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EUROPE
Friday March 9 2012
Too much information
Are regulators overwhelmed? Gillian Tett, Page 26
The winning pragmatism
of China’s communists
Jamil Anderlini, Page 3
World Business Newspaper
●
Move will allow largest sovereign default
●
80% of investors agree to debt restructuring
TOMORROW IN
FT WEEKEND
Takentoextremes
The world’s most
extreme ski school.
Rémy Lécluse skis
impossible slopes.
Now he can teach
you to do the same
Life & Arts
Bondholders back Greek bailout
By Kerin Hope in Athens, Peter
Spiegel in Brussels and James
Mackintosh in London
Draghi hits back
at German critics
Mario Draghi yesterday took on
his Bundesbank critics, warning
Germany’s central bank against
public expressions of concern
over his actions to combat the
eurozone debt crisis,
writes
Ralph Atkins in Frankfurt
.
The ECB president insisted the
bank’s actions had been “an
unquestionable success”.
Seeking to defuse a row that
threatened his authority,
Mr Draghi said he “cherished”
the culture and traditions of
Germany’s central bank, but
added: “I think that there is
nothing to gain by fighting or
arguing publicly outside the
[ECB] governing council.”
Mr Draghi’s comments
followed the leaking last week
of a letter from Jens
Weidmann, Bundesbank
president, warning about the
dangers created by ECB
policies that have provided
more than €1tn in three­year
loans to eurozone banks.
Mr Weidmann’s letter, which
people close to him say he did
not leak, angered other ECB
council members and
threatened a serious rift less
than five months after Mr
Draghi took over as president.
Tensions were raised further by
Jürgen Stark, a former German
ECB executive board member,
who told a German newspaper
the quality of the ECB’s
balance sheet was “shocking”.
Speaking after the ECB’s
council left its main interest
rate unchanged at 1 per cent,
Mr Draghi played down the
divisions. Concerns raised by
the Bundesbank were “present
in all our minds” while worries
about broadening the pool of
assets that banks could use to
obtain ECB funds were “vastly
overblown”. Relations with
Mr Weidmann were “excellent”,
he said. Mr Draghi pointed out
that the Bundesbank had not
objected to the ECB’s two
three­year longer­term
refinancing operations.
Investors holding more than
three-quarters of Greece’s pri-
vate debt have agreed to partici-
pate in the country’s €206bn
debt restructuring, allowing
Athens to proceed with the
world’s largest ever sovereign
default.
The Greek government was
expected to announce the
results of its two-week cam-
paign to win over private inves-
tors this morning. But accord-
ing to Greek officials and bank-
ers briefed on the results, as of
Thursday evening investors con-
trolling almost 80 per cent of the
country’s privately held debt
had agreed to accept new bonds
worth less than half their origi-
nal holdings.
“It will be good news tonight,”
one Greek cabinet minister told
the FT. “Take-up will be around
80 per cent.” Another person
involved in the deal said the
acceptance rate could reach 85
per cent.
Athens is now expected to
trigger recently legislated “col-
lective action clauses”, which
give it the power to impose a
53.5 per cent loss on all holders
of bonds issued under Greek
law. In order to use the CACs,
Athens needed agreement from
investors holding two-thirds of
all bonds voted.
Once CACs are triggered, all
€177bn worth of bonds issued
under Greek law will be
swapped for a cash payment
equivalent to 15 per cent of
investors’ original holding. They
will also be issued new Greek
debt worth 31.5 per cent of their
old bonds. The two measures
will wipe about €100bn from
Athens’ €350bn debt pile.
“This extraordinarily difficult
deal . . . allows Europe to avoid
what could have been an enor-
mously costly, disorderly
default,” said Charles Dallara,
the chief negotiator for Greek
bondholders. In another sign
that a deal was imminent, the
European Central Bank also
began to reaccept Greek bonds
as collateral from banks seeking
cheap loans to run their day-to-
day operations.
News Briefing
Ofcom BSkyB inquiry
focuses on Murdochs
Rupert Murdoch is facing a
fresh challenge to his UK
business after Britain’s
communications regulator
escalated its probe into
whether British Sky
Broadcasting is a “fit and
proper” owner of a
broadcasting licence.
www.ft.com/media
D Bank taps ECB
Deutsche Bank took as
much as €10bn of European
Central Bank emergency
funding last week.
Page 15;
New generation, Page 17
Spain’s debt worry
Economists, business
executives and government
officials have started to
sound the alarm about the
rapid growth of Spain’s
public debt burden.
Page 4
Siemens Greece deal
Greece has reached an out of
court settlement with
Siemens over the alleged
bribery of politicians and
state officials by the German
conglomerate.
Page 15
LatAm China warning
Latin America’s economies
have become increasingly
resilient to global shocks but
have not prepared for a
China slowdown, the
Institute of International
Finance has warned.
Page 2
Emirates Airbus ire
Emirates Airline, the largest
operator of Airbus’ A380,
plans to seek compensation
from the aircraft maker over
wing cracks.
Page 15; Lex,
Page 14; A380 woes, Page 18
US ETFs in price war
The three largest providers
of so-called US exchange-
traded funds are aggressively
slashing their management
fees, fuelling a price war
among asset managers for
market share.
www.ft.com
Graffiti in Athens depicts the euro as a mechanical monster, on the day bondholders voted to accept a debt restructuring
AFP
‘This extraordinarily
difficult deal . . . allows
Europe to avoid what
could have been an
enormously costly,
disorderly default’
The ECB stopped accepting
the bonds in liquidity operations
after Standard & Poor’s last
week declared Athens to be in
“selective default”. Yesterday’s
successful debt restructuring
freed up €35bn in eurozone
funds to back Greek bonds, giv-
ing the central bank the comfort
it needed.
