September 1, 2013 7:27 pm
The emerging markets crisis is threatening the global recovery
It is increasingly odd that feedback effects on the US economy are taboo, says Guillermo Ortiz
The world is expecting the US Federal Reserve to start tapering its quantitative easing programme soon. This has increased market volatility. And, as in past episodes of Fed tightening, emerging markets are at the centre of the turmoil. But this time the adjustments taking place are the product of imbalances that originated in the developed world.
Sincé 2010, advanced economies’ unconventional monetary policies have fuelled unprecedented capital flows into emerging markets, reaching $1tn a year. This generated unsustainable credit growth, raised asset prices and worsened several recipient countries’ vulnerability.

When the Fed signalled the forthcoming end of QE, emerging markets became the focus of financial distress. This creates a challenge for them – and policy makers must go beyond temporary measures to defend currencies and stem capital outflows. Exposed countries must move fast to recover their balance, to reassure markets of their long-term stability and to accelerate structural reforms to increase productivity growth.

The Fed has not helped: its lack of clarity on tapering caused the Indian and Indonesian currencies and stock markets to sink. But clarity alone will not reverse the process that is under way. This is the start of a renormalisation in global interest rates, and countries with the greatest external imbalances feel the greatest pressure. Since April Indonesia has lost about 14 per cent of its foreign exchange reserves; India, nearly 5.5 per cent. If this stress persists, it is not difficult to envision a full-blown balance of payments crisis. The same holds true for Turkey, Ukraine and South Africa, among others.
In this scenario, the international community’s failure to put in place safeguards against financial dislocation risks derailing the global recovery. Fed officials invoke the domestic character of their mandate, but emerging markets are more and more important for global growth. It is increasingly odd that feedback effects on the US economy are taboo.

Special responsibility, then, falls to the International Monetary Fund – the only multilateral organisation with the mandate and strength to mitigate the effects of large central banks’ unconventional policies. During the 2007-09 crisis, liquidity backstops through the IMF and the Fed prevented further economic deterioration. But the IMF has been slow to act here and even recommended both continued monetary stimulus and reduced global financial risk. The speech at last month’s annual gathering of central bankers at Jackson Hole, Wyoming, by Christine Lagarde, head of the IMF arguing that the world must buildfurther lines of defenceagainst a possible emerging markets crisis, but that the IMF was prepared to offer financial support – was an important first step.

However, without follow-through it will prove inconsequential.

QE was the right policy to see off the 2008 financial crisis and ensure a lack of liquidity did not push solvent economic agents into bankruptcy, inducing downward production spirals. But maintaining an active monetary policy once the zero lower bound in interest rates had been reached meant entering uncharted waters. Fed purchases in long-term bond markets ended up bigger than expected, amid private sector deleveraging, synchronous restrictive fiscal policies and liquidity leaking into emerging markets’ financial markets.

For liquidity provision to be sufficient, it had to be excessive. To enable an escape from depression in developed economies, it was almost inevitable bubbles would emerge, especially in emerging markets.

The effectiveness of “forward guidance” has been overstated as a tool to manage the exit from QE. And, no matter how gradual the tapering of QE, abrupt adjustments will occur. It is in the nature of financial markets to overreact and overshoot.

Methods used to bring about an escape from a potential depression built in a bumpy recovery. As always, a central bank’s communication strategy is important, and may mitigate volatility, but should not by itself be considered a crucial policy tool. Second-guessing market participants is bound to be an awkward, self-defeating undertaking for a central bank. Better to have an economics PhD running the Fed than a spin-doctor.

The writer is chair of Grupo Financiero Banorte and was formerly governor of Banco de México and Mexican Treasury secretary
Copyright The Financial Times Limited 2013


Updated August 30, 2013, 7:05 p.m. ET

Cameron's Defeat on Syria Is Also President Obama's

The prime minister's loss in the House of Commons was the first on such a question since 1782.


 In the deadly poker game that the great powers are playing over Syria, the British have just folded. Thursday's vote in the House of Commons has not only damaged Prime Minister David Cameron's authority, perhaps beyond repair, but forced President Obama to face the prospect of military intervention without the support of America's staunchest ally. 

