Financial Times Europe July 27 2012

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Financial Times Europe July 27 2012, Financial Times

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EUROPE
Friday July 27 2012
Why America must lead
Safeguarding freedom. Condoleezza Rice, Page 9
Blood, khat and goats –
on board a pirated ship
Business Life, Page 10
World Business Newspaper
Best foot forward
London readies for Olympic spectacle
Draghi
triggers
rally with
bonds talk
TOMORROW IN
FT WEEKEND
Alexander
Lebedev
Best known in the
UK as a newspaper
owner with a KGB
past, the oligarch
tells Charles Clover
about his clashes
with the Kremlin
Life & Arts
By James Wilson in Frankfurt
and Robin Wigglesworth
and Brian Groom in London
The European Central Bank’s
mandate allows it to fight exces-
sive borrowing costs for euro-
zone countries, Mario Draghi
said yesterday, sparking a mar-
ket rally amid hopes the bank
would intervene to buy sover-
eign bonds.
The euro strengthened and
the bond prices of debt issued
by stressed eurozone countries
rallied after the ECB president
told a conference that the bank
was “ready to do whatever it
takes” to preserve the single
currency. “Believe me, it will be
enough.”
Following days of market tur-
moil and concern that Spain’s
high borrowing costs could
force it to seek a full sovereign
bailout, Mr Draghi suggested
the ECB had a remit to inter-
vene if market interest rates
were not “inherent” to borrow-
ers and interfered with the cen-
tral bank’s implementation of
monetary policy.
The yields on Spanish and
Italian bonds, which move
inversely to prices, have soared
to levels that risk making bor-
rowing unsustainable over the
long term.
Spain had called for the ECB
to reactivate a dormant bond-
buying programme to drive
down yields. Italy’s 10-year bond
yield dropped 39 basis points to
6.05 per cent, and Spain’s fell
45bp to 6.93 per cent.
Julian Callow, head of inter-
national economics at Barclays,
said Mr Draghi was echoing lan-
guage used by the ECB to jus-
tify bond purchases in the past.
However, Mr Draghi did not
indicate what action the bank
might take and some analysts
said he might instead favour
giving the EU’s rescue fund a
banking licence to borrow from
the ECB in order for it to buy
bonds.
Italian gymnast Vanessa Ferrari attends a training session ahead of the opening of the Olympic Games tonight. London’s readiness was questioned by Mitt Romney,
US Republican presidential candidate, in a TV interview on Wednesday, on the eve of his visit to the UK
Report, Page 3; Editorial Comment, Page 8; www.ft.com/olympics
Reuters
News Briefing
Madoff clients in line
for $1.5bn payout
Customers of convicted Ponzi
fraudster Bernard Madoff
will receive at least $1.5bn if
a court approves a plan by
the trustee overseeing the
fund’s liquidation.
Page 13
Dexia unit deal near
A consortium of Chinese
private equity funds is
nearing a deal to buy the
asset management arm of
Belgo-French bank Dexia for
about €500m.
Page 13
.
Barroso Athens plea
European Commission
president José Manuel
Barroso urged Greece to end
delays to reform and show
“results, results, results” if it
wished to stay in the
eurozone.
Page 2
Bankia recriminations
Ousted Bankia chairman
Rodrigo Rato has hit at
Spain’s central bank and his
own political party for their
role in the stricken lender’s
nationalisation.
Page 2
Brazil bank upbeat
Brazil will grow at an
annualised 4 per cent in the
second half of 2012 as a
credit boom threat recedes
and activity recovers from a
poor start, its central bank
governor said.
Page 4
OECD in Lisbon fear
Portugal risks missing fiscal
targets as squeezed bank
lending and weak global
demand deepen its recession,
the OECD warned.
Page 2
Barrick lowers targets
Barrick Gold, the world’s
largest miner of the metal,
has pruned growth targets
and shelved projects after
revealing an overspend of up
to $3bn on a South American
project.
Page 13; Gold shines,
Page 24
Push on tax evasion
The US and Europe’s five
biggest economies have
unveiled new details of their
tax evasion crackdown in a
move that promises to ease
the burden on financial
institutions asked to gather
data.
Page 4
Nomura axe falls on top staff
Japanese bank to rein
in global operations
Purge of executives
behind Lehman deal
replaced by more domestically
focused executives, signalling
that the bank is retreating from
its costly four-year expansion
following the Lehman deal.
London-based bankers said
the changes would throw the
bank’s global operations into
turmoil, adding that senior UK
staff were planning to leave.
Koji Nagai, president of
Nomura Securities, the domes-
tic brokerage, will become chief
executive. Atsushi Yoshikawa,
regional head of the Americas,
will replace Mr Shibata.
Regulators had added to
recent pressure on management
by calling on Nomura’s institu-
tional clients to cease trading
with the bank, according to
people inside Japan’s largest
investment bank by revenues.
That led to a damaging fall-off
in domestic trading volumes in
the past two weeks, they said.
Nomura also recently lost the
mandate to lead manage a gov-
ernment’s sale of shares in
Japan Tobacco and was given a
less prominent role than it orig-
inally had in the initial public
offering of Japan Airlines.
Rating agency Moody’s had
cut Nomura’s credit rating to
the brink of junk status in
March, over concerns on profit-
ability. Fitch said yesterday
that the likely pullback from
global operations should help
the bank’s ratings.
Mr Nagai is the first CEO
with a strong domestic retail
background to head Nomura in
about 15 years. He said Nomura
would continue to pursue its
objective of becoming a global
bank, with a strong focus on
Asia. But he said he aimed to
remake Nomura’s global fran-
chise into an appropriate size.
“The business environment
has changed so I am thinking of
reallocating our management
resources,” he said.
Internationally experienced
management, including Hiromi
Yamaji, chairman of banking,
and Philip Lynch, head of Asia,
will step down as part of the
reshuffle. Hiroyuki Suzuki, co-
head of banking, is moving
from his role to an administra-
tive job. Nomura’s shares
gained 5.7 per cent on the news.
Mr Watanabe and Mr Shibata
had come under mounting criti-
cism over the lossmaking over-
seas businesses, which had put
the bank under financial strain.
The bank said yesterday that
its global wholesale business
generated an Y8.6bn ($110m)
pre-tax loss for the first quarter,
down from a Y15.9bn loss in the
same period last year. Group
net profit plunged 91 per cent
year on year to Y1.9bn.
Nomura’s global expansion
has faltered in the face of a
sharp downturn in market trad-
ing, because of the eurozone cri-
sis, and management missteps.
Earlier this year Nomura
forced the resignation of Jesse
Bhattal, head of the global
wholesale division. The bank
attempted to stem the red ink
with a $1.2bn cost-cutting exer-
cise, late last year. However,
the reputational damage from
an insider trading scandal had
undermined Nomura’s domestic
operations, which provided the
bulk of its profits in recent
years and have been critical to
covering its overseas losses.
