Posts Tagged ‘International Monetary Fund’

US isolated as allies line up to join China-led bank — Leading from behind

March 27, 2015


By Matthew Pennington

In this March 23, 2015, photo, International Monetary Fund Managing Director Christine Lagarde, second from left, talks with Chinese Premier Li Keqiang, second from right, during a meeting at the Great Hall of the People in Beijing. Lagarde said Sunday that China’s economic slowdown is legitimate and that Beijing can contribute to global prosperity. U.S. resistance to a Chinese-led Asian regional bank has left it isolated among its Asian and European allies and given some heft to China’s frequent complaints that Washington wants to contain its rise as a world power. (AP Photo/Lintao Zhang, Pool)

WASHINGTON (AP) — U.S. resistance to a Chinese-led Asian regional bank has left it isolated among its Asian and European allies and given some heft to China’s frequent complaints that Washington wants to contain its rise as a world power.

South Korea, one of America’s closest friends in Asia, announced Thursday it will join the Asian Infrastructure Investment Bank, or AIIB, which is intended to help finance construction of roads and other infrastructure. Beijing has pledged to put up most of the initial $50 billion in capital for the bank, which is expected to be set up by year’s end.

The U.S. has expressed concern the new bank will allow looser lending standards for the environment, labor rights and financial transparency, undercutting the World Bank, where the U.S. has the most clout, and the Asian Development Bank, where it is the second-largest shareholder after Japan.

But since Britain broke with Washington two weeks ago and announced it was signing up for the AIIB, the floodgates have opened. France, Germany, Italy and Switzerland quickly followed. On Wednesday, Prime Minister Tony Abbott heavily hinted Australia would also join.

While Japan, which has tense relations with China, is still holding out, the Obama administration appears increasingly at odds with sentiment in the very region where it has striven to forge closer ties for the past five years. India and all 10 members of Southeast Asia’s regional bloc are among the more than 30 governments that have so far sought to join the bank before a March 31 deadline.

That has prompted handwringing among Asia-watchers in Washington. Many policy experts have been urging for months that the U.S. has a better shot at reforming the new bank from inside the tent than outside.

“By maintaining their distance from the bank, American and Japanese responses seem problematic at best and churlish at worst,” wrote Jonathan Pollack, a specialist on East Asia at the Brookings Institution.

“It is a small-potato issue that is making the United States look weak at a time when U.S. influence in the region is otherwise quite strong,” said Elizabeth Economy, director for Asia studies at the Council on Foreign Relations.

China has been reveling in Washington’s unease.

After the European nations signed up, a commentary in the official Xinhua news agency began triumphantly: “Welcome Germany! Welcome France! Welcome Italy!”

Writer Tian Dongdong accused the U.S. of “sour grapes” and hypocrisy, noting that President Barack Obama has urged a rising China to shoulder more international obligations.

Australia’s Mandarin-speaking former prime minister, Kevin Rudd, said Tuesday the emergence of AIIB was part of China’s geopolitical reaction to “the door being slammed in its face” over increasing the voting quotas of developing countries at the International Monetary Fund and World Bank, currently skewed in favor of the U.S.

Congress has refused to support the proposed quota changes at the IMF — and congressional approval of U.S. membership of an international lender led by strategic rival China would also be a hard sell.

State Department spokesman Jeff Rathke said Thursday the U.S. would welcome new institutions that could help meet the pressing need for infrastructure funding and incorporate high standards but it was “not considering joint any new institution at the moment.”

The risk of sticking to that path is that Obama’s commitment to make Asia a higher priority will appear too focused on security concerns.

Obama has pushed a 12-nation pan-Pacific trade pact to beef up commercial ties, but the pact still faces stiff opposition from Obama’s own Democratic Party, leaving doubt over whether it can be finalized this year.

Vikram Nehru, an expert on Southeast Asia at the Carnegie Endowment for International Peace, said Chinese officials have made positive statements about the new bank cooperating with other lenders. He said the AIIB would benefit from tapping into the experience of the Asian Development Bank and World Bank, and supporting projects that those lenders already have in the pipeline.

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With Development Bank, China Challenges Japan’s Role in Asia

March 25, 2015

Support for the Asian Infrastructure Investment Bank is growing, but Japan remains wary

Asian Development Bank President Takehiko Nakao, left, meets with Chinese Premier Li Keqiang in Beijing. Emerging nations, particularly China, say they lack influence over the ADB, the World Bank and the IMF.  
Asian Development Bank President Takehiko Nakao, left, meets with Chinese Premier Li Keqiang in Beijing. Emerging nations, particularly China, say they lack influence over the ADB, the World Bank and the IMF. Photo: Associated Press
By Tom Wright
The wall Street Journal

China’s plans for a new development bank to fund infrastructure in Asia pose a challenge to Japan, which has been a major donor in the region and controls a decades-old institution with a similar remit.