No wonder officials in Washington are making no secret of their fury that for the first time in half a century the Anglo-American "special relationship" has proved unreliable. It was Mr. Cameron who had tried to play the heroic part of Margaret Thatcher by taking the lead on Syria, dragging a reluctant U.S. administration to choose sides in the civil war by arming the rebels. But when put to the test, he failed to deliver.
It is difficult to convey the historical magnitude of Mr. Cameron's defeat, narrow as it was. American presidents can continue in office even if they lose control of Congress, but British prime ministers must command a parliamentary majority at all times, especially on issues of war and peace.  
Zuma Press
U.K. Prime Minister David Cameron

Mr. Cameron is the first prime minister to have been defeated in the House of Commons on such a question since 1782, when King George III's premier, Lord North, lost a vote of no confidence and resigned, following the British defeat at Yorktown. In British politics, careers are usually made or unmade on the floor of the House of Commons. Mr. Cameron will be fortunate to survive such a humiliation.
It was all the worse for being self-inflicted: He had recalled parliament from vacation, taking its endorsement of his policy on Syria for granted. By the time he realized that he had misjudged the country's appetite for action, it was too late: In the final vote, some 50 members of his coalition deserted him.

The gravity of Thursday's defeat, however, extends far beyond domestic politics. Just as Hitler in his bunker ranted about dividing the Allies, playing on Stalin's fears that the U.S. and Britain would make a separate peace with Germany, so Bashar Assad must hope to save himself by dividing his foes. At next week's G-20 summit in Moscow, the West will struggle to present a united front against Russia and China. The British, with whom the United States normally makes common cause, will this time stand aloof, leaving the Americans with the French and the Turks; instead of the special relationship, a ménage à trois.
Will dictators now be emboldened to use weapons of mass destruction? That depends, as always, on whether the U.S. administration has the confidence to raise the cost of their doing so. But it is always easier for any president to deter evildoers if he has allies on whom he can rely. Usually that means the British—but not this time.
What, then, has changed? In a speech on Thursday that otherwise failed to persuade, Mr. Cameron had one memorable line: The experience of Iraq, he said, had "poisoned the wells of public opinion," undermining trust in the intelligence and other evidence on which all governments must make decisions.
It will indeed be hard to rebuild that trust, on both sides of the Atlanticeven though the war crimes of the Assad regime are being committed in broad daylight. But the mistake that both Mr. Cameron and Mr. Obama are making, like their predecessors Tony Blair and George W. Bush, is to focus solely on chemical weapons.
Mr. Cameron ruled out regime change as the aim, yet it is obvious that unless he is deposed, Bashar Assad (like his father Hafez Assad before him) will continue to use the genocidal methods to destroy the rebels that have already cost well over 100,000 mainly civilian lives and displaced up to three million refugees.
The attacks now planned by the allies are thus explicitly intended to leave Mr. Assad and his regime in place, but to deter them from deploying WMD. This makes no sense. More likely, airstrikes with this limited purpose will merely embroil the West in a protracted civil war.

The lack of a clear and attainable objective in Syria was one of the main reasons why Mr. Cameron was unable to persuade many of his Conservative colleagues to support him. Another reason was suspicion that Syria's opposition groups, such as the Syrian National Council, are really Islamist front organizations, funded by the Saudis and Gulf states and infiltrated by al-Qaeda-linked terrorists.

Many in the West are deeply concerned by the persecution of Christians and other minorities in Syria and across the Middle East, as evidence mounts that rebel forces have carried out ethnic and religious cleansing in the areas under their control. Clearly, any U.S.-led intervention must take precautions against the danger that one genocidal regime could be replaced by another.
How have we arrived at a point where the West, and even the Anglosphere, is not only divided, but we also have only the choice between greater and lesser evils? The ultimate responsibility must lie with the person to whom the Free World looks for leadership: the president of the United States. It is because Barack Obama has abdicated that responsibility, refusing to make a clear distinction in his policy between liberty and tyranny, that the world is now in such an ominous predicament.
Other members of the administration must of course share the blame. Is it any surprise that Joe Biden, John Kerry, Chuck Hagel, Susan Rice and Samantha Power inspire little confidence that they have learned the right lessons from Iraq and Afghanistan? President Obama has "led from behind," which is as much as to say that he has not led at all. This abdication of leadership is apparent in the president's naïve mishandling of the disintegration of the old order in the Middle East, in his failure to anticipate or respond adequately to the wave of Islamist extremism that has imperiled Western interests in the region, and above all in his arrogant treatment of America's closest ally, Israel.
It is easy for President Obama to call on Israel to take risks for peace with the Palestinians. As Mr. Cameron has learned the hard way, his own colleagues are not prepared to risk British lives to bring peace to Syria. Nor has President Obama shown much inclination to risk American lives for Syria.
Israel, in constant danger of attack from Syria, is our best source of intelligence about what is happening there. Yet both Mr. Obama and Mr. Cameron are eager that Israeli lives should be risked: not for peace, but to appease the intransigence of the Islamic world.
The British are proud of their parliament, which served as a model for so many others in the days when it stood for freedom, democracy and the rule of law. The eyes of the world were once again on Westminster this week, but what they beheld was an unedifying spectacle: a prime minister who failed to lead and a nation disinclined to follow its own best traditions. When Chamberlain resigned after the Norway debate in May 1940, there was a Churchill to replace him. If only we had a lionhearted leader waiting in the wings today.

