China's Helping Hand for Europe

Made In China by CHOW HOW BAN

China has promised to help the EU deal with its debt problems through the stability facilities, but it should not be misread as a pledge to buy more European government bonds.

Sino-EU ties: Chinese vice-premier Li Keqiang (right) talking to Barroso (left) and Van Rompuy during their meeting at the Great Hall of the People in Beijing on Wednesday. — AFP

EUROPE has played a big role in China’s economic successes throughout the past three decades. That was the main tone the European Union (EU) brought to Beijing for the China-EU Summit on Tuesday.

And China’s response was that it would offer the EU more help to overcome the eurozone sovereign debt crisis – an assurance from the economic powerhouse that the EU pretty much hoped for.

The friendly exchanges between the Chinese and EU leaders laid the foundation for the success of the summit. Sino-EU trade relations have continued to thrive amid the debt crisis in Europe, with trade volume surpassing €460bil (RM1.83 trillion) last year. Europe is China’s biggest export destination.



 “Over the past decades, China has become an even greater force in regional and global affairs and its economic and social development has been immense,” European Commission president Jose Manuel Barroso said after the summit attended by Chinese Premier Wen Jiabao, his Cabinet members and European Council president Herman Van Rompuy.

“Europe can only rejoice at this success. I believe that Europe can legitimately claim some parts of the success because China’s economy has greatly benefited from Europe’s open policies and open markets.

“As Europe and China are inter-connected and inter-dependent, we should work even more closely on different fronts to deepen our relations.”

He assured the Chinese leaders that the EU was doing what it takes to restore the confidence of investors and international stakeholders and its partners amid the crisis.

Wen said China was ready to help Europe deal with its debt problems but the EU would have to take its own initiatives as well as address the issues.

“China’s willingness to support the EU in dealing with its debt crisis is sincere and resolute. China will continue to join hands with the EU for mutual benefit despite the fast-changing global economic situation,” he said.

Last week, Wen had told German Chancellor Angela Merkel at a meeting during her official visit to China that China would consider getting more involved in solving the debt woes in Europe, especially through the European Stability Mechanism and European Financial Stability Facility.

“Resolving the debt crisis relies fundamentally on the efforts made by the EU itself.

“We expect the debt-stricken nations, according to their own situations, to strengthen fiscal consolidation, reduce their deficits and lower their debt risks,” he said.

However, analysts said that Wen’s promise to help the EU deal with its debt problems through the stability facilities should not be misread as China’s intention to buy more European government bonds.

Speaking at a forum on Monday, Lou Jiwei, chairman of China Investment Corporation (CIC), a sovereign wealth fund tasked with managing China’s foreign exchange reserves of US$3.2 trillion (RM9.7 trillion), said Merkel expressed her hope that long-term investors like CIC would buy German, French, Italian and Spanish debts.

“Some people think that there have been some positive improvements in the eurozone debt crisis in the short-term as the EU came up with some fiscal policies. But they have not got to the root of the problem and we should be able to see the effects in June or July,” he said.

He said it would be more likely for investors to invest in infrastructure and industrial projects, which would help in the economic recovery of the European nations.

In its editorial, People’s Daily said the eurozone debt crisis stemmed from the zone’s monetary and financial systems and its flaws in economic governance and policy-making mechanism.

“The unification of the euro currency has failed to promote fiscal unification because the EU member states are reluctant to give up their control over tax revenues,” it said.

“EU politicians may have the determination to safeguard the eurozone but they do not have fiscal resources which can be channelled in a unified way to troubled nations and do not have a proper mechanism to solve the debt issue. This has resulted in a worsening of the crisis.”

During its short trip to China, besides having deeper exchanges of views on EU-China relations with the Chinese leaders, the EU delegation was also on a mission to convince Chinese scholars and investors that Europe was on the right track to come through the crisis.

“Incomplete governance and surveillance in the euro area have caused imbalances and divergences in competitiveness. The sovereign debt crisis has been a wake-up call,” Barroso said.

“But the EU has acted decisively to tackle the crisis, strengthen economic governance, stabilise public finances and implement structural reforms such as the European Stability Mechanism and European Financial Stability Facility with a combined fund of €500bil (RM1.99 trillion) as financial aid for some member states.

“Other measures aimed at creating more jobs and ensuring sustainable growth include the EU2020 Strategy, a blueprint which will get the economy back on track over the next eight years with education, research and innovation as key drivers.

“In my view, what Europe has been doing, particularly during the most recent period, constitutes a basis for investors to regain confidence in Europe.”

G20, Apec without gusto; Asean for peace; US cold war against China!

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G-20, Apec summits – without gusto!

What Are We To Do By TAN SRI LIN SEE-YAN

WHEN President Sarkozy of France assumed the presidency of G-20 for 2011, I was delighted for alas, international monetary reform would take centre stage. That's what he promised. I felt it's high time leadership was put to bear on an issue of critical international concern, where the Americans had for years “ feared to tread,” for obvious reasons: to protect US national interest to preserve (as long as feasible) an archaic international monetary system with the US dollar as its centrepiece and which has outlasted its usefulness.

But this was not to be. Political turmoil in Greece had added fuel to the European financial chaos, with the G-20 meeting scrambling to arrange (and rearrange) emergency measures aimed at preventing the eurozone sovereign debt crisis from contaminating the rest of Europe and the global economy. As they gathered in Cannes on Nov 3-4, leaders from G-20 faced high expectations to confront the festering European turmoil. Instead, the two-day summit in this Mediterranean resort largely resulted in more pressure on Europe to respond more forcefully. The United States, China and others were worried that Europeans may fail to avert a collapse of the Greek economy, bringing with it sovereign default and corporate bankruptcies that would inevitably send shock waves through the global financial system. Priority was placed to quickly resolve the evolving European crisis. It was clear the weight of the crisis had overshadowed other policy goals of the summit.

G-20 and France

France's president had hoped to use the G-20 to burnish his reputation as a global statesman. I gathered Sarkozy had intended to focus the G-20 agenda on French ideas for reducing global imbalances. Instead, he found himself in the midst of a gathering euro-storm, now focused on Greece's sudden decision to call a referendum on its bailout.

