10/10/2011 04:28 PM

The Financial Crisis Returns

Europe's Attention Shifts to Its Ailing Banks

Sovereign bonds were once considered among the safest of all investments. Yet with Greece teetering and several more euro-zone countries on the watch list, the Continent's banks are in trouble. The European Union is struggling to come up with an antidote.


The mood was decidedly somber last Thursday as Jean-Claude Trichet put in his last appearance as the president of the European Central Bank (ECB) following a meeting of the institution's governing council. There was no farewell gift and no bouquet of flowers -- only a few words of praise from Jens Weidmann, the president of Germany's central bank, the Bundesbank.

Trichet briefly acknowledged that he was "deeply moved" by the tribute from his German colleague. Then the Frenchman, who will be replaced by Italy's Mario Draghi at the end of this month as the head of Europe's currency watchdog, turned to the latest casualty of the euro crisis: The banks.

Three years after the collapse of the Lehman Brothers investment bank in September 2008, the crisis is heading toward a new peak. The banks no longer trust each other and, during the past week, prices of insurance policies to protect investors in the event that credit institutions go bankrupt have soared to the highest levels ever observed. Only the central banks are considered safe havens and are flooded with money from financial institutions.

Even US President Barack Obama is anxiously watching as events unfold in Europe. He recently stated publicly that the events transpiring on the other side of the Atlantic currently represent the greatest threat to the American economy. "You must act fast," he told the Europeans, adding that there needs to be a "very clear, concrete plan of action that is sufficient to the task."

Back in 2008, the threat came from America. At the time, the US government allowed Lehman Brothers to go bankrupt -- and unleashed a financial tsunami that drove large parts of the global economy into a recession and cost millions of jobs.

Extremely Precarious Situation

Now, it has become apparent that the danger from the heart of the financial world has not yet been eliminated. This time, though, it is emanating from Europe. With leading politicians and economists saying that the cash-strapped Greeks will soon require substantial debt relief, Europe's financial institutions find themselves in an extremely precarious situation.

Many banks still hold billions of euros in government bonds from Greece and other debt-stricken European countries. If these securities tumble in value, the institutions involved could face bankruptcy themselves. In the financial sector there is a growing fear of a chain reaction -- and of a second meltdown in the banking sector. The supply of money to business and industry could soon dry up, sparking a new credit crunch.
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As a precautionary measure, ECB President Trichet has turned on the money pump again. Over the coming months, the banks will have access to virtually unlimited liquidity from the ECB.

Furthermore, European heads of government are debating a new radical program. It has become apparent that a number of European banks will have to be nationalized and plans call for the money to finance this move to come, at least in part, from the European Financial Stability Facility (EFSF), the temporary euro backstop fund.

It was only in early September that Christine Lagarde, as the new head of the International Monetary Fund (IMF), was heavily criticized after she suggested that European banks would need some €200 billion ($267 billion) in additional capital. Now though, following a meeting with German Chancellor Angela Merkel and World Bank President Robert Zoellick last week in Berlin to discuss the banking crisis, it is clear that everyone agrees on the gravity of the situation.
Zero Risk?

The problems are immense. The European debt crisis involves a type of investment long considered to be one of the soundest available -- government bonds issued by European countries. It is a situation which has taken politicians by surprise as well, as can be seen by existing regulations regarding the assessment of risk posed by sovereign bond investments. When determining how much equity capital banks need as a buffer, the risk of financial loss associated with government bonds is considered to be zero.

In the middle of the year, many banks were already forced to write off 21 percent of their Greek bonds due to the impending debt reduction, known as a "haircut." That, though, likely won't be enough. Greek bonds may soon lose half their value -- if not more.

German financial institutions would likely be able to absorb such losses. The country's 13 largest banks have reduced their Greece-related risks to €5.6 billion.

But what if other European countries are affected by the turmoil? Currently, Italian and Portuguese government bonds are only being traded at a steep discount. If Greece were to default on its loans, the market value of these bonds would plummet even further.