By Michiyo Nakamoto in Tokyo
and Patrick Jenkins in London
Nomura is to rein in its global
investment banking operations
after regulators pressured the
bank to purge top management
in the wake of a damaging
insider trading scandal.
The architects of the bank’s
troubled push to join the top
tier of global investment banks
after the takeover of the non-US
operations of Lehman Brothers
resigned yesterday.
Kenichi Watanabe, chief exec-
utive, and Takumi Shibata,
chief operating officer, will be
Eurozone woes, Page 2
Lex, Page 12
The Short View, Page 13
Looking beyond hints, Page 25
Lex, Page 12
Retreat to Japan, Page 15
Bo Xilai’s wife charged with
murder of British businessman
Rwanda pressure
By Kathrin Hille and
Simon Rabinovitch in Beijing
and Sally Gainsbury in London
a Bo family employee, Zhang
Xiaojun, had been charged with
poisoning Mr Heywood. It said
an investigation had found that
Ms Gu and her son Bo Guagua,
who was not mentioned by
name, had a conflict with Hey-
wood over “economic interests”
and that she believed that the
Briton posed a threat to her
son’s life. Guagua has not been
charged with any wrongdoing.
“The facts of the two defend-
ants’ crime are clear, and the
evidence is irrefutable and sub-
stantial,” Xinhua said.
The agency added that they
would be charged with “inten-
tional homicide”, which could
lead to a death sentence. A Bo
family associate who also knew
Mr Heywood said: “Neil, Gua-
gua and Gu were good friends. I
can’t see that he would be a
threat to the life of Guagua. He
always spoke of him warmly.”
Xinhua said the case would be
tried at a court in Hefei, capital
of central Anhui province, at a
later date. Sensitive cases are
often tried in locations far from
the defendant’s home or even
the scene of the crime to ensure
tight party control.
Chinese criminal trials are
also typically concluded very
quickly and rarely vindicate the
accused, suggesting that the
party wants to wrap up the Bo
saga ahead of its 18th Congress.
The Congress, expected in Octo-
ber, will confirm the members
of the next Politburo standing
committee, the apex of political
power in the country.
The Xinhua report made no
mention of Mr Bo, whose fate
remains uncertain. No criminal
charge has been brought against
him. He is instead officially
under investigation for violating
party “discipline”.
Chinese authorities have
charged the wife of Bo Xilai
with the murder of a British
businessman as Beijing tries to
orchestrate a smooth leadership
transition later this year.
In a scandal that rocked
China and led to the downfall of
Mr Bo – the populist politician
who had been on course for a
possible seat on the Chinese
communist party’s most power-
ful body – Gu Kailai was
arrested in April in connection
with the death of Neil Heywood.
The business consultant was
found dead in November in a
hotel in Chongqing, the south-
western city Mr Bo presided
over as party secretary until he
was purged.
The official Xinhua news
agency reported that Ms Gu and
Paul Kagame, Rwanda’s
president, is under growing
pressure from international
donors to end alleged support
for a fresh rebellion in the
neighbouring Democratic
Republic of Congo. The
Netherlands became the first
European country to announce
it was suspending budget
support to Kigali as a result of
evidence in a report by a UN
group of experts.
Subscribe now
Report, Page 3
Murder charge, Page 6
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Fax: +44 20 7873 3428
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FINANCIAL TIMES
FRIDAY JULY 27 2012
WORLD NEWS
Barroso calls for Greece ‘results’
German talk of
eurozone exit
undermines
Athens reform
Athens told to push
on with reforms
Coalition endorses
latest spending cuts
sovereign default, stressed
that delays in implementing
agreed measures had
undermined the country’s
credibility with its partners,
adding: “Actions are more
significant than words.”
“You must rebuild your
country with our help and
increase your competitive-
ness and the best way is
within the euro, especially
for the most vulnerable
groups in society,” he said.
Mr Barroso’s strongly-
worded message, delivered
after a two-hour meeting
with prime minister
Antonis Samaras, came
after leaders of the three-
party coalition government
endorsed in principle a
€11.5bn package of spend-
ing cuts for 2013-14 that
were agreed with creditors
six months ago but kept on
hold during two successive
election campaigns.
Mr Samaras said his gov-
ernment was determined to
push ahead with structural
reforms, privatisation, fiscal
consolidation and a crack-
down on tax evasion. “We
will cut public spending at
every level from the prime
minister’s office to the very
last rung of the ladder,” he
said. Earlier Yannis Stour-
naras, finance minister, out-
lined the proposed cuts to
the “troika” of officials
from the commission, IMF
and
Bank. A ministry official
said the next round of
reforms had been discussed
in full but no decisions had
been taken. IMF officials
declined to comment on the
discussion.
The package still has to
be fine-tuned according to
Fotis Kouvelis, head of the
Democratic Left party, the
junior coalition partner:
“We haven’t finished, every
single topic has to be exam-
ined . . . The economic con-
ditions are very difficult but
society can’t endure much
more pain.”
Yet prolonged discussions
on the new measures along
with the August summer
break could stretch Athens’
public finances close to
breaking point, putting the
finance ministry under
pressure to accelerate reve-
nue collection by offering a
partial amnesty in disputed
tax cases and also crack
down on widespread tax
evasion in tourist centres.
The troika is not due to
return until September to
decide whether enough
progress has been achieved
to disburse a €31.2bn loan
tranche from the country’s
second bailout already over-
due since June.
The new package targets
pensions rather than wages,
with staggered reductions
in pensions above €1,000 a
month
monthly cap of €2,000-2,200
aimed at securing savings
of €2bn a year or one per-
centage point of national
output.
Thousands of higher-paid
workers in local govern-
ment and state-controlled
corporations would also
face salary caps, losing sen-
iority pay and a raft of spe-
cial allowances allocated by
politicians without consult-
ing the finance ministry.
“Pensioners are not in a
position to lead violent
street protests against the
cuts . . . while setting ceil-
ings gives meaning to the
coalition’s pledge to enact
social justice,” said an Ath-
ens-based economist.
By Kerin Hope in Athens
José Manuel Barroso has
urged Greece to accelerate
reforms after two years of
foot-dragging if it wants to
stay in the eurozone, saying
Athens needed to show
“results, results, results.”
The European Commis-
sion president, making his
first visit to Greece since it
sought assistance from the
EU and International Mone-
tary Fund in 2010 to avert a
By Quentin Peel in Berlin
end that a Greek exit no
longer terrified him. He was
“very sceptical” about the
success of the Greek rescue
programme.
At the same time, Alexan-
der Dobrindt, secretary-gen-
eral of the CSU, proposed
that Greece ought to start
paying half its civil serv-
ants in drachma – the
former national currency –
to prepare for a “soft land-
ing” outside the eurozone.
The sudden revival of
German speculation about a
Greek exit was compounded
by a report in Der Spiegel,
the weekly magazine, sug-
gesting the International
Monetary Fund was no
longer willing to extend
more loans to Athens. The
report has never been con-
firmed, but has entered the
German debate as a fact.