Mr. Johnson is the editor of Standpoint magazine, published monthly in London (

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Waking from the Middle East Nightmare

Javier Solana

30 August 2013

  This illustration is by Paul Lachine and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

MADRIDThe Middle East is caught in a seemingly endless spiral of instability. The possibility of military intervention in Syria, together with the deteriorating situation in Egypt since the army’s coup, has placed the region on a razor’s edge. Moreover, despite the changes in Iran since its presidential election in June, international negotiations over its nuclear ambitions remain a dead letter.
Paradoxes abound, as the United States’s traditional Middle East allies (Saudi Arabia, Israel, Turkey, Egypt, and the Gulf states) have taken opposing – and sometimes seemingly contradictory – positions on the region’s key conflicts. And, in all of today’s hotspots, the assertion of interests by neighboring or nearby countries has complicated matters further.
Saudi Arabia, fearing severe domestic consequences from the Muslim Brotherhood’s empowerment in Egypt, does not want to see an Islamist movement legitimized democratically. So it has taken a consistently harsh position against the Brotherhood, despite the latter being more moderate than the Saudis’ own brand of Islam.
Israel, for its part, is exerting pressure in two ways. First, it is supporting the Egyptian coup and international recognition of the military regime, thereby ensuringit hopesgreater stability along the Sinai border. Second, it is making progress in its negotiations with the Palestinians dependent on events in Egypt and elsewhere in the region, such as Iran. US Secretary of State John Kerry has invested considerable political capital in the revival of peace negotiations, and Israel can use that to its advantage as well.
The civil war in Syria, meanwhile, has inflamed the Sunni-Shia fault line that traverses the entire region, and that defines, for example, the rivalry between Saudi Arabia and Iran. In fact, while Saudi Arabia opposes elected Islamists in Egypt, it supports insurgent Islamists in Syria, owing entirely to Iran’s support for Syrian President Bashar al-Assad’s regime.
The Egyptian coup has already proved to have been a mistake. The military seems to be reverting to the governing methods – and even the feared security institutions – of former President Hosni Mubarak’s 30-year rule. Even Mubarak himself has now been released from prison.
The army’s repression of the Muslim Brotherhood is more a question of competition for power than of religion. As the only organized force in the country that could seriously challenge the military, the Brotherhood is the greatest threat that the Army faces, as demonstrated by Mohamed Morsi’s victory in the election that made him president a year before he was overthrown.
And, on top of it all, the problem posed by Iran’s nuclear program remains unresolved. That may not be surprising, given the violence and turmoil elsewhere in the region. But, since Iran’s new president, Hassan Rouhani, took office at the beginning of August, the West, to put it bluntly, has not demonstrated sufficient will to explore possible openings.
That is a grave mistake, because progress in the negotiations with Iran over its nuclear program would create a more propitious climate for resolving the region’s other problems. Moreover, the negotiations will now be under the jurisdiction of Iran’s presidential administration, which gives Rouhani greater room for maneuver. The new foreign minister, Mohammad Javad Zarif, is well known and respected by the leaders of all of the countries participating in the negotiations, and he will assume important responsibilities in any talks that take place.
While caution is certainly in order, the importance of Rouhani’s election must be recognized. If a window of opportunity has opened, the West should do everything possible to take advantage of it.
Rouhani, it should be remembered, won a surprising victory in an election with roughly 75% voter turnout, despite expectations of widespread apathy. Rouhani mobilized Iranians by offering a clear program for economic renewal, which hinges on Iran’s engagement with the international community – and thus on progress in nuclear negotiations.
Sincé taking office, Rouhani has responded quickly to the Iranian public’s demands. His cabinet, in terms of its members’ positions on economic reform and international relations, is one that few observers believed he would be capable of assembling.
Thus, two important steps have been taken: one by the people of Iran, who have shown that they understand the challenges they face, and the other by their new president, who has assembled the best team available to undertake an enormously difficult program.
There is an expression in Iran that applies to the international community: “You can wake only someone who is sleeping, not someone who is pretending to be asleep.” Whether Iran’s international interlocutors act on the importance of Rouhani’s election is a matter of choice, not of ignorance.
In a Middle East so full of uncertainty, a more predictable Iranone that behaves like a regionally important state, not a destabilizing Shia movement whose ambitions exceed what international law permits – would be in everyone’s interest. There can be no path from the Middle East’s agony without the participation, commitment, and determination of all parties.