Behind the scene, France was itself subject to growing economic stress. The market's verdict on France's finances had since grown increasingly harsh. The spread between the yields on German & French 10-year AAA government bonds widened to a euro-era record of 1.95%-age points. France is a triple-A rated nation in name only because its debt is in danger of spiralling out of control.

Forecast by Fitch Ratings at 86.8% of gross domestic product (GDP) in 2013, it is the highest among AAA-rated nations. Its recent sharp economic downturn has exposed an 8-billion-euro gap in France's efforts to reduce its budget deficit to 4.5% of GDP in 2012 from 7.1% in 2010 more than twice the permissible limit of 3%. At 45% of GDP, France is already among the most highly taxed in the Organisation for Economic Co-operation and Development or the OECD. The recent report by the Lisbon Council ranked France 13th out of 17 for its overall health, including growth potential, unemployment and consumption, and 15th for progress on economic adjustments, including reducing the budget deficit and unit labour cost.

G-20 and Italy

It's quite clear G-20's prime concern is Italy. The country is increasingly unable to raise debt at affordable cost, and its prime minister was struggling to push through austerity measures in the face of mounting labour unrest amid an unfriendly parliament. It was also clear the eurozone isn't equipped to deal with the collapse of Italy. At G-20, although they had indicated a willingness to co-operate, non-European leaders had made it clear they want the eurozone to first rely on its own resources to resolve the crisis. Nevertheless, Europeans did consider seeking outside help, in particular to boost their bailout fund, including asking the International Monetary Fund (IMF) for co-operative support. But no one bit. The very hint of boosting IMF's role underscored deepening worries about the adequacy of Europe's own response. In the end, G-20 leaders agreed only to explore options, including voluntary contributions and using its special drawing rights (SDR) in some fashion.

G-20 has little to show

As in the previous year, an all too familiar G-20 meeting ended with a long list of promises made, many of which reflected a rehash of old ones; with most promises made and then broken in the past; and still others, not known to be kept.

However, one key step did emerge: Italy, the focus of most worries in the European, and indeed the world, markets agreed to permit the IMF to monitor its progress with fiscal reforms. This is as drastic a step as can be expected, given the biggest fear among Europeans is that markets will cease financing Italy, causing a meltdown the eurozone would be quite powerless to stop.

European leaders had hoped G-20 would conclude with an endorsement of their plan announced a week before, that would boost confidence in the markets. It included new efforts to recapitalise European banks, an upgraded bailout scheme for Greece, and an increase in funding available to the eurozone's bailout fund, the European Financial Stability Facility (EFSF).

There was also the hope to enhance EFSF's capacity through parallel “investments” from non-European G-20 members. G-20 had noted the European Central Bank's (ECB) refusal to act as lender of last resort and to provide financing to help leverage the EFSF's 440 billion euro into something much larger, which had led the Europeans to pursue the non-Europeans with large surpluses, such as China.

As the eurozone crisis deepened, much of the wider G-20 agenda to encourage “strong, stable & balanced” global growth fell by the wayside at this time. As I understand it, it would appear the stronger economies, including China, Germany, Canada & Brazil, did agree to limit efforts at fiscal tightening and possibly do more to boost demand at home. This marked a reversal from last year's summit which centred on fiscal deficit reduction.

The G-20 pact 

The more important conclusions reached at the Summit included the following:

● Commitment to take decisions to reinvigorate economic growth, create jobs, ensure financial stability and promote social inclusion; and to coordinate their actions and policies.
● An action plan for growth and jobs to address short-term vulnerabilities and strengthen foundations for growth. Advanced economies committed to adopt policies to build confidence and support growth, and implement clear & credible measures at fiscal consolidation.
● Commitment by (i) countries whose public finances remain strong to take discretionary measures to support domestic demand; (ii) countries with large current surpluses commit to reforms to raise domestic demand; and (iii) all commit to further structural reforms to raise output in their countries.
● Commitment to strengthen the social dimension of globalisation.
● Set-up a taskforce to work with priority on youth unemployment.
● Agreement to (i) ensure the SDR basket composition continues to reflect the global role of currencies; (ii) review the composition of the SDR basket in 2015, or earlier; and (iii) make progress towards a more integrated, even-handed and effective IMF surveillance.
● Commitment to move rapidly toward more market-determined exchange rate systems, avoid persistent exchange rate misalignments, and refrain from competitive devaluation.

Despite the cheering about Europe's debt deal and G-20's role in pressuring Europe to act swiftly, worries continue to mount that the world can't succeed without stronger growth. Europe and the United States are virtually at a standstill. At the present pace of muted expansion, unemployment will stay high and incomes stall. Debt saddled nations will have an even tougher time generating enough revenue to pay bills & service debt. This would spark more default fears or even higher borrowing rates in Italy, Greece and others under pressure.

Latest projections point to the eurozone flirting with recession in 2012. Even in Asia, a critical engine of recovery, prospects are dimming. Yet, nations remain divided on enacting new measures to boost growth or continue focus on deficit reduction. Weak nations like Italy and Greece are under intense pressure to adopt very severe austerity schemes in the face of enormous suffering by its people who fall victim to weakened social safety nets and reduced cashflows.

Towards this end, the G-20 commitments fall far short. Markets worldwide have since responded; their verdict: continuing sell-off of bonds and shares, and continuing high cost of borrowing by Italy and Spain.

APEC Honolulu Declaration

Following the goings-on at G-20, the 21-member Asia-Pacific Economic Cooperation (Apec) economic leaders met in Honolulu on Nov 12-13 to bolster their economies and lower trade barriers as they seek to prop up global growth and shield themselves against fallout from Europe's debt crisis.

They adopted the Honolulu Declaration in which leaders agreed to take concrete steps towards building a “seamless regional economy” to generate growth and create jobs in “three priority areas”: (i) strengthening regional economic integration & expanding trade, (ii) promoting green growth, and (iii) advancing regulatory convergence and co-operation. Apec leaders gathered at a time when “growth and job creation have weakened and significant downside risks remain, including those arising from the financial challenges in Europe and a succession of natural disasters in the region.”