Another article, in the
Süddeutsche Zeitung,
quoted unnamed govern-
ment officials as saying it
was “inconceivable that
Angela Merkel will ask the
German Bundestag once
again for a third aid pack-
age for Greece”.
Mr Rösler has been
attacked as “unprofes-
sional”, even in his own
party, for his careless com-
ments on Greece. The oppo-
sition Social Democrats
called on Ms Merkel to sack
him as her vice-chancellor.
The official line from
Wolfgang Schäuble, finance
minister, is that Germany
will take no position on the
Greek situation until it has
received the report of the
“troika” of officials – from
the IMF, the European
Commission and the Euro-
pean Central Bank – in
early September. The
inspectors arrived in Ath-
ens on Tuesday.
Yet, the political assess-
ment – that there would be
no support in the Bun-
destag for a third Greek res-
cue package – is widely
shared. Volker Kauder,
leader of the CDU/CSU par-
liamentary group, said as
much on Monday. So did
Horst Seehofer, CSU leader
in Bavaria.
In the end, German policy
will be decided by Ms Mer-
kel and Mr Schäuble. By
the time they return from
their holidays, however,
their room for manoeuvre
within the coalition may be
extremely narrow.
Even as hundreds of thou-
sands of German tourists
head south for their holi-
days on the front line
beaches of the eurozone cri-
sis, the politicians and com-
mentators left behind are
indulging in an orgy of
speculation about whether
Greece can last for long as a
full participant in the com-
mon currency.
Markus Söder, finance
minister of Bavaria, yester-
day joined a chorus of
voices from Germany’s
wealthiest federal state to
declare his belief that Ath-
ens would be forced to leave
the eurozone.
“In the end we must get
to the point where Greece
will have to leave,” he said
in a television interview. “A
eurozone is only going to be
internationally stable in the
long term if it is made up of
strong partners, and not
always with weak ones.”
His interview coincided
with an alarming prediction
by Ifo, the Munich-based
economic institute, that a
Greek insolvency would
cost Germany €82bn if it
quit the eurozone, and even
more – €88.7bn – if it
remained a full member.
Hans-Werner Sinn, head
of the institute, has long
argued that Greece would
be better off outside the
monetary union.
Lüder Gerken, director of
the Freiburg-based Centre
for European Policy, a mar-
ket liberal think-tank, is
another leading economist
who believes Greece should
pull out, although he does
not think it is possible to be
precise about the cost.
He admits it would be
painful for Germany, but
thinks “the danger of a
domino effect is rather
small”.
“It might be seen as a
sign of the strength of the
eurozone,” he told the
Financial Times, that a
country unable to abide by
its
European
Central
and
an
overall
Hollande labours to end despair of workless
FT series: Left Behind
A jobless generation
In France, a quarter of
those aged 18­25 are not
in employment; the figure
hits half for the 115,000 a
year leaving education
without the baccalauréat,
writes
Hugh Carnegy
Jacqueline Deneux, a widow whose
two young adult sons count among
France’s 4m jobless, holds out little
hope that François Hollande, the pres-
ident, will fulfil his promise to tackle
youth unemployment.
“I hope it gets better, but there is a
big difference between what they say
and what they do,” she said as she sat
during last month’s parliamentary
elections in the Peace Café in Hénin-
Beaumont, a northern constituency
blighted by unemployment.
Beside her sat Jeremy, 28, who said
his only job since leaving school had
been a short spell as a waiter in the
café. His 20-year-old brother Jonathan
had also been jobless since school,
despite some training in sales.
In Paris, meanwhile, Adrien Stalter
has been scouring the capital for his
first proper job since completing his
masters in museography last year.
He is not having much luck. He has
had a six-month “stage”, a low-paid
internship, followed by two short-term
contracts with a company staging
exhibitions. But when they expired,
employment law dictated the com-
pany must either give him a perma-
nent contract or let him go. It let him
go. “It’s very difficult, because it is
hard to find a job in the cultural sec-
tor in France at the moment. In four
months I’ve made about 40 applica-
tions but I’ve not had one interview,”
he said. He is now resigned to accept-
ing any post he can find – as a recep-
tionist or a waiter – because much of
his unemployment benefit will cease
in August.
The experience of these young men
highlights the challenge facing Mr
Hollande as he seeks to defy the
despair of Mrs Deneux and reduce
unemployment, which reached one in
10 of the workforce shortly after he
took power in May.
In France, like most European coun-
tries, the problem among the younger
generation is much worse than the
national average. About one in four of
those aged between 18 and 25 are out
of work; the figure is one in two for
the 115,000 a year leaving education
without the baccalauréat, or full high
school qualification.
For those who do find work, four
out of five win only short-term con-
tracts, or CDDs as they are known by
their French initialism. The average
age for gaining a first CDI, or perma-
commitments
would
On your banlieue
bike: youth
unemployment is
rampant in
France’s big­city
suburbs
nent contract with full employee
rights, is 28. Apart from the social
cost, there is a worry borne out by the
recent elections that the lack of work
is driving some voters to the
extremes: Marine Le Pen, leader of
the far-right National Front, came
within a whisker of winning Hénin-
Beaumont from Mr Hollande’s Social-
ist party in the June elections.
Mr Hollande is responding with a
number of initiatives. He is laying
heavy emphasis on improving train-
ing for the unemployed, the majority
of whom do not receive any at
present. But he put two specific pro-
grammes at the heart of his election
campaign that the government is now
working towards implementing.
The “contract of generations” seeks
to boost both opportunities for young-
sters and the retention of older work-
ers – 45 per cent of people of working
age over 55 are not in work, another
structural weakness in the French
labour market. The proposal is that
employers who take on a youngster
on a permanent contract and pairs
them with an older worker who will
transfer skills to the newcomer will
not pay social charges on either.
The second initiative is called
“employment of the future”. It will
find temporary work for low-skilled
young people – those most prone to
long-term unemployment – to give
them a first experience of a job that
will set them on the path to a qualifi-
cation or skill that will help them to
find permanent work.
Aimed particularly at France’s
ban-
lieues
, the deprived big-city suburbs
where unemployment is rampant,
labour ministry officials say they
want to cover 100,000 people under
this scheme in the first year.
The question is whether such initia-
tives will make much difference.
Medef, the employers’ federation, is
prepared to co-operate with the gov-
ernment to make them work. But
what it really wants to see are more
profound changes in France’s rigid
labour market rules and labour costs
– a view recently backed by the cen-
tral bank.
“France remains largely incapable
of creating jobs, particularly for
young people,” Christian Noyer, Bank
of France governor, wrote in his
annual report this month. “This
unhappy
exception française
can
largely be ascribed to a segmentation
of the labour market between, on the
one hand, employees who enjoy a
high degree of job security thanks to
very protective legislation, and on the
other, workers who are trapped in job
insecurity.”
Mr Noyer called for reforms to
break down the differential in terms
attached to CDDs and CDIs to give
employers more flexibility and hence
more incentive to hire staff on perma-
nent contracts. He also called for
more agreements on employment
terms to be set at the level of both
industries and companies, more liber-
alisation of goods and services mar-
kets and cuts in heavy social charges
that affect businesses.