Despite the optimism, markets
are already betting Greece will
default again in the future. Grey
market pricing for Greece’s new
bonds ranged from 17 to 28 cents
on the euro, a highly distressed
level, according to indicative
quotes seen by the FT.
The pricing equates to a yield
on the new bonds of 17 to 21 per
cent – about where Greek yields
stood in the autumn and far
worse than the yield on debt
issued by Portugal.
In addition, 14 per cent of the
country’s bonds are not Greek-
law bonds. Most are governed
instead by English law and their
status remains unclear.
According to a confidential
analysis prepared for eurozone
finance ministers last month, 95
per cent of all privately held
Greek bonds must be included
in the restructuring for Athens
to lower its overall debt level to
120 per cent of economic output
by 2020 – the target mandated
by its new €130bn bailout. For-
eign-law bondholders are sched-
uled to meet at the end of the
month.
The FTSE All-World equity
index was up 1.5 per cent at
midday in New York. The FTSE
Eurofirst 300 added more than 1
per cent following a 1.3 per cent
advance for its Asia-Pacific peer.
Additional reporting by Joseph
Leahy in Rio de Janeiro, Richard
Milne in London and Vivianne
Rodrigues in New York
€100bn
Amount set to be wiped off
Athens’ €350bn debt pile
Red faces, Page 2
Alan Beattie, Page 11
The Short View, Page 15
Markets, Page 28
Faith being restored, Page 2
D Bank takes €10bn, Page 15
Secret deal to win UK backing for fiscal pact
By Alex Barker in Brussels
and George Parker in London
While Mr Barroso has the
power to allocate portfolios to
European commissioners, the
enthusiasm for the reshuffle
waned because of concerns that
it would be resisted by the Euro-
pean parliament – which has
the power to remove the com-
mission en masse – and fail to
satisfy
were both aware of the discus-
sions, but Downing Street and
the European Commission insist
it was never explicitly raised in
any official meetings between
the leaders.
A spokesperson for Mr Bar-
roso said: “The president of the
European Commission never
had and never does have the
intention
There has long been specula-
tion in Brussels about Mr
Barnier taking on Lady Ash-
ton’s job, given his keen interest
in foreign policy and experience
as French foreign minister.
Accounts differ on how the
talks were initiated. But several
people involved say the commis-
sion reshuffle was a serious
option during the intense diplo-
matic activity before the Decem-
ber summit. The British “were
handed Barnier’s head on a
plate,” one person said.
The plan was taken so seri-
ously that it was informally
raised with Lady Ashton.
According to two senior offi-
cials, Lady Ashton was open in
principle to moving jobs and
even stepping down if a commis-
sioner with more relevant exper-
tise was required. Lady Ash-
ton’s office denied that the ques-
tion even arose.
Downing St said yesterday:
“Cathy Ashton is doing fine
work in her current role, which
is a priority for the UK.”
British and European officials
drew up a deal to install a UK
commissioner as Europe’s top
financial regulator last Decem-
ber in a last-ditch attempt to
win David Cameron’s backing
for a new fiscal treaty, the
Financial Times has learnt.
According to several senior
officials privy to the talks, the
political bargain involved
Michel Barnier, the French com-
missioner for the internal mar-
ket and scourge of the UK
Treasury, replacing the UK’s
Baroness Ashton as the Euro-
pean Union’s foreign policy
chief.
The reshuffle plan was devel-
oped with the team of José
Manuel Barroso, European Com-
mission president, and was seen
by its advocates as the ultimate
safeguard for London’s financial
centre which would in return
secure Mr Cameron’s approval
for a new fiscal pact.
restless
Conservative
eurosceptics.
Mr Cameron and Mr Barroso
to
propose
this
change”.
Separate section
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FRIDAY MARCH 9 2012
WORLD NEWS
Red faces over Greek deal talks
Latin America
warned over
slowdown in
China growth
Embarrassment at
local opposition
Athens closes in on
restructuring target
ticipate in the debt swap.
One government official
said the six funds had been
“hijacked” by trade union-
ists on their boards in an
attempt to embarrass the
government as it restruc-
tures the debt under an
international
ing they were letting
Greece down at a pivotal
moment.
“When pension funds in
countries like Austria and
Sweden that invested in
Greek bonds are taking a
haircut, how can our own
funds refuse to join in?”
The six funds cover
better-paid workers, includ-
ing civil servants, police
and other security officials,
as well as media employees
and self-employed profes-
sionals, who will be hard
hit by a fresh round of pen-
sion cuts agreed last week
with Greece’s international
lenders.
“We are going to lose
another 20-25 per cent on
top of last year’s 20 per cent
cut, while lower paid work-
ers won’t be affected,” said
a militant board member of
Teady, the civil servants’
pension fund. Teady’s deci-
sion to hold out also reflects
fears that the government
will cut the civil service
payroll by as much as one-
third as a condition of
Greece’s
as well as the €7bn they
manage directly.
“The finance ministry
tells us to sell assets like
property and real estate to
help plug the hole, but that
is impossible in the current
environment,” said a law-
yer who advises ETAA, the
fund covering civil engi-
neers.
Another holdout fund,
Teaypoik, covering finance
ministry workers, faces a
cash crunch after following
the example of hedge funds
betting that Greece’s debt
restructuring would not be
completed before a €14.4bn
bond matured on March 20
– forcing the government
and international lenders to
make full repayment.