Against this uncertain backdrop, the forum had something more concrete to focus on than the usual bromides about extending free trade. This reflected in part frustration with the long-running (entering its 11th year with no end in sight) world trade talks, and in part, a desire to snap out of the poor global economic outlook. There is also a broader influence from concern about how best to grow and create jobs.

The Trans-Pacific Partnership (TPP), a proposed free trade pact covering nine Apec members (the United States, Australia, New Zealand, Vietnam, Singapore, Malaysia, Brunei, Chile & Peru) account for 35% of the world economy, is unique, making it the blueprint for future global trade agreements since it had taken on new issues including green technologies & the digital economy. An agreement was reached on the broad outline of a deal with a final agreement in sight for 2012.

Since then, three more Apec members (Japan, Canada and Mexico) have expressed interest to join. Together, this would create a market of 800 million, the largest trade deal for the United States. The aim is to eventually cover all 21 members of Apec which accounts for more than one-half of the world's economic output. Apec says: “We recognise that further trade liberalisation is essential to achieving a sustainable global recovery in the aftermath of the global recession of 2008-09.” An expanded TPP would provide the much needed boost.

But no trade agreement in the Pacific is complete without China. Looks like a power play between the United States and China is in the works. As such, optimism about its potential benefits needs to be tempered.

At the conclusion of Apec meeting, leaders agreed to: (i) address two key next generation trade and investment issues, viz. commitment to help the small and medium-sized enterprises grow and plug into global production chains; and to promote effective market-driven innovative policies; (ii) develop by 2012 a list of environmental goods (including solar panels, wind turbines and energy efficient light bulbs) that contribute to green growth on which members resolved to reduce tariffs to 5% or less by end 2015, and to also eliminate non-tariff barriers; and (iii) take steps by 2013 to implement good regulatory practices. In the end, the question remains how far leaders will be able to turn promises into action.

The biggest problem on the Asia-Pacific horizon remains Europe, where fiscal turmoil centred on Italy and Greece will continue to surprise and send shock waves worldwide.

As feared, both summits ended with a whimper, eclipsed by the Italian and Greek sovereign debt drama.

● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.

Asean for Pacific peace

BEHIND THE HEADLINES By BUNN NAGARA

WHEN the US hosted this year’s Apec (Asia-Pacific Economic Cooperation) summit, Honolulu was the natural venue. Hawaii is the only US state in the Pacific, as distinct from merely being on the periphery.

But as regions go, the “Asia-Pacific” itself is a cumbersome construct alien to existing realities. Not only is the Pacific Ocean the largest expanse of water on the planet, making the Asia-Pacific a “region” is a geopolitical attempt to fuse several distinct regions lapped by Pacific waters into a single whole: East Asia, Oceania, North America and Latin America.

That has made an ambitious, 21-member Apec an unwieldy mass of anxieties in search of a higher purpose beyond generalities shared also by much of the rest of the world. With few common interests and fewer shared priorities and modalities, Apec proceedings have progressively suffered from inertia.

In contrast, more natural regions as clusters of nations or economies in and around the Pacific have evolved with greater vibrancy. The late Robert Scalapino, UC Berkeley’s specialist in East Asian affairs, called these “natural economic territories (Nets)”.

On one level, culture, history and trade (economics) have bonded these entities together as identifiable regions: thus the North American Free Trade Agreement (Nafta), Mercosur, the EU and Asean Plus Three (APT, with China, Japan and South Korea). They developed from geographical proximity and social affinity through economic logic and official policy.

Although today’s US-China economic relationship continues to grow, it is at least as competitive as it is complementary. Their non-economic relationship is even more troubled.

On a localised level, Nets are evident in “growth triangles” and various growth polygons in several cross-border regions. Without their non-political elements, however, “regions” become undernourished because they cannot live on strategic concerns alone.

Nets do not deny a unitary global economy with globalised supply chains and markets – or the contagion effect these produce when core economies decline. But Nets do help to explain the distinct economic impulses and motive forces for each region, such as why East Asia remains the world’s most economically dynamic region even when North American and European economies falter.

Politically, East Asia also has no ideological encumbrances when state policy determines economic priorities. Culturally, pragmatism is key, so that eclecticism is often rated above orthodoxy.

Differences between regions are also manifested in the way foreign relations are shaped. For Asean, it is better for countries to agree to disagree without being disagreeable, than for them to confront each other with self-righteous ire and distinct dogmas.

East Asia is also not as hypersensitive to the vagaries of a fickle electorate with sensibilities set to four-year election cycles. National policy therefore has more time to develop, mature and yield dividends.

In the build-up to Apec 2011, Ralph Cossa of Honolulu-based think tank Pacific Forum CSIS said: “China is becoming an 800-pound gorilla. The US is still the 1,600-pound gorilla, so which one would you rather have? ... we’re housebroken; we’re a lot more fun to invite into your living room ...”

China’s impressive rise still marks it as aspiring to only a fraction of what the US has already achieved, economically and more so militarily – if China is aiming for tactical parity at all, which is doubtful.

But Cossa is right only in part. The reality of a post-Cold War world, and one which all Asean countries hope will prevail, is not having to choose between superpowers.

The regional situation is not either-or, “with us or against us”. It is “both and”, so the question of “rather having” one or the other does not arise.

Besides, whether any superpower is, ever has, or can be “housebroken” remains very much in doubt. Nations that have borne the brunt of US military intervention are still hoping to recover.

But Cossa is right in that the US needs to be invited into this region’s “living room” – it is not an Asian country. China, however, has always been an Asian power, and an East Asian giant at that.

How the US today, still bristling with military technology and looking to confront global challenges, responds to a rising China forms the basis of the region’s concerns. Developments in recent days have not been reassuring.

On his way to the East Asia Summit (EAS) in Bali after Apec, President Barack Obama stopped over in Australia and announced plans for stationing US troops there.

Mean­while, the Pentagon has been working quietly on its AirSea Battle concept to counter China (see   next).

