No new recession, let tax cuts die: Geithner

July 26, 2010 By Leave a Comment

(Reuters) – The economy is not likely to slip back into recession but letting tax cuts for the wealthiest Americans expire is necessary to show commitment to cutting budget deficits, Treasury Secretary Timothy Geithner said on Sunday.

In appearances on several Sunday talk shows, Geithner said only 2 to 3 percent of Americans — those making $250,000 or more a year — will be affected when tax cuts enacted under former President George W. Bush end on schedule this year.

Republicans want to extend the tax cuts and Democrats are divided but Geithner said reductions for top earners should end.

“We think that’s the responsible thing to do because we need to make sure we can show the world that (we’re) willing as a country now to start to make some progress bringing down our long-term deficits,” he said on ABC’s “This Week” program.

Geithner played down fears that a slow-paced recovery might slide into a double-dip recession. He told NBC’s “Meet the Press” he did not expect that to happen, although recovery from the deep recession that followed the 2008-2009 financial crisis will be prolonged.

STRENGTHENING, BUT SLOWLY

“I think the most likely thing is you’ll see an economy that gradually strengthens over the next year or two, you’ll see job growth start to come back, investments expanding … but we’ve got a long way to go still,” Geithner said.

The Obama administration has said it wants to keep tax cuts in place for Americans earning less than $250,000 a year. Some Republicans say letting any of the tax cuts expire is effectively a tax hike that may hurt recovery.

Geithner disagreed, saying it was more important to aim tax cuts at lower-earning Americans and businesses.

“Just letting those tax cuts that only go to 2 percent to 3 percent of Americans, the highest-earning Americans in the country, expire I do not believe it will have a negative effect on growth,” he said on ABC.

Geithner said the Obama administration wants Congress to agree on measures to help small businesses, traditionally the main job-creating engine. He said there were signs “critical” private sector hiring was strengthening.

“We want to see it happen at a faster pace but I think most people understand that … this was a deep crisis,” he said. “It’s going to take time to repair that damage, take time to grow out of this.”

He said the overhaul of U.S. financial rules signed into law last week by President Barack Obama should bolster confidence in the economy by giving consumers new protections and the government more powers to restrain bank risk-taking.

Geithner said no reforms can ward off all future crises but can mitigate the harm. If the reforms that are now law, including powers to wind down troubled financial firms, had been in place before the crisis, the damage to jobs and fortunes would have been less, he said.

On NBC, Geithner said there is work ahead to repair the housing finance system that contributed to the crisis and led to putting mortgage finance giants Fannie Mae and Freddie Mac into government conservatorship.

HOUSING REFORM STILL AN ISSUE

“We have to bring to Fannie and Freddie, to the GSEs (government-sponsored enterprises) and to the broader housing finance market a better set of policies to make sure we can deliver affordable financing … without leaving the economy vulnerable to this kind of crisis,” he said.

Geithner said some type of government guarantee to make sure people have the ability to borrow to finance a house even may be necessary but said Fannie and Freddie will not be preserved in their current forms.

“We’re going to have to bring fundamental change to that market but I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so homeowners have the ability borrow … even in a very difficult recession,” he said.

Geithner said it was encouraging China recently ended a peg between its yuan currency and the dollar, which should help correct a trade relationship that enables China to rack up huge surpluses while the United States and others record soaring trade deficits.

“What matters to us and to all of China’s trading partners is that they let that currency appreciate,” he said. “What matters to us is how fast and how far they let it go.”

(Editing by John O’Callaghan)

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UPDATE 2-Geithner: No new U.S. recession, let tax cuts die

July 26, 2010 By Leave a Comment

WASHINGTON, July 25 (Reuters) – The U.S. economy is not likely to slip back into recession but letting tax cuts for the wealthiest Americans expire is necessary to show commitment to cutting budget deficits, Treasury Secretary Timothy Geithner said on Sunday.

In appearances on several Sunday talk shows, Geithner said only 2 to 3 percent of Americans — those making $250,000 or more a year — will be affected when tax cuts enacted under former President George W. Bush end on schedule this year.

Republicans want to extend the tax cuts and Democrats are divided but Geithner said reductions for top earners should end.

“We think that’s the responsible thing to do because we need to make sure we can show the world that (we’re) willing as a country now to start to make some progress bringing down our long-term deficits,” he said on ABC’s “This Week” program.

Geithner played down fears that a slow-paced recovery might slide into a double-dip recession. He told NBC’s “Meet the Press” he did not expect that to happen, although recovery from the deep recession that followed the 2008-2009 financial crisis will be prolonged.

STRENGTHENING, BUT SLOWLY

“I think the most likely thing is you’ll see an economy that gradually strengthens over the next year or two, you’ll see job growth start to come back, investments expanding … but we’ve got a long way to go still,” Geithner said.

The Obama administration has said it wants to keep tax cuts in place for Americans earning less than $250,000 a year. Some Republicans say letting any of the tax cuts expire is effectively a tax hike that may hurt recovery.

Geithner disagreed, saying it was more important to aim tax cuts at lower-earning Americans and businesses.

“Just letting those tax cuts that only go to 2 percent to 3 percent of Americans, the highest-earning Americans in the country, expire I do not believe it will have a negative effect on growth,” he said on ABC.

Geithner said the Obama administration wants Congress to agree on measures to help small businesses, traditionally the main job-creating engine. He said there were signs “critical” private sector hiring was strengthening.

“We want to see it happen at a faster pace but I think most people understand that … this was a deep crisis,” he said. “It’s going to take time to repair that damage, take time to grow out of this.”

He said the overhaul of U.S. financial rules signed into law last week by President Barack Obama should bolster confidence in the economy by giving consumers new protections and the government more powers to restrain bank risk-taking.

Geithner said no reforms can ward off all future crises but can mitigate the harm. If the reforms that are now law, including powers to wind down troubled financial firms, had been in place before the crisis, the damage to jobs and fortunes would have been less, he said.

On NBC, Geithner said there is work ahead to repair the housing finance system that contributed to the crisis and led to putting mortgage finance giants Fannie Mae and Freddie Mac into government conservatorship.

HOUSING REFORM STILL AN ISSUE

“We have to bring to Fannie and Freddie, to the GSEs (government-sponsored enterprises) and to the broader housing finance market a better set of policies to make sure we can deliver affordable financing … without leaving the economy vulnerable to this kind of crisis,” he said.

Geithner said some type of government guarantee to make sure people have the ability to borrow to finance a house even may be necessary but said Fannie and Freddie will not be preserved in their current forms.

“We’re going to have to bring fundamental change to that market but I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so homeowners have the ability borrow … even in a very difficult recession,” he said.

Geithner said it was encouraging China recently ended a peg between its yuan currency and the dollar, which should help correct a trade relationship that enables China to rack up huge surpluses while the United States and others record soaring trade deficits.

“What matters to us and to all of China’s trading partners is that they let that currency appreciate,” he said. “What matters to us is how fast and how far they let it go.” (Editing by John O’Callaghan)

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US’s Geithner says double-dip recession unlikely

July 26, 2010 By Leave a Comment

July 25 (Reuters) – U.S. Treasury Secretary Timothy Geithner said on Sunday the economy was recovering from a severe recession and he did not expect it to slip back into a downturn.