Beijing’s efforts to muster international support for the Asian Infrastructure Investment Bank are gathering pace, with a handful of European nations signing up in the past few weeks despite U.S. opposition.

Many other Asian countries also are on board, but Japan is a notable exception. Its reticence, in part, shows its reluctance to cede influence to China over infrastructure development in the region.

Japan and the U.S. dominate the Asian Development Bank, a Philippines-headquartered multilateral lender that has been headed by a Tokyo appointee since its launch in the 1960s.

China’s push under President Xi Jinping to set up a new China-backed lender is a direct challenge to Japan’s current pre-eminence, said Curtis S. Chin, a former U.S. ambassador to the ADB. The two development banks “will be very much competitors,” Mr. Chin said.

Beijing’s move to set up the new lender comes after Japan has dragged its feet on allowing other countries to have a greater say at the ADB, he added.

Emerging nations, particularly China, complain they lack influence over the ADB, the World Bank and the International Monetary Fund, which are dominated by the U.S. and its allies.

The U.S. has a lock hold on major decisions at the World Bank and IMF. Japan lacks formal veto powers over the ADB, but together with the U.S. controls around a quarter of votes, many more than any other member. China’s voting share is about 6%.

Jin Liqun, a Chinese official picked by Beijing to set up the new bank, is a former vice president of the ADB.

On Tuesday, Japanese Finance Minister Taro Aso said he didn’t see competition between the two banks as a “zero sum” game. The region’s infrastructure needs—which the ADB estimates at $750 billion annually—are huge, he noted.

But Mr. Aso raised concerns over whether the China-backed lender will follow international best practices, including ensuring high standards of due diligence on projects. Japan will “maintain an extremely cautious stance” toward joining the bank, he said.

The U.S. has raised similar concerns to Japan. In recent weeks, though, the U.K., France, Germany and Italy have signed up.

A promise from Beijing to forgo veto power at the new institution was critical in getting these countries on board, say people involved in the negotiations. In Asia, Japan, South Korea and Australia are the major countries yet to join.

Outside of the ADB, both China and Japan have spent billions of dollars in bilateral aid and concessional financing in recent years to help poorer Asian nations build infrastructure. Such funding helps their companies, which increasingly are looking for cheaper production bases as costs rise in China.

In Vietnam, Japan has built a new airport terminal and a highway into the capital, Hanoi. Chinese state-owned companies have constructed a majority of Vietnam’s recent coal-fired power plants.

This week, Prime Minister Shinzo Abe of Japan committed to supplying ¥140 billion ($1.17 billion) in loans to build rail lines and power projects in Indonesia.

China’s moves to set up a development bank are viewed by some observers as an attempt to make its assistance program more transparent. But Japanese officials say they are concerned China might use the lender to carry out President Xi’s vision of tying Asian countries to China through a network of roads, rails and pipelines—rather than focusing on developing countries’ needs.

China and the ADB are playing down any sense of rivalry. The bank’s president, Takehiko Nakao, met Tuesday with Chinese Premier Li Keqiang in Beijing. Mr. Li said the Beijing-led bank will be complementary to existing institutions such as the ADB, according to the state-run Xinhua News Agency.

Chinese Finance Minister Lou Jiwei last week said there was an enormous need for infrastructure development in Asia and vowed the new Beijing-backed lender won’t usurp the role of existing organizations, Xinhua reported.

Mr. Nakao, in a statement, said the ADB would cooperate with the China-backed lender once it is “formally established, adhering to international best practices in procurement and environmental and social safeguard standards on its projects and programs.”

The ADB already is sharing expertise with officials looking to set up the bank, Mr. Nakao said.

ADB’s chief economist, Wei Shang-Jin, said ADB lending on infrastructure projects in 2014, including private participation, was $22 billion, much lower than the region’s needs.

—Yuka Hayashi and Tatsuo Ito contributed to this article.

Write to Tom Wright at

China’s growing support to lead multilateral lending bank worries US

March 22, 2015

IMF and Asian Development Bank tell Beijing conference they are happy to cooperate with Asian Infrastructure Investment Bank, but US urges caution


 China’s finance minister, Lou Jiwei (left) and Takehiko Nakao, president of the Asian Development Bank (right) at China Development Forum 2015 in Beijing.
China’s finance minister, Lou Jiwei (left) and Takehiko Nakao, president of the Asian Development Bank (right) at China Development Forum 2015 in Beijing. Photograph: Rolex Dela Pena/EPA

China has received critical support from the International Monetary Fund and Asian Development Bank for its goal of establishing a new Chinese-led multilateral lender, adding to a growing wave of endorsements that has worried the United States.

Leaders of the IMF and ADB, speaking at a conference in Beijing on Sunday, said they were in talks with or happy to cooperate with the Asian Infrastructure Investment Bank (AIIB), a $50bn (£33bn) lender to be majority funded by China that is seen by some as a rival to these established international financial institutions.

The United States, concerned about China’s growing diplomatic clout, has urged countries to think twice about signing up and questioned whether the AIIB will have sufficient standards of governance and environmental and social safeguards.