On Wednesday the US said it would provide the Philippines with an additional warship to boost Manila’s claims to islands in the South China Sea disputed by China. The next day a US Congressional committee voted to provide Taiwan with new F-16 jet fighters in addition to technical upgrades to its existing fleet, upping the ante in Taipei against Beijing.

On Friday Japan pledged US$25bil (RM79bil) in infrastructure projects for Asean countries, in efforts described as raising its regional profile in competing with China. Following China’s reservations about the US-Australia military arrangements, Canberra warned Beijing not to interfere.

East Asia has tried and tested ways of satisfactorily engaging various powers, regardless of size and strength.

What the region does not need, and can ill afford, is superpower presumptuousness that upsets diplomacy and destabilises geopolitics.

A pragmatic Asean has learnt that bluster, bravado and brinkmanship are not the way to proceed. Its steadier if slower methods are respected internationally, having made it the most successful regional organisation in Asia.

Where US military dominance of the Pacific has ensured safe passage of international shipments, the US is the main benefactor and a resource-importing, export-oriented China the main beneficiary.

If there is any change to the status quo, China would want to be the least involved.

Pentagon planning Cold War against China - AirSea Battle concept

Pentagon battle concept has Cold War posture on China ...

Washington Times: 12 November 2011

The Pentagon lifted the veil of secrecy Wednesday on a new battle concept aimed at countering Chinese military efforts to deny access to areas near its territory and in cyberspace.
 
The Air Sea Battle concept is the start of what defense officials say is the early stage of a new Cold War-style military posture toward China.
 
The plan calls for preparing the Air Force, Navy and Marine Corps to defeat China's "anti-access, area denial weapons," including anti-satellite weapons, cyberweapons, submarines, stealth aircraft and long-range missiles that can hit aircraft carriers at sea.
 
Military officials from the three services told reporters during a background briefing that the concept is not directed at a single country. But they did not answer when asked what country other than China has developed advanced anti-access arms.

 

** FILE ** A security officer walks on the roof of the Pentagon. (AP Photo/Charles Dharapak)

A senior Obama administration official was more blunt, saying the new concept is a significant milestone signaling a new Cold War-style approach to China.

"Air Sea Battle is to China what the maritime strategy was to the Soviet Union," the official said.
 
During the Cold War, US naval forces around the world used a strategy of global presence and shows of force to deter Moscow's advances.
 
"It is a very forward-deployed, assertive strategy that says we will not sit back and be punished," the senior official said. "We will initiate."
 
The concept, according to defense officials, grew out of concerns that China's new precision-strike weapons threaten freedom of navigation in strategic waterways and other global commons.
 
Defense officials familiar with the concept said among the ideas under consideration are:
 
• Building a new long-range bomber.
• Conducting joint submarine and stealth aircraft operations.
• New jointly operated, long-range unmanned strike aircraft with up to 1,000-mile ranges.
• Using Air Force forces to protect naval bases and deployed naval forces.
• Conducting joint Navy, Marine Corps and Air Force strikes inside China.
• Using Air Force aircraft to deploy sea mines.
• Joint Air Force and Navy attacks against Chinese anti-satellite missiles inside China.
• Increasing the mobility of satellites to make attacks more difficult.
• Launching joint Navy and Air Force cyber-attacks on Chinese anti-access forces.
 
Pentagon press secretary George Little said the new office "is a hard-won and significant operational milestone in meeting emerging threats to our global access."
 
"This office will help guide meaningful integration of our air and naval combat capabilities, strengthening our military deterrent power, and maintaining US advantage against the proliferation of advanced military technologies and capabilities," Mr. Little said.
 
He noted that it is a Pentagon priority to rebalance joint forces to better deter and defeat aggression in "anti-access environments."
 
Earlier this month, Defense Secretary Leon E. Panetta said during a visit to Asia that US forces would be reoriented toward Asia as the wars in Iraq and Afghanistan wind down. The new focus will include "enhanced military capabilities," he said without elaborating.
 
The military officials at the Pentagon on Wednesday did not discuss specifics of the new concept. One exception was an officer who said an example would be the use of Air Force A-10 ground attack jets to defend ships at sea from small-boat "swarm" attacks.
 
China in recent years has grown more assertive in waters near its shores, harassing Navy surveillance ships in the South China Sea and Yellow Sea.
 
China also has claimed large portions of the South China Sea as its territory. US officials said the Chinese have asserted that it is "our driveway."
 
The Pentagon also is concerned about China's new DF-21D anti-ship ballistic missile that can hit aircraft carriers at sea. Carriers are the key power-projection capability in Asia and would be used in defending Japan, South Korea and Taiwan.
 
"The Air Sea Battle concept will guide the services as they work together to maintain a continued US advantage against the global proliferation of advanced military technology and [anti-access/area denial] capabilities," the Pentagon said in announcing the creation of a program office for the concept.
 
Although the office was set up in August, the background briefing Wednesday was the first time the Pentagon officially rolled out the concept.
 
The Army is expected to join the concept office in the future.
 
One defense official said the Army is involved in cyberwarfare initiatives that would be useful for countering anti-access weapons.
 
"Simply put, we're talking about freedom of access in the global commons. Increasing ranges of precision fire threaten those global commons in new expanding ways," said a military official speaking on condition of anonymity. "That, in a nutshell, is what's different."
 
Defense officials said some administration officials opposed the new concept over concerns it would upset China. That resulted in a compromise that required military and defense officials to play down the fact that China is the central focus of the new battle plan.
 
A second military official said the new concept also is aimed at shifting the current US military emphasis on counterinsurgency to the anti-access threats.
 
The office was disclosed as President Obama sets off this week on trip to Asia designed to shore up alliances. He is set to meet Chinese President Hu Jintao in Hawaii on Saturday.
 
The concept grew out of the 2010 Quadrennial Defense Review that, in its early stages, had excluded any mention of China's growing military might.
 
China was added to the review after intervention by Andrew Marshall, director of the Pentagon's Office of Net Assessment, and Marine Corps Gen. James N. Mattis, at the time head of the Joint Forces Command.
 
China military specialist Richard Fisher said the new Air Sea Battle office is necessary but may be "late in the game."
 