US investment bank JP Morgan suggests a scenario in which Greek bonds have to be written down by 60 percent, Portuguese and Irish bonds by 40 percent and Italian and Spanish bonds by 20 percent on bank balance sheets. Due to these writedowns alone, JP Morgan says that European banks require an extra €54 billion. Analysts at Morgan Stanley even recommend up to €150 billion more in capital.
Signs of Trouble
French banks are particularly vulnerable, as demonstrated by last week's collapse of the troubled Belgian-French bank Dexia. After being bailed out in 2008, it now has to be rescued a second time with public funds from France, Belgium and Luxembourg. The Dexia Group holds €21 billion worth of sovereign bonds from ailing euro-zone countries. BNP Paribas also has more than €20 billion in Italian government bonds on its books while Spain owes the French bank some €2.5 billion. Furthermore, BNP and Dexia together constitute Greece's leading foreign creditor with approximately €4 billion.

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France's banks are now showing signs of trouble. The venerable commercial bank Société Générale has lost 50 percent of its share value since the beginning of the year. It, along with Crédit Agricole, was recently downgraded by the US rating agency Moody's. To make matters worse, both banks have Greek subsidiaries that have been dragged down by the crisis.

On top of that, the French will find it increasingly difficult to raise money on a daily basis to meet their ongoing obligations. They are much more dependent than other European financial institutions on cash injections from powerful US money market funds. These investment funds, which manage a total of $1.5 trillion, are specialized in such short-term transactions.

Such lenders, however, immediately cut all lines of credit if any doubts arise over whether they will be repaid. According to the Fitch rating agency, the funds are setting increasingly tighter deadlines. Nearly 30 percent of the French securities traded by the 10 largest US money market funds only have terms of up to seven days. Dexia's rapid collapse shows what happens when the cash flow suddenly stops.
Europe Mulls Forced Bailouts
Sources of liquidity are already starting to dry up. Since late July, US funds have withdrawn nearly 20 percent of their investments from French banks. Société Générale alone lost nearly €20 billion in financing within just a few weeks this summer.

The situation is even worse for Spanish and Italian banks, which have been largely cut off from this important flow of dollars for some time now. A few weeks ago, the US Federal Reserve and the ECB, together with the British, Swiss and Japanese central banks, joined forces to make dollars available to these banks until the end of the year. Without this regular intervention by the central banks, liquidity would have long since dried up.

Greek financial institutions have been forced to stop financing many domestic businesses and investments. Even many healthy companies now find it almost impossible to borrow money. "This is the death of the Greek economy," Greek Economy Minister Michalis Chrysochoidis grimly commented. The country's banks are first in line for any European bailout program.

Things look significantly better for German financial institutions thanks to the country's robust economic recovery. But banks such as the state investment bank Nord/LB in Hanover and the publicly-owned regional bank Landesbank Hessen-Thüringen (Helaba) have too little equity to weather a major crisis. These financial institutions reportedly need an extra €20 billion in capital.

Commerzbank was bailed out in 2008 with two injections of capital. It was only recently that Commerzbank CEO Martin Blessing returned the majority of the state guarantees that he had received from Berlin -- but he may have to turn right around and ask the German government for more money.
A Different Story

The Greek debts are not his major concern, though: Commerzbank lent €2.2 billion to the Greek government in late July, and an additional €900 million to Greek banks and other enterprises. "Commerzbank could reasonably withstand even a 100-percent haircut in Greece," says Merck Finck analyst Konrad Becker.

It would be a different story altogether, though, if Italy and Spain ran into greater difficulties in the event of a Greek default. The governments of both countries owe Blessing's bank a total of €11.6 billion. On top of that, there are loans and other financing measures for the private and banking sector amounting to nearly €19 billion.

Should the crisis actually escalate and debt restructuring also become necessary in Spain and Italy, "Commerzbank would certainly no longer be in a position to cope with this alone," says Becker. This would make Commerzbank a candidate for recapitalization. If necessary, the medicine will have to be administered forcibly.