Teaypoik put its entire
cash reserves of €3m into
the March bond, leaving the
fund with barely enough
cash to pay employees this
month.
“The fund took advice
from a financial consultant.
It made the bet and lost,”
said a finance ministry offi-
cial.
“That is why we are hold-
outs. We are hoping we will
be rescued.”
However, the funds’ show
of resistance is likely to be
shortlived, as they will be
forced to accept a haircut
on their bondholdings when
the government activates
collective action clauses,
probably today, in order to
bring more than 90 per cent
of bondholders on board.
second
€130bn
By Kerin Hope
in Athens
bailout deal.
Fund managers are also
furious that the €23bn of
their reserves held by the
central bank will be
included in the swap, which
requires bondholders to
take a 75 per cent loss on
the value of their holdings,
spotlight’s
glare.
“They are using a credit
event for political gain,” he
said.
While the rebel funds’
bondholdings represent less
than 2 per cent of the
€177bn of Greek-law bonds
included in the swap, their
decision triggered an angry
response from Evangelos
Venizelos, finance minister,
not least because his own
ministry’s
By Joe Leahy
in Rio de Janeiro
The Greek government
might have been on course
last night to conclude a
€206bn debt restructuring
yesterday but not before
meeting some embarrassing
opposition to the deal.
Hours before last night’s
deadline for offers six Greek
state-controlled pension
funds, which together own
€3.3bn of government
bonds, were still holding
out.
Nine other state-control-
led funds with another €3bn
of bonds had agreed to par-
terms of trade losses,” the
report said.
It cited the need for
improved infrastructure
and education, less red
tape, increased labour mar-
ket flexibility and greater
competition in domestic
markets. This was particu-
larly the case for Brazil, the
region’s largest economy.
“It will be important that
Brazil sustain a reform
agenda,” said Charles Dal-
lara, IIF managing director.
Chinese moves to reorient
the economy towards one
based on greater domestic
consumption and less on
investment will not neces-
sarily reduce its demand for
raw materials from Latin
America in the near term,
economists say.
However, they believe in
the medium term, China’s
demands for metals, in par-
ticular, should begin to tail
off in line with global
trends. This would fall
Latin America’s economies
have become increasingly
resilient to global shocks
but they have not prepared
for a possible slowdown
in China, according to
the Institute of Interna-
tional Finance, which repre-
sents the global banking
industry.
Most of the countries in
the region, whose economic
growth was expected to
slow to 3.7 per cent this
year from 4 per cent last
year due to weakness in the
eurozone, should use the
present commodity super-
cycle to undertake more
serious reforms to improve
productivity, said Ramón
Aracena, IIF deputy direc-
tor of Latin America.
“Nothing lasts forever so
the role of policymakers
should be to prepare for
that,” said Mr Aracena at a
meeting of the IIF in Rio de
Janeiro yesterday.
Chinese premier Wen Jia-
bao this week set China’s
official growth target at
7.5 per cent for 2012 – the
first time it has been
lower than 8 per cent since
2004 – in a signal that the
country wants to change
the nature of its economic
expansion.
Slower Chinese growth
coincides with softer expan-
sions in other emerging
markets, even as the devel-
oped world economies
appear to be nearing the
bottom.
“While stronger macro-
economic positions have
bolstered Latin America’s
resilience to external
shocks, luck has been on
the region’s side,” the IIF
said in a report.
It said higher prices
explained most of the
region’s export sector
growth in the past five
years, providing a lift to
Latin American economies
but “masking policy weak-
ness”.
“Growing dependency on
commodities and the Chi-
nese market requires
improving lines of defence
against sharp and sustained
‘When funds in
Austria are taking a
haircut, how can
our own funds
refuse to join in?’
See The Short View
See Comment
For latest news and analysis
on the eurozone debt crisis
and Greece’s problems:
www.ft.com/eurozone
union
was
among the holdouts.
Mr Venizelos, who is
supervising the debt swap,
blasted the dissenters, say-
3.7%
Expected level of growth in
Latin American economies
more heavily on Brazil,
whose iron ore exporter
Vale is one of the world’s
biggest producers of the
commodity.
Figures from Hans Tim-
mer of the World Bank
show that metals have
diverged from an historical
trend by which commodity
use per unit of gross domes-
tic product has become
more efficient.
Today, it requires less
food and energy to produce
the same amount of eco-
nomic output. However,
thanks to intensive Chinese
use of metals in its recent
development, the world is
consuming more metals per
unit of GDP output than it
did in 1971.
Economists believe this
should revert towards the
norm as China moves away
from a focus on developing
metal-intensive infrastruc-
ture and heavy manufactur-
ing industries.
Looking elsewhere: Mario Draghi says the ECB’s work is largely done and the ‘ball is in the courts of governments and other actors’ to support the recovery
EPA
Draghi sees restoration of faith in eurozone
Facing German criticism
over the generosity of ECB
help for eurozone banks
and its hugely expanded
balance sheet, Mr Draghi
stressed the importance of
Europe’s new fiscal rule-
book – pushed by Ger-
many’s government. For
“this monetary union to
continue, [it] needs the will
to be subject to a discipline
that cannot be changed by
a government”, he said.
“These rules are the pillars
of trust between countries
and this trust is essential to
monetary union.”
But in a clear indication
that, barring an escalation
of the crisis, he saw the
work of the ECB as largely
done, Mr Draghi said the
“ball is in the courts of gov-
ernments and other actors”
to support the recovery.
