The Great Debate UK

from Breakingviews:

RBS shows watchdogs need power to stop M&A

By Peter Thal Larsen The author is a Retuers Breakingviews columnist. The opinions expressed are his own.

The failure of Royal Bank of Scotland shows bank reform still has some way to go.

The report should dispel any doubts that new Basel III rules make banks safer. Using this measurement of capital, RBS's equity Tier 1 capital ratio at the end of 2007 was around 2 percent -- well below the 7 percent now considered to be an acceptable minimum. Under the new regime, RBS would have been prevented from paying a dividend at any time from 2005 onwards. Its heavy dependence on short-term funding would also now be deemed unacceptable.

However, RBS's collapse was also a failure of supervision. The FSA describes in painful detail how its team of supervisors -- which comprised just six people, compared to 23 today -- did little to challenge the bank's assessment of the risks it faced. That approach reflected the reigning theory of efficient markets and political pressure to maintain a "light-touch" regulatory regime. Both those factors no longer apply. Moreover, UK bank supervision is being transferred to the Bank of England.

What of RBS's management? The public desire for someone to be held accountable won't be appeased by the FSA's decision not to bring charges against executives or board members. Adair Turner, the watchdog's chairman, has called for a debate about how to hold bank directors accountable in future. But the public humiliation suffered by former RBS executives -- particularly Chief Executive Fred Goodwin -- should deter similar gambles for the foreseeable future. Besides, increasing the penalties for bank failure seems at odds with the regulatory drive to make it possible for even big banks to fail without triggering an economic catastrophe.

But when it comes to big bank takeovers, there is a case for further reform. RBS's decision to lead a hostile break-up bid for ABN AMRO in the summer of 2007 was not the only factor behind its collapse, but it made a precarious situation even more fragile, and it was done on the basis of minimal due diligence: according to the FSA, the information made available by ABN AMRO amounted to "two lever arch folders and a CD".

from Lawrence Summers:

It’s time for the IMF to step up in Europe

By Lawrence Summers The opinions expressed are his own.

European leaders will meet today for yet another “historic” summit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last convened to deal with the financial crisis.

If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge.

Given that Europe is the largest single component of the global economy, the rest of the world has a stake in helping to avoid major financial accidents. It also has a stake in aiding continued growth in Europe and ensuring that the European financial system supports investment around the world – particularly as cross-border European bank lending dwarfs that of banks from any other region.

Now is also a historic juncture for the International Monetary Fund. The focus of the policy response to the crisis must now shift from Brussels and Frankfurt to the IMF’s boardroom.

From the problems of the UK and Italy in the 1970s, through the Latin American debt crisis of the 1980s, the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about the precise policy choices the fund has made in the past. But, the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of borrowed funds, but also for those whose success is systemically important for the global economy.

Christine Lagarde, the head of the IMF, highlighted the seriousness of problems in Europe to members of the international financial community assembled in Jackson Hole in August. She pointed to capital shortfalls in the European banking system and the need for adjustment to be carried on in ways that were consistent with continuing growth. Now, the IMF needs to speak and act on several fronts.

from The Great Debate:

Is Burma the next Mexico?

By Federico Varese The opinions expressed are his own.

Hillary Clinton had many "hard issues" to tackle during her recent visit to Myanmar. Yet there was no mention of one of the most, if not the most, difficult issue Burma faces: their lucrative drug trade.

Northern Burma is the home of the “Golden Triangle,” a hub for opium production and the location of hundreds of heroin and amphetamine refineries. So how do political leaders and the international community plan to tackle this problem in the event that Burma truly becomes  a democratic country?

The totalitarian regime which has ruled Burma since 1962 has been, to a point, successful in keeping the production of illicit substances under control. In 1999, Burma's notorious military junta (which is now dissolved) started a ruthless elimination plan of opium in the Golden Triangle (the Shan State, the Wa Region and the Kachin State). The region produced one-third of the world's opium in 1998, but that figure was down to about 5% nine years later. From 2006 to 2007, the army eradicated 8,895 acres of opium fields. A 2007 United Nations Report trumpeted that “a decade-long process of drug control is clearly paying off.”