A move to compel banks to increase their liquidity buffers, as is currently under discussion in Brussels, would meet with even more resistance from Deutsche Bank. "We are very well capitalized," said Deutsche Bank CEO Josef Ackermann at an analysts' conference last week in London. He explained in detail that the bank will be able to improve its capital base thanks to billions in anticipated profits, adding that by the end of 2013 Deutsche Bank intended to shed risky securities worth nearly €100 billion. At the same time, however, Ackermann had to admit that the bank will miss its profit target of €10 billion for 2011. Although the bank reduced its risks in Greece, Italy, Portugal, Spain and Ireland to €3.7 billion by late June, it's clear that if other euro countries besides Greece start spinning out of control, things could also get tight for the German market leader.

One analyst at JP Morgan has already put forward a scenario in which Deutsche Bank requires nearly €10 billion in additional capital. Moreover, the analyst argues that the bank's liquidity cushion may be insufficient once regulators introduce new provisions over the coming years. Ackermann cites big numbers in an effort to refute such criticism. He says the bank has obtained €180 billion in liquidity.

Soffin Relaunch

There is so much fear of a second banking meltdown that officials in the German Finance Ministry are working to redeploy a tool that already proved itself during the financial crisis of 2008 and 2009 -- the Special Fund for Financial Market Stabilization (Soffin). The fund was able to provide ailing banks with guarantees totaling up to €400 billion. This initiative expired in 2010 and is now only dealing with old cases -- but it would be easy enough to revive it: "All we would have to do is change the date in the text of the law," according to staff members working for German Finance Minister Wolfgang Schäuble. They also think that such a move would be approved by the parliamentarians of the parties in Germany's center-right coalition government.

The topic of bailing out the banks is at the top of the agenda across the European Union, and a fundamental decision on the issue was expected at the next summit of the 27 heads of state and government in Brussels, originally scheduled for Oct. 17-18. Due to ongoing differences between France and Germany, however, it has now been postponed until Oct. 23.

When it comes to banks, the Germans are pushing for all banks in the euro zone and the UK to have a standard capital ratio of, for example, 10 percent. Furthermore, experts in Brussels are considering introducing compulsory aid for banks. This contrasts with existing rules in individual EU countries that provide no means of bolstering recalcitrant financial institutions. According to the new concept, any bank that can't raise enough private capital would be financed from public coffers.

Sources in the German Finance Ministry say that these measures would be limited to banks deemed "too big to fail." In addition, the affected banks would initially be given a deadline to bring their capital reserves up to the required level on their own. "Compulsory capitalization is definitely a controversial issue," says Michael Meister, deputy leader of the conservatives' parliamentary group in the Bundestag.

It is still unclear whether the plan would receive majority support in Germany and the EU. France is pushing for the expanded European Financial Stability Facility (EFSF) bailout fund to quickly and unbureaucratically aid embattled banks with sorely-needed capital. This would be a less conspicuous way of recapitalizing French banks -- and at a lower cost to the French.

'The Faster, the Better'

By contrast, the German government wants to limit EFSF operations to extreme emergencies. The Germans say that initially, at least, the struggling banks would have to attempt to raise fresh capital from private investors. If that doesn't succeed, says Berlin, then the home country will have to step in.

France is, however, not alone in its demand that the bailout fund be used to recapitalize banks. Support for the idea also comes from countries that generally argue for cautious spending of taxpayers' money. Austria, for instance, whose banks are also under threat, does not oppose in principle using the EFSF to support the sector.

Another contentious aspect is Germany's determination to give the Bundestag a say on how the money is spent. The plan calls for the majority of EFSF operations to be subject to the approval of a parliamentary committee. Germany's partners in the EU have expressed reservations about this approach. "A government needs the general confidence of parliament for it to be able to act effectively on decisions that affect the financial markets," says Luxembourg Finance Minister Luc Frieden, "and this is especially true of large countries."

A very different proposal to use the new bailout funds more efficiently has been made by Walther Otremba, a former top official in the German Economics Ministry. In an article in this week's SPIEGEL, the former state secretary proposes creating a Europe-wide insurance for struggling peripheral countries like Portugal, Italy, Spain and Ireland. According to Otremba, the concept would be financed from the risk premiums of the associated bonds -- and would provide a way of preventing the contagion from spreading to other members of the euro zone should Greece default.