The ECB’s 23-strong gov-
erning council left its main
interest rate unchanged at
the record low of 1 per cent,
and Mr Draghi said changes
had not been discussed. He
hinted strongly there would
be no further three-year
Longer-Term Refinancing
Operations (LTROS).
Downward-revised fore-
casts showed the ECB
expected the eurozone econ-
omy to contract this year –
with growth in a range with
a midpoint of minus 0.1 per
cent. But Mr Draghi
expected the economy to
recover gradually during
the year, and dropped the
adjective
used last month to describe
the “signs of stabilisation”.
At the same time, the
ECB revised significantly
higher its forecast for infla-
tion this year to a range
with a midpoint of 2.4 per
cent. Although inflation
was expected to remain
within the ECB’s target of
an annual rate “below but
close” to 2 per cent “over
the policy relevant hori-
zon”, Mr Draghi warned
higher than expected oil
prices and indirect tax
increases posed upside risks
to its forecasts.
The ECB’s three-year
LTROS have expanded to
more than €3tn the size of
the ECB’s balance sheet:
much larger than the US
Federal Reserve’s.
However, Mr Draghi said
it was “not correct” to say
the risks for the ECB were
greater. Excluding assets
not related to monetary pol-
icy operations, its balance
sheet was equivalent to 15
per cent of gross domestic
product. For the Fed and
the Bank of England the fig-
ures were 19 per cent and 21
per cent.
The Bundesbank had
voiced concern at the ECB’s
decision to give banks more
scope for using their loan
books as collateral when
obtaining ECB liquidity and
to give more discretion to
individual eurozone central
banks. Mr Draghi revealed
the move had in fact led to
only an additional €53bn in
collateral being used by
banks, of which French
banks accounted for €40bn
and Italian banks just €3bn.
He revealed 460 of the 800
banks had taken part in the
second three-year LTRO
had been German – many
small banks based in vil-
lages. As a result, the ECB’s
help was “now closer to
small and medium sized
enterprises than it was
before”.
Germany’s Bundesbank
has also expressed alarm at
its €500bn in claims on the
Target2 payment system
used by eurozone central
banks, which have resulted
from funds flowing to dis-
tressed eurozone periphery
countries. It has proposed
studying whether the risks
could be offset by demand-
ing countries pledge or
align assets to the ECB. But
its criticism implicitly sug-
gested a break-up of the
eurozone was possible,
something Mr Draghi again
argued was inconceivable.
News analysis
President trumpets
‘great progress’
through the ECB’s
offer of liquidity to
banks, writes
Ralph Atkins
Metal fatigue, Page 21
Money laundering
threatens Vatican
Mario Draghi has trum-
peted the European Central
Bank’s success in restoring
confidence in Europe’s mon-
etary union, making clear
that responsibility for fur-
ther action lies with govern-
ments and banks – while
the ECB fretted about oil
price-driven inflation risks.
Two ECB offers of unlim-
ited, three-year liquidity,
which saw the central bank,
providing more than €1tn
to eurozone banks, had
achieved “great progress,”
said the ECB president yes-
terday. Investors had
returned to the eurozone
and signs were emerging of
lending to the real economy
picking-up.
“tentative”
he
Fed and ECB balance sheets
€bn
By Guy Dinmore in Rome
last year but the probe
continues.
“To be considered a juris-
diction of concern merely
indicates that there is a vul-
nerability to a financial sys-
tem by money launderers.
With the large volumes of
international currency that
goes through the Holy See,
it is a system that makes it
vulnerable as a potential
money-laundering centre,”
the state department said,
quoted by Reuters.
In 2009, Pope Benedict
appointed Ettore Gotti
Tedeschi, a banker and lec-
turer in ethics in finance, as
head of IOR with a mandate
to draw a line under its
sometimes murky past
through greater transpar-
ency and by adopting inter-
national norms.
This was followed by the
naming of Cardinal Attilio
Nicora to act as the equiva-
lent of a central banker
with a regulatory role over
IOR as the Vatican sought
to comply with interna-
tional standards and be
included on a “white list” of
states complying with tax
fraud and money launder-
ing regulations. That proc-
ess could be concluded later
this year, though media
reports have suggested that
the cardinal’s authorities
have been reduced.
Italian newspapers have
published leaked Vatican
letters that point to internal
disagreements over how
transparent the Vatican
bank should be about its
past.
Formally known as the
Institute for Works of Reli-
gion, the bank was entan-
gled in the fraudulent col-
lapse of Banco Ambrosiano
in the 1980s, which resulted
in the death of its former
chairman, Roberto Calvi,
found hanging from Lon-
don’s Blackfriars Bridge,
and the Enimont corruption
trials involving payments to
Italian officials a decade
later.
3000
The US state department
has added the Vatican for
the first time to its annual
list of countries considered
vulnerable to money laun-
dering, despite efforts by
Pope Benedict to bring the
city state into line with
international standards.
The 2012 International
Narcotics Control Strategy
Report places the Vatican
among 68 countries defined
as “jurisdictions of con-
cern”, the second of three
categories. Most of the
world’s leading economies,
including the US, are
included in the most vul-
nerable group labelled as
being of “primary concern”.
Argentina was one of
three countries that moved
one notch up the list
into the most vulnerable
category.
The report, which noted
the Vatican’s inclusion for
the first time, did not spe-
cifically accuse it of being
involved in money launder-
ing, although in 2010 Italian
prosecutors froze €23m of
the Vatican bank, known as
IOR, in the course of an
investigation into suspected
violation of money launder-
ing regulations. The bank
denied any wrongdoing.
