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POLITICAL ECONOMY
The future of Greece remains uncertain
by Moran Zhang, Medill News Service
Washington (UPI) Jul 26, 2011

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Despite a second bailout deal, the Greek debt crisis is far from over.

"Turbulence could easily resurface," Christine Lagarde, the International Monetary Fund managing director, said Tuesday in her first major policy speech, touching on issues of sovereign debt around the world.

Greece struck a deal last week to improve the sustainability of the country's debt and avoid contagion risk. The markets initially reacted favorably to the package but Monday began to show traders' doubt.

Seventeen EU countries have been working on the Greek bailout plan.

"The clock is ticking," Lagarde warned. "It is essential that the summit's commitments should be implemented quickly."

The IMF may need to engage in serious discussion on its resources as more countries face crises, Lagarde said.

On top of the $159.5 billion granted to Greece in May 2010, EU leaders agreed to provide another $158.1 billion of 15- to 30-year loans at a lowered interest rate of 3.5 percent, with an additional grace period of 10 years.

Private-sector creditors will swap or roll over $196 billion of existing bonds into new, long-term instruments -- a move considered as a "restricted default" by Fitch Ratings. By doing so, investors are going to suffer a 21 percent loss of the net of the net present value of their Greek debt holdings.

Evangelos Venizelos, the Greek finance minister and deputy prime minister, met with U.S. Treasury and the IMF officials Monday to gain American support.

Speaking Monday evening at the Peter G. Peterson Institute for International Economics in Washington, Venizelos said Greece needs "a more functional and less expensive state."

Greece will push forward with a privatization program by selling real estate and government stakes in companies to achieve the government's goal to "return to positive growth and create primary surpluses by 2012," Venizelos said.

The Greek economy shrank 4.5 percent last year and the IMF predicts it will shrink 3.9 percent this year.

On Monday, rating agency Moody's Investors Service downgraded Greece's local- and foreign-currency bond ratings to Ca from Caa1, just one notch from Moody's lowest rating. The "junk" bond rating reflects the current uncertainty about the exact market value of the securities creditors will receive in the exchange.

Despite the unfavorable ratings, Venizelos said he expected private-sector participation to reach at least 90 percent.

"We are here to achieve a difficult but not impossible mission," he said. "I am here to win this war."

Clearly, Venizelos hopes to interest U.S. investors in Greece, despite the country's latest setbacks.

"This is also my invitation to the U.S. private-sector," he said Monday, adding Greece will once again be an "investor friendly country."

It's still an open question whether the new deal cut Greece's debt enough to allow it to reach sustainable levels.

IMF officials estimate that Greece's debt-to-gross domestic product ratio would reach 139.3 by the end of 2011.

"With the current plan, if everything goes smoothly, by 2014, Greece will still have about 120 percent of GDP of debt, said Sandro Andrade, a professor of the University of Miami School of Business Administration. "That's quite a lot."

However, Greece can't choose to simply default.

"If Greece decided to pay 25 cents on a dollar, take it or leave it, which was what Argentina did, the country's banking system will take a huge blow," Andrade said. "Around 10 percent of the total assets of Greek banks are parked in Greek government bonds."

Investors remain doubtful about the deal's effectiveness and the fate of the euro.

As a member of the European Union, Greece can't shore up its troubled economy by utilizing exchange rate devaluation -- a key macroeconomic tool favored by policy makers.

Exports become cheaper and hence more competitive in the eyes of the rest of the world, which help the economy grow.

Greece also cannot simply devaluate its currency because its currency is the euro, which is the combined currency of 17 countries.

Amitrajeet Batabyal, the Arthur J. Gosnell Professor of Economics at Rochester Institute of Technology, said the second bailout is "a short-term solution."

"What they've done is delay the inevitable." Batabyal said. "Within the next decade, either a country like Greece will voluntarily leave the euro zone and go back to the drachma or the European Union will ask them to leave."

"Even if one country bails, I think it's the end of the euro," he said. "The euro is a grand experiment that's trying to compete effectively with the U.S. A lot of people have warned that this is an experiment that's likely to fail."

Batabyal said the impact of the new bailout plan on the U.S. markets and U.S. financial entities will largely be neutral or slightly positive.

The yield on the Greek 10-year bond fell 6 basis points, to 14.7 percent Tuesday.




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British economy hit by royal wedding, Japan disaster
London (AFP) July 26, 2011 - Britain's economy, already struggling to absorb deep budget cuts, slowed to a trickle in the second quarter when output was also hit by the royal wedding and Japanese earthquake.

The economy narrowly turned in growth, with expansion of 0.2 percent.

The slowdown had been widely forecast as the coalition government pursues a strategy of tough budget measures to slash a huge budget deficit, in the belief this will eventually give the economy room to grow.

Following the latest data, British finance minister George Osborne launched a staunch defence of the government's policies, arguing that Britain was a "safe haven" amid a global debt storm in the eurozone and the United States.

"There's positive news today which is: the economy is growing and creating jobs, and crucially at a time when many other countries in the world are facing a lot of instability, we are providing stability in Britain and we are a safe haven in the storm," Osborne told Sky News.

He added: "There is enormous instability in the euro area, there is a big argument in the United States at the moment about debt, and here in Britain we have got a plan that has provided stability in a very unstable world and has brought our interest rates down -- and that has helped the economy grow."

However British gross domestic product (GDP) expanded only slightly in the second quarter, or three months to June, by 0.2 percent, the Office for National Statistics (ONS) said in a statement.

Analysts had forecast anaemic growth of about 0.1-0.2 percent in the second quarter, as the economy struggled under the weight of high inflation and flagging consumer sentiment.

The economy grew by 0.5 percent in the first quarter -- but that only offset a 0.5-percent drop in the last three months of 2010, leaving activity broadly flat over the six month period.

"The GDP report is weak but not as bad as it could have been," said Howard Archer, chief European economist at IHS Global Insight research group.

"While the worst fears were not realised, growth of just 0.2 percent in the second quarter after flat activity in the previous two quarters combined is hardly a performance to celebrate."

The ONS added that a series of one-off events had knocked as much as 0.5 percentage points off GDP in the second quarter -- which would otherwise have registered impressive growth of 0.7 percent.

"There were a number of special events in Q2: the additional bank (public) holiday for the royal wedding; the royal wedding itself; the after-effects of the Japanese tsunami; the first phase of Olympic ticket sales; and record warm weather in April," it said.

Most workers in Britain did not work on April 29, the day of Prince William's marriage to Catherine Middleton. Also during the second quarter, British manufacturing was hit by a shortage of parts arriving from earthquake-hit Japan.

Additionally, output was affected by Britons taking time off work to purchase tickets for next year's Olympics in London, while others basked in the sun.

The nation's sluggish recovery from a record recession that ended in 2009 has been hampered by spending cuts and tax hikes introduced by the coalition Conservative-Liberal Democrat government, which rose to power last year.

Opposition Labour politicians have long argued that the government is cutting back too fast and risks choking off the fragile economic recovery.

But Osborne added on Tuesday: "Britain has got to stick to its plan to deal with its debts because you see what happens to other countries that have not got a plan -- they have got themselves in to real trouble (and) there has been real instability."





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POLITICAL ECONOMY
Clinton says 'confident' of deal on US debt crisis
Hong Kong (AFP) July 25, 2011
US Secretary of State Hillary Clinton said Monday she was confident lawmakers would reach a deal to avert a debt default, as she addressed business leaders in Hong Kong. "The political wrangling in Washington is intense right now," she said towards the end of an Asian tour, while the White House and top lawmakers scrambled to avert a disastrous default on the country's debt. "I am confid ... read more


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