Speaking in Berlin last Thursday, ECB President Jean-Claude Trichet made it clear that he thought domestic programs should be used first to strengthen the banks' equity capital base. He added that the EFSF bailout fund would soon be in a position to lend money to the member states to recapitalize their banks. "The faster the EFSF can tackle the root causes of the crisis," Trichet said, "the better."
Translated from the German by Paul Cohen

10/11/2011 02:33 PM

The World from Berlin

'EU Leaders Are Staring at Markets Like Rabbits at a Snake'

French President Nicolas Sarkozy and German Chancellor Angela Merkel have made sweeping promises in recent months. The results, however, have been meager. Now the two are demanding a swift recapitalization of European banks. German commentators aren't buying it.

The euro crisis is escalating again, with growing concern that a looming Greek insolvency could trigger a new banking crisis. Furthermore, apparent divisions between France and Germany on the recapitalization of banks have unsettled investors and there are widespread concerns that Slovakia will block the expansion of the euro bailout fund in a parliamentary vote due later on Tuesday.

Meanwhile, Greek newspapers are reporting that inspectors from the "troika," made up of the European Union, the European Central Bank and the International Monetary Fund, will issue a tepid report on Greece's progress on reforms. The report's findings are crucial for Greece to receive the next tranche of international aid from the rescue package assembled in the spring of 2010.

German media commentators on Tuesday heap criticism on the crisis management of European leaders, saying policy responses have been dictated throughout by pressure from the financial markets. Whenever those market pressures ease, leaders seem to take a breather rather than using periods of calm to come up with a comprehensive strategy to solve the crisis once and for all.

The regular meetings between German Chancellor Angela Merkel and Nicolas Sarkozy are a case in point, commentators say. The two leaders get together whenever financial markets start panicking, and make grand pledges to try to calm the situation. But then little concrete progress is made. Their announcement in mid-August of plans to set up an economic government for the euro zone, to enshrine debt brakes in all euro zone member states and introduce a financial transaction tax seem forgotten. Instead, because financial markets now fear European banks -- and French banks in particular -- will get into trouble as a result of a possible Greek debt cut, they talked at their last meeting on Sunday in Berlin about a recapitalization of banks, feigned agreement and said a comprehensive plan would be in place by the end of the month.

Pundits say EU leaders need to step back from the hectic fire-fighting that has dictated their crisis response over the last 18 months, and come up with a bold, comprehensive, lasting solution.

Left-wing Berliner Zeitung writes:

"How long ago did this happen? Angela Merkel and Nicolas Sarkozy stood in front of the media and announced the results of their crisis talks: debt brake and economic government were their buzzwords, and they also referred to a tax on financial transactions. That was in mid-August. Last Sunday evening they stood there again, and this time they talked about recapitalizing banks. By the start of November, they said, Europe's banks must be stabilized. What happened to the financial transaction tax between those two meetings? What about the debt brake? And the economic government? And the European coordination of all these projects? Hard to say. They didn't say anything about it."

"No, our governments aren't lazy, that's not the problem. In fact they're hard at work setting up rescue funds for Greece and stability mechanisms for later, and now they're trying to save the banks again. The problem is that almost everything they do consists of hectic reactions to the next looming disaster that 'the markets' have in store for us. Our governments have turned into what armies call 'crisis reaction forces.' The markets dictate the pace of their actions -- and it's a break-neck pace. What the governments are doing has little in common with politics, if you see politics as shaping society and the economy in the interests of the common good, however that is defined."

Conservative Die Welt writes:

"Europe's top politicians are staring at the financial markets like rabbits at a snake. They are allowing themselves to be driven along by developments in the capital markets as if they had no will of their own. Virtually every major anti-crisis measure in the last year and a half was only decided and implemented under the (time) pressure of acute market turbulence; the recapitalization of banks being discussed now will only be the next example."

"All this wouldn't be so bad if the impetus of governments didn't immediately wane whenever the market situation eases even a little. As it is, periods of relative calm aren't used, and any thinking about a comprehensive solution to the crisis is left to academics -- until politicians are reawakened by the next outbreak of panic in the share, bond or inter-bank markets. The markets are in charge in this crisis. But in a way that no one can want."