Javier Solana was EU High Representative for Foreign and Security Policy, Secretary-General of NATO, and Foreign Minister of Spain. He is currently President of the ESADE Center for Global Economy and Geopolitics and Distinguished Fellow at the Brookings Institution.

September 1, 2013 7:59 pm

Lessons for Greece from down-and-out Detroit

The US city symbolises modern industrial decline. There is no reason to think it could not happen elsewhere
'Detroit City Limits' border sign is seen as traffic enters a westside neighborhood in Detroit©Reuters
While spending part of my summer break away from the eurozone in downtown Detroit, I came across an old article by the Chilean-born writer and photographer Camilo José Vergara. In the mid-1990s he made what he called “an immodest proposal”: to turn a dozen city blocks of derelict pre-Depression skyscrapers into an “American Acropolis”.
Most Detroiters hated, and rejected, his idea for a “skyscraper ruins park” – although, looking at the sheer scale of dereliction today, one wonders whether it has ultimately prevailed. I have never seen a city so empty. About 40 per cent of its area is unoccupied, much of it covered in ruins.

For me, however, the interesting question is not so much whether Detroit should have emulated ancient Greece, but whether modern Greece will end up where Detroit is today. Could the indebted nation, too, face non-reversible long-term economic decline?
I am aware of the differences between the economics of a city and that of a country. But there are uncanny parallels – especially if the country is a member of a monetary union with the institutional design of the eurozone.

The first is, obviously, that both Detroit and Greece have defaulted on their debt. Greece has restructured some of its debts. Detroit has filed for Chapter 9 municipal bankruptcy protection.

Second, neither Greece nor Detroit benefited on a sufficient scale from financial transfers. Greece receives structural funds from the budget of the EU and loans to stretch its debt repayments. In Detroit, economic functions such as unemployment insurance and education are supported by the state and federal governments. But these transfers have not been nearly sufficient to reverse its decline. When companies and citizens leave, the city loses irreplaceable tax revenues.

Third, emigration had a huge effect on the decline. American economists frequently point out that migration flows constitute a natural stabiliser in the US; if a region is hit by unemployment, people pack up and seek their fortune elsewhere. That is beginning to happen in the eurozone too. In Ireland, emigration flows are at the highest level since the 1980s.
But if the talented people leavewhich, in Ireland and Greece, they are doing – the chances of a return to growth diminish, especially in the absence of any form of stimulus. The permanent decline of a city such as Detroit is the price you pay for labour mobility. The middle classes there mostly left for nearby suburban areas, such as Oakland County in the north, one of the richest in the US. The population of Detroit has declined from a peak of 1.8m in 1950 to 700,000 in 2012.

Fourth, falling wages do not bring back equilibrium. As unionised jobs disappeared from Detroit, wages fell; yet unemployment remains extremely high. Unemployment peaked at 27.8 per cent in 2009virtually the same as in Greece today. Unemployment in Detroit has fallen since but, at 18.6 per cent in June, remains far higher than the national average.

Fifth, in both cases the optimists have kept on forecasting that the recovery is around the corner. In Detroit, optimism usually correlates with the performance of the Detroit Tigers baseball team.

In Greece, it usually rests on some anecdotal story. One of my interlocutors recently witnessed the opening of a new shop in Athens, and drew wild conclusions about an incipient recovery. 

Official forecasts by the European Commission regularly, and wrongly, show that an upturn is just around the corner. The example of Detroit shows that economies without effective policy instruments are not self-stabilising.

Permanent decline is still not inevitable, neither for Detroit nor for Greece. The US city’s house prices are so low that people are moving back to start businesses there, at least in the relatively safe areas. A few large companies have been investing in downtown Detroit, and there is also a vibrant arts scene in the inner-city areas. With the right set of incentives, the demolition of ruins and a crackdown on crime, Detroit might yet prosper again after 40 years of decline, albeit at a permanently lower level.

In Greece, the eurozone may yet accept a total debt write-off, and shift some investment into the country. If everything that went wrong in the past four years now turns right, it is conceivable that the Greek economy will resume growth after six years of recession. I do not think this will happen, but at least it is theoretically possible. Unlike Detroit, Greece also has the option of leaving the monetary union and adopting its own currency. But it is far from clear whether Athens would opt to do thateven if it were in the country’s best economic interests – since political factors may prevail.

Of course, Greece has already experienced decline. The Acropolis is probably the most potent example of the long-term political decline of a powerful city-state. The ruins of Detroit symbolise the decline of a modern industrial city. There is no reason to think that it could not happen elsewhereeven to a modern sovereign nation state when the conditions are what they are.

Copyright The Financial Times Limited 2013