing periphery cousin, Merkel and Sarkozy help to repair the damage done to the country’s national pride in recent months.

Monti will go home from Strasbourg not as a leader battered into submission by his peers, but as a participant who helps design solutions for the zone as a whole. This will strengthen his authority – and his ability to reform.

Insider trading another reason to Occupy Congress

By Richard Beales and Reynolds Holding The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Occupy Congress has garnered far less attention than the global protest movement that started as Occupy Wall Street in lower Manhattan. But politicians helped create the financial crisis. Fresh news of U.S. lawmakers trading on inside information is further reason for mistrust.

The evidence is tough to ignore. Beyond specific examples broadcast on Sunday by TV news program “60 Minutes,” studies have found that stock portfolios modeled on those of U.S. senators and representatives beat the market each year by a whopping 12 percentage points and 6 percentage points, respectively.

It’s easy to see why that might be. Lawmakers get the scoop on bills or regulations that can send a company’s or sector’s shares soaring or plunging. But they’ve been allowed to slide under insider-trading law, partly because regulators have concluded that members of Congress don’t owe anyone a legal duty to avoid trading on what they learn in their jobs.

This cramped reading of the law may suit some watchdogs, whose wages come at the whim of lawmakers. But whatever the strict legalities, actions like selling stocks short the day after a closed-door Federal Reserve briefing on the 2008 financial collapse surely breach the public’s trust.

Meanwhile, politicians refuse to make such snappy calls with the nation’s finances. They have delayed even the smallest decisions they’re supposed to take on behalf of their constituents.

One example was the bickering over raising the cap on federal debt, which helped trigger an unprecedented credit downgrade from Standard & Poor’s. Another ongoing scandal is the failure, three years on, to even begin reforming Fannie Mae and Freddie Mac, the government mortgage finance giants that have cost taxpayers tens of billions of dollars.

Roman politics could gum Europe up

By Hugo Dixon The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The euro zone’s future hangs on Italy – and Italy’s future hangs on its politics. The best way forward would be a grand coalition replacing Silvio Berlusconi’s discredited government. But after the prime minister’s Houdini act last week, that doesn’t seem likely and other scenarios aren’t as attractive.

Until recently, investors didn’t pay too much attention to the multi-dimensional chess game that is Italian politics. The state may have nearly 2 trillion euros of debt, equal to 120 percent of GDP, but the country is rich: Net household wealth was 8.6 trillion euros in 2009, according to the Bank of Italy. The deal-making and back-stabbing in Rome – or for that matter, Berlusconi’s bunga-bunga sex parties – didn’t seem to matter. True, the country has virtually stopped growing in recent years. But there was even a view that Italy benefited from having politicians that were so concerned with their elaborate games that they couldn’t interfere with the business of business.

All that changed in early July. As the euro crisis gathered pace, scandals and wrangling in Rome unsettled markets. The 10-year bond yield, which had been a relatively comfortable 4.8 percent, shot up to 6 percent in two weeks. Berlusconi and Giulio Tremonti, his previously respected finance minister, fell out. The center-right government, which survives on a wafer-thin majority, was able to pass austerity measures to cut the deficit. But the actions were seen as too little, too late. Investors became hyper-sensitive to Italian politics and were no longer willing to take things on trust.

The rot was only stopped by the European Central Bank wading into the market in August and buying Italian bonds. But even this bought only temporary respite. Despite two European summits last week designed to provide a comprehensive solution to the euro crisis, Italian yields ended the week back at 6 percent. The country is on the edge of a debt spiral as investors’ concerns about the country become self-fulfilling. If borrowing costs rise further, the country’s debts won’t seem sustainable, meaning yields could shoot still higher.