The actual story is a little more complicated. The regime did manage to reduce opium production, but this policy led to an increase in the production of amphetamines, methamphetamine in particular. The U.N. estimated that at least 700 million tablets were shipped from Burma to Thailand in 2003 alone, which is about 20 tons of methamphetamine, or 7.5% of what is manufactured globally.

Most recently, opium production in Burma is on the rise again, pushed by an ever-increasing demand for heroin in China, as documented by an eye-opening report compiled by the Transnational Institute, an NGO based in Amsterdam.

In order to see these developments for myself, I spent time this past summer in Muse, a town in the northeast section of Myanmar, and Ruili, right across the border in the Chinese province of Yunnan. “What you’ll see in Ruili you won’t be able to observe in any other part of China,” the taxi driver told me, surprised to find a foreigner around these parts. The place is reminiscent of a Mediterranean country, a relaxed atmosphere reigning supreme, where it’s hard to come by taxis and open shops in the mornings.

from The Great Debate:

The abyss and our last chance

By Carlo De Benedetti The opinions expressed are his own.

In a magnificent book published a few years ago Cormac McCarthy imagines a man and a child, father and son, pushing a shopping cart containing what little they have left, along a back road somewhere in America. Ten years earlier the world was destroyed by a nameless catastrophe that turned it into a dark, cold place without life.

There is no history and there is no future. But there is an objective: to head south toward the sea. Mythical places, only vaguely perceived, where there might be salvation. The father is getting older and is ever more weary. But he has the child with him. And he has his objective. He wants to take him southward to the sea. Toward a future that may still be possible.

Today, is the western economy, in particular the Italian economy, that world destroyed by an Apocalypse? Are we pushing that cart, containing the few things we have left, toward a mythical sea of which we know nothing, or even what it is like or where it is?

Re-reading the book I was tempted to think this. To think that those pages, written in 2006, were in some way a prophesy of what we are living through today. Never before has an entire productive system, our own, been so fundamentally questioned.

I have been convinced for some time now that the huge financial crisis of the last few years is the litmus test of a deeper crisis to do with the universal economic order that has lasted through the centuries, with a shift of the balance of world wealth toward new countries.

We need to rethink the next steps to tackling climate change

By Lord Julian Hunt. The opinions expressed are his own.

The main aim of the UN climate summit at Durban, which began on November 28 and runs until December 9, is to produce an agreement about targets for emissions by developed countries, and longer term targets from developing countries.  But with sudden switches in energy policies, environmental regulations and accidents such as Fukushima, plus increasing financial fragility, national governments, especially here in Europe, are increasingly aware how policy in these areas impacts on everyone’s lives as well as the economy.

Decision-makers thus have a great responsibility and a very difficult task to pursue long term objectives at the same time, especially about climate change.  The key question is how best to do this, and should this involve only regional, national and city-level policies, or are binding global agreements also necessary?

Especially here in Europe, governments have become more cautious about signing up to new long lasting and tightly defined transnational agreements that might affect their flexibility to respond to changing circumstances.  Moreover, a global deal on climate change may be less effective than regional, national and city level initiatives because global treaties are sometimes perceived as insensitive to the different technologies and time scales for emission reduction in varying countries.

No government yet endorses the extreme position of some economists that future economic growth will lead to the panacea of limitless technological solutions in the future. However, governments with rapidly growing populations and developing technology, such as many of those in Asia and Africa, will need longer to get to grips with their emissions than those with falling populations and advanced technology such as here in Europe.  The influential Stern report on the economics of climate change does not take this into account.

So should Durban concentrate on what may ultimately prove to be unproductive negotiations on a comprehensive, global agreement? Or would it be wiser to find a more collaborative way to respond to climate change?