Conservative Frankfurter Allgemeine Zeitung writes:

"If the next EU summit is really to have a calming effect on citizens and financial markets, it will have to come up with credible solutions: the euro-zone banks must be recapitalized to such an extent that they can withstand a far greater loss on their Greek bond holdings than they had factored in so far. That is linked to the acknowledgement by governments that Greece is insolvent."

"One mustn't abandon the principle that every euro member state is responsible for its own banks. That is the only way to retain the incentive to limit the aid to the lowest possible amount. The German chancellor is right to prevent French President Sarkozy from trying to plunder the bailout fund EFSF for the purpose of protecting French banks and sparing his own budget."

"In political terms, the second banking sector rescue will be hard to convey to the public, especially in Germany. The government didn't use its primacy over the financial industry to force private sector banks to set aside more provisions in time. And politicians didn't restructure the state Landesbanken (publicly-owned regional banks) either."

Business daily Financial Times Deutschland writes:

"After President Sarkozy's brief meeting with Frau Merkel on Sunday, both emphasized that they are in total agreement on the rescue of banks. The opposite is the case. The French president wants the joint rescue of banks. Merkel wants the same procedure as in 2008, when euro-zone countries competed over who could provide the most aid to their banks. Sarkozy believes the French banks will need a lot of money. Merkel believes what German banking associations are whispering to her, that German banks will be less affected this time around."

"One has to conclude that the German position is even crazier than the French one. The euro debt crisis should have shown even the German nationalists in the government and parliament that every competitive advantage that German banks and the German government budget enjoy as a result of investors' flight to quality evaporates very quickly. The partner countries suffering the capital outflows end up needing all the more aid."

David Crossland

October 10, 2011 11:16 pm

Washington and world trade: Intentions in tatters

Battles in a bitterly divided Congress are rendering US international economic policy impotent or counterproductive
The American flag flies in tatters above the US Capitol
A hard rain: the American flag in shreds above the Capitol building after Washington's August buffeting by hurricane Irene. Cuts to spending on disaster relief in its wake are among austerity measures being sought by Republicans

The eurozone has been attracting plenty of opprobrium for its dysfunctional handling of the sovereign debt crisis. But as François Baroin, French finance minister, mischievously pointed out on a recent trip to Washington, the US also has problems. Whereas managing the euro requires laborious consultations with 17 national parliaments, he said, “here you seem to be having enough trouble with just one”.

This week should have been a rare triumph for White House international economic policy. After protracted squabbling with, and inside, Congress, bilateral trade deals with South Korea, Panama and Colombia negotiated four or five years ago by George W. Bush’s administration are finally coming up for ratification.

But another vote on Capitol Hill last week was potentially far more important than three bilateral trade deals, which are of minor economic significance. The Senate alarmed many supporters of free trade by pushing forward aggressive legislation to punish China for manipulating its currency.
Those free-trade supporters, along with some of America’s trading partners, say an acrimonious atmosphere in Washington – particularly a divided and fractious Congress bickering over debt and deficits – is rendering much of US international economic policy either impotent or counterproductive at a time when the world economy needs leadership and confidence.

With eurozone policymaking also in turmoil, many emerging market economies are increasingly alarmed that the rich world is either asleep at the wheel or fighting with its co-driver. Guido Mantega, the Brazilian finance minister, recently told the Financial Times: “Most of the problems we are seeing today come from problems in reaching political solutions in Europe and America.”

Interviews with current and former administration and congressional officials suggest there are three main reasons. First, there is a poisonous cloud of suspicion around anything to do with trade, particularly trade with China. Second, fierce congressional battles over taxes and spending undercut the administration’s attempts to project a coherent economic policy abroad. Third, the raucously partisan atmosphere on Capitol Hill has held global as well as domestic policymaking hostage to point-scoring and tactical manoeuvring.