The funds were released
ECB
2500
Federal Reserve
2000
1500
1000
500
0
03
04
05
06
07
08
09
10
11 12
Source: RBS
See Comment
Slovakia coalition heads for defeat
Leftwing opponents
vow to tax wealthy
partners] would be normal,”
said Ivan Miklos, the
finance minister, of the
decision by the Freedom
and Solidarity party, to
overturn the government
led by Ms Radicova.
Since then, support for
Ms Radicova and Mr Mik-
los’ SDKU party has with-
ered after publication of a
leaked intelligence file that
suggested corrupt contacts
between businessmen and
senior officials during the
centre-right’s 2002-20 stint
in power.
The file, codenamed
“Gorilla”, has brought tens
of thousands of Slovaks out
on to the streets to protest
against political corruption.
“It has had devastating
consequences for us,” said
Mr Miklos. “The campaign
was not about programmes,
but about scandals and
accusations.” Polls suggest
the SDKU could now strug-
gle to make the 5 per cent
threshold needed to win
seats in parliament.
The latest polls see the
leftwing Smer party of
Robert Fico, former prime
minister, with almost 40 per
cent support, enough to
give it 75 seats in the 150-
member parliament.
The rest of the vote is
split among the four mem-
bers of the outgoing coali-
tion plus two new parties,
making any potential anti-
Fico grouping awkward to
organise. “It’s very difficult
to predict what will happen
on Saturday because a third
of the electorate is still
undecided,” said Grigorij
Meseznikov, a local political
scientist.
Mr Fico is keen to junk
the 19 per cent flat tax
brought in by Mr Miklos
and return to progressive
taxation. “Those who have
high incomes and huge
profits will have to pay
more,” he has told Slova-
kia’s Sme daily.
It is not clear what this
new higher rate will be, but
his advocacy of a higher
rate reflects a broader Euro-
pean Union trend of
leftwing parties promising
to soak the wealthy, as seen
in the campaign promises of
François Hollande, France’s
Socialist leader.
But Mr Fico’s possible
return to power is unlikely
to dismay economists. Ms
Radicova’s administration
brought in one of the euro-
zone’s most ambitious fiscal
tightening programmes. All
leading parties are commit-
ted to stick to a plan that
aims to drive the deficit to
below 3 per cent of gross
domestic product by next
year. The deficit is set to
reach 4.6 per cent this year.
Smer, which supported
both the European Finan-
cial Stability Facility and
the draft 2012 budget, is less
populist than it was in the
early years of its 2006-10
term in office. Mr Fico, who
previously opposed adop-
tion of the euro, became an
enthusiastic advocate of the
single currency, which Slo-
vakia joined in 2009.
By Jan Cienski in Bratislava
Slovakia’s centre-right gov-
erning coalition, brought
low by conflicts over the
euro and old corruption
scandals, faces a resound-
ing defeat in tomorrow’s
parliamentary election and
possible replacement by a
leftwing opposition that
promises to increase taxes
on the wealthy.
It is a remarkable turn of
fortune for a coalition that
won power in 2010 and led
Slovakia to a growth rate of
3.3 per cent last year – one
of the eurozone’s fastest.
Prime minister Iveta
Radicova’s government fell
apart in October when one
of the parties in her coali-
tion did not support the
government in a vote to
approve new powers for
the eurozone’s rescue fund.
Since then, she has run a
caretaker administration.
“We were really sur-
prised. I really expected
that they [the coalition
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‘The campaign
was not about
programmes, but
about scandals’
Ivan Miklos
Finance minister
The Vatican: placed on US
vulnerable list for first time
  FINANCIAL TIMES
FRIDAY MARCH 9 2012
★
3
WORLD NEWS
Sarkozy’s campaign ‘carpet bombing’ falls flat
which he will attempt to
regenerate the enthusiasm
that carried him to victory
in 2007.
The president’s camp
insists all is still to play for,
despite a strong feeling
among the Paris punditry
that the election is there for
the taking by François Hol-
lande, the opposition Social-
ist challenger.
“That doesn’t mean any-
thing,” says Jean-François
Copé, head of Mr Sarkozy’s
centre-right UMP party. “As
the campaign goes on, peo-
ple will see only Mr Sarkozy
has the capacity to face the
crisis. That is what is begin-
ning to come together.”
Mr Sarkozy has certainly
shown all of his campaign-
ing teeth. In a bruising
debate with former premier
Laurent Fabius on Tuesday,
he retorted at one point: “I
don’t have any style lessons
to learn from someone who
supported Dominique
Strauss-Kahn [the former
International Monetary
Fund chief brought down
by a sex scandal].”
The president’s big push
follows months in which Mr
Hollande has led him in the
polls. Maddeningly for Mr
Sarkozy, just as he seemed
to be closing the gap in first
round polls, Mr Hollande
seized back the initiative
last week with his proposal
to impose a marginal tax
rate of 75 per cent on
incomes above €1m.
More worryingly for Mr
Sarkozy, Mr Hollande’s lead
for the decisive second
round, on May 6, has so far
remained above 10 points.
There is some urgency:
under election rules all can-
didates receive equal broad-
cast time from March 16.
Mr Sarkozy has used the
intervening time to unleash
what Guillaume Tabard, a
commentator for Les Echos
newspaper, called “a strat-
egy of carpet bombing”.
A stream of policy propos-
als include imposing a tax
on French companies that
use foreign profit centres to
minimise their tax dues in
France, giving companies
the ability to negotiate
plant-level labour hours and
salaries, cutting social
charges on employers and
holding referendums to
drive social reforms blocked
by special interest groups.