Those issues are being wrestled
with by the government, which has so
far proved reticent about loosening
employee protection.
However, Mathieu Plane, of the
French Economic Observatory, says:
“You can do all the structural reforms
you like on the labour market, but if
you don’t have growth, it doesn’t
make much difference.”
have to leave.
Mr Söder, who is a rising
star in the Bavaria-based
Christian Social Union, the
conservative sister party to
Chancellor Angela Merkel’s
Christian Democratic
Union, said it would be pos-
sible to cope with a Greek
exit.
His high-profile interview
on ZDF, the public broad-
caster, was merely the lat-
est alarming statement
made by middle-ranking
German politicians in the
past week, causing Antonis
Samaras, Greek prime min-
ister, to complain bitterly
about irresponsible foreign
officials undermining his
efforts at reform.
The main target of his
attack appeared to be
Philipp Rösler, German
economy minister, vice-
chancellor and leader of the
liberal Free Democratic
party in the centre-right
coalition headed by Ms
Merkel.
He started the debate
when he declared in a tele-
vision interview last week-
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Chris Giles explains the
likely consequences of a
default and eurozone exit
by Greece
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consequences
‘France remains largely
incapable of creating
jobs, particularly for
young people’
For previous
articles in this
series, plus
interactive
features, go to
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youth
The road to bailouts: key
events in Spain, Greece,
Ireland and Portugal
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Christian Noyer
Bank of France governor
Ousted Bankia chief blames central bank and politicians
By Miles Johnson in Madrid
over the consequences that
Bankia’s failure to list
would have for Spain,” Mr
Rato said.
Mr Rato, a former Span-
ish finance minister for the
ruling Popular party and
one of its most revered
alumni until the Bankia
fiasco, appeared to under-
mine his own party by
claiming the current gov-
ernment of Mariano Rajoy
had vetoed a plan in April
he said would have cost the
taxpayer less money.
Mr Rato is the most high
profile of the conservative
PP figures to be damaged
by involvement in the res-
cue of Bankia, itself a
merger of seven local sav-
ings banks connected to the
PP, and many of which had
politicians from the party
serving on their boards.
During Spain’s real estate
bubble,
nated “cajas” lent heavily
to fund local construction
projects across Spain.
This mix of political,
regional and business inter-
ests often resulted in poor
financial management that
has all but wiped out the
savings banks, most of
which are now under state
control, or have been sold
to larger rivals.
Mr Rajoy’s government
had resisted calls from
within Spain’s parliament
for an inquiry into the
bank’s short life as a public
company, pressing instead
to hold any hearings behind
closed doors, but was forced
to relent after the high
court opened a fraud probe
into the matter.
Mr Rato also directly con-
tradicted the testimony of
Miguel Ángel Fernández
Ordóñez, the socialist-ap-
pointed Bank of Spain gov-
ernor who stepped down a
month earlier than planned
last month.
The former central
banker claimed on Tuesday
that he had not pressed Mr
Rato to merge what was
then Caja Madrid with the
Valencian Bancaja to form
Bankia.
Mr Rato said that in June
2010 he was called urgently
to the Bank of Spain and in
effect forced to negotiate
with Bancaja, which from
its base in Valencia, the
centre of Spain’s property
bubble, had made large
amounts of bad loans.
He then later stepped
down from the bank on May
7 as he felt he had lost the
confidence of the Rajoy
government, and thus the
authority to stay and solve
Bankia’s problems.
Opposition politicians in
Spain’s parliament were
critical of Mr Rato’s
account, saying he was
diverting the blame. “The
perfect crime is one that
looks like an accident, as
you have described the fall
of Bankia” said Irene Loz-
ano of the Union, Progress
and Democracy party.
Rodrigo Rato, the ousted
chairman of Bankia, has
taken aim at the central
bank and his own political
party for their role in the
stricken lender’s nationali-
sation as the political
recriminations intensify
over Spain’s largest bank
rescue.
Speaking publicly for the
first time since Bankia suc-
cumbed to a €23.5bn rescue
in May, the former manag-
ing director of the Interna-
tional Monetary Fund told
Spain’s parliament the pre-
vious Socialist government
and the Bank of Spain had
pressed him to launch the
lender’s ill-fated stock
market listing last year.
Less than a year after
Bankia listed, its request
for state aid in May
inflicted losses on
thousands of small savers
and forced Spain itself into
accepting €100bn in Euro-
pean aid last month which
came with painful austerity
conditions attached.
“The government [of José
Luis Rodríguez Zapatero]
made their concerns clear
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Portugal runs the risk of
missing its fiscal targets this
year as constraints on bank
lending and weak global
demand deepen the
country’s recession, the
OECD warned yesterday,
writes Peter Wise in
Lisbon.
The possibility of
undershooting growth
expectations meant Lisbon
would face “additional
challenges to regain full
market access” when its
international bailout
programme ended in 2013,
the Organisation for
Economic Co­operation and
Development said in a
survey of the Portuguese
economy.
International capital flows
had dried up and weak
growth prospects had led to
loss of market confidence
and sharply rising interest
rates, “despite the fact that
Portugal has steadfastly
implemented an ambitious
three­year financial
assistance programme”.
“Tight credit conditions
and a worsening external
environment are deepening
the recession,” the report
said. “The [adjustment]
programme is expected to
remain on track, but the
balance of risks to growth is
skewed to the downside.”
Earlier, Pedro Passos
Coelho, prime minister,
defended his policies against
critics who had attacked the
government for excessive
austerity measures. “We are
adjusting to living within our
means,” he said. “We’re
showing those who lend us
money that we comply with
our commitments.”
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Pedro Passos Coelho: nation
is ‘living within our means’
In full: www.ft.com/europe
  FINANCIAL TIMES
FRIDAY JULY 27 2012
★
3
WORLD NEWS
Romney falters as he casts
doubt on London Olympics
Games bring more than
touch of joy to host city
continue alongside the new
enthusiasm. In this
oversized, workaholic city
of Victorian infrastructure,
where simply travelling to
the office can drain you of
everything you have,
people will complain if the
Olympics add 45 minutes
to their journey home.
Living, working and
raising children here is a
precarious endeavour that
barely works in normal
times.
Nor are the games an
incomparable treat for
Londoners. Huge events
happen in London every
day. Just look at the
posters on the Tube. Next
week, an Alfred Hitchcock
season starts at the British
Film Institute.
Recent hosts such as
Beijing, Athens and
Sydney had been less
spoiled. London won’t
swoon under the spotlights
as did Kharkiv, the
Ukrainian town where I
watched last month’s
European football
championship. Archers and
pole vaulters will hardly
confer glamour on London.
More likely, London will
confer it on them.
Tonight’s opening
ceremony is inspired by
Shakespeare’s
The Tempest
.
In the play, Prospero
prefigures London’s closing
ceremony on August 12.