“The economy is starting to heal again,” he said in an interview on NBC’s “Meet the Press” program, adding in response to a question that he did not foresee a “double dip” recession.

“I think the most likely thing is you’ll see an economy that gradually strengthens over the next year or two, you’ll see job growth start to come back, investments expanding … but we’ve got a long way to go still,” Geithner said.

(Reporting by Glenn Somerville; Editing by Eric Beech)

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Geithner: US must show deficit-cutting commitment

July 26, 2010 By Leave a Comment

July 25 (Reuters) – Letting tax cuts for the wealthiest expire on schedule this year is necessary to highlight U.S. commitment to curb deficits and it won’t stall the recovery, Treasury Secretary Timothy Geithner said on Sunday.

On ABC’s “This Week” program, Geithner said only 2 to 3 percent of the wealthiest Americans — those earning more than $250,000 a year — will be affected when tax cuts passed by the former Bush administration expire at the end of this year.

“We think that’s the responsible thing to do because we need to make sure we can show the world that (we’re) willing as a country now to start to make some progress bringing down our long-term deficits,” he said.

(Reporting by Glenn Somerville; Editing by Eric Beech)

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Factbox: Congress late-night decisions on swaps reforms

June 29, 2010 By Leave a Comment

Here are some of the key agreements for swaps rules agreed to by a conference panel of Senate and House of Representatives members:

* Banks can trade foreign exchange and interest rate swaps in house, as well as gold and silver swaps, and derivatives deigned to hedge their own risk.

* Banks need to spin off desks to affiliates to handle agricultural, energy and metals swaps, equity swaps, and uncleared credit default swaps.

* Non-financial companies “using swaps to hedge or mitigate commercial risk” are exempt from clearing the trades, as long as they explain to regulators how they are meeting financial obligations.

* The financing arms of manufacturers like Ford Motor Co, Deere & Co, Caterpillar Inc and Boeing and other “end users” do not have to clear swaps when they assist in selling the parent company’s products.

* Clearinghouses will not be forced to accept credit risk from other clearinghouses — interpreted as a win for the CME Group, the world’s biggest operator of futures exchanges.

* Federal Reserve governors and the Treasury secretary would need to agree before a clearinghouse could access the Fed’s emergency funds.

* Firms engaged in a “de minimis” amount of swap dealing with or on behalf of customers will be exempt from new rules for swaps dealers.

* Capital and margin requirements for uncleared swaps done by non-bank swap dealers and major players will be set at “appropriate” levels, softening earlier language that said levels would be as strict or stricter than those set for banks.

* Traders can use non-cash collateral to meet margin requirements.

* Regulators “shall” set limits on speculative positions “as appropriate” but have authority to exempt traders or types of swaps from the limits.

* Movie futures will be banned.

* There will be no ownership restrictions set for major swaps players, banks and financial companies involved in clearinghouses, exchanges, or swap execution facilities.

* Regulators will have at least a year after the time of passage to implement the legislation.

(Reporting by Roberta Rampton and Charles Abbott, editing by Jackie Frank)

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Germany defends austerity measures ahead of G20

June 25, 2010 By Leave a Comment

(Reuters) – Finance Minister Wolfgang Schaeuble rejected criticism that Germany was endangering economic recovery with austerity measures, saying the government had a “well-conceived” exit strategy from its stimulus spending.

In a guest column for the Handelsblatt newspaper on Thursday, Schaeuble said he could not understand criticism from abroad that Germany was “wrecking the recovery with austerity measures” because Berlin was doing a lot to stimulate growth.

“There is an implicit accusation that we’re not living up to our international responsibilities as far as economic policies are concerned,” Schaeuble wrote in a contribution for the business daily ahead of the G20 summit this weekend in Toronto.

“I cannot understand this argument because Germany has taken sweeping measures since 2008 to stabilize the economy. We’ve done that on top of all the automatic stabilizers we have (such as higher social welfare spending) that play a much smaller role in countries from which we’re now being criticized.”

Germany recently announced plans for 80 billion euros in budget cuts over the next four years, a package it hopes will bring the structural deficit of Europe’s biggest economy within European Union limits by 2013.

U.S. Treasury Secretary Timothy Geithner and top White House economic adviser Lawrence Summers wrote in a Wall Street Journal piece on Tuesday that G20 peers should not risk undermining growth for the sake of cutting deficits, echoing a similar call from President Barack Obama.

‘WELL-CONCEIVED EXIT STRATEGY’

Schaeuble pointed to Germany’s budget deficit climbing to five percent of gross domestic product (GDP) as evidence of its commitment to growth-boosting measures.

“It’s true that an abrupt and ill-conceived exit from the stabilization measures could endanger their success,” he said. “But a credit-financed stimulation of demand cannot become a permanent, drug-like fix.

“We need a well-conceived exit strategy. The German government has one. The first consolidation measures won’t take effect until 2011 and amount to less than 0.5 percent of GDP. There’s no way that can be called hitting the brakes.”

Germany, Europe’s largest economy, has vigorously defended its plans to pursue the 80 billion euro savings measures euros in the next four years after Obama preached patience in clamping down on public spending.

On Thursday, Chancellor Angela Merkel dismissed criticism in a separate interview with ARD TV that Germany was not doing enough to stimulate its economy.

Merkel said she had told Obama in a phone call that Germany had done much to support economic growth with stimulus measures.

“Germany is doing much more in 2010 for the worldwide economic recovery than (other countries) on average,” she said.

(Writing by Erik Kirschbaum; editing by Mike Peacock)

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Germany defends austerity measures ahead of G20

June 25, 2010 By Leave a Comment

BERLIN, June 24 (Reuters) – Finance Minister Wolfgang Schaeuble rejected criticism that Germany was endangering economic recovery with austerity measures, saying the government had a “well-conceived” exit strategy from its stimulus spending.

In a guest column for the Handelsblatt newspaper on Thursday, Schaeuble said he could not understand criticism from abroad that Germany was “wrecking the recovery with austerity measures” because Berlin was doing a lot to stimulate growth.

“There is an implicit accusation that we’re not living up to our international responsibilities as far as economic policies are concerned,” Schaeuble wrote in a contribution for the business daily ahead of the G20 summit this weekend in Toronto.

“I cannot understand this argument because Germany has taken sweeping measures since 2008 to stabilise the economy. We’ve done that on top of all the automatic stabilisers we have (such as higher social welfare spending) that play a much smaller role in countries from which we’re now being criticised.”

Germany recently announced plans for 80 billion euros in budget cuts over the next four years, a package it hopes will bring the structural deficit of Europe’s biggest economy within European Union limits by 2013.

U.S. Treasury Secretary Timothy Geithner and top White House economic adviser Lawrence Summers wrote in a Wall Street Journal piece on Tuesday that G20 peers should not risk undermining growth for the sake of cutting deficits, echoing a similar call from President Barack Obama. [ID:nN22169279]

‘WELL-CONCEIVED EXIT STRATEGY’

Schaeuble pointed to Germany’s budget deficit climbing to five percent of gross domestic product (GDP) as evidence of its commitment to growth-boosting measures.