Twenty-seven countries have already signed up to participate in the AIIB, China’s finance minister, Lou Jiwei, told China National Radio on Saturday. It will provide project loans to developing countries and is slated to begin operations at the end of 2015.

The United States’ key strategic allies in the region, Australia, Japan and South Korea, are also considering joining the proposed Beijing-based bank.

Early opposition to the AIIB from western countries partially dissolved after Britain said this month it would join, with France, Germany and Italy swiftly following suit.

“China will follow the rules of the international community and will not bully other members but work together with them and try to reach consensus in all the decisions we make without brandishing the majority shareholder status,” he said.

In an editorial published on the same day, China’s official Xinhua news agency suggested that the US might be embarrassed that many of its allies had not heeded its warnings.

“For decision-makers in the United States, they really have to be reminded that if they do not jump on the bandwagon of change in time, they will soon be overrun by the bandwagon itself,” it said.

The IMF’s managing director, Christine Lagarde, said on Sunday that the fund would be delighted to cooperate with the AIIB.

China’s Lou and ADB president, Takehiko Nakao, said at the conference they had held discussions on possible cooperation, with the Chinese finance minister adding that topics discussed included safeguard standards.

Lou has previously said AIIB would complement rather than compete with other institutions such as the ADB, the Manila-based multilateral lender dominated by Japan and the United States.

The AIIB’s Jin said developing countries in Asia would receive the bulk of loans for infrastructure projects, which could be co-provided with commercial banks and pension funds.

Non-Asian countries would also only hold 25% of the AIIB’s shareholding, lower than their stakes at the founding of the ADB, he said.

Obama and Abe suffer strategic defeat over China-backed bank

March 22, 2015

Support for AIIB will enable Beijing to finance projects and assume a more prominent role in regional development

By Cary Huang
South China Morning Post

Obama and Abe suffer strategic defeat over China-backed bank

For months, US President Barack Obama’s administration has been pressuring its main allies in the region, including Australia, Japan and South Korea, no to join the China-led Asian Infrastructure Investment Bank (AIIB).

France, Germany and Italy announced on Tuesday they would join Britain in becoming members, while Australia was reported to be “on the brink” of making the move. South Korea was also weighing whether to remain with the US, while Japan said it was possible they would come on board.

China is putting up most of the US$50 billion (HK$388 billion) in initial funding for the bank, which will be headquartered in Beijing. The government hopes the AIIB will work closely with the Silk Road Fund announced at the end of last year by President Xi Jinping , with an initial US$40 billion in funding.

The AIIB will be a direct competitor to the Manila-based Asian Development Bank (ADB) and may even pose a threat to the post-war Bretton Woods order of monetary management, and its representative institutions, the International Monetary Fund (IMF) and World Bank. Closer to home, it will challenge an established Asian financial system long dominated by the US dollar.

Understandably, the collapse of US-led opposition sparked editorials and commentaries warmly welcoming European members – Britain in particular – while sneering at Washington.

“Britain has become the first major Western country to recognise China’s rise. Britain has embraced China’s rise with its joining of the AIIB,” said the overseas edition of People’s Daily, the Communist Party’s flagship newspaper.

China Daily said that by joining the bank, the four European friends of the United States would both contribute to and benefit from a more prosperous Asia-Pacific.

In another commentary, the newspaper said US pressure on its allies on the AIIB issue “has raised many questions over its true intentions”.

Xinhua rapped the US for its scepticism, writing in a commentary on Friday that Washington “exhibited nothing but a childish paranoia towards China”.

Indeed, the development is a major Chinese triumph, leaving the US and Japan isolated among major nations in opposing the Chinese-initiated bank.

The bank apparently reflects China’s long frustration with what it regards as the slow pace of reforms and governance that would give developing nations greater involvement in global institutions like the IMF, the World Bank and the ADB.

Chinese policymakers believed that the dollar’s unrivalled position as the world’s de facto reserve currency had become a policy tool that helped the US in many areas.

Beijing also believed that Washington’s opposition towards a Chinese-led bank was further proof of America’s intention to curtail China’s rise as the bank could allow Chinese capital to finance projects while giving it a greater role in development of the region commensurate with its growing economic and political clout.

Beijing regards the international financial institution as an instrument of “soft power”, as it sees the Word Bank tending to reflect US foreign policy imperatives. The IMF traditionally mixes US and European influence; the ADB is an American fiefdom shared with Japan. Now, China finally has an international institution that gives Chinese their own say.

IMF Welcomes Beijing’s Efforts to Boost Regional Investment

March 22, 2015

The Associated Press

BEIJING — International Monetary Fund chief Christine Lagarde says China’s economic slowdown is legitimate and Beijing can contribute to global prosperity.

Lagarde welcomed Beijing’s efforts to boost investment outside China, referring to the new Beijing-led Asian Infrastructure Investment Bank.

She was speaking Sunday at the opening of China Development Forum in Beijing.