“Our revels now are
ended,” he says. “The
solemn temples, the great
globe itself, / Yea, all
which it inherit, shall
dissolve, / And, like this
insubstantial pageant
faded, / Leave not a rack
behind.”
What the games will
leave behind, beyond some
unnecessary stadiums, is a
renewed London identity.
Until about the 1950s, the
city’s communal identity
was mostly white working-
class “Cockney”, captured
in songs such as “Maybe
it’s because I’m a
Londoner”. Then London
gradually became
cosmopolitan. That change
weakened the old identity.
But the long, strange
ride of recent years has
helped crystallise a new
identity. The ride started
not so much on July 6
2005, when London was
named host, but the next
morning, when four
Islamist suicide-bombers
blew up 52 people in the
city’s public transport
system. The bombings
were a rare shared London
experience. A week later,
Londoners of all colours
filled the city’s grubby
pavements for a minute’s
silence. Many of them had
probably never felt like
Londoners before.
The shared debates,
moans and moments of
enthusiasm about the
Olympics these past seven
years – and now the actual
games – will strengthen
London’s identity further.
Part of that identity is
humour, brilliantly
expressed by the mayor,
Boris Johnson. London
intends to stage the first
funny Olympics.
Increasingly, Londoners
are seeing themselves as
Londoners. In the current
“We Love This Book”
magazine, the novelist Will
Self is asked if his writing
is British. “Absolutely
not,” he replies. “I don’t
think of myself as British.
I think of myself as
Londonish, and my writing
as correspondingly
Londonish – whatever that
means.”
The Olympic Games will
make Londoners more
Londonish.
White House
hopeful visits UK
Remarks draw ‘tart
rejoinder’ from PM
Simon Kuper
By Ben Fenton in London
One recent morning, in an
otherwise empty Olympic
park, young games
volunteers were practising
a dance. Together they
pointed their fingers at an
imaginary ticket-holder,
and sang, tunelessly: “Da-
da-da-da-DA – the finest
person in the queue!”
A touch of joy is finally
arriving in London, along
with a star that some
astronomers believe to be
the so-called “sun”, an
astral body usually sighted
here once every 76 years.
Londoners are starting to
sense that they will get an
Olympic legacy. It won’t be
economic stimulus, or a
mass post-games take-up of
synchronised swimming,
but something less
tangible: a feeling of
togetherness, a new
London identity.
Grumbling in the host
city is integral to the
Olympic build-up even
when the games are not
held in London. The
grumbling phase is now
giving way to tempered
enthusiasm. In a YouGov
survey this week, 51 per
cent of Britons expressed
interest in the games.
Though hardly national
hysteria, that’s better than
previous surveys. Even
bankers have been spotted
cheering the passing torch.
As an ex-Londoner
“home” for the games, I
have been catching up
with friends and relatives.
Typically they start with a
moan about disrupted
commutes, before telling a
rueful story about entering
the lottery for tickets and
drawing something bizarre
– kayaking, say.
London grumbling will
Mitt Romney, the presump-
tive Republican candidate
for the US presidency, got
off to a shaky start in his
effort to show a statesman-
like profile when he seemed
to get into a public spat
with the UK prime minister
over London’s readiness to
host the Olympics.
In a US TV interview on
Wednesday night, Mr Rom-
ney said there were “discon-
certing” signs of unprepar-
edness for the games and he
questioned whether British
people had taken the event
to their hearts.
But the remarks, from a
man whose experience of
salvaging the 2002 Salt Lake
City Winter Olympics after
a corruption scandal makes
him something of an expert,
appeared to prompt what
US reporters described as a
slapdown from David Cam-
eron, even after Mr Romney
later attempted a hasty
pivot.
The prime minister said
after a meeting with Mr
Romney, who is on his first
foreign trip since becoming
the prime Republican chal-
lenger for the White House:
“We are holding an Olym-
pic Games in one of the
busiest, most active, bus-
tling cities anywhere in the
world. Of course it’s easier
if you hold an Olympic
Games in the middle of
nowhere.”
US reporters took the sec-
ond part of his comment as
a snipe at Salt Lake City.
The New York Times called
Mr Cameron’s remark a
“tart rejoinder”. However,
his office said the prime
minister had not been refer-
ring to the Utah city.
Sporting challenge: the Republican presidential contender questioned whether the UK capital was ready for the games
PA
Outside Downing Street,
Mr Romney executed a
U-turn, saying: “I expect the
games to be highly success-
ful. I am very delighted
with the prospects of a
highly successful Olympic
Games. What I have seen
shows imagination and fore-
thought and a lot of organi-
sation.”
In an NBC interview, Mr
Romney had been asked if
London “looked ready” for
the games. His response
was equivocal: “You know,
it’s hard to know just how
well it will turn out. There
were a few things that were
disconcerting – the stories
about the private security
firm [G4S] not having
enough people, the sup-
posed strike of the immigra-
tion and customs officials,
that obviously is something
which is not encouraging.”
He also said it would only
be possible to tell if British
people would “come
together to celebrate the
Olympic moment” after the
games had started.
Mr Romney also made a
diplomatic slip when he
told reporters he had
received a briefing from Sir
John Sawer, head of MI6.
Foreign politicians by con-
vention do not refer to
meetings with the Secret
Intelligence Service.
Had Mr Cameron been
comparing London and Salt
Lake City, he would have
had statistical support. The
largest city in Utah sits in a
desert and has a metropoli-
tan-area population of 1.1m
spread over 1,600 sq miles,
with a population density of
687 per sq mile. London has
a population of 8.1m and an
area of 607 sq miles, with a
population density of 13,344.
The former Massachu-
setts governor, who arrived
in London on Wednesday
night, has been hoping to
use his trip to the UK,
Israel and Poland to demon-
strate broader qualities of
leadership and switch atten-
tion from headlines about
his tax affairs, personal
wealth and business record.
Ann, Mr Romney’s wife,
co-owns a horse with her
trainer Jan Ebeling, which
will be competing in the
London 2012 dressage event.
The horse, Rafalca, has
been used in hostile adver-
tising by Democrat activists
who have mocked the vast
expense and elite nature of
dressage to emphasise the
Romneys’ wealth.
What the games
will leave behind,
beyond some
stadiums, is a
renewed identity
Editorial Comment, Page 8
Olympics news and comment at
www.ft.com/2012
●
Matthew Engel
Read his sketch on opening
ceremonies past and
present,
www.ft.com/engel
●
Assessing economists
Interactive coverage of how
the games are expected to
benefit the British economy,
www.ft.com/
interactivegraphics
●
Blogs
FT correspondents share
their views,
www.ft.com/blogs
●
FTOlympics
Follow FTOlympics on
Twitter for all the latest
news and views from
FT correspondents
Roger Blitz and Vanessa
Kortekaas
●
Pre­games jitters
Tension and excitement
build in London as the
years of planning finally
come to a climax,
www.ft.com/uk
●
Soviet­era data
Ukraine and Georgia
complain about athletes’
biographical details,
www.ft.com/2012
Dutch cut aid to Rwanda after UN
report alleges support for rebellion
Kigali accused over
Congo arms supply
it was delaying a disburse-
ment of budget support,
intended to be paid this
month, because of human
rights concerns.