Underlying the current stalemate between developed countries such as Canada, Russia and Japan and key developing countries like China and India on a global climate deal is a sup-optimal negotiations process. As proved the case in Copenhagen, hugely ambitious political deals are being discussed which are neither ripe for agreement now, nor framed to inspire people to act and collaborate on both a local and regional level.

The euro is on life support, and the on-off switch is in Frankfurt

By Laurence Copeland. The opinions expressed are his own.

The short term solution to the problem of how to manage the euro zone crisis may now be right there in front of us. The central issue, as far as Germany is concerned at least, is how to reconcile bailing out the other member countries with keeping up the pressure on them to put their fiscal house in order. Quietly, without any official recognition of the fact, the ECB has taken charge of the situation and is now effectively running fiscal policy for most of the euro zone by simply buying enough Greek, Italian, Spanish and maybe French bonds to keep yields from going too high, but not buying so many as to reduce yields to anything like comfortable levels.

Moreover, treasury officials in every country will be only too well aware that what the ECB giveth, the ECB can take away. Any relaxation in austerity regimes can always be countered by an end to ECB purchases or even by ECB sales in the secondary market, driving yields back up in the space of a few minutes to 7%, 8% and beyond. In short, most of the euro zone members are now  on a life support machine, and the on-off switch is in Frankfurt.

As a temporary situation, this suits everyone. Politically, it is far more acceptable both for Germany and its clients to conceal the fact that power in Europe is now shared only between Berlin and Frankfurt. Moreover, it conceals from the German electorate that the dreaded Transfer Union is already up and running, because they are in fact subsidising their neighbours via the ECB. With transparent subsidies ruled out – the European Financial Stability Fund has failed to get off the ground and Frau Merkel is unwilling to contemplate a Eurobond – the transfers are being made in the most opaque way possible.

Notice also that the current state of affairs is entirely consistent with developments in Greece and Italy, insofar as it means that technocrats are now running the euro zone too. For Europe, it is the culmination of the trend to unaccountable government that stretches all the way back to the Treaty of Rome in 1958.

Convenient as the current ad hoc arrangement may be, however, I suspect it will not hold up for long, though it will probably get us through to the New Year and beyond. Holding a gun to someone’s head only works if you are really willing to pull the trigger. If, or more likely when, one of the ECB’s clients calls its bluff by refusing or simply being unable to implement additional austerity measures for fear of bloodshed in the streets, a decision will have to be taken in Frankfurt and Berlin. Either stop buying bonds and run the risk of being seen to precipitate a collapse in both the economy and possibly in law and order too, or alternatively surrender to moral hazard, abandon any hope of controlling the money stock and accept inflation as the inevitable long run consequence.

Germans who believe, with their Chancellor, that fiscal integration is the ultimate answer might like to ponder the question: how would it differ from the current scenario? Would it involve some kind of rules to set limits on each country’s fiscal policy? If so, they should explain how those rules could be made any more effective than those in the Maastricht Treaty, which even Germany itself flouted. Some in Germany are said to favour fines for overspending countries, which demonstrates that there is in fact such a thing as a Teutonic sense of humour. (Imagine imposing a fine on Greece today. How do you levy a fine on any country, let alone one which is already bankrupt and which you yourself have to bail out? Presumably, Germany would have to pay Greece’s fines too?)

Rating agencies as powerful as ever

By Kathleen Brooks. The opinions expressed are her own.

Some people assumed that after the debacle over the 2008 mortgage-backed security crisis in the U.S., the credit rating agencies would be discredited. However, here we are three years later and the focus is still on the same rating agencies, waiting with bated breath to see whether they move the ratings of some of the world’s most important economies.

Within the last six months rating agencies have played a big part in shaping the direction of financial markets. First, there was Standard & Poor’s downgrading of the U.S. at the start of August, which caused a wave of risk aversion and turmoil on financial markets. Europe has also been the focus of concern.

Italy has seen its credit rating slashed to the lowest A rating you can have, while new kid on the block rating agency Egan Jones has gone one step further and on Monday cut Italy’s rating to BB from BB+. Belgium has also been cut and rumours are spreading that France isn’t going to keep its coveted triple A status for much longer.