"A Pentagon office focused on China's military challenges in Asia or beyond will be insufficient," said Mr. Fisher, of the International Assessment and Strategy Center. "This challenge will require Cold War levels of strategic, political and economic policy integration well beyond the Pentagon's writ."
 
Said former State Department China specialist John Tkacik: "This new Air Sea Battle concept is evidence that Washington is finally facing up to the real threat that China has become an adversarial military, naval and nuclear power in Asia, and that the only way to balance China is to lend the weight of US air and naval forces to our Asia-Pacific allies' ground forces."
 
Source: Washington Times

Eurozone seeks bailout funds from China

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Klaus Regling: ''These are regular consultations at an early stage and there will be no conclusions''

Martin Patience BBC News, Beijing

The head of the eurozone's bailout fund is beginning attempts to persuade China to invest in a scheme to help rescue member countries facing debt crises.

After meeting Chinese leaders, Klaus Regling said there were no formal negotiations and would be no deal now.

It is thought China may pay about 70bn euros ($100bn) into the fund, which is expected to be boosted to 1tn euros.

Meanwhile French President Nicolas Sarkozy said debt-ridden Greece's entry to the eurozone was a mistake.

Greece was "not ready" when it joined in 2001, he said, adding that it could be rescued thanks to a new deal on the debt crisis.

European leaders worked into the early hours of Thursday in Brussels to secure an agreement aimed at preventing the crisis from spreading to larger eurozone economies.

The deal triggered a worldwide shares rally.

'Regular buyer' Beijing has made it clear that it will demand strong guarantees on the safety of any contribution it might make.

With more than $3tn in foreign reserves there are European hopes that China could ride to the rescue.

As the EU's biggest trade partner Beijing would also be hard hit by any downturn in Europe.



But like other investors, China will want guarantees.

And Beijing may push for other concessions, such as market economy status - a move that would make it harder for European companies to press trade complaints against Chinese rivals.

Any investment will also be fraught with political risk.

China's fund managers have faced criticism after earlier overseas investments soured.

Despite being the world's second economy, more than 200m Chinese live in poverty.

China's leaders won't want to be seen giving "charity" to countries richer than their own.

Mr Regling, who is chief executive of the European Financial Stability Facility (EFSF), said he was not negotiating with China as a potential investor but holding consultations to decide the terms for raising the money.

"Don't expect any precise outcome of our talks," he said, quoted by AFP news agency.

"I cannot say today, and it's certainly far too early to say what kind of amounts might be envisaged."
He said China had been a regular buyer of EFSF bonds in the past.

He would present the fund's bonds as a potential commercial investment to China, he said, adding that Beijing regularly needed to find safe investments for its trade surpluses.

"I am optimistic that we will have a longer term relationship," he said.

Chinese Vice Finance Minister Zhu Guangyao said there was work still to be done.

"We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment," he said, quoted by AFP.

“Start Quote

If we have the ability to help them then we should, but there is no feeling of pride in that”

Xu Juan International trade firm employee in Beijing

• Why would China want to help Europe?

"We hope that all these technical and specialised arrangements can be thrashed out at an early date and can be implemented and feasible. That will be very important for the effectiveness" of the fund.

The President of the World Bank, Robert Zoellick, has said he believes China will invest in Europe only if there are incentives for it to do so.

"I don't think that China will just come in as a white knight to try to provide money just to bail out Europeans," he told the BBC.

But investor Jim Rogers said China was prepared to help.

"From China's point of view, it's cheap foreign aid. They'll buy goodwill. I guess they'll put up some money," he said on BBC Radio 4's Today programme.

The suggestion that China should use its financial clout to assist the eurozone met with mixed reactions on the streets of Beijing.

"If we have the ability to help them then we should, but there is no feeling of pride in that," said Xu Juan - a 27-year-old employee of an international trade firm.

We need to focus on doing a good job on developing our own country."

Wang Xiaodong, a 23-year-old univeristy student, said "With the global economy everybody prospers together or becomes weaker together, so we just have to endure this tough time together."

The framework for the new EFSF bailout fund is to be put in place in November.

Germany, as the largest economy in eurozone, is expected to be the largest contributor.

Asian markets rose for a second day on Friday and bank stocks in Europe continued to rally, a day after the deal was reached.

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The gloomy outlook takes its toll

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What Are We To Do by LIN SEE-YAN

About one-half of European Financial Stability Fund already committed or utilized

WITH every passing day, the shelf-life of eurozone's rescue package is getting shorter. On July 21, eurozone leaders agreed to a second Greek bailout (see Greek Bailout Mark II: It's a Default in this column on July 30, following the first, Greece is Bankrupt on July 2). European parliaments have yet to complete ratification to expand the 440 billion euros bailout fund (European Financial Stability Fund or EFSF). Already, talk has shifted to expanding the EFSF in the light of escalation of the crisis.

Frankly, the fund is just not large enough to halt the contagion. It's a matter of market confidence really the larger, the better. About one-half of the fund is already committed or utilised with more demands coming on. Greece will miss the deficit targets for this year and next despite austerity, showing the drastic steps taken to avert bankruptcy are not enough. The crisis is boiling over. Eurozone ministers have since delayed the release of 8 billion euros cash scheduled for Oct 13, threatening to revisit the deal where private bondholders may be asked to take a higher “haircut”. This has rattled markets and raised fears of an imminent messy default. Estimates are that with a 60% haircut (21% now) for private bondholders, Greek banks would suffer another 27 billion euros write-down, wiping out their capital. Inevitably, the fall-out will have much wider repercussions.

The contagion

The world economy once again stands on a knife's edge. As finance leaders gathered at end-September, they all want to look forward. But markets and investors are forcing them to peer down the precipice into the abyss as growth in advanced economies slackened sharply and emerging nations grappled with inflation in the face of a fast deteriorating eurozone debt crisis, wondering how to make the needed adjustments to restore confidence. Continuing uncertainty and worries about the global economic outlook fuelled a rush into safe assets. The eurozone is seen to be on the brink of recession. Its prospects have been hit by sharp falls in consumer and business confidence as well as fiscal austerity measures across the continent and pessimism about US growth. Germany's slowdown is worrisome because of its role as Europe's powerhouse.