With an eye on winning
back votes from Marine Le
Pen of the far-right
National Front, Mr Sarkozy
has also proposed cutting
immigration in half, impos-
ing tough conditions on
benefits for newcomers and
tougher penal conditions.
He also fuelled a dispute
with Muslim and Jewish
leaders by saying he
favoured labelling meat to
sentiment is very apparent
among the electorate. The
left is not a majority in
France, but there is an anti-
Sarkozy desire for change.”
Mr Sarkozy is aware of
the problem: he spent some
45 minutes of his marathon
TV grilling on Tuesday
apologising for perceived
past transgressions and
rebutting the label of “pres-
ident of the rich”.
But, Prof Perrineau says:
“He is accumulating propos-
als every day, but he has
not yet outlined a real
project. He needs to show
where he will lead France
over the next five years – to
go back to the heart of the
crisis and how France will
deal with it. That way he
can create a real difference
with François Hollande
because [Mr Hollande] is
more tied by a left which is
reticent about adapting
France’s social system.”
That is what Mr Sarkozy
will attempt to lay out on
Sunday. If, on May 6, it does
not deliver victory, Mr
Sarkozy was emphatic yes-
terday that would be the
end of his political life. “I’ll
bow out,” he declared.
French election
François Hollande
still leads the polls
despite a concerted
policy drive by the
incumbent, writes
Hugh Carnegy
A plan to nail tax-avoiding
big companies, a crackdown
on immigration, a swipe
against halal meat, a verbal
punch-up with a former
Socialist prime minister
during a three-hour televi-
sion appearance – and a
promise to retire from poli-
tics if he loses the presiden-
tial election.
Even by the all-action
standards of France’s
“omni-president”, this has
been a high-volume week
for Nicolas Sarkozy as he
battles to overcome a stub-
born opinion poll deficit in
the run-up to the first
round of voting on April 22.
Nor is he done yet: on
Sunday, Mr Sarkozy aims to
attract more than 30,000
supporters to a televised
rally just outside Paris, at
‘[Mr Sarkozy] is
accumulating
proposals . . . but
he has not outlined
a real project’
show if it had been ritually
slaughtered. Polls show
that many of these policies
are popular, but still the
poll numbers have moved
little. “It is the great mys-
tery of the Sarkozy cam-
paign,” wrote Mr Tabard.
Professor Pascal Perri-
neau of Sciences Po univer-
sity puts this down to Mr
Sarkozy’s personal unpopu-
larity. “The anti-Sarkozy
Charm offensive: the president speaks to a factory worker in Yssingeaux
Reuters
Doublethink no
longer enough to
sustain Beijing’s
grip on power
problem that Mr Wen was
not prepared to deal with
and the impression was of
a party that listens to its
subjects’ complaints and
acts at a speed no
democracy can match.
But if people seated in
the Great Hall were to pull
out a copy of Mr Wen’s
speech last year they
would see similarities. In
fact, there was barely an
issue that Mr Wen did not
promise to address last
year, or the year before.
Indeed, as Mr Wen and
most of his contemporaries
prepare to step down next
year from government, the
biggest complaint about
their decade in power is
that most of the problems
they promised to confront
have actually got worse.
Perhaps it is unfair to
expect a government to
make quick progress on
challenges as huge as
economic imbalances and
official corruption, but
when it comes to specific
policies the current
administration’s record is
also rather patchy.
China has some of the
best environmental laws in
the world but one look
outside the window in
Beijing tells you how
GLOBAL INSIGHT
Jamil Anderlini
in Beijing
For more than two decades
western observers have
been predicting the
collapse of Communist
China, an event that
seemed inevitable after the
1989 Tiananmen massacre
and the demise of the
Soviet Union.
But here we are, in 2012,
with China more powerful
than at any time in the
past two centuries and the
party seemingly in control
of what is now the world’s
second-largest economy.
To the casual observer,
the party’s internal
contradictions and the
rising corruption in its
ranks appear likely to
bring it down eventually.
China’s political
evolution has certainly
forced Marxist theorists in
Beijing to practise some
conceptual and linguistic
contortions – think “the
great banner of socialism
with Chinese
characteristics” (ie:
capitalism) and “the
important thought of Three
Represents” (ie: allowing
capitalists to join the
party).
But this willingness to
adopt new and formerly
taboo ideologies while
calling them something
else is at the heart of the
party’s resilience and the
main reason it has
managed to stop its
citizens repeating the
Tiananmen protests.
As China’s top leaders
gathered in Beijing this
week for the annual
session of their rubber-
stamp parliament, the
party’s pragmatism and
responsiveness was on full
display.
Listening to premier Wen
Jiabao deliver the annual
government work report to
3,000 delegates in the Great
Hall of the People was like
listening to a round-up of
China’s most pressing
problems, including some
that have only hit the
headlines recently.
The premier vowed to
“enhance school bus
safety”, a reference to a
series of school bus
crashes in poor rural areas
last year, and also
promised to improve air
quality monitoring in key
urban centres, following an
outcry late last year.
Widespread violent land
requisitions, corruption in
hospitals, courts and
schools and pollution were
all on Mr Wen’s list of
issues the government
intends to tackle. By the
end of his two-hour speech
it was hard to think of a
Officials at all levels
tend to hide
mistakes, play up
achievements and
pander to superiors
poorly those are enforced.
Another example is the
2004 blanket ban on golf
courses to preserve
dwindling farmland, save
water and reduce the huge
number of peasant farmers
displaced by a “rich man’s
sport”. At that time there
were about 170 golf courses
across the country. Today
there are more than 600.