China established the regional lending institution last year and put up most of its initial $50 billion in capital with the goal to finance construction of roads and other infrastructure.

At the forum, Chinese Vice Premier Zhang Gaoli said environmental protection and sustainably development will be Beijing’s priorities.

The forum is an annual gathering of academics, entrepreneurs and representatives of multilateral organizations.

U.S. Treasury Secretary: U.S. credibiilty at risk if IMF reforms not approved

March 17, 2015



US Treasury Secretary Jacob Lew noted that the reform delay was pushing emerging-market powers to create their own parallel multilateral financial institutions
WASHINGTON (AFP) – The credibility of the United States is at risk if Congress fails to approve International Monetary Fund quota and governance reforms, Treasury Secretary Jacob Lew warned Tuesday.”Critically, we are seeking Congressional approval of the IMF quota and governance reforms,” Lew told a hearing of the House of Representatives financial services committee, according to the prepared text.“Our international credibility and influence are being threatened.”For more than two years the US Congress has prevented the 2010 IMF reforms from taking effect.

The US is the only member country with veto power over major IMF decisions.

The reforms would give more weight to emerging-market powers, like China, and double the Fund’s permanent financial resources.

That impasse has raised the ire of China and other countries which would benefit from a power structure more representative of the current global economy.

“The proposed reforms will put the IMF’s finances on more stable footing over the long term, help modernize the IMF’s governance structure, and preserve America’s strong leadership role in shaping the institution,” Lew said.

“Our continued failure to approve the IMF quota and governance reforms is causing other countries, including some of our allies, to question our commitment to the IMF and other multilateral institutions that we worked to create and that advance important US and global economic and security interests.”

Lew noted that the reform delay was pushing emerging-market powers to create their own parallel multilateral financial institutions. The BRICS — Brazil, Russia, India, China and South Africa — announced their own development bank in 2014, and China recently led the launch of a separate institution, the Asian Infrastructure Investment Bank.

“The IMF reforms will help convince emerging economies to remain anchored in the multilateral system that the United States helped design and continues to lead,” Lew said.

The Obama administration’s proposed fiscal year 2016 budget includes the increase in the IMF financial commitment.


The Fragility of the Global Financial Order

March 5, 2015

Russia and China have been trying to develop their own alternative system. One day soon they may succeed.

ALTERNATE REALITY: A strong dollar keeps countries like Russia and China from undermining U.S. dominance. For now.  
ALTERNATE REALITY: A strong dollar keeps countries like Russia and China from undermining U.S. dominance. For now. Photo: AFP/Getty Images
By Mark Dubowitz and Jonathan Schanzer
The Wall Street Journal

The U.S. Treasury has, over the past decade, been at the forefront of waging economic warfare against rogue actors. President Barack Obama has used sanctions to combat Iran’s nuclear program, punish Russian aggression against Ukraine, squeeze the Assad regime in Syria and prevent the flow of funds to terror groups such as the Islamic State and al Qaeda.

U.S. financial-warfare capability reached its height in 2012 when Congress forced the Obama administration and European Union regulators to expel Iranian banks from the Swift system, the primary messaging mode by which financial institutions move funds electronically. As a result, Tehran lost its most important global-banking entry point to finance its overseas trade, impelling the mullahs to negotiate with the West over its illicit nuclear program.

Watching from the sidelines, however, Washington’s adversaries have been developing economic weapons of their own. In 2010 China banned exports of rare-earth minerals critical to Japan’s electronic industry, and Beijing has frequently used economic and diplomatic pressure to challenge the international recognition of Taiwan. Soon China may complement its naval maneuvers in the South China Sea with economic coercion to pressure Vietnam, the Philippines and other Asian nations over ownership of the massive oil and gas reserves in the disputed waters.

As former U.S. Treasury Secretary Henry Paulson describes in his book, “On the Brink,” the Kremlin amid the Great Recession tried to persuade China to dump their massive holdings in Fannie Mae and Freddie Mac . This would have forced an intervention by the U.S. government to save the two institutions and dramatically exacerbated the already-serious economic crisis. The two powers ultimately balked, likely over fears that they had just as much to lose if they were to dump their investments.

In short, America and its allies are vulnerable, and while mutual economic dependence may have made the West’s adversaries cautious, this could change if countries such as China, Russia and Brazil decide to challenge U.S. global economic dominance.

For now, U.S. dominance means that it sets the rules and penalties in the financial sector. That dominance and coercion hinges on the strength of the U.S. dollar. As long as global finance is structured as it is—with the dollar as the currency of choice and U.S. Treasurys seen as the safest investment even during a financial crisis—Washington will continue to enjoy a strong advantage. Thankfully, 87% of international trade is still conducted in dollars and 61% of global foreign-exchange reserves is denominated in dollars.