Gathering pessimism came to a head as global equities tumbled on Sept 22 as the Federal Reserve's (Fed) gloomy outlook (“there were significant downside risks to the economic outlook”) caused investors to sell stocks in a widespread flight to safety. UK's FTSE (All World) Index fell by as much as 23% from its May high, signifying a bear market as it fell through the 20% threshold. US and UK stocks were not yet in bear territory but German and French equities have since been there. The sell-off was mooted by a big move into government bonds. Benchmark German 10-year bond yields hit an all-time low of 1.65%, while US Treasuries fell to 1.77%, the lowest level since 1946. On a day reminiscent of 2008, Asian stocks and currencies tumbled reflecting foreign capital repatriation, with the Indonesian stock market plunging 9%, the Australian dollar falling below US dollar parity, and the Hong Kong Hang Seng index settling at its lowest point since July '09.



Amid market tumult, investors were left wondering what to do in October. The 3rd quarter had been painful and volatile. The Dow finished the quarter down 12.1%; the S&P's 500 fell 14%. Many had hoped for a 2nd half rebound after spring's “soft-patch”, only to be confronted with worries of a possible double-dip recession. There is also a new fear: weakness in emerging market economies, especially China. During the 3rd quarter, markets were tossed to and fro on a daily (even hourly) basis, reflecting developments in Europe and United States. In August and September, the Dow industrials rose or fell by more than 1% on each of 29 days; on another 15 days, the daily moves were more than 2%. The last time the market saw this was in March/April '09. The “fear index” (Vix volatility index) reflecting market instability was up 160% over the 3rd quarter, finishing at 40% (normal 15%-20%) on end September.

The problem is Europe

The damage was worse in Europe. The main German and French stock indices both lost more than 25% of their value in the 3rd quarter, the largest quarterly loss since 2002. Asian stocks also took a pounding, experiencing double-digit losses. The Hong Kong Hang Seng index lost 21%. Even gold usually the refuge suffered a collapse in September from its record high in August. The safety was in US Treasuries, German bunds and UK gilts. Yields didn't matter for now it's just preservation of capital. As I see it, the sovereign risk crisis is compounded by much weaker growth among the “core” nations, and increasing market stress. In the United States, it has just managed to avoid recession, with little buffer to insulate itself from any fallout from an European event. Complications can also come from a busting bubble in the Chinese property market, rattling Chinese banks with ripple effects on world markets.

US and European stocks tumbled when markets opened in the new 4th quarter, with S&P's 500 entering the bear market as Europe postponed a vital tranche drawing to debt-stricken Greece. Wall Street fell about 2% on Oct 3, extending decline to a 13-month low as investors feared the crisis would lead the United States into a new recession. With this drop, the benchmark S&P's 500 had fallen past 20% putting it in bear territory. In Europe, banking stocks dived as investors slashed their exposure on worries authorities are unable to contain the debt crisis. The Stoxx Europe 600 index tumbled 2.8%, hitting its lowest since Oct '08; Stoxx Europe 600 banks finished 4.3% lower. Euro-zone's problem is one of market confidence rather than solvency. In Asia, most regional markets in the 3rd quarter suffered their biggest falls since the Lehman's collapse in '08, with Tokyo losing 11% and Hong Kong 21%. Since then, Korea dropped 3.6%, Hong Kong another 3.4%, India's Sensex 1.8%, the Nikkei, 1.1% and Australia, 0.6%. Italy's latest downgrade a 3-notch cut by Moody's to A2 with continued negative outlook reflected as much euro-zone's inability to spur market confidence, as it does Italy's failure to promote growth. Without a comprehensive response to the crisis, the risk of a downward spiral remains. In the past days, European stocks posted hefty gains as policymakers were reported to be prepared to help recapitalise European banks, estimated at 100-200 billion euros. Priority remains with Spain and Italy which are basically solvent, but lacks credibility. The prospect of the IMF coming-in alongside EFSF to buy Spanish and Italian bonds boosted sentiment.

Default by Greece?

Greece will miss the targets set just two months ago. The 2012 approved budget predicts a deficit of 8.5% of GDP for '11, well short of the 7.6% target. For '12, the deficit is set at 6.8%, short of the target of 6.5% reflecting the sluggish economy. Its 8.5% target remains a challenge in the current environment. GDP is expected to fall by 5.5% in '11 pushing unemployment to 16%, and a further GDP shrinkage of 2%-2% is in prospect. The '11 shortfall meant Greece would need another 2 billion euros just to bridge the gap. Greece is now off-track, reflecting disappointing revenues and missed targets. On Sept 21, it acted to raise taxes, speed-up public lay-offs, and cut some pensions. Ongoing austerity measures are already deeply unpopular.

My mentor and teacher at Harvard (Marty Feldstein) believes the only way out is for Greece to default and write down its debt by at least 50%. This strategy of default and devalue is standard fare for nations in Greece's shoes. But this hasn't happened because “Greece is trapped in the single currency.” So why are the political leaders trying to postpone the inevitable? He offered two sensible reasons: (i) banks and other financial institutions in Germany and France have large exposures to Greek debt, and time is needed to build capital; and (ii) default would induce sovereign defaults in other countries and runs on their banks. The EFSF is just not large enough to bail out Italy and Spain. Europe's politicians hope to buy enough time (2 years) for Spain and Italy to prove they are financially viable. As I see it, both these nations don't have another two years to prove their worth. The markets will decide the fate of Greece (and possibly Spain and Italy), not the other way around.