Mr Kagame’s government
has won international plau-
dits for the way it has used
development aid to reduce
poverty and foster eco-
nomic growth. It still
depends on foreign aid for
more than one-third of its
budget, but has sought to
reduce its dependence.
However, relations with
donors have been strained
as a result of human rights
abuses at home and
Rwanda’s military involve-
ment in the Congo conflict.
The Dutch foreign minis-
try told the FT the Nether-
lands would, in concert
with EU partners, deter-
mine its stance on develop-
ment aid to Rwanda on the
basis of the country’s for-
mal reaction to the UN
Group of Experts report,
and on “developments in
the field, including an
immediate end to support
from Rwanda for the rebels
in the DRC”.
Scandinavian
on the board of the African
Development Bank also
forced the delay of a deci-
sion on the disbursal of
$38.9m of budget aid from
last week to a September
meeting, according to donor
officials.
A Swedish official said
the Nordic countries, along
with India, called to delay
the cash transfer because of
the UN report. “We are very
concerned about the UN
report and we need to see
how Rwanda and the region
will respond before making
our move,” the official said.
“The ball is very much in
Rwanda’s court right now,”
he added.
The M23 emerged this
year when a militia allied to
Kigali – but integrated into
the Congolese army as part
of a 2009 peace agreement –
mutinied under the leader-
ship of Bosco Ntaganda. Mr
Ntaganda is wanted on war
crimes charges by the Inter-
national Criminal Court.
The mutiny has triggered
defections from the Congo-
lese army and a resurgence
of violence by militias.
Rwandan officials have
reacted furiously to the UN
report, dismissing its allega-
tions as “ill-informed” and
questioning the expertise of
the authors.
According to a spokesper-
son for Mr Kagame, the
government has issued a
detailed rebuttal to the UN
that has not yet been made
public.
And, unlike in similar cri-
ses in the past, Kigali has
continued talking to the
Congo government through-
out.
The Dutch decision fol-
lows the US move to freeze
$200,000 in military support
– an unprecedented signal
from Washington, which
has been a staunch ally of
Mr Kagame since his own
rebel movement overthrew
the former Rwandan gov-
ernment responsible for the
1994 genocide.
Until now, there has been
little unanimity in the
donor community. Britain,
the largest single bilateral
provider of aid to Kigali,
has been cautious.
“If Rwanda has breached
Security Council resolu-
tions by breaking the UN
arms embargo, we will need
to evaluate our position,”
the Foreign Office said.
“However, suspending an
aid programme would only
serve to hurt those who
most need our assistance,
so any response would need
to be carefully assessed,” it
added.
Another senior donor offi-
cial in the region ques-
tioned the value of punitive
action.
“They [the rebels] could
over-run Goma [the DRC
city] for breakfast tomor-
row morning. The only
restraining force I see is
Rwanda; the UN’s not going
to do anything.”
By William Wallis in London,
Katrina Manson in Nairobi
and Matt Steinglass
in Amsterdam
Paul Kagame, Rwanda’s
president, is under pressure
from international donors
to end alleged support for a
rebellion in the neighbour-
ing Democratic Republic of
Congo.
The Netherlands yester-
day became the first Euro-
pean country to announce
it was suspending budget
support to the Kigali gov-
ernment as a result of evi-
dence in a report by a UN
group of experts.
The report accused Rwan-
dan officials of violating a
UN arms embargo by sup-
plying weapons, ammuni-
tion and fighters to the M23
militia in eastern Congo
responsible for the heaviest
outbreak of fighting in the
region in several years.
Britain’s development
agency Dfid also told the
Financial Times yesterday
countries
SUDAN
Rwanda
Government revenue 2012/13
($m)
GDP (annual % change)
UGANDA
30
20
10
Kigali
NORTH
KIVU
Lake
Victoria
Aid
$790m
(34.5%)
0
RWANDA
-10
Other
$1,500m
(65.5%)
-20
DEMOCRATIC
REPUBLIC
OF CONGO
BURUNDI
-30
TANZANIA
-40
Lake
Tanganyika
-50
1993
2000 04
08
12*
*
Forecast
Sources: EIU; IMF
200 km
   4
★
FINANCIAL TIMES
FRIDAY JULY 27 2012
WORLD NEWS
Brazil bank chief upbeat on economy
US and
Europe
in accord
on tax
evasion
Data show defaults
have stabilised
Growth of 4%
forecast by year end
showing that the number of
consumers and businesses
defaulting on bank loans
fell slightly in June after
growing since January.
“We’re not saying this is
the start of a downward
trend but the situation has
stabilised,” Mr Tombini
said.
Brazil became the darling
of emerging market inves-
tors after it appeared to
brush off the 2008-09 finan-
cial crisis and achieve eco-
nomic growth of 7.5 per
cent in 2010, driven by a
surge in consumer spending
based partly on rapid
expansion in bank lending,
and by global demand for
its export commodities.
The attraction soured
after growth fell to just 2.5
per cent last year. The cen-
tral bank said activity was
flat in May; for the year,
economists expect growth
of just 1.9 per cent. One big
concern is that credit has
expanded too quickly and
households are spending
more than they can afford
on debt service.
But Mr Tombini said
delinquency was “a prob-
lem of the past” that had
been addressed, for exam-
ple, by raising capital
requirements on longer-
maturing consumer credit
such as car loans.
“I have made credit
expansion a key issue of my
administration. We were
going too fast. Now we are
in healthy shape,” he said.
He said a return to con-
sumption would be more
sustainable partly because
consumers were paying less
for credit. Since last
August, the bank has cut
its policy interest rate by
4.5 percentage points from
12.5 per cent to 8 per cent a
year. Over the same period,
the average cost of con-
sumer credit had fallen by
9 percentage points from a
peak of more than 46 per
cent a year in August.
Over the past 12 months,
1.2m jobs had been created
and the real wage bill had
increased 5 per cent. More
people had access to more
affordable credit, Mr Tom-
bini said, but their desire
for credit was “very moder-
ate”. “Leverage has stabi-
lised and we have seen
some deleveraging in recent
months.”
The stock of household
debt had nearly doubled
over the past six years to
about 45 per cent of
incomes and credit service
consumed 22 per cent of
household
because of the short dura-
tion of most loans, “balance
sheet repair is fast”.
Credit growth had been
running at 30 per cent a
year a few years ago but
would be only half that this
year. The profile of credit
was changing, with more
going to housing loans
rather than consumption.
But Mr Tombini conceded
that credit growth alone
was not enough to drive the
economy. “We have issues
to address. In a few years
the global costs of capital
and labour will be very low.
That will create a different
situation for emerging mar-
kets and for Brazil.”
Asked if there was a need
to redirect government pol-
icy from supporting chosen
sectors of the economy –
such as the car industry –
to broader based-reform, he
said the government would
address broader issues such
as infrastructure, energy
and the tax burden.