Far from drift into the background, the focus has been on the diminishing number of countries rated triple A in the western world and what this means for borrowing costs. France has also been under the rating agencies’ microscope. It is at risk of losing its triple A credit rating due to its high public sector debt level combined with a sizeable deficit, also Paris has been slow to take steps to try and bring public sector finances under control. A false statement that France had been downgraded by Standard & Poor’s in October caused French bond yields to surge and it also enraged the French government who threatened to take steps to ban the rating agencies from commenting on France again.

But in recent months there has been no smoke without fire and newspaper reports this week suggest that S&P is days away from stripping France of its top rating due to the slowdown in global growth and the impact this will have on French tax receipts. This couldn’t come at a worse time for Europe as France is integral to the European Financial Stability Facility (EFSF) – Europe’s rescue fund, which relies on France and Germany’s triple A status to keep its own top rating. Thus if France is stripped of its triple A this will have ripple effects on the EFSF fund and could make bailing out Europe’s troubled members more expensive, thus aggravating the debt crisis even more.

There were rumours that France was meant to be downgraded last week along with Belgium; however this was scrapped at the last minute. This has set the market rumour mill into over-drive with speculation building that the EU high command could have had something to do with the delay.

from Pakistan: Now or Never?:

Winning the battle, losing the war; the US and Pakistan

When former foreign minister Shah Mehmood Qureshi said this weekend that Pakistan's nuclear weapons are not safe under President Asif Ali Zardari, he almost certainly did not mean that the nuclear arsenal is not secure. The nuclear weapons have little to do with the civilian government; they are guarded ferociously by the Pakistan Army both against terrorist attacks and any foreign or U.S. attempt to seize them, and, as a matter of pride for Pakistanis chafing at any American suggestions otherwise,  safeguarded to international standards.

Rather it was a rhetorical device to attack the government at a rally where Qureshi announced he was joining the Pakistan Tehreek-e-Insaf (PTI) , the party of former cricket star Imran Khan, a rising force in Pakistani politics.  Qureshi's assertion tapped into growing anti-Americanism, and a populist view that the  civilian government led by the Pakistan People's Party, to which he once belonged, had somehow sold the country's honour - in this case symbolised by nuclear weapons - in return for American aid.  (Pakistan first agreed its uneasy alliance with the United States under former military ruler Pervez Musharraf.)

Yet it is a measure of how distorted and narrow political discourse has become within Pakistan that Qureshi might use the safety of nuclear weapons to attack the government. That political discourse, difficult even at the best of times, is likely to become even narrower in the fury which has followed the NATO airstrikes which killed 24 Pakistani soldiers on the border with Afghanistan on Saturday. 

The attack, which Pakistan says was unprovoked and NATO described as a "tragic, unintended incident", has outraged Pakistanis who have already endured thousands of casualties in a war they believe was forced on them by the United States.

Underneath the confusion about the aims and course of the Afghan war, lies a deep sense of hurt that Pakistani lives are somehow less valued than American lives, and a painful loss of pride over the country's inability to defend its territory from attacks by a foreign, and apparently hostile, power - whether from airstrikes, drones, or even the May raid by U.S. forces who killed Osama bin Laden.

The result is a society which is being shaped by the Afghan war in ways which neither Pakistan's neighbours, nor western powers, would choose.  The airstrikes, coming soon after the forced resignation of Pakistan's ambassador to Washington Husain Haqqani for allegedly seeking American help to curb the power of the military, have added fresh oxygen to a combustible mix of anti-Americanism and religious nationalism enveloping Pakistan.  Haqqani denies the allegation, but the so-called "Memogate" scandal has badly weakened the civilian government, while the airstrikes have rallied the country behind the army.

In such an environment, there is little room for a discourse that might suggest Pakistanis should also be outraged at the deaths of civilians blown up by suicide bombers sent by the Tehrik-e-Taliban Pakistan (TTP), and therefore discuss ways to turn decisively against Islamist militants. Nor is there space for a realistic political debate on how Pakistan should manage its foreign relations that goes beyond a hatred of America and an illusory faith in China's readiness to ride to the rescue. 

from FaithWorld:

World’s top Muslims list appears with Erdogan only #3. Who should be #1?