The shadow of recession

International Monetary Fund's September forecast pointed to growth in emerging economies exceeding 6% in '11 and '12, but with the advanced nations sliding to below 2%. On current trends, the latter prediction is perhaps closer to 1%. I think the outlook for the eurozone is deteriorating fast: at best, they are already in the throes of a severe slowdown; at worst, a relapse into recession. The European Commission recently stated growth is at a virtual standstill, with eurozone GDP rising by 0.2% in 3Q'11 and 0.1% in 4Q'11. Pain will be most intense in the south (no growth in Italy in '11 and '12) where the pressure of austerity is greatest. But the “core” economies are also hurting. IMF estimated German growth would slow down from 2.7% in '11 to 1.3% in '12. The short-term outlook is even worse. According to Markit Economics, eurozone's factory activity fell to a 25-month low of 48.5 (a reading below 50 indicates contraction). Indications are economic conditions will deteriorate. Germany's index fell in September with overall activity just above 50 the worst performance in two years. France's index stood at 48.2; Italy, 48.3 both in contraction territory. Eurozone contractions reflected lacklustre domestic demand and falling export sales. More sluggish growth will make it harder to achieve fiscal targets. Rising risk of recession will damage efforts to deal with the crisis.

The Fed's latest assessment is for the US economy to falter needs to be taken seriously. Citing anaemic employment, depressed confidence and financial risks from Europe, its chief urged Congress not to cut spending too quickly in the short-term even as they grapple with fiscal consolidation over the medium-term. The IMF expects the United States to grow by 1.5% in '11 (less than 1% in 1H'11) and 1.8% in '12. The short-term outlook isn't looking better. Indeed, the business cycle monitoring group ECRI concluded last week that the US economy is tipping into a new recession. Latest data are mixed after a dismal August. US manufacturing managed to keep expanding and employment strengthened in September but the tone has not been sufficiently robust to dispel fears of another downturn. Sure, United States was not in recession in 3Q'11 but the lack of new orders remains of concern. While even sluggish job growth is welcome, the government's belt-tightening is likely to prove a significant drag on the economy. The Fed's commitment to ensure recovery continues will re-assure. But if Europe falters badly, there is little the Fed can do.

Housing ignored

Over the past 35 years, housing had added value to the GDP. Empirically, in the two years following most recessions, housing adds about 0.5%point to US GDP growth. So far, the contribution has been negative. This is so because: (i) home prices dropped 2.5% this year; since its '05 peak, home prices have fallen 31.6%; (ii) United States lost US$7 trillion (close to one-half of GDP) in the value of homes they own: homeowners equity has since fallen to 38.6% of home values; (iii) home-starts are at an all time low and still falling. The housing bust weighs heavily on consumers making them more reluctant to spend. Innovative ways to unleash housing are needed.

Looks like the world remains in a bad shape. It is also a dangerous place with growing uncertainty, high volatility and increasing social unrest. Europe in particular is in a high risk gamble. I worry European politicians may learn the hard way in trying to outsmart the markets.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my

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European choice: Greek bailout Mark II – it’s a default !

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WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

The European debt crisis has evolved rather quickly since my last column, “Greece is Bankrupt” (July 2). The European leadership was clearly in denial. The crisis has lurched from one “scare” to another. First, it was Greece, then Ireland, then Portugal; and then back to Greece. On each occasion, European politicians muddled through, dithering to buy time with half-baked solutions: more “kicking the can down the road.” By last week, predictably, the crisis came home to roost. Financial markets in desperation turned on Italy, the euro-zone's third largest economy, with the biggest sovereign debt market in Europe. It has 1.9 trillion euros of sovereign debt outstanding (120% of its GDP), three times as much as Greece, Ireland and Portugal combined.

Over the next two weeks the EU must come up with a second Greek bailout which could be as high as £107billion on top of the £98billion in rescue loans agreed for Greece in May 

The situation has become just too serious, if contagion was allowed to fully play out. It was a reality check; a time to act as it threatened both European integration and the global recovery. So, on July 21, an emergency summit of European leaders of the 17-nation euro-currency area agreed to a second Greek bailout (Mark II), comprising two key elements: (i) the debt exchange (holders of 135 billion euros in Greek debt maturing up to 2020 will voluntarily accept new bonds of up to 15 to 30 years); and (ii) new loans of 109 billion euros (through its bailout fund and the IMF). Overall, Greek debt would fall by 26 billion euros from its total outstanding of 350 billion euros. No big deal really.

Contagion: Italy and Spain

By mid-July, the Greek debt drama had become a full-blown euro-zone crisis. Policy makers' efforts to insulate other countries from a Greek default, notably Italy and Spain, have failed. Markets panicked because of disenchantment over sloppy European policy making. For the first time, I think, investors became aware of the chains of contagion and are only now beginning to really think about them.

The situation in Italy is serious. At US$262bil, total sovereign claims by international banks on Italy exceeded their combined sovereign exposures to Greece, Ireland, Portugal and Spain, which totalled US$226bil. European banks account for 90% of international banks' exposure to Italy and 84% of sovereign exposure, with French & German banks being the most exposed. Italy & Spain have together 6.3 trillion euros of public and private debt between them. Reflecting growing market unease, the yield on Italy's 10-year government bonds had risen to 5.6% on July 20, and Spain's, to 6%, against 2.76% on German comparable bunds, the widest spread ever in the euro era.

Italy and Spain face different challenges. Spain has a high budget deficit (9.2% of GDP in 2010, down from 11.1% in 2009) the target being to take it down to 6% in 2011 which assumes high implementation risks. Its debt to GDP ratio (at 64% in 2011) is lower than the average for the eurozone. The economy is only gradually recovering, led by exports. But Spain suffers from chronic unemployment (21%, with youth unemployment at 45%), weak productivity growth and a dysfunctional labour market.



It must also restructure its savings banks. Spain needs to continue with reforms; efforts to repair its economy are far from complete and risks remain considerable. Italy has a low budget deficit (4.6% of GDP) and hasn't had to prop-up its banks. But its economy has barely expanded in a decade, and its debt to GDP ratio of 119% in 2010 was second only to Greece. Italy suffers from sluggish growth, weak productivity and falling competitiveness. Its weaknesses reflect labour market rigidities and low efficiency. The main downside risk comes from turmoil in the eurozone periphery.

Another decade of stagnation also poses a major risk. But both Spain and Italy are not insolvent unlike Greece. The economies are not growing and need to be more competitive. The average maturity of their debt is a reasonable six to seven years. But the psychological damage already done to Europe's bond market cannot be readily undone.