“Reform used to be verti-
cal. Now we are going to go
horizontal,” he said. “We
need to improve competi-
tiveness.”
Brazil continued to be a
big recipient of foreign
direct investment. But it
would have to work hard to
compete with other emerg-
ing markets and with devel-
oped markets in coming
years.
By Jonathan Wheatley
and John Paul Rathbone
By Vanessa Houlder
in London and Shahien
Nasiripour in Washington
Brazil’s economy will grow
at an annualised rate of
4 per cent in the second half
as the threat of an unstable
credit boom recedes and
activity recovers from a dis-
appointing start to the year,
Alexandre Tombini, central
bank governor, has told the
Financial Times.
His comments came
before the bank was due to
release figures yesterday,
‘We have issues to
address. In a few
years the costs of
capital and labour
will be very low’
The US and Europe’s five
biggest economies released
details of a co-ordinated
crackdown on tax evasion
yesterday, in a move that
promises to ease the burden
on financial institutions
that have been enlisted to
gather information.
The announcement paves
the way for the US to
exchange information on
account holders who are cit-
izens of the UK, Italy,
Spain, France and Germany
with tax authorities in
those countries. They, in
turn, are to share informa-
tion on US account holders
with the Internal Revenue
Service.
Tim Geithner, US Treas-
ury secretary, said the
agreement was an “impor-
tant milestone in our joint
efforts to combat offshore
tax evasion and make our
tax systems more efficient
and fair”.
The agreement aims to
overcome the objections
raised by foreign govern-
ments to the Foreign
Account Tax Compliance
Act, a US law passed in 2010
against tax dodgers using
foreign accounts.
Authorities said they
hoped the compromise –
sharing information
between governments
rather than between institu-
tions and foreign govern-
income.
But
www.ft.com/beyond­brics
Remortgaging
boom offers
election hope
for Obama
Mitt Romney, his Republi-
can challenger.
Parts of the Midwestern
“rust belt” are also seeing
high refinancing volumes.
Ohio refinancing applica-
tions rose 193 per cent –
well above the national
average – while in Michigan
they increased 294 per cent
over the past year.
The reason behind the
surge in the hardest-hit
states is that they have the
biggest shares of homeown-
ers “underwater” with their
mortgages – meaning the
home loan is worth more
than their house and they
are stuck with “negative
equity”.
More fortunate borrowers
with equity in their homes
in other parts of the US
have in some cases been
able to refinance three or
four times since 2009. But
many of the most distressed
had been ineligible for refi-
nancing until the Federal
Finance Housing Agency,
an independent government
agency, last November loos-
ened the rules for its home
affordable refinancing pro-
gramme (Harp). By lifting
the cap on the loan-to-value
ratio that had prevented
many households from
qualifying, the revised pro-
gramme unleashed a rush
of pent-up demand in these
struggling areas when it
kicked in this year.
The weak state of the
economy is a central issue
in the race for the White
House – and Mr Obama’s
biggest vulnerability in his
bid for a second term.
The Obama administra-
tion has been criticised for
not being effective in aiding
homeowners – particularly
in its first two years in
office – but the relative suc-
cess of the Harp revisions
may dampen those attacks.
And although many vot-
ers in states hit hard by the
housing crisis will continue
to blame the president and
back Mr Romney because of
the sluggish recovery, the
refinancing rush could help
Mr Obama on the margins
in certain areas.
Mr Obama holds a narrow
lead over Mr Romney in
national polls. His advan-
tage is equally tight in
Florida, where he is ahead
News analysis
States that suffered
the most as a result
of the housing crisis
are seeing a surge
in home loans,
writes
James Politi
The agreement is
a ‘milestone in our
efforts to make tax
systems more fair’
Tim Geithner
US Treasury secretary
A mortgage refinancing
boom is sweeping through
parts of the US ravaged by
the housing crisis, offering
relief to strained household
balance sheets in several
states that will be pivotal to
Barack Obama’s presiden-
tial re-election prospects.
Interest rates have moved
steadily lower over the past
18 months, allowing more
people to take advantage of
better borrowing rates on
their home loans.
According to Freddie
Mac, the government-
backed mortgage company,
the average 30-year fixed
mortgage rate was 3.49 per
cent this week, compared
with 4.55 per cent in July
2011 and 5.05 per cent when
Mr Obama took office in
January 2009.
For those who succeeded
in refinancing, this has
translated into savings of
about $2,500 to $3,000 a year
on mortgage payments.
“To be able to refinance is
just like getting a tax cut,”
says Mark Zandi, a senior
economist at Moody’s. “It’s
a very effective kind of tax
cut that goes to high-to-mid-
dle-income households, and
in many cases that money
will be put to pretty good
use [and pumped back into
the economy].”
Mortgage refinancing
applications jumped 134.5
per cent between June 2011
and June 2012, with states
that suffered the most as a
result of the housing crash
witnessing the biggest
gains, according to data
from the Mortgage Bankers
Association.
Refinancing applications
in Nevada jumped 368.8 per
cent in the year to June,
and 247 per cent in Florida.
Both of these “sunbelt”
states are expected to be big
political prizes in the presi-
dential contest in Novem-
ber between Mr Obama and
ments – would minimise
compliance costs and help
alleviate the concerns of
financial institutions.
The agreements were wel-
comed by industry, which
said the task of implement-
ing Fatca, though still sub-
stantial,
looked
more
achievable.
Harris Horowitz, global
head of tax at BlackRock,
the world’s largest money
manager, hailed the devel-
opment as good news for
investors. He cautioned that
critical details remained
unknown, however.
The latest agreements on
tackling international eva-
sion come as policy makers
on both sides of the Atlan-
tic face public pressure to
crack down on tax-dodging,
particularly by the wealthy.
The European Commission
said last month that “tens
of billions of euros remain
offshore, often unreported
and untaxed, reducing
national tax revenues”.
Politicians are also facing
pressure from campaign
groups, such as Tax Justice
Network, which this week
claimed that between $21tn
and $32tn of financial assets
were held offshore – more
than twice most previous
estimates.
It argues that efforts to
crack down on evasion have
been ineffective, pointing to
a recent analysis by Niels
Johannesen of the Univer-
sity of Copenhagen and
Gabriel Zucman of Paris
School of Economics that
showed the 2009 G20 tax
haven initiative resulted in
“a modest relocation of
deposits between havens”.
Some lawyers say the
direct result of the latest
Fatca agreements is also
likely to be limited. One fac-
tor is the inability of US
authorities to collect infor-
mation on assets held by
entities, such as companies,
which are widely used by
tax evaders. The scope of
the information provided by
the UK will be even nar-
rower.
But policy makers expect
information exchange
agreements will be rolled
out more widely.
A senior Treasury official
said the US hoped the
agreement it had reached
with the five European
countries would serve as a
template for future deals
with other states. The Cay-
man Islands, one of the
world’s largest tax havens,
recently expressed interest
in reaching a tax accord
with the US, the official
said.