“It’s true that an abrupt and ill-conceived exit from the stabilisation measures could endanger their success,” he said. “But a credit-financed stimulation of demand cannot become a permanent, drug-like fix.

“We need a well-conceived exit strategy. The German government has one. The first consolidation measures won’t take effect until 2011 and amount to less than 0.5 percent of GDP. There’s no way that can be called hitting the brakes.”

Germany, Europe’s largest economy, has vigorously defended its plans to pursue the 80 billion euro savings measures euros in the next four years after Obama preached patience in clamping down on public spending.

On Thursday, Chancellor Angela Merkel dismissed criticism in a separate interview with ARD TV that Germany was not doing enough to stimulate its economy. [ID:nLDE65N04E]

Merkel said she had told Obama in a phone call that Germany had done much to support economic growth with stimulus measures.

“Germany is doing much more in 2010 for the worldwide economic recovery than (other countries) on average,” she said. (Writing by Erik Kirschbaum; editing by Mike Peacock)

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Scenarios: Where next for China’s yuan?

June 21, 2010 By Leave a Comment

(Reuters) – China has vowed to resume currency reform by increasing the yuan’s flexibility, indicating that it will end a 23-month-old peg to the dollar.

China

But it has said little about what this means in practice.

Below are scenarios for how Beijing will manage the exchange rate in the coming weeks.

GRADUAL APPRECIATION

* Probability: Most likely

In its announcement, the central bank said that exchange rate reform would be gradual, ruling out both major appreciation and a one-off revaluation.

The strength of China’s economic recovery gave policymakers the confidence to end the peg that had helped cushion the economy from the global financial crisis, but they remain worried that external demand is still not on a solid footing, especially with European debt worries in the background.

Nevertheless, China needs to allow the yuan to rise, even if it is in tiny steps, to prove that it is serious in its commitment to make the currency more flexible. U.S. Treasury Secretary Timothy Geithner stressed that Beijing’s actions would speak louder than words.

Under this scenario, the central bank could use its setting of the yuan’s daily reference rate to nudge the exchange rate up by modest amounts each day, for example from 6.8260 per dollar to 6.8250 per dollar, for a few months until the global economic picture becomes clearer.

Any rally in global equity markets and yuan forwards may fade out quickly and even reverse as disappointment sets in that China’s reform is not more radical.

TWO-WAY VOLATILITY

* Probability: Possible

In explaining how yuan reform will proceed, the central bank said it will increase the exchange rate’s flexibility and ensure that it could both rise and fall depending on market conditions.

For a long time, China has wanted to introduce more two-way risk into the exchange rate. In theory, traders will no longer be able to assume that the yuan can only move in one direction — up.

In the past, the yuan rarely fluctuated more than 0.1 percent in intraday trading, even though the trading band permitted a rise or fall of 0.5 percent against the dollar each day. Beijing will be more determined to increase volatility this time, to discourage the hot-money inflows that accompanied its steady appreciation from 2005 to 2008.

Li Daokui, an academic adviser to the central bank, said that a sustained fall in the euro against the dollar could also lead to a decline in the yuan against the dollar.

In other words, on days when the dollar is falling globally, Beijing may push the yuan up slightly. When the dollar is strong, the Chinese currency may pare these gains.

But marked depreciation of the yuan would infuriate lawmakers in Washington, auguring poorly for a trade dispute.

And given the widespread belief among investors that the yuan is undervalued, it will be hard to counter the view that the currency remains a one-way bet from a longer-term perspective, even if the day-to-day ride may be bumpier.

BIG EARLY GAINS

* Probability: Unlikely

Viewed abstractly, there is a strong rationale for allowing a major appreciation of the yuan right out of the starting blocks.

Speculators may be tempted to pour money into China to benefit from a stronger yuan, but if Beijing moves the yuan up quickly enough, many may conclude that they have missed the best opportunity and so stay away.

Similarly, hawks in the U.S. Congress are ready to pounce if China only tip-toes toward a stronger yuan.

But the government will be loath to push the yuan up too aggressively. Politically, it would look like an embarrassing about-face, having sworn off a one-off appreciation.

And concerns about the health of the global economy are real enough to dissuade Beijing from making a move that might prove too disruptive.

STATUS QUO

* Probability: Least likely

China’s announcement that it was resuming yuan reform seemed calculated to disarm critics of its currency regime before a Group of 20 summit this coming weekend in Canada. If Chinese leaders are risk-takers — and nearly all evidence suggests they are not — then they might gamble that words alone will be powerful enough.

Keeping the yuan locked at about 6.83 to the dollar would please hard-liners at home who have accused Beijing of capitulating to foreign pressure.

And there is an economic justification for the status quo. The yuan’s exchange rate against a basket of currencies has risen strongly in recent months even as it has remained pegged to the dollar, simply because of the broad strength of the U.S. currency.

But continuing the peg would infuriate U.S. lawmakers and strip China of any goodwill it earns from its promise to make the yuan more flexible.

The announcement alone implies that China’s top leaders have forged a consensus to break the peg launched in July 2008. Any maintenance of it now would be a massive surprise.

(Reporting by Aileen Wang, Zhou Xin and Simon Rabinovitch: Editing by Neil Fullick)

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SCENARIOS – Where next for China’s yuan?

June 21, 2010 By Leave a Comment

June 20 (Reuters) – China has vowed to resume currency reform by increasing the yuan’s flexibility, indicating that it will end a 23-month-old peg to the dollar.

Currencies | Bonds | Global Markets

But it has said little about what this means in practice.

Below are scenarios for how Beijing will manage the exchange rate in the coming weeks.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Yuan Debate Top News page: link.reuters.com/jej52k

Insider TV:

-- New tone, same yuan link.reuters.com/cad92m

-- Defers need for rate rise link.reuters.com/wyc92m

Graphic: yuan moves since 2005 r.reuters.com/sut87k

G10, emerging FX scenarios [ID:nSGE65J005] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

GRADUAL APPRECIATION

* Probability: Most likely

In its announcement, the central bank said that exchange rate reform would be gradual, ruling out both major appreciation and a one-off revaluation.

The strength of China’s economic recovery gave policymakers the confidence to end the peg that had helped cushion the economy from the global financial crisis, but they remain worried that external demand is still not on a solid footing, especially with European debt worries in the background.

Nevertheless, China needs to allow the yuan to rise, even if it is in tiny steps, to prove that it is serious in its commitment to make the currency more flexible. U.S. Treasury Secretary Timothy Geithner stressed that Beijing’s actions would speak louder than words.

Under this scenario, the central bank could use its setting of the yuan’s daily reference rate to nudge the exchange rate up by modest amounts each day, for example from 6.8260 per dollar to 6.8250 per dollar, for a few months until the global economic picture becomes clearer.

Any rally in global equity markets and yuan forwards may fade out quickly and even reverse as disappointment sets in that China’s reform is not more radical.