The deal: Europeanisation of Greek debt 

The new bailout deal soughts to ring-fence Greece by declaring “Greece is in a uniquely grave situation in the eurozone. This is the reason why it requires an exceptional solution,” implying it's not to be repeated. Most don't believe it. But to its credit, the new deal cuts new ground in addition to bringing-in much needed extra cash - 109 billion euros, plus a contribution by private bondholders of up to 50 billion euros by mid-2014. For the first time, the new framework included solvent counterparties and adequate collateral. For investors, there is nothing like having Europe as the new counterparty instead of Greece. This europeanisation of the Greek debt lends some credibility to the programme. Other new features include: (i) reduction in interest rates to about 3.5% (4.5% to 5.8% now) and extension of maturities to 15 years (from 7 years), to be also offered to Ireland and Portugal; (ii) the European Financial Stability Facility (EFSF), its rescue vehicle, will be allowed to buy bonds in the secondary market, extend precautionary credit lines before States are shut-out of credit markets, and lend to help recapitalise banks; and (iii) buy collateral for use in the bond exchange, where investors are given four options to accept new bonds carrying differing risk profiles, worth less than their original holdings.

The IIF (Institute of International Finance), the industry trade group that negotiated for the banks, insurance funds and other investors, had estimated that one-half of the 135 billion euros to be exchanged will be for new bonds at 20% discount, giving a savings of 13.5 billion euros off the Greek debt load. Of the 109 billion euros from the new bailout (together with the IMF), 35 billion euros will be used to buy collateral to serve as insurance against the new bonds in exchange, while 20 billion euros will go to buy Greek debt at a discount in the secondary market and then retiring it, giving another savings of 12.6 billion euros on the Greek debt stock.

Impact of default

Once again, the evolving crisis was a step ahead of the politicians. There are fears that Italy and Spain could trip into double-dip recession as global growth falters, threatening the debt dynamics of both countries. This time the IMF weighed in with serious talk of contagion with widespread knock-on effects worldwide. Fear finally struck, forcing Germany and France to act, this time more seriously. The first reaction came from the credit rating agencies. Moody's downgraded Greece's rating three notches deeper into junk territory: to Ca, its second-lowest (from Caa1), short of a straight default. Similarly, Fitch Ratings and Standard & Poor's have cut Greece's rating to CCC.

They have since downgraded it further. They are all expected to state Greece is in default when it begins to exchange its bonds in August for new, long-dated debt (up to 30 years) at a loss to investors (estimated at 21% of their bond holdings). The rating agencies would likely consider this debt exchange a “credit event”, but only for a limited period, I think. Greece's financial outlook thereafter will depend on whether the country would likely recover or default again. History is unkind: sovereigns that default often falters again.

What is also clear now is the new bailout would not do much to reduce Greece's huge stock of sovereign debt. At best, the fall in its debt stock will represent 12% of Greece's GDP. Over the medium term, Greece continues to face solvency challenges. Its stock of debt will still be well in excess of 130% of GDP and will face significant implementation risks to financial and economic reform. No doubt the latest bailout benefitted the entire eurozone by containing near-term contagion risks, which otherwise would engulf Europe. It did manage to provide for the time being, some confidence to investors in Ireland, Portugal, Spain and Italy that it's not going to be a downward spiral. But the latest wave of post-bailout warnings have reignited concerns of contagion risks and revived investor caution.

Still, the bailout doesn't address the very core fiscal problems across the eurozone. This is not a comprehensive solution. It shifted additional risks towards contributing members with stronger finances and their taxpayers as well as private investors, and reduces incentives for governments to keep their fiscal affairs under strict check. This worries the Germans as it weakens the foundation of currency union based on fiscal self-discipline. Moreover, the EFSF now given more authority to intervene pre-emptively before a state gets bankrupt, didn't get more funds.

German backlash appears to be also growing. While the market appears to be moving beyond solvency to looking at potential threat to the eurozone as a whole, the elements needed to fight systemic failure are not present. At best, the deal reflected a courageous effort but fell short of addressing underlying issues, leading to fears that Greece-like crisis situations could still flare-up, spreading this time deep into the eurozone's core.

Growing pains

The excitement of the bailout blanked out an even bigger challenge that could further destabilise the eurozone sluggish growth. The July Markit Purchasing Managers Index came in at 50.8, the lowest since August 2009 and close enough to the 50 mark that divides expansion from contraction. And, way below the consensus forecast. Both manufacturing and services slackened. Germany and France expanded at the slowest pace in two years in the face of a eurozone that's displaying signs it is already contracting. Looking ahead, earlier expectations of a 2H'11 pick-up now remains doubtful.Lower GDP growth will require fiscal stimulus to fix, at a time of growing fiscal consolidation which threatens a downward spiral. At this time, the eurozone needs policies to restart growth, especially around the periphery. Without growth, economic reform and budget restraints only exacerbate political backlash and social tensions. This makes it near impossible to restore debt sustainability. Germany may have to delay its austerity programme without becoming a fiscal drag. This trade-off between growth and austerity is real.

IMF studies show that cutting a country's budget deficit by 3% points of GDP would reduce real output growth by two percentage points and raise the unemployment rate by one percentage point. History suggests growth and austerity just do not mix. In practical terms, it is harder for politicians to stimulate growth than cut debt.

Reform takes time to yield results. And, markets are fickle. In the event the market switches focus from high-debt to low-growth economies, a crisis can easily evolve to enter a new phase one that could help businesses invest and employ rather than a pre-mature swing of the fiscal axe. Timing is critical. It now appears timely for the United States and Europe to shift priorities. They can't just wait forever to rein in their debts. Sure, they need credible plans over the medium term for deficit reduction. More austerity now won't get growth going. The surest way to build confidence is to get recovery onto a sustainable path only growth can do that. Without it, the risk of a double-dip recession increases. Latest warnings from the financial markets in Europe and Wall Street send the same message: get your acts together and grow. This needs statesmanship. The status quo is just not good enough anymore.

Former banker Dr Lin is a Harvard educated economist and a British chartered scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.