The best way of breaking the vicious spiral would be to have a positive political shock – to counter the negative one delivered over the summer. And the best way of achieving that would be to have a temporary grand coalition led by a technocrat such as Mario Monti, the former European Commissioner. Its mission would be to take harsh actions needed to solve Italy’s two big problems: debt and low growth. Labour markets would be liberalised; the bloated public sector would be cut down to size; and the over-generous pension system would be reformed. It might even be possible to reduce debt to below the psychologically important 100 percent mark by privatising assets and instituting a one-off property tax.

Such an outcome doesn’t look likely. Although Berlusconi’s government has come close to collapsing several times in recent months, he has so far managed to pull it back from the brink. The latest crisis was caused by pressure last week from Germany and France to produce a stronger reform programme. The Northern League, Berlusconi’s main coalition partner, balked at this. In the end, a compromise was struck which was just enough to satisfy the European allies but not too strong to bring the government down.

Euro-recession, not rebellion, is what boxes UK in

By Ian Campbell. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

An E.U. protest vote by members of his own party has knocked the UK prime minister. For the moment, the Conservative party rebellion is largely symbolic.

But it could be the thin end of the wedge. David Cameron, just like Margaret Thatcher before him, risks being undermined by his party’s euro-divisions.

But Cameron’s more immediate European problem is that the euro crisis looks very likely to drag an already-weak UK into recession. Cameron, rightly dedicated to reducing public spending, could get caught in the crossfire. Fiscal policy revisions may be necessary.

Cameron’s left-leaning political opponents blame too-tight fiscal policy for the UK’s weakness. It’s true that even before Europe took another turn for the worse, the UK was sliding towards recession. In August unemployment rose to a near 17-year high of 2.57 million. British households aren’t spending. They fear losing their jobs and their finances are being doused by inflation of 5.2 percent while their incomes rise by less than 2 percent. Britain’s recovery isn’t going to begin at home. The trouble is, it won’t begin in Europe either. And 47 percent of UK exports go to the euro zone.

Latest growth numbers for Europe are still worse than the UK’s. Economic activity in the euro zone contracted in October at the fastest rate for 27 months. The risk of outright recession is high. Things are so bad the European Central Bank might even cut its interest rate.

So where does that leave UK policy-makers? The Bank of England has already acted, upping quantitative easing by 75 billion pounds at least in part because it sees euro zone troubles getting worse.

BBC ersatz trader has serious markets message

By Christopher Swann The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Wall Street now has its equivalent of a reality TV star. A clip from the BBC of a self-described trader admitting to dreaming of financial doom as a money spinner has spread like wildfire. The Gordon Gekko wannabe doesn’t work for a Wall Street firm but his vulgar amorality offers a description of trading that has struck a chord with a public still smoldering over bank bailouts.

Ersatz trader Alessio Rastani wasn’t a big name in finance. He was nobody until this week. Still, he has some claim to represent the primitive Id of traders everywhere. His obvious indifference to the human suffering caused by financial collapses and economic downturns — in this case the crisis facing European nations — seemingly shocked the public, not to mention BBC presenters who let him rant ad nauseam.

Few traders, however, would have failed to recognize his priorities. The best of them should be able to exploit disasters as well as coast upward in good times. In fact, traders are often at their worst when they start to care — as usually masterful hedge fund godfather George Soros showed when he lost money investing in Russia in the late 1990s, seemingly out of a desire to help politically.

Wall Street executives prefer Rastani’s dirty secret to remain on the trading floor. The likes of Goldman Sachs’ boss Lloyd Blankfein have worked hard to underline the social benefits of banking. While his claim to be doing “God’s work” was a throwaway joke, he has argued that the financial industry helps companies to raise capital, generate wealth and create jobs. This is not an entirely spurious point, if not the whole picture.

Confessions of brutal self interest — whether credit agencies admitting they would rubber-stamp products structured by cows, or Enron traders gloating over power outages — reliably shock the public. Yet they are useful reminders of the need to create regulatory frameworks that curb rapacious excess without squelching capital formation.

In that respect, though Rastani’s infamy will be short-lived, he may have done the public a favor during his fifteen minutes.