TWO-WAY VOLATILITY

* Probability: Possible

In explaining how yuan reform will proceed, the central bank said it will increase the exchange rate’s flexibility and ensure that it could both rise and fall depending on market conditions.

For a long time, China has wanted to introduce more two-way risk into the exchange rate. In theory, traders will no longer be able to assume that the yuan can only move in one direction — up.

In the past, the yuan rarely fluctuated more than 0.1 percent in intraday trading, eventhough the trading band permitted a rise or fall of 0.5 percent against the dollar each day. Beijing will be more determined to increase volatility this time, to discourage the hot-money inflows that accompanied its steady appreciation from 2005 to 2008.

Li Daokui, an academic adviser to the central bank, said that a sustained fall in the euro against the dollar could also lead to a decline in the yuan against the dollar.

In other words, on days when the dollar is falling globally, Beijing may push the yuan up slightly. When the dollar is strong, the Chinese currency may pare these gains.

But marked depreciation of the yuan would infuriate lawmakers in Washington, auguring poorly for a trade dispute.

And given the widespread belief among investors that the yuan is undervalued, it will be hard to counter the view that the currency remains a one-way bet from a longer-term perspective, even if the day-to-day ride may be bumpier.

BIG EARLY GAINS

* Probability: Unlikely

Viewed abstractly, there is a strong rationale for allowing a major appreciation of the yuan right out of the starting blocks.

Speculators may be tempted to pour money into China to benefit from a stronger yuan, but if Beijing moves the yuan up quickly enough, many may conclude that they have missed the best opportunity and so stay away.

Similarly, hawks in the U.S. Congress are ready to pounce if China only tip-toes toward a stronger yuan.

But the government will be loath to push the yuan up too aggressively. Politically, it would look like an embarrassing about-face, having sworn off a one-off appreciation.

And concerns about the health of the global economy are real enough to dissuade Beijing from making a move that might prove too disruptive.

STATUS QUO

* Probability: Least likely

China’s announcement that it was resuming yuan reform seemed calculated to disarm critics of its currency regime before a Group of 20 summit this coming weekend in Canada. If Chinese leaders are risk-takers — and nearly all evidence suggests they are not — then they might gamble that words alone will be powerful enough.

Keeping the yuan locked at about 6.83 to the dollar would please hard-liners at home who have accused Beijing of capitulating to foreign pressure.

And there is an economic justification for the status quo. The yuan’s exchange rate against a basket of currencies has risen strongly in recent months even as it has remained pegged to the dollar, simply because of the broad strength of the U.S. currency.

But continuing the peg would infuriate U.S. lawmakers and strip China of any goodwill it earns from its promise to make the yuan more flexible.

The announcement alone implies that China’s top leaders have forged a consensus to break the peg launched in July 2008. Any maintenance of it now would be a massive surprise. (Reporting by Aileen Wang, Zhou Xin and Simon Rabinovitch: Editing by Neil Fullick)

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Benmosche looks safe despite AIA deal failure

June 4, 2010 By Leave a Comment

(Reuters) – When large deals fail, heads often roll. In the case of Prudential Plc’s (PRU.L) failed attempt to buy American International Group Inc’s (AIG.N) Asian life insurance unit for $35.5 billion, the British insurer’s management has more to worry about than AIG’s.

Deals

Prudential CEO Tidjane Thiam, in the top job for less than a year, is facing investor speculation about how long he can remain. But AIG Chief Executive Robert Benmosche, also in charge less than a year, looks set to survive unscathed.

Treasury Secretary Timothy Geithner said AIG, which is nearly 80 percent owned by the government, is now in a position where it can “maximize the return to the taxpayers.”

“We have a very strong management team and a much stronger board in place making incredibly impressive progress, frankly, in restructuring that entity,” Geithner told reporters before departing for the G20 meeting in Busan, Korea. “So I wouldn’t look at that as a setback.

“AIG is now free to pursue a bunch of other options to help maximize the return and reduce any risk of loss to the taxpayer,” Geithner added, when asked whether the collapse of the deal hurt AIG.

MORE LIQUIDITY

Benmosche has said AIG has several options and more flexibility on timing regarding AIA now than it did when the deal was struck earlier this year.

These options could include reviving plans for an AIA IPO or selling the business piece by piece.

Benmosche has also indicated he is not going anywhere.

“I am very proud of the progress we have made together to take our company forward,” he told employees in a memo after the deal looked set to collapse on Tuesday. “I am committed to continuing this process with all of you.”

Still, the collapse of the deal sets back his plans to repay U.S. taxpayers owed billions after AIG’s $182.3 billion U.S. government rescue at the height of the financial crisis.

Benmosche has been a proponent of a deal with Prudential rather than monetizing it through a public float.

Earlier this year, AIA was well on its way to an IPO when Prudential offered to buy it. Benmosche backed the deal, but the AIG board was initially divided before coming around.

On Monday, when the board met to consider selling AIA on revised terms, Benmosche favored accepting Prudential’s new deal because, even at a lower price of $30.4 billion, it offered more liquidity and sooner. But this time the board voted against changing the terms.

AIG’s board wanted assurances from Prudential it would be able to close a revised deal, which the British insurer was not able to provide.

“Anytime there is a fundamental action in which the CEO and the board disagree, your relationship needs to be evaluated,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “That doesn’t happen too often.”

But Elson said having the U.S. government as the largest shareholder made the AIG situation hard to read.

Benmosche does not appear to be taking the heat for the deal’s failure, with the focus more on how the Prudential management was unable to rally its shareholders.

AIG Chairman Harvey Golub told the Wall Street Journal the board had “full confidence” in senior management. At any rate, running AIG is not an easy job, with Benmosche the fourth CEO at the insurer since June 2008.

“Who else are they going to get? Who is going to do a better job?” said Aite Group senior analyst Clark Troy. “I don’t think Benmosche is at great risk and, frankly, I think AIA still has a very strong franchise.”

(Reporting by Paritosh Bansal; additional reporting by Glenn Somerville; editing by Andre Grenon)

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Britain’s coalition says no change on budget plan

May 31, 2010 By Leave a Comment

LONDON, May 31 (Reuters) – British Prime Minister David Cameron’s new coalition government is committed to cutting a gaping budget deficit despite the resignation of a finance minister over his expenses claims, officials said on Monday.

They said the loss of Chief Treasury Secretary David Laws, number two at the finance ministry, would have no impact on the Conservative-led government’s plans to push through tough austerity measures in an emergency budget on June 22.

“I think in the first three weeks the government has now clearly demonstrated its commitment to getting on with tackling the deficit and debt,” Justice Secretary Ken Clarke told the BBC in an interview.

Clarke, a former Conservative finance minister, said it was obvious around the cabinet table that there was no division of opinion between Cameron’s Conservatives and their Liberal Democrat partners.

At the weekend Cameron appointed Danny Alexander, a former close aide to Liberal Democrat leader Nick Clegg, to replace Laws as number two to Conservative Chancellor of the Exchequer George Osborne.

“Danny has all the intelligence, ability, potential, required for the task,” said Clarke.