But this won’t last forever. A number of countries and institutions are already looking at nondollar options. As global-finance expert James Rickards describes in his book “The Death of Money,” the International Monetary Fund is working to establish an alternative global-reserve asset, known as Special Drawing Rights, linked to a basket of currencies that would reduce the weight of the greenback and increase the weight of the yuan.

Other attempts are underway to circumvent the dollar-dominated system, primarily to evade U.S. penalties. One popular workaround is China’s UnionPay, an interbank credit-card association like Link or Interac that also issues credit cards. UnionPay accounts for 45% of all credit and debit cards in circulation and is now accepted in 135 countries. It can also be delinked from New York, providing an alternative for countries like Russia to skirt U.S. sanctions.

Meanwhile, Russian officials, with Chinese cooperation, are creating an alternative to Swift, according to Andrei Kostin, head of Russia’s state-owned VTB Bank and a close adviser to Vladimir Putin . With the Ukraine crisis escalating, the Kremlin knows that more U.S. sanctions are coming. U.S. legislators and British officials have even contemplated expelling Russian banks from Swift—a move Mr. Kostin has warned would be tantamount to a declaration of war. This system lacks the credibility of Swift, and therefore lacks customers—for now. But the combination of an alternative global-reserve asset, a Chinese global credit card, an alternative Swift system backed by Russia and China, and a number of banks willing to defy the global financial order, could represent a significant challenge to U.S. interests.

U.S. allies will also feel the pain. In 2014, pro-Palestinian organizations petitioned Swift to disconnect Israeli financial institutions from its financial-messaging system. Swift rejected the pressure, explaining that it wouldn’t take action without direction from EU regulators. Swift, however, would presumably comply, as it did in the case of Iran, if Brussels gave the order.

The U.S. and its allies must prepare for a growing and dangerous era. It will be marked by cyberwarfare, by abuses of the international legal system to disrupt national security, and by attempts to undermine the integrity of the U.S.-backed global system. Led by Washington’s sanctions architects, who have turned financial power into a significant instrument of offensive coercion, the West must now turn our punitive system into one that also provides a shield of defense.

Mr. Dubowitz is executive director of the Foundation for Defense of Democracies and its Center on Sanctions and Illicit Finance, where Mr. Schanzer, a former Treasury terrorism analyst, is vice president of research.

Greece hopes for solution, still opposed to bailout

February 20, 2015

ATHENS Fri Feb 20, 2015 1:40am EST

Greek Prime Minister Alexis Tsipras (R) and Finance Minister Yanis Varoufakis talk during the first round of a presidential vote at the Greek parliament in Athens February 18, 2015. Credit: Reuters/Alkis Konstantinidis

(Reuters) – Greece has made every effort to reach a mutually beneficial agreement with its euro zone partners but will not be pushed to implement its old bailout program, its government spokesman said on Friday.

“The Greek government has done all it should at every level in an effort to find a mutually beneficial solution,” government spokesman Gabriel Sakellaridis told Mega TV.

On Thursday, Germany rejected a Greek proposal for a six-month extension to its euro zone loan agreement, saying it was “not a substantial solution” because it did not commit Athens to stick to the conditions of its international bailout.

“We are not discussing the continuation of the (bailout) program,” Sakellaridis said. “The Greek government will maintain this stance today, although conditions have matured for a solution to be found at last.”

(Reporting by George Georgiopoulos, Editing by Angeliki Koutantou)


‘There is no macro-economic argument for further fiscal tightening. The only reason for doing so is on punitive grounds,’ says Greece’s YanisVaroufakis

Euro and Greek flags in Athens

Failure to agree a deal could set off a chain-reaction in Greece as capital flight accelerates, leading ineluctably to a sovereign default and ejection from the euro Photo: Alamy

The Daily Telegraph

Greece has vowed to reject any demands for further austerity at a last-ditch meeting with eurozone creditors on Friday, even though the country risks running out of money by next week without a deal.

Yanis Varoufakis, the Greek finance minister, said there can be no agreement if the EMU creditor powers continue to insist that Greece sticks to the terms of its EU-IMF Troika bail-out and increase its primary budget surplus from 1.5pc to 4.5pc of GDP by next year.

“We have bent over backwards to reach an accord. We are perfectly prepared to refrain from any moves that would jeopardize financial stability or Greek competitiveness. But what we cannot accept is that the fiscal adjustment, agreed by the last government, be carried through just because the rules say so,” he told The Telegraph.

The defiant stand by the Leftist Syriza government raises the risk of an irreversible showdown when finance ministers from the Eurogroup converge on Brussels on Friday for yet another emergency meeting.

While there is mounting irritation in EU circles over Germany’s refusal to give ground, and signs of a Franco-German rift are emerging, the Greeks are on thin ice. Failure to agree a deal could set off a chain-reaction as capital flight accelerates, leading ineluctably to a sovereign default and ejection from the euro.

“We have already done more fiscal tightening than has ever been done by any country in peace-time, and Greece is still in depression with declining nominal GDP. There is no macro-economic argument that can be made for further tightening,” said Mr Varoufakis.