This is what admirers of
China miss when they laud
its decisiveness and the
ability of officials to act
without the constraints of
democracy. Under party
rule, enforcement of well-
meaning policies and laws
is sketchy at best and
without oversight from
below; officials at all levels
tend to hide their
mistakes, play up their
achievements and pander
to their superiors.
Real political reform that
allows China’s citizens to
have more say over how,
and by whom, they are
ruled is something else Mr
Wen has been promising
but has not delivered. If
his successors cannot
follow through with
actions that match Mr
Wen’s words, then it may
not be long before the
forecasters of political
collapse are proved right.
See Editorial Comment
www.ft.com/beyondbrics
  4
★
FINANCIAL TIMES
FRIDAY MARCH 9 2012
WORLD NEWS
Alarm sounds over Spain’s rising public debt
growing quickly with each
successive annual deficit.
This year will see a further
€60bn added to the total, or
6 per cent of GDP, and it
could be greatly swollen in
future by contingent liabili-
ties for everything from
bank bailouts to guarantees
for lossmaking toll road
contracts managed by the
private sector.
Edward Hugh, a Barcelo-
na-based economist who
has studied the composition
of Spanish public debt, con-
cludes that by EU measures
it has already reached
about 70 per cent of GDP, to
which must be added 7 per-
centage points for the
unpaid bills of central,
regional and municipal gov-
ernments, 5 percentage
points for the debts of pub-
lic enterprises and a further
5 percentage points for pub-
lic debt held by the state
pension fund.
Mariano Rajoy, the cen-
tre-right prime minister, is
acutely aware of the prob-
lem – not least because his
government has announced
it will pay €35bn in overdue
bills owed to waste collec-
tion companies, pharmaceu-
tical groups and other sup-
pliers by municipalities and
regional governments.
The unpaid bills and the
other extras take Spain’s
actual public debt total to
about 87 per cent of GDP –
close to the €877bn esti-
mated by the Bank of Spain
as the amount of total pub-
lic sector liabilities
(although the items
included by the central
bank and Mr Hugh are
slightly different).
Spain is not unique in
having a total debt higher
than the EU-defined
number. But if the debt con-
tinues to rise, it will
become ever harder to serv-
ice in a recession that has
probably already begun.
“Once they get past 90 per
cent they could have a
problem at any moment,”
says Mr Hugh. Even using
the more narrowly defined
EU numbers, it is hard to
see how Spain can obey its
own, EU-compliant fiscal
stability law and cut its
debt to 60 per cent of GDP
by 2020.
Spain’s burgeoning debt
problem has its roots in the
housing construction boom
that came to an end shortly
before the collapse of Leh-
man. Ephemeral tax reve-
nues from the building
bonanza encouraged high
expenditure in municipali-
ties and regional govern-
ments on public swimming
pools, hospitals and more,
including several airports
that now lie empty.
Among other actions that
have come back to haunt
the authorities was a deci-
sion to suppress inflation
by keeping electricity prices
down in spite of costly
renewable energy subsidies.
That meant tolerating the
build-up of what is now a
€24bn “tariff deficit” under-
written, yet again, by the
government.
“If you go back a few
years and understand what
was happening in the good
years, you’ll see that people
were just trying to use the
government’s
money – without breaking
EU rules or inflation tar-
gets,” says one Spanish fin-
ancier involved in the sale
of distressed debt.
The onset of the economic
crisis soon made things
worse, sinking several sav-
ings banks that had to be
rescued and ultimately
leading to the transfer of
billions of euros of debt
from the private sector to
the public. “Spain’s total
debt [public and private]
rose from 337 per cent of
GDP in 2008 to 363 per cent
in mid-2011, due to rapidly
growing government debt,”
said the Debt and Delever-
aging report published by
the McKinsey Global Insti-
tute in January.
Last year, the former
Socialist government of
José Luis Rodríguez Zapa-
tero tried and failed to pri-
vatise the state lottery and
the airports authority,
which would have reduced
public debt. Today, with
another recession immi-
nent, the new government
is contemplating the oppo-
site: an €3bn-€4bn national-
isation of the underused
“radial” toll roads leading
to and from Madrid.
“It all adds up,” says Mr
Hugh, adding that Spain
risks raising its acknowl-
edged public debt ratio to
100 per cent of GDP.
“When you add all the
debt up, we are already in
the high 80 per cent range,
and two more years of ‘nor-
mal’ deficit plus more fund-
ing for the financial sector
should take it through the
psychological barrier,” he
says.
Economy fears
As the total climbs
past 87% of GDP,
it will become
ever harder to
service, writes
Victor Mallet
In the years of economic
crisis since the collapse of
Lehman Brothers in 2008,
Spanish leaders have
always been able to boast to
nervous investors that
Spain’s public debt burden
– however bad its annual
budget deficits – is smaller
than Germany’s and well
below the European Union
average.
Economists, business
executives and even govern-
ment officials, however,
have recently started to
sound the alarm about the
rapid and unsustainable
growth of the country’s
public debt.
The original boast
remains officially true
today, despite scepticism
about “peripheral” Euro-
pean economies after the
Greek bailouts. The latest
statistics from September
2011 show total Spanish
public sector debt standing
at €706bn, as measured by
the EU’s deficit-control
rules – a manageable 66 per
cent
New homes in Alicante (above) and an airport in Huesca (below) lie empty after the construction boom collapsed
AFP, Getty
Spanish government debt
Governments’ gross debt
As a % of GDP (2012 forecasts)
€bn
According to
Bank of Spain
According to
EU data
800
Spain
Germany
Portugal
Ireland
Italy
Greece
EU 12
600
400
of
the
country’s
200
€1.07trn
gross
domestic
product.