The Financial Times quoted an unnamed aide to Cameron as saying: “I can safely say the strategy and direction (of the coalition government) will not change at all.”

The coalition is drawing up cuts to rein in Britain’s record peacetime budget deficit, which exceeds 11 percent of gross domestic product.

LAWS’ RESIGNATION

Laws resigned on Saturday within 24 hours of a newspaper reporting the Liberal Democrat politician had claimed tens of thousands of pounds in parliamentary expenses for rent he passed on to his long-term male partner.

The loss of Laws occurred less than three weeks after the formation of Britain’s first coalition for 65 years. The coalition took power after a May 6 election ousted the Labour Party from 13 years in office.

Laws, an economist with a background in London’s financial services industry, was a key player in striking the coalition accord and appeared to have struck up an effective relationship with Osborne.

He had won the respect of his Conservative colleagues and his willingness to make cuts had reassured markets worried about a deficit forecast to top 160 billion pounds this year.

Alexander will now take over the role of seeing through a series of tough austerity measures needed to save Britain billions of pounds.

The loss of Laws is an unwelcome distraction for a new government eager to focus on the economic challenges and to start a new chapter after a scandal over parliamentary expenses that dogged the final months of the previous Labour government.

Cameron had promised a new, open administration that abides by strict rules of conduct.

Alexander, who is 38, was little known outside parliament before the election. [ID:nLDE64S0IE]

He rose to prominence during the election campaign as Clegg’s chief of staff and as a negotiator in the days of talks that led to the formation of Britain’s first coalition government since World War Two.

The coalition agreement is a delicate balance of the two parties’ policy priorities. By appointing another Liberal Democrat to replace Laws, Cameron has been careful not to upset the party balance in the coalition cabinet.

(Editing by Ralph Gowling)

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Geithner calls for action on euro debt crisis

May 27, 2010 By Leave a Comment

U.S. Treasury Secretary Timothy Geithner said on Wednesday that financial markets want to see euro zone countries put into action their $1 trillion standby package designed to stabilise the European currency.

Geithner, on a visit to London, also urged Europeans to work for a globally consistent approach to financial reform as the European Union said it might go it alone with a crisis levy on banks.

After talks with his British counterpart, George Osborne, Geithner said of the EU plan to support indebted states: “It’s a good programme (and) has got all the right elements. What markets want to see is action.”

The fund would provide heavily conditioned loans to euro zone governments that had difficulty borrowing on capital markets after a separate bailout for Greece failed to calm fears of a sovereign debt default in southern European countries.

European shares rallied by 3 percent from Tuesday’s nine-month lows and Wall Street was more than 1 percent up but the euro remained under pressure amid continuing signs of banks’ reluctance to lend to euro zone counterparts exposed to south European sovereign debt.

Geithner’s stress on coordination of new regulation appeared aimed chiefly at Germany, Europe’s biggest economy, which stunned markets and angered EU partners by unilaterally banning some speculative financial trades last week.

He is due to meet German Finance Minister Wolfgang Schaeuble in Berlin on Thursday after dinner in Frankfurt with European Central Bank President Jean-Claude Trichet.

On his flight to Europe from China, Geithner told reporters he would “emphasise the importance of a carefully designed global approach” to the next stage of financial reform.

Business television channel CNBC said he would also urge the Europeans to stress test their banks to identify those that need new capital and restore market confidence in the banking system.

The executive European Commission outlined a framework on Wednesday for a levy on banks’ assets, liabilities or profits to pay in advance for the cost of future crises, setting the stage for a showdown on the tax at G20 summit in Toronto next month.

“On this question, we can go forward by ourselves, on our own,” Barnier told Reuters. “It is not up to the United States to pay for the financial stability of Europe.”

The Commission said the proceeds of a bank levy should be ring-fenced for national bank resolution funds, putting Brussels at odds with France and Britain, which want the money to help strapped national budgets.

Fears that Europe’s debt crisis could engulf some banks have made them reluctant to lend to each other as happened during the 2007-2009 financial crisis.

The costs for banks to borrow dollars from each other crept up to a new 10-month high on Wednesday.

Money markets are “pricing in for a credit crunch”, said Michael Pond, Treasury strategist at Barclays Capital in New York. “A crisis of confidence is developing once again.”

For a graphic on Greek bailout, click http://link.reuters.com/rad45k

For a graphic on the euro zone, click http://link.reuters.com/fyw72j

OECD UPBEAT

The Paris-based Organisation for Economic Co-operation and Development said the global economy was recovering faster than expected from recession with Asia leading the way but remained at risk from huge debts in developed countries.

The OECD survey was relatively upbeat about the euro zone, forecasting growth of 1.2 percent this year and 1.8 percent in 2011 — a more optimistic forecast than the European Commission’s 0.9 and 1.5 percent respectively.

The OECD also said banks remained vulnerable, noting the high price of credit default swaps to protect bond investments.

European regulators conducted a confidential assessment of the solvency of national banking systems last September, but their reassuring conclusion failed to dispel doubts because they did not test individual banks or publish detailed findings.

Any European stress tests would have to differ from those conducted by U.S. regulators early last year, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found.

GERMAN BAN “COUNTER-PRODUCTIVE”

A senior U.S. Treasury official said Washington was unhappy with Berlin’s “counter-productive” decision to go it alone in banning naked shorting of shares in top financial companies and sovereign euro bonds and related transactions in sovereign credit default swaps.

Geithner has also criticised European Union proposals to regulate hedge funds and private equity, warning that they could discriminate against non-European funds.

Far from yielding to widespread criticism, Berlin proposed on Tuesday extending restrictions on such speculative trades to include all shares, a government source said.

In the latest move in a German-inspired Europe-wide austerity drive meant to restore market confidence, Italy’s cabinet approved a multibillion-euro package of budget cuts designed to slash the government’s deficit to beneath the EU ceiling of 3.0 percent of GDP by 2012.

The 24 billion euro ($29.49 billion) plan includes a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five leavers.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Italy’s budget cuts were “very significant” and would help restore confidence in the euro zone. Credit ratings agencies Standard and Poor’s and Moody’s both said the package put Italy’s finances on a sounder footing and should assure markets.

Italy’s largest trade union, CGIL, with about five million members, said it would decide on a national strike after evaluating the measures to be presented by Prime Minister Silvio Berlusconi later on Wednesday.

(Additional reporting by Sumeet Desai in London, Daniel Flynn and Deepa Babington in Rome; writing by Paul Taylor, editing by Mike Peacock/Toby Chopra)

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China holds door open a crack to U.S. on yuan

May 24, 2010 By Leave a Comment

China struck a conciliatory note in talks with the United States on Monday by vowing to spur domestic demand and keeping a guarded opening to exchange rate reform, which the Obama administration says is needed to rebalance the global economy.

The United States treaded softly on the subject and welcomed Beijing’s long-standing pledge to reform the yuan as the two sides opened their second Strategic and Economic Dialogue.

But both countries also made clear that a stronger Chinese currency was not enough by itself to narrow the whopping U.S. bilateral trade deficit that has fuelled tensions between them at a time when the global economic recovery remains fragile.