“The only reason for doing so is out of ideology or on punitive grounds. All we are seeking is a way to end the debt-deflation cycle and restore the credit circuits of the Greek economy,” he said.

Mr Varoufakis sent a fresh proposal on Thursday to Jeroen Dijsselbloem, the Eurogroup’s chief, stating that Syriza is willing to “honour Greece’s financial obligations to all its creditors” and desist from any “unilateral actions” in exchange for bridging finance and a six-month interim arrangement. The Greek offer included the crucial proviso that Syriza will limit austerity to “appropriate primary fiscal surpluses .. that take into account the present economic situation”.

EU officials said the text was prepared in conjunction with Mr Dijsselbloem on Wednesday night. He drafted eight bullet points that would be “palatable” to the Eurogroup. These were accepted by the Greeks.

The plan had the enthusiastic support of the Jean-Claude Juncker, the European Commission’s chief. French president François Hollande also backed the compromise, going so far as to telephone Greek premier Alexis Tsipras on Thursday morning to congratulate him on the breakthrough.

Diplomats thought there was a “done deal”. The German finance ministry then issued a statement rejecting the text out of hand, causing consternation. “The letter from Athens offers no substantial solution. It focuses on bridge financing without meeting the conditions of the programme,” it said. Berlin later described the Greek demarche as a “Trojan Horse”.

It is far from clear whether German finance minister Wolfgang Schäuble has majority backing for a position that could lead to the break-up of monetary union by the end of the month – with unknown risks of financial and political contagion – or whether he has overplayed his hand. There is a loose parallel with developments at the European Central Bank, where a noisy German-led bloc was outmanoeuvred by a Franco-Italian alliance on quantitative easing.

Greece has quietly kicked the issue of debt relief into touch, and agreed to work with the various components of the Troika so long as the term is not used. It has yielded so much ground that there was uproar within the Syriza party in Athens on Wednesday night. A mutiny was narrowly quelled.

“Syriza have made a lot of mistakes and there isn’t much sympathy for them in the Eurogroup,” said Simon Tilford, at the Centre for European Reform. “But at the same time frustration is increasing at the intransigence of the Germans. Not every country is relaxed at the prospect of Greece being ejected from the euro. That would be the start of the real political crisis in Europe, not the end of it.”

The EMU-wide politics are complex. Madrid is insisting on an extremely tough line with Greece because it fears that any concessions to Syriza would be further grist to the mill of Spain’s Leftist Podemos party, which is pulling far head in the polls. Slovakia and the Baltic states are broadly aligned with Germany.

Officials at the International Monetary Fund and the Commission admit privately that the Troika’s fiscal targets have been overtaken by events and no longer make any sense. The Eurogroup nevertheless reiterated its demand for strict compliance with the old demands last Monday.

Greece is now prostrate. Tax arrears have reached €76bn and are rising by €1.1bn a month. “Greece is totally bankrupt. The ECB’s constant talk against us is causing a self-fulfilling deposit flight in the banks. It is so bad that anything could happen,” said one Greek official.

Germany appears to be working from the assumption that Syriza has no legitimate case and should abandon its election pledges, despite having won a landslide election victory with a mandate for radical change. Critics say this fails to acknowledge that the tectonic plates are shifting across Europe as electorates lose patience with austerity policies that have led to a longer slump than the 1930s.

Jacob Lew, the US Treasury Secretary, called Mr Varoufakis this week to urge a compromise and avert a potential disaster for the Greek people, but he has also called on the creditor powers to be more flexible. Washington has warned that Europe faces a “lost decade” if it persists with contractionary policies, a view shared by Britain, China and Japan.

Syriza’s leaders say Greece has gone as far as it possibly can to assuage creditors but has reached its limits. They await the verdict in Brussels with weary fatalism. “Whatever happens we are not going to accept humiliation or become a debt colony of the Eurogroup. We will uphold our sovereignty,” said one official.

Germany Rejects Greek Request for Bailout Extension

February 19, 2015

Greece, eurozone creditors poised for another round of tough negotiations

Greek Prime Minister Alexis Tsipras, right, and Finance Minister Yanis Varoufakis attend a presidential vote in Athens on Wednesday.  
Greek Prime Minister Alexis Tsipras, right, and Finance Minister Yanis Varoufakis attend a presidential vote in Athens on Wednesday. Photo: Associated Press
By Matthew Dalton and Alkman Granitsas
The Wall Street Journal

Greece and its eurozone creditors are poised for another round of tough negotiations over extending the government’s bailout program, after Germany summarily rejected a request for an extension sent by Athens on Thursday morning.

“The letter from Athens doesn’t offer a substantial proposal for a solution. In reality, it aims for a bridging loan without meeting the terms of the [bailout] program,” Martin Jaeger, spokesman for Finance Minister Wolfgang Schäuble, said in a statement a few hours after receiving the request.

Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of the eurozone ministers, said they would meet on Friday afternoon in Brussels to discuss the situation, days after talks with Greek Finance Minister Yanis Varoufakis collapsed in acrimony. Officials had been hoping to deal with the extension request via a teleconference meeting, so the fact that they will meet in person is another sign that differences between Greece and its creditors remain significant.

Senior eurozone officials will first meet this afternoon to discuss the request before the finance ministers gather on Friday.

Greece has little more than a week before its €240 billion ($273 billion) bailout expires at the end of February, leaving the government without financing and its banks at risk of being completely cut off from the lending facilities of the European Central Bank. A move to cut off Greek banks could well force Greece to leave the eurozone.

Eurozone governments are seeking more clarity from Greece about its budget plans, particularly for this year, officials say. Greece’s letter only pledges to agree on measures that would “attain appropriate primary fiscal surpluses, guarantee debt stability and assist in the attainment of fiscal targets for 2015 that take into account the present economic situation.”

“It’s understandable,” said one eurozone official, “since their tax receipts are melting like snow before hot fire.”

The governments also want more detail on Greece’s pledge to keep in place “structural reforms”—such as cuts to its pension system—that are required under the current bailout. The new left-wing government of Prime Minister Alexis Tsipras was swept to victory in last month’s elections on pledges to scrap many of these measures.

A eurozone official said the letter sent by Athens on Thursday was too vague on crucial points and didn’t fulfill the conditions set by the ministers at their previous meeting on Monday.

The letter is missing a clear commitment from Greece to work with the European Commission, International Monetary Fund and ECB as the program’s supervisors and enforcers, the person said.

Likewise, Greece’s pledge to honor its debts appeared ambiguous and open to interpretation.

Nevertheless, European Commission President Jean-Claude Juncker sees the extension request as a positive sign that could help pave the way for a compromise between Greece and its eurozone partners, a spokesman for the commission said.

The letter is “a positive sign, which in [Jean-Claude Juncker’s] assessment could pave the way for a reasonable compromise in the interest of stability in the euro area as a whole,” said Margaritis Schinas, the spokesman.

The request comes after two weeks of stormy negotiations between Greece and its eurozone partners over the broad terms of a new financing deal for the country.

In consultation with European officials overseeing the bailout, the Greek government has been drafting the details of its request over the past several days, but insists that it won’t abide by the same reform and austerity measures under the current deal.

Voted into office in late January, Greece’s new Syriza-led coalition government has consistently rejected the austerity measures that it says have pushed Greece deep into recession. But with the government facing a cash crunch in the weeks ahead, the government wants to negotiate a new short-term deal to secure financing that would give it time to negotiate a new, long-term rescue deal to cover the following four years.

So far Greece says that it only wants a new loan agreement, but has been vague on what sort of budget and reform measures it would take in exchange for further funding.

Write to Matthew Dalton at and Alkman Granitsas at

India’s Economic Growth Surpasses China’s

February 15, 2015

India’s growth rate is suddenly rivaling, even outpacing, China’s. Can it sustain the momentum?


The progress of Asia’s two giants, China and India, can be neatly encapsulated by the imagery used to portray them. China is usually characterized as a dragon, aggressive and slightly frightening. India, on the other hand, is often described as an elephant—big and powerful, but also lumbering and slightly ungainly.

Unfortunately for India, the caricatures are all too accurate. For the past three decades, China has reigned as the world’s premier emerging economy; India always plodded behind, stumbling in China’s formidable wake. As China raced with fiery purpose from a poor, isolated nation into the world’s second-largest economy, India’s boundless potential remained mostly untapped, its people mired in poverty and its footprint on the global stage barely perceptible.

Mention China to an international executive and watch him salivate over 1.3 billion increasingly wealthy consumers. Mention India and listen to complaints about a bureaucracy that tramples free enterprise. That’s why foreign investors plowed $124 billion into China in 2013, according to the United Nations Conference on Trade and Development, but only $28 billion into India.

President Barack Obama and Indian Prime Minister Narendra Modi (R) arrive for a photo opportunity ahead of their meeting at Hyderabad House in New Delhi, Jan. 25, 2015. REUTERS/Adnan Abidi

All that’s about to change. The Indian elephant is set to outpace the Chinese dragon to become the world’s fastest-growing major emerging economy. According to official data released on Feb. 9, India’s gross domestic product in the last two quarters of 2014 surged 8.2 percent and 7.5 percent, topping China’s performance. For the current fiscal year, India’s government expects GDP to grow 7.4 percent, a hefty jump from 6.9 percent the previous year. “The stars do seem to be aligning in India’s favor,” says Cornell University economist Eswar Prasad. “Among the large emerging-market economies, India stands out.”

Granted, these eye-popping growth rates are the product of a controversial and confusing revision by India’s statisticians of how they calculate GDP. But even before this, some economists had been predicting that India would start to grow more quickly than China over the next two years. That’s because dramatic changes are afoot in both countries.