But the total debt is
already much higher than
the number calculated
according to the EU’s defi-
nitions. Moreover, it is
0
2007
08
09
10
11*
0
50
100
150
200
*
End of Q3
guarantees
Sources: Bank of Spain; European Commission
and
the
government’s
Overseas buyers rush for
a place in the Miami sun
years ago, they don’t have
a concept of what Miami is
today,” said Frank Nero,
chief executive of the
Beacon Council, a local
economic development
group.
The turnound is most
vivid in downtown Miami,
one of the hardest hit
markets during the
financial crisis. As credit
dried up in late 2008, half-
built condominium towers
loomed over the business
district, leading many to
predict it would take
decades for the city’s
urban core to recover.
But as money began
flowing again in late 2009,
investors from around the
world were quick to
recognise that Miami real
estate had emerged as an
attractive investment
opportunity.
Median sale prices for
downtown condos had
fallen by more than half,
making the market’s price
per square foot a bargain
compared with prices in
cities such as São Paulo.
Now, as inventory at the
high end of the market
dries up, “prices are finally
beginning to come up a
little bit”, said Ron
Shuffield, president of
EWM Realtors, one of the
area’s largest brokers.
Though still well below
their 2007 peaks, median
sale prices for downtown
properties have risen
steadily for 18 consecutive
months, according to
EWM.
Many buyers come from
overseas. “We continue to
be a city of immigrants,”
says former Miami mayor
Manny Diaz. “We’re going
to be a substantial
beneficiary of
globalisation.” More than
half of residents in Miami
Dade County are foreign-
born, the highest split in
the US. In the broader
South Florida region, there
are more than 300,000
Brazilians.
Some of the attractions
are obvious. “Brazilians
like to be by the beach,”
said Harvey Hernandez, a
Venezuelan who is
chairman of Newgard
Group. Newgard is the
developer of Brickell
House, a new development
where Mr Pileggi bought
his condominium.
Another factor attracting
some foreign buyers is the
weakness of the US dollar.
Over the past five years,
the Brazilian real, for
example, has grown
stronger, further enticing
new arrivals from Rio de
Janeiro and São Paulo. “I
never dreamed I’d be
following currency
exchanges like I do,” said
Mr Shuffield.
Brickell House, the first
big development to get
started since the crash,
will have more than 374
units, with prices ranging
from $200,000 to $1.4m. Mr
Hernandez has sold more
than 200 units since he
began taking orders in
October, with a majority of
buyers from overseas.
Yet with credit still hard
to come by for developers,
Mr Hernandez is not
offering financing. Instead,
buyers are paying all cash
in the “preconstruction”
model more common in
Latin America. Buyers pay
20 per cent of the price on
signing, 10 per cent when
the project breaks ground,
another 20 per cent when
the floor of their unit is
built, 20 per cent when the
roof is put on, and the
final 30 per cent on
delivery of their keys.
Mr Hernandez adds:
“Getting in early in the
project means good value.”
US property
Three years after
bottoming out the
housing market in
the Florida city is
booming, writes
David Gelles
Vince Pileggi always
wanted to be a snowbird
and flee the northern chill.
A telecommunications
contractor from Toronto,
Mr Pileggi had visited
Miami for years, soaking
up the sun and Latin-
infused culture that
distinguishes the
southernmost metropolis in
the US.
And last year, with the
Canadian dollar strong and
new high-rises sprouting
up around downtown
Miami, Mr Pileggi plunked
down a deposit for an
apartment with ocean
views. “I always wanted to
retire down south where
it’s warm,” he said.
Mr Pileggi is not alone.
Three years after the
Miami real estate market
bottomed out amid the
wreckage of the financial
crisis, it is booming once
more – especially at the
high end, and thanks to
foreign buyers.
Buoyed by strong
exchange rates, relatively
cheap real estate prices
and political turmoil in
some countries, buyers
from Latin America, Asia
and Canada are snatching
luxury properties.
“We’re in at the
epicentre of the
international real estate
market,” said Alicia
Cervera Lamadrid,
managing partner at
Cervera Real Estate.
“Miami is the meeting
place for Europe, South
America and the US.”
Local real estate brokers
are forecasting a record
number of sales topping
$1m this year, and several
projects under development
will bring more than 1,000
new units to the market.
“When people think of
what Miami was just four
Apartments in Miami Beach:
prices are soaring again
Increase in jobless claims fails to dent optimism
First­time claims for jobless
benefits in the US rose
unexpectedly last week but
the data failed to damp
optimism about a labour
market recovery,
writes
Anjli Raval in New York
.
In the week to March 3,
initial jobless claims rose
8,000 to 362,000 from the
previous week’s revised
figure of 354,000, the US
labour department said.
Analysts had expected
claims to be near 351,000.
The four­week moving
average was 355,000, an
increase from the previous
week’s revised figure of
354,750. The monthly
average smoothes out
seasonal quirks and provides
a more accurate view of
labour market trends.
Continuing claims, or
payments to people already
approved for jobless
benefits, increased by
10,000 to a seasonally
adjusted 3.42m in the week
ending February 25.
Bret Barker, portfolio
manager and managing
director at TCW, said:
“Overall this a pretty good
number and a far cry from
2008­2009. We are back to
levels seen prior to the
financial crisis.”
  FINANCIAL TIMES
FRIDAY MARCH 9 2012
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