(King Abdullah of Saudi Arabia (R) and Turkey's Prime Minister Tayyip Erdogan (L) pose for pictures before a meeting in Ankara August 8, 2006. REUTERS/Umit Bektas)

An annual list of the world's 500 most influential Muslims has appeared and Turkish Prime Minister Tayyip Erdogan, the man who made Turkey's "Muslim democracy" a model for many Arab Spring protesters, did not win the top spot. Not #2 either. Erdogan came in at #3, a notch down from his 2010 ranking as number two.

The Muslim 500: The 500 Most Influential Muslims 2011, the third list in this series started in 2009 by the Royal Islamic Strategic Studies Centre in Amman, named Saudi Arabian King Abdullah as the #1 Muslim in the world and Morocco's King Mohammed VI as #2. It said the Arab Spring had had no impact on Abdullah's influence, had boosted Mohammed's and had no effect on Erdogan's. Fourth and fifth places in the list went to Jordan's King Abdullah and Iran's Supreme Leader Grand Ayatollah Sayyid Ali Khamenei.

The list is available here as a PDF download or a hard copy to order. Give us your view on the  “most influential Muslim of 2011” in the poll at the bottom of this post.

In this year of enormous change in the Arab world, I think Erdogan should have been #1. And it seems I'm not alone. In its 2011 Arab Public Opinion Poll published on Nov 21, the Brookings Institution in Washington wrote: "Turkey is the biggest winner of the Arab Spring. In the five countries polled, Turkey is seen to have played the 'most constructive' role in the Arab events. Its Prime Minister, Recep Erdogan, is the most admired among world leaders and those who envision a new President for Egypt want the new President to look most like Erdogan. Egyptians want their country to look more like Turkey than any of the other Muslim, Arab and other choices provided."

My choice for #2 was actually ranked sixth -- Emir of Qatar Hamad bin Khalifa Al Thani. The Muslim 500 spells out its reasons for saying his influence rose during the Arab Spring in a description so clear that should have merited him the second spot. It said the emir "has driven much of the Arab Spring through the coverage given by Al-Jazeera, the financial support given to protesters and political support to Libya. He is arguably the biggest enabler of the Arab Spring." The entry on him also notes that Qatar had jet fighters flying with NATO to enforce the no-fly zone over Libya and also won the 2022 soccer World Cup.

Give us a bit of Christmas cheer, George

John Evans is CEO of Incahoot.com. The opinions expressed are his own.

When Chancellor George Osborne presents the official economic and public finance forecasts in his autumn statement on November 29, he will effectively be telling us how we are doing as a country. Given the parlous state of some of the euro zone countries, many will be inclined to agree with Labour leader Ed Miliband’s claim that Osborne is about to “mark a crucial moment in the economic course of our country”.

So, aside from announcing tax, business and regulatory changes, what will the Chancellor be telling us? What will the fallout from “the biggest economic gamble in a generation” (Miliband again) mean for the man and woman in the street?

Following the recent announcements on housing, help for first-time buyers is likely to be one of the headline stories, with underwritten mortgages making it less risky for banks to lend money to people struggling to raise enough for the necessary deposit.

First-time buyers will welcome any moves to get them on the housing ladder, but the rest of us will be in a less joyous mood if the Chancellor confirms rumours that he will impose another rise in VAT.

The Financial Times in particular has warned a further VAT increase to 22.5% could be required in the near term if the Coalition Government is to meet its economic objectives in the face of a structural deficit up to 25% bigger than previously thought.

On balance, Osborne is likely to be hesitant about bumping up VAT another notch. The January 2011 VAT increase from 17.5% to 20% is widely believed to have contributed to the UK’s current problems with high inflation and low economic growth. The Chancellor may well take the view that another rise is more trouble than it’s worth.