China’s era of supercharged expansion looks to be coming to an end. In 2014 the economy sank to its slowest growth in almost a quarter century, and many economists anticipate its pace will decline even further. The International Monetary Fund expects growth to fall from 7.4 percent in 2014 to 6.3 percent in 2016. To return to health, Beijing’s policymakers are trying to engineer a critical rebalancing from investment-led to consumption-driven growth—a tricky transition that’s proving much harder than it sounds.

India, on the other hand, is still sitting on the launchpad, waiting for true economic liftoff. Even after two decades of solid if not spectacular growth, it’s at an early stage of development compared with China. India’s GDP is a fifth of China’s. Nearly one out of four Indians remains trapped in absolute poverty, according to the World Bank, compared with only 6 percent of Chinese. Corporate India has scored a few impressive successes—most notably in IT services—but hasn’t left as deep a mark on the global economy as Chinese industry.

That gap is, to a great degree, a creation of politics. After China cracked open its Soviet-style economy to private enterprise and foreign investment in the early 1980s, India began liberalizing its state-dominated economy in 1991 by dismantling what was called the License Raj, an impenetrable web of regulations that allowed the government to control business. But the reforms didn’t go far enough. Many of India’s squabbling politicians continued to distrust the free market and foreign companies and held up reform in interminable debates and protests.

That set the two economies on very different courses. In China, factories and skyscrapers rose with authoritarian efficiency; in India, major investment projects were stalled by the bureaucracy. While China became the Workshop of the World, India missed out on the mass manufacturing that generates jobs and exports. As reform in India faltered earlier this decade, growth slumped, and confidence in the economy deteriorated. India’s policymakers, meanwhile, were often too politically paralyzed to repair the problems.

Now, however, a fresh, can-do spirit has captivated New Delhi. In May voters kicked out the ineffective Indian National Congress-led coalition and ushered the Bharatiya Janata Party into power in an overwhelming landslide. Prime Minister Narendra Modi has restarted India’s free-market reform program with the aim of spurring a China-like investment surge. In September he launched a “Make in India” campaign, with a roaring lion as its logo, intending to turn the country into a manufacturing powerhouse to rival China. To get there he loosened convoluted land acquisition laws that held back big projects and streamlined the cumbersome process of obtaining government approvals. He increased the limit on foreign ownership in the insurance sector and other industries. India under Modi “has already seen a move towards kick-starting the investment cycle, and we think reforms to boost investments can continue,” economists at Goldman Sachs wrote optimistically in a recent report.

India is also catching on to long-term trends that helped boost growth in China. Its Internet and computer usage is low compared with much of the rest of Asia, but new technologies are penetrating deeper and deeper into Indian society, which will provide a much-needed jolt to productivity. Goldman expects the number of Indian Netizens to rise almost two-thirds by 2018, to 410 million. India also possesses a demographic edge over China. Thanks to China’s one-child policy, its labor force is shrinking, which should drag down growth. India’s working-age population is expanding rapidly, which will give the economy a lift.

Modi’s reforms, combined with the new GDP revisions, could push growth to China-like rates. In a preliminary estimate, HSBC figures India’s growth in the next fiscal year could reach around 8 percent. Still, if India wants to sustain such superhigh growth, as China had for decades, much more has to be done. “Ultimately the question is if the reforms will be far-reaching enough,” says Cornell’s Prasad. “That is far from certain.”

Modi has barely gotten a start on some critical but politically sensitive reforms—most of all, overhauling archaic labor laws that discourage job creation and worker training and scare off manufacturers. To implement such controversial changes, he’ll have to overcome persistent resistance from unions, civil servants, and recalcitrant politicians. Although Modi and his allies command a majority in Parliament’s lower house, the upper chamber is still controlled by the opposition, which has foot-dragged on passing his reform measures. Modi’s BJP also lost local elections in Delhi to a small, anti-corruption party, a reminder that his political position is far from unassailable. And there’s always the risk that the Hindu nationalists, who form the backbone of the BJP, could stir up trouble. If Modi’s reforms stumble, so could India’s prospects.

Even with a sustained reform effort, India’s growth spurt may not match China’s past performance. With its more decentralized governing system and contentious political culture, India might not be equipped to marshal men and material in a China-like quest for industrial prowess. It’s also so far behind China that it could take decades of high growth to truly catch up. Research firm Oxford Economics projects that India’s per capita income will still be lower in 2030 than China’s is today. That means India’s rise may not have the globe-rattling impact of China’s. “India may grow faster than China, but that’s not to say that it will pack the same punch,” notes Frederic Neumann, co-head of Asian economics research at HSBC.

That’s not necessarily all bad. Perhaps India can develop in a more sustainable and balanced way than China, without the excessive waste and environment degradation that breakneck expansion spawned. At a time when China is slowing, Europe and Japan are flatlining, and other major emerging economies such as Russia and Brazil are struggling, the global economy needs a strengthening India to act as a reliable pillar of growth. We should all hope that the Indian elephant finally starts to charge.


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