While Chinese President Hu Jintao broke no new ground on the yuan dispute, he set an amicable tone for the two days of talks during which the world’s biggest and third-biggest economies will seek to steady their relations.

“China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual,” he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington — worried about its yawning trade deficit with China — has also advocated.

U.S. Treasury Secretary Timothy Geithner said the Chinese government was moving in the right direction on the yuan, which has been effectively pegged to the dollar since the global financial crisis worsened in mid-2008.

“We welcome the fact that China’s leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda,” he said.

Trying to press the case that appreciation would be in China’s own interest, Geithner said that a more market-driven exchange rate would help suppress inflation while also driving private firms to move up the value chain.

TRADE POLICIES

China and the United States signalled that there could be progress on two other trade-related policies that have been additional irritants in their relations.

China said that it was working to resolve the concerns of foreign companies about an “indigenous innovation” programme that the United States has said was unduly restrictive and a concern on par with the yuan.

And Chinese Commerce Minister Chen Deming said he was optimistic that the United States would loosen controls over high-tech exports, a move that would go a small way to balancing their trade ties.

The talks also touched on Europe’s debt woes, with both sides saying that they were cautiously optimistic that any fallout would be limited.

“The general view was that the pace of the global economic recovery will be basically maintained,” People’s Bank of Governor Zhou Xiaochuan told a news conference.

The one slight point of open discord were U.S. calls for a tougher line against North Korea over an alleged sinking of a South Korean warship, contrasting with China’s appeals for restraint.

Tensions flared between Beijing and Washington in the first months of 2010, when China denounced U.S. criticism of its Internet censorship, Washington’s arms sales to Taiwan, and President Barack Obama’s meeting with the Dalai Lama, Tibet’s exiled leader.

Beijing considers Taiwan a part of its territory, and Hu said on Monday that it was important for countries to respect one another’s sovereignty.

Beijing officials have said they want only “quiet discussion” of U.S. complaints that the Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope that a quieter approach will give Beijing more political space to let its currency appreciate.

The annual U.S. trade deficit with China fell to $226.8 billion in 2009 from a record $268.0 billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a point of friction with Beijing.

(Additional reporting by Arshad Mohammed and Doug Palmer; Editing by Ken Wills)

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U.S. plays down European crisis but China worried

May 24, 2010 By Leave a Comment

Mon, May 24 12:49 PM

The United States suggested Europe’s debt crisis would have minimal impact on global growth, but China took a more pessimistic view, warning it would impact demand for its exports and other regions would suffer too.

The two countries, meeting in Beijing for high-level talks, set the differing tones as eurozone leaders sought to conquer doubts that they can cut fiscal deficits and stimulate growth to overcome the crisis.

Global markets have been gripped by fears that a debt crisis engulfing Greece will spread to other highly indebted nations, particularly in southern Europe, dragging down the continent’s economy and hitting trade with the United States and Asia.

“The euro zone problems haven’t been cleaned up yet,” said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

“And even though the global economy is definitely showing more signs of recovery than it did 6 months ago, worry continues that the euro zone’s woes will put a brake on this growth.”

Greece’s prime minister on Sunday ruled out defaulting on payments or restructuring its debt and his Spanish counterpart vowed to push through an austerity plan despite union threats to strike.

In Beijing, where officials from the world’s No.1 and No.3 economies were meeting for U.S.-China Strategic and Economic Dialogue, there were contrasting messages about the dangers Europe’s woes posed to the global recovery.

U.S. Treasury Secretary Timothy Geithner, who flies to Europe on Tuesday for talks in Britain and Germany on stabilising the continent’s economy and financial markets, said on Monday the global economy had been strengthening faster than expected.

At the weekend, a senior U.S. Treasury official, who declined to be identified, had said the European crisis would have minimal impact on the world economy.

China’s state planning commission seemed less optimistic, saying on Monday that the crisis would affect demand of Chinese goods. On Sunday, Finance Minister Xie Xuren had warned that Europe’s debt woes could hit other regions.

“At present, risks from European sovereign debt have increased factors of instability in the course of global economic recovery,” Xie wrote an essay published in the Washington Post and on his Ministry’s website (www.mof.gov.cn).

Some analysts suggest China may delay letting its yuan currency rise in value — as Washington has urged — out of concern that its exports to Europe will suffer.

“China is unlikely to de-peg the yuan anytime soon,”Standard Chartered Bank said in a note to clients.

Citing, among other factors, the need to see some stabilisation in global markets and a sustained trade surplus, the bank said Beijing is likely to wait until the third quarter to unleash the yuan. It had previously predicted May.

POLITICAL WILL

Japan’s government also raised concerns, saying in its monthly economic report that attention should be paid to the potential risks of a slowdown in overseas economies, particularly in Europe.

European leaders have sought to deal with a crisis that has pushed many euro zone member states’ borrowing costs sky high through a 110 billion euro bailout of Greece and the setting up of a $1 trillion safety net to stabilise the single currency.

But after riots on the streets of Athens and with strikes looming elsewhere, investors remain concerned about whether Europe has the political will to rein in bulging government deficits and tackle sluggish growth.

“Europe is trying to solve a debt problem with further debt,” said Domenico Lombardi, president of the Oxford Institute for Economic Policy.

Greek Prime Minister George Papandreou said in an interview published on Sunday in a Spanish newspaper that EU governments had been slow to act in order to prevent the Greek crisis spreading to other members of the 16-country euro zone.

“The EU took time to realise that speculators’ attacks on Greece were just a step before attacking other countries and even threatening the stability of the euro zone,” he said.

But he insisted Greece was not sliding towards insolvency.

“We have no need for defaulting on payments or restructuring,” Papandreou told El Pais. “We have opted not to do so. We have opted to pay back the loans we have requested.”

Spain’s Prime Minister Jose Luis Rodiguez Zapatero is also under pressure to make spending cuts and implement long-awaited labour reforms to avoid a Greek-style loss of confidence.

The country’s largest union has said it may call a general strike, but Zapatero insisted on Sunday he would not revise a 15 billion euro austerity plan.

“I know there are protests by those who do not share them (government views), like the unions, but we will not change,” Zapatero told his Socialist party in Elche, southeast Spain.

“No one can doubt at any time that Spain is a strong country and an economic power that will meet its obligations and pay debts.”

The euro was under pressure again on Monday, after posting its first weekly gain against the dollar in six weeks last week as investors bought back the currency following its long slide.

The euro fell close to 20 percent against the dollar between a high in November and last week’s 4-year low of $1.2143. Since then it has rebounded almost 3 percent to $1.2504 on Monday.

Adding to worries about government debt were concerns about the health of Spain’s banking system, after the central bank said on Saturday it had taken over the running of savings bank CajaSur after a planned merger with another small lender failed.

The country’s largely unlisted savings banks — accounting for about half of the financial system — are most exposed to struggling property developers and have seen their capital eroded by soaring bad loans.