That the bilateral trade deals, formally called free trade agreements, have languished so long largely reflects the toxicity the issue has acquired. Though the administration’s own estimates suggest that the agreements will provide only a relatively minor boost to jobs and growthColombia and Panama are small economies, and most tariffs with South Korea are already quite lowsuch pacts are widely blamed by trade unions and the public for sending jobs abroad. The debate that surrounds them has become a proxy for those about globalisation, employment, inequality, and the future of the American middle class.
Negotiating new pacts has proved difficult. For example, the US is supposed to be agreeing bilateral investment treaties with the Bric countries (Brazil, Russia, India and China) to protect the interests of US companies operating there. But first it has to finish an internal review of its Bit strategy, which has been under way for more than two years. Unions have argued that the current standard template for investment treaties, developed under the Bush administration, risks allowing foreign investors in the US to circumvent environmental and labour law.
Indeed, opposing trade agreements and confronting China are among the highest priorities of those unions – which play a large role in financing and campaigning for Democratic candidates. Reversing the traditional pattern, whereby the Senate acts as a calming influence on the hot-headed House of Representatives, the Republican House leadership is deeply sceptical about the Democratic-controlled Senate’s push for the currency legislation. Xinhua, the official Chinese news agency, sniffily said of the bill last week: “This has become a common practicewhenever the [US] economy is slow, whenever an election is nearing, voices in the United States pressing for the rise of the renminbi are all over.”
The number of Democratic law­makers who can be relied on to vote for trade bills and against measures such as the currency legislation has been shrinking steadily over the years, a trend strengthened by disillusionment with earlier deals, such as the North American Free Trade Agreement, launched in 1994.
If anything, to the surprise of some, the polarisation has intensified since November’s midterm polls. The election of dozens of Tea Party Republican lawmakers, many of whom profess an America-first foreign policy that es­chews nation-building in places such as Iraq and Afghanistan, raised concern among trading partners that they would also push US economic policy towards protectionism. As it happens, Tea Party legislators strongly supported the bilateral trade agreements, the government-phobic trait in their political character winning out over the isolationist. A large majority 67 out of 87 – of Republican congressional freshmen, including many Tea Party supporters, wrote to President Barack Obama in March urging him to submit the pacts to Congress.
Dan Price, managing director at the Rock Creek Global Advisor consultancy, and formerly George W. Bush’s White House point man on international economics, says of the Republican intake: “They were painted as isolationists and nativists, and that has not proven to be the case.”
Moreover, the only leading candidate for the Republican presidential nomination to oppose the currency bill is Rick Perry, the conservative Texas governor who is close to the Tea Party. The relatively centrist Mitt Romney supports currency tariffs against China. Remarkably, Jon Huntsman, former ambassador to Beijing, and usually an advocate of constructive engagement rather than confrontation with China, said he would sign the currency bill.
. . .
Still, while the Republican law­makers’ stance is at least enabling the bilateral pacts to crawl through Congress, ideological and partisan divides are preventing coherent international economic policy from being formed on other fronts.
One of the fiercest fights has been over fiscal policy. The protracted and heated discussions over raising the federal debt ceiling in August, which led to the first sovereign credit downgrade in US history, are likely to be repeated when the government needs fresh funding in November.
The episode was watched with astonishment in much of the rest of the world, the US apparently bent on creating its own voluntary sovereign debt crisis to match the involuntary one in the eurozone, spreading fear and volatility through global financial markets along the way. Arvind Subramanian, a fellow at the Peterson Institute for International Economics in Washington, says: “Many people in emerging markets were asking: what the hell are you guys up to?”
Mr Price counsels against paying excessive attention to congressional thunder and lightning. Legislative battles can look very messy to an international audience, particularly issues like the debt ceiling, which are surrogates for wider debates,” he says. “But the rest of the world should not infer too much from them about the stance of the US administration.”
However, the short-term fiscal austerity being preached by the Republicansright down to trying to make compensatory cuts to the disaster relief spending after hurricane Irene in Augustflatly contradicts one of the administration’s main international messages. The US has consistently argued that governments should be prepared to keep the fiscal taps open to boost demand if, as indeed seems to be coming to pass, economic growth falters.
. . .
The Treasury has clashed over the issue with governments such as that of Germany, which prioritises public finance consolidation over short-run stimulus. Yet because of opposition in Congress to prolonging temporary tax cuts and to fresh stimulus spending, it is the US, not Germany, that is on track for one of the sharpest fiscal tightenings next year in the Group of 20 large economies – a potentially serious weakening of global demand.

Tim Geithner, Treasury secretary, last month attended a eurozone finance ministers’ meeting in Poland to offer friendly advice on how to manage a financial bail-out, based on experience with American banks. But his domestic problems gave ammunition to those who resent US lecturing. “We can always discuss with our American colleagues,” said Didier Reynders, the Belgian finance minister. “I’d like to hear how the United States will reduce its deficits.”
Brazil’s Mr Mantega – in the past year a fierce critic of the US Federal Reserve policy of quantitative easing, which he says weakens the dollar to the detriment of trade rivalsrecently said Congress bore much of the blame. Its refusal to sanction more fiscal stimulus, he argued, forced the Fed to do too much elsewhere. “Monetary policy is overextended due to the absence of fiscal policy,” he told the FT. “One without the other is like a crippled duck.”
Bipartisan co-operation in Congress has collapsed across a range of subjects; policy towards globalisation is no exception. “We are in a situation where political dysfunction has made it difficult even to move things forward that have broad support,” says Ted Alden at the Washington-based Council on Foreign Relations, who co-wrote a recent CFR report into US international economic policy.
He cites plans for a “start-up visa” – a bill that, if passed, would give foreign entrepreneurs a work permit in return for investing in the US. “This has broad bipartisan support, and even the labour unions are relatively comfortable with it,” Mr Alden says. But the bill is held up, he says, largely because Democrats are pitching for Latino votes by holding out for a more comprehensive immigration bill that they privately know they will not get.

Mr Geithner – a veteran of the all-powerful Treasury of Bill Clinton’s administration, which dominated the International Monetary Fund and more or less ran the global response to the Asian financial crisisunderlined last week how far US credibility had deflated. Look at our politics today,” he told a Washington audience. “People look at us and they wonder whether they’re going to see Washington demonstrate they can do things on a scale commensurate with our challenges.”

He added: “So you have to come to these discussions with countries around the world recognising we need to do so from a position of extraordinary humility.”

It is not a posture the rest of the world is used to seeing US policymakers adopt. But as long as the politics back in Washington produces distrust and gridlock, it is one they will have to get used to in years ahead.

DEVELOPMENT FUND: Alarm at a reluctance to bolster multilateral banks

Giving money to foreigners is always likely to be one of the first things to be sacrificed when there are cuts in government spending to be made. But this year the House of Representatives appropriations committee went further than might have been expected.

The committee said it would not fund general capital increases for the World Bank and institutions including the Inter-American, African and Asian development banks that had painstakingly been negotiated by the banks’ shareholder countries.

If this threat is carried through, it will have serious consequences for the multilateral development banks, which finance their activities by borrowing commercially against their capital base. The last World Bank capital increase was two decades ago and winning agreement on a new one was being seen as a success for Robert Zoellick, its president.

An array of current and former US officials has quickly assembled to argue against the decision. But the need to appeal to US self-interest is evident, especially given the suspicion of multilateral institutions in some parts of the conservative wing of the Republican party. Accordingly, the request for funding has been couched largely in terms of protecting US security.

In a letter to Congress last month, Tim Geithner and Leon Panetta, secretaries of the Treasury and defence respectively, said: “The MDBs have been our partners in promoting security around the globe. In key frontline states vital to US national security, such as Afghanistan, the combined contributions of the World Bank and the Asian Development Bank rank among the top four donors.”

Ever-present is the threat that if US-influenced institutions do not provide money for development, geopolitical rivals will move in. A smaller share of capital contributions would mean a lower voting weight on the banks’ boards. The US losing its leading role in the Asian and African development banks, Mr Geithner and Mr Panetta wrote, “would effectively cede more influence to China in both regions”.

In Central America, the oil-funded influence-buying of Hugo Chávez, Venezuela’s president, is a main fear. Jim Kolbe, a Republican ex-congressman who chaired the House committee that financed foreign aid, says: “If we withdraw from the World Bank and the IDB we leave the space open for others – for Chávez or the Chinese or whoever.”
Copyright The Financial Times Limited 2011.