(Writing by Alex Richardson; Editing by Neil Fullick)

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China avoids commitment to U.S. on currency

May 24, 2010 By Leave a Comment

China struck a conciliatory note on Monday by promising to spur its domestic demand at the opening of Sino-U.S. talks, but it avoided specific commitments, including on whether to allow its currency to appreciate.

The United States, which has called for a stronger Chinese exchange rate, also treaded softly on the subject as the two sides held their second Strategic and Economic Dialogue, welcoming Beijing’s long-standing pledge to reform the yuan.

Chinese President Hu Jintao, speaking at the opening session, said the two global powers needed to enhance economic policy coordination and work together to promote “full economic recovery”.

The world’s biggest and third-biggest economies are seeking to steady relations after a burst of tensions early this year, and while Hu broke no new ground on the currency dispute that has divided them, he set an amicable tone for the two days of talks.

“China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual,” he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington — worried about its yawning trade deficit with China — has also advocated.

At the meeting, U.S. Treasury Secretary Timothy Geithner appealed to Beijing to work together to reduce trade barriers and develop a more balanced global economy.

He indirectly urged China to ease up on its “indigenous innovation” policies aimed at giving Chinese companies a larger share of new cutting-edge technologies developed in China.

On the yuan, which has been effectively pegged to the dollar since the global financial crisis worsened in mid-2008, Geithner said the Chinese government was moving in the right direction.

“We welcome the fact that China’s leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda,” he said.

Trying to press the case that yuan appreciation would be in China’s own interest, Geithner said that a more market-driven exchange rate would help suppress inflation while also driving private firms to move up the value chain.

PRESSING NORTH KOREA

The vows of closer economic coordination were partly offset by U.S. Secretary of State Hillary Clinton’s effort to coax China into joining international pressure on North Korea after South Korea found it responsible of torpedoing its warship in late March, killing 46 sailors.

China is the sole major backer of North Korea, and has not publicly criticised Pyongyang over allegedly sinking, instead issuing broad calls for restraint. Earlier this month, China hosted the North’s leader, Kim Jong-il, on a visit.

“We must work together to address this challenge and advance our shared objectives for peace and stability on the Korean peninsula,” Clinton told the meeting.

Tensions flared between Beijing and Washington in the first months of 2010, when China denounced U.S. criticism of its Internet censorship, Washington’s arms sales to Taiwan, and President Barack Obama’s meeting with the Dalai Lama, Tibet’s exiled leader.

Beijing considers Taiwan a part of its territory, and Hu said on Monday that it was important countries respected one another’s sovereignty.

Beijing officials have said they want only “quiet discussion” of U.S. complaints that the Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope a quieter approach will give Beijing more political space to let its currency appreciate.

Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, told a news conference that the euro, not the yuan, had come up for discussion in the opening session of the dialogue. China’s “basic principles” of exchange rate policy were unchanged, he said.

China’s main official newspaper, the People’s Daily, on Monday repeated the government’s position that a rise in the yuan would not help the U.S. economy anyway.

The annual U.S. trade deficit with China fell to $226.8 billion in 2009, down from a record $268.0 billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a point of friction with Beijing.

U.S. officials have sought to concentrate attention on policies they claim may unfairly impede U.S. companies hunting for customers in China.

(Additional reporting by Chris Buckley; Editing by Nick Macfie and Ken Wills)

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China’s Hu tells U.S. he wants gradual yuan reform

May 24, 2010 By Leave a Comment

China will stick to gradual reform of its yuan currency, President Hu Jintao told the United States at the start of high-level talks on Monday in which North Korea emerged as a point of potential contention.

Hu, speaking at the opening session of the U.S.-China Strategic and Economic Dialogue (S&ED), said the two global powers needed to enhance economic policy coordination and work together to promote “full economic recovery”.

The world’s biggest and third biggest economies are seeking to steady relations after a burst of tensions early this year, and while Hu broke no new ground on the currency dispute that has divided them, he set a generally conciliatory tone for the two days of talks.

“China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual,” he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington — worried about its yawning trade deficit with China — has also urged.

At the meeting, U.S. Treasury Secretary Timothy Geithner urged Beijing to work together to reduce trade barriers and develop a more balanced global economy.

Geithner indirectly urged China to ease up on its “indigenous innovation” policies aimed at giving Chinese companies a larger share of new cutting-edge technologies developed in China.

But the vows of closer economic coordination were partly offset by U.S. Secretary of State Hillary Clinton’s effort to coax China into joining international pressure on North Korea.

South Korean President Lee Myung-bak said on Monday that he would take Pyongyang to the U.N. Security Council after his government found North Korea was responsible for torpedoing its warship, the Cheonan, in late March, killing 46 sailors.

China is the sole major backer of North Korea, and has not publicly criticised Pyongyang over the sinking, instead issuing broad calls for restraint. Earlier this month, China hosted the North’s leader, Kim Jong-il, on a visit.

“Today we face another serious challenge provoked by the sinking of the South Korean ship,” Clinton told the meeting. “We must work together to address this challenge and advance our shared objectives for peace and stability on the Korean peninsula.”

Tensions flared between Beijing and Washington in the first months of 2010, when China denounced U.S. criticism of its Internet censorship, Washington’s arms sales to Taiwan, and President Barack Obama’s meeting with the Dalai Lama, Tibet’s exiled leader.

Beijing considers Taiwan a part of its territory and Hu said it was important countries respected one another’s sovereignty.

QUIET DISCUSSION OF YUAN

Beijing officials have said they want only “quiet discussion” of U.S. complaints the Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope a quieter approach will give Beijing more political space to let its currency appreciate. Geithner did not mention the yuan issue in his opening remarks to the S&ED.

China’s main official newspaper, the People’s Daily, on Monday repeated the government’s position that a rise in the yuan would not help the U.S. economy anyway.

“Appreciation of renminbi will not solve the imbalance in China-U.S. trade and it will not solve U.S. employment problems,” said a commentary in the paper.

“China is advancing reform of the renminbi exchange rate formation mechanism based on its own economic development needs.”

The annual U.S. trade deficit with China fell to $226.8 billion in 2009, down from a record $268.0 billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a point of friction with Beijing.

U.S. officials have sought to concentrate attention on policies they claim may unfairly impede U.S. companies hunting for customers in China.

(Additional reporting by Chris Buckley; Editing by Nick Macfie)

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US, China hope to restore mutual trust through dialogue next week

May 21, 2010 By Leave a Comment

Washington/Beijing, May 21 (ANI): China and the United States will hopefully set the tone for smoother bilateral relations with candid reflections on past problems when officials of the two sides meet for strategic and bilateral discussions next week.

“The significance of the dialogue is that the two countries can enhance mutual understanding and strategic trust, which is conducive to smooth discussions if there are more frictions in the future,” the China daily quoted Tao Wenzhao, an expert on US studies at the Chinese Academy of Social Sciences, as saying.

An escalating situation on the Korean Pennisula and the European debt crisis will be among the top topics discussed at the talks between China and the United States next week, said senior officials from both sides.

The Second China-US Strategic and Economic Dialogue – the highest-level forum between the two countries – will bring together 50 representatives from more than 40 departments of both countries, Chinese Vice-Foreign Minister Cui Tiankai said on Thursday.

Cui said the dialogue would also include energy security, climate change, UN peacekeeping and anti-terrorism.

Regional issues including the sinking of a Republic of Korea warship, Cheonan, the Iran nuclear issue and the frequent intervention of US ships into China”s Exclusive Economic Zone will be among the remaining topics, according to diplomatic sources.

The dialogue, taking place on May 24 and 25, will be co-chaired by Chinese Vice-Premier Wang Qishan and State Councilor Dai Bingguo, along with US Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner. (ANI)

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Rejecting negative gearing changes is ‘cowardice’

May 4, 2010 By Leave a Comment

Federal Treasurer Wayne Swan has responded to the Henry tax review by saying Labor would never reduce the existing concessions on negative gearing and capital gains tax.

The latest official estimates show house prices jumping by 20 per cent over the past year and critics say that reinforces the need to wind back tax breaks that inflate house prices.

Former New South Wales auditor-general Tony Harris says Mr Swan’s response to the recommendation is the wrong attitude for lifting Australia into the next league.

“It doesn’t do Australia any good to have a government which when they see these rational arguments from a very well experienced team, they give it three minutes’ thought and then just ditch it,” Mr Harris said.

Treasury Secretary Ken Henry’s panel proposed an innovative solution: replacing a raft of investment tax breaks with one – a 40 per cent discount on your marginal tax rate.

It would have meant that low to middle-income earners would not pay tax on the interest they get from money in the bank.

Mr Harris says not only would that help the less well-off, it would benefit the economy.

“One of the things it does is help the banks reduce their reliance on foreign borrowings. The biggest problem Australia faces is the fact we’ve got $700 billion or $800 billion worth of net debt to overseas lenders,” he said.

“Some of that would have been replaced by Australian lenders because the Australians would have found investing in bank deposits, bank bonds and the like significantly better.”

The Henry plan would also have cut back the ability of high-income earners to avoid paying income tax by investing in loss-making property, while upping the bill on their capital gains a little.

And that, says Saul Eslake, formerly the chief economist at ANZ and now a fellow of the Grattan Institute at Melbourne University, is good policy.

“Broadly I thought these were sensible recommendations that addressed what has been glaring anomalies between the tax treatment of different forms of saving,” he said.

“Anomalies that for the most part work to the advantage of higher-income earners and to the disadvantage of those lower down the income scale.”

Mr Eslake says it is not surprising the Government rejected any change to negative gearing or capital gains tax concessions.

“I was disappointed, although I wouldn’t have expected them to have taken up such controversial recommendations immediately before an election,” he said.

“It was rather disappointing that they were put in the never-ever category rather than in the category of measures that might be on the agenda for a second term of the present government if it’s re-elected later this year.”

Disadvantaged

Housing commentator and the NSW general manager for property valuers Herron Todd White, Michael McNamara, says it makes sense to dilute the attractiveness of negative gearing.

“Negative gearing inevitably puts house prices up because what happens is you get investors competing with first homebuyers who are also being incited to enter the property market and those investors and first homebuyers compete with mums and dads in the very same property market,” he said.

“This inevitably puts pressure on property prices, disadvantaging those people in the middle which are generally regarded as your mum and dad property owners.”

Mr Swan said the Government rejected recommendations from the Henry review that did not fit with Labor values and philosophy.

Mr McNamara says subsidising the high-income earners who invest in property at the expense of low and middle-income families is a strange reflection on Labor values.

“Essentially what happens today is that taxpayers subsidise investors. We subsidise them when interest rates go up by the tune of their marginal tax rate, which might be as much as 48 cents in the dollar,” Mr McNamara said.

“It’s a regime that encourages investors to make losses which is inevitably picked up by the taxpayer.”

Then taxpayers subsidise the capital gains.

Mr Harris says the rejection of the Henry review’s recommendations on property taxes and other reforms smacks of political cowardice and ranks this Government one of the most timid and ineffective in modern times.

“I mean you contrast this with the Hawke/Keating government where they actually introduced capital gains tax and they did that knowing it might hurt a little but knowing that Australians would benefit in the long run,” he said.

“I think this Government – well it’s certainly got less courage than the Hawke/Keating. It’s got less courage than the Howard/Costello government. It probably has even less courage than the Whitlam government.

“One wonders why they’re in government if they’re not going to do anything.”

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Geithner: pact agreed on World Bank capital rise

April 26, 2010 By Leave a Comment

(Reuters) – World Bank members have agreed to pour more capital into the lender and give developing countries a greater voice in running the bank, Treasury Secretary Timothy Geithner said on Sunday.

“We can feel proud that we have concluded agreements on a transformative financial and governance reform agenda, along with new capital for the World Bank and a new and more representative shareholding formula,” Geithner said in a statement delivered to its development committee.

He also said that the United States, which holds the largest voting share in the World Bank at 16.4 percent, would not seek any increase for itself under a revised voting formula that is to better reflect developing countries’ economic heft.

“Because we believe this overall outcome merits our strong endorsement, the United States agreed not to take up its full shareholding in this new arrangement,” Geithner said.

Geithner said the World Bank deserved more capital to help it in efforts like helping Afghanistan to develop more productive farming and for relief efforts such as those it has undertaken in Haiti after it was struck by an earthquake.

The World Bank had asked for a capital increase of $3 billion to $5 billion, allocated proportionally among its members.

Geithner said he considered the World Bank had made “a strong and compelling case” for a $3.5 billion increase and said he would ask Congress to approve the U.S. share of it.

(Reporting by Glenn Somerville; Editing by Padraic Cassidy)

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Geithner says reforms will benefit Wall Street

April 26, 2010 By Leave a Comment

WASHINGTON, April 25 (Reuters) – U.S. Treasury Secretary Timothy Geithner said on Sunday that proposals to more tightly regulate the financial sector are not a threat and will ultimately be a benefit to banks by making them more credible.

Regulatory News | Funds News | ETFs News

Interviewed on CNN’s “GPS” program, Geithner said the financial crisis had exposed the degree to which banks had strayed from their traditional mission of channeling Americans’ savings into growing businesses.

When trouble developed because of excessive risk-taking, customers suddenly went from “banks falling all over themselves to lend them money at unrealistic rates, to credit drying up in a heartbeat,” he noted.

“That system didn’t work so good for our country,” Geithner said. “That’s why I think these reforms are not just so important for future growth, but they’ll be better for the overall public interest and (for) having a strong, stable institution.”

He acknowledged there was staunch opposition from some firms on Wall Street that fear some of their trading and other activities might be curbed, but said it will not stop the reform drive.

The U.S. House of Representatives passed a package of financial reform proposals late last year and the Senate is due to vote on Monday whether to start working on its own sweeping set of proposals this week.

Geithner said the fact that so many firms had to be bailed out at taxpayers’ expense demonstrates the flaws of the current regulatory system and underlined why it had to be changed.

“We’re not going to support a bill that is weakened by big exemptions that leave this system in place, because that would be irresponsible for the country,” Geithner said. (Reporting by Glenn Somerville; Editing by Maureen Bavdek)

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