The US hopes it will final-
ise another set of accords,
reached with Switzerland
and Japan, by September.
Bright lights of Las Vegas: refinancing applications in the state of Nevada almost quadrupled in the year to June
Getty Images
Soaring demand
Rise in mortgage refinancing applications
134.5%
US overall
368.8%
Nevada
294%
Michigan
247%
Florida
193%
Ohio
by 1.1 percentage points,
according to an average
from the Realclearpolitics
website. In Nevada and
Ohio, the president holds
leads of 4.5 and 4.3 percent-
age points respectively.
It is likely that the refi-
nancing boom will con-
tinue, although there is
some concern that lenders
may already be at full
capacity in terms of
processing the applications.
Mortgage rates could well
continue to drop, particu-
larly if the Federal Reserve
decides to engage in more
easing of monetary policy.
However, Michael Fratan-
toni, senior vice-president
of research at the MBA,
says that if rates flatten out
“what we have seen is that
refinancing activity falls off
pretty quickly”. By the time
that occurs, several hun-
dred thousand homeowners
– and the Obama campaign
– may have reaped some
benefits.
The campaigns traded
barbs on housing in state-
ments yesterday.
Eric Jotkoff, a spokesman
for Mr Obama’s campaign
in Florida, said: “Mitt Rom-
ney believes the housing
market should ‘hit the bot-
tom’ and thinks struggling
homeowners who have
acted responsibly and have
played by the rules should
be on their own.”
But Amanda Henneberg,
a spokeswoman for the
Romney campaign, said:
“Romney is focused on
making sensible changes
that will get credit flowing
again so the housing recov-
ery can begin in earnest.”
Republicans feel pressure on farming crisis
Republicans in the House of
Representatives are under
growing pressure to help
farmers hit by America’s
worst drought in decades,
either by passing a five­year
funding bill that has stalled
in the lower chamber, or
advancing more temporary
legislation,
writes James
Politi in Washington.
After the Democratic­
controlled US Senate
overwhelmingly approved its
version of a long­term “farm
bill” last month, Republican
leaders in the House
delayed moving forward with
their own legislation for fear
of forcing members to take
a tough election year vote.
Some conservative groups
are opposed to the farm
subsidies and food stamp
fund in the five­year bill,
causing Republican leaders
to be wary of a vote, even if
the agriculture committee
approved the legislation.
But the severity of the
drought has ratcheted up
the pressure, amid fears
lawmakers from farm
districts may head home for
the August recess with
stricken constituents
unhappy at the delay in
Washington. Current funding
for farm programmes
expires on September 30,
and uncertainty is another
big headache facing farmers.
House leaders said
yesterday they were
“working” on a solution.
Among the options is to bite
the bullet and bring the five­
year bill to the floor. But
they are also considering a
one­year extension of
current funding levels,
though that could prove
unpalatable to Democrats,
whose support may be
crucial for passage. Also on
the table is a more limited
disaster assistance law.
But, in the meantime,
Democrats have seized on
the delay in the House to
attack Republicans. “As rural
America waits, GOP leaders
are readying vacation plans
not farm bill,” said the office
of Nancy Pelosi, the
Democratic leader.
Fall in demand for industrial exports poses challenges for S Korea
By Simon Mundy in Seoul
bal trade. A reason for its
flagging growth rate has
been the weakness of its
exports, which suffered
annual falls in four of the
first six months of the year.
Troubles in Europe’s
economy have been of con-
cern for exporters. Even in
the first 20 days of June – a
month in which overall
exports rose for the first
time since February –
exports to Europe fell more
than a fifth, undermining
hopes of a boost from a free-
trade agreement with the
EU that came into force last
year.
European weakness is
also threatening sales to
China, the biggest foreign
buyer of Korean goods,
because many of those
exports are used in making
products for sale to Europe.
Ronald Man, an econo-
mist at HSBC, said that
while the slowdown in
exports had been expected,
more surprising was the
extent of the slowdown in
domestic demand. Fixed
investment fell 1.5 per cent,
while consumption growth
slowed from 2.2 per cent in
the previous quarter to
1.8 per cent.
On Wednesday, the gov-
ernment said the country’s
main index of consumer
confidence had fallen to its
lowest level in five months.
“For policy makers,
today's figures suggest a
greater need to sustain
domestic demand," Mr Man
said. "Pressure is also
mounting on fiscal stimu-
lus, especially to support
employment as third-quar-
ter growth remains fragile."
The announcement will
strengthen expectations of a
second successive interest
rate cut next month. The
central bank surprised
economists two weeks ago
by cutting its benchmark
base rate by 25 basis points
to 3 per cent, in the first
reduction since 2009.
In its explanatory
remarks following the rate
cut, the central bank said
the economy would “sus-
tain a negative output gap
for a considerable time
going forward, due mostly
to the increase in euro area
risks and the sluggish econ-
omies of its major trading
partners".
The weak first-half data
mean South Korea will need
a pickup in growth in the
remainder of this year to
meet the BoK’s annual
growth forecast of 3 per
cent. This month, the bank
lowered its forecast by 50
basis points, but economists
say the target is still too
optimistic.
Annual growth in manu-
facturing, the biggest sector
of the economy, was 2.7 per
cent in the second quarter.
Manufacturing expansion
has consistently slowed fol-
lowing growth of 7.2 per
cent last year and 14.7 per
cent in 2010.
The country's largest
manufacturers have experi-
enced mixed fortunes amid
the tough export conditions.
Hyundai Motor said yester-
day its sales in Europe had
risen 15 per cent in the first
half as cost-conscious
consumers favoured its
vehicles’ perceived value
for money – but sales fell 5
per cent in a shrinking
domestic market, where it
is by far the biggest car-
maker.
Samsung, the biggest
exporter by sales, reported
strong revenue growth in
the second quarter, but
sales at chipmaker SK
Hynix and LG Electronics
fell 5 per cent and 11 per
cent respectively.
The big exporters also
face a darkening political
outlook. Pressure on real
household incomes has con-
tributed to a resurgence of
labour unrest this summer,
with industrial action at
Hyundai and Kia Motors.
Several of the leading can-
didates ahead of Decem-
ber’s presidential election
have vowed to check the
perceived excessive power
of the large, family-control-
led “chaebol” corporations,
which are blamed for
restricting the prospects of
smaller businesses.
Last week, the Korea
Employers’ Federation hit
out at politicians' talk of
"economic democracy",
warning of “huge inconven-
ience to employers running
the companies”.
South Korea's economic
growth rate fell to its low-
est level in nearly three
years in the second quarter,
amid lower demand for its
exports in China, Europe
and the US.
The Bank of Korea yester-
day said year-on-year
growth fell to 2.4 per cent in
the April-June period, the
weakest rate since the third
quarter of 2009. Data
showed a heavy quarterly
fall in plant investment – in
part a symptom of ebbing
confidence in the country's
large manufacturing sector
in which output growth has
decelerated sharply over
the past year.
South Korea's open,
export-driven economy, the
fourth largest in Asia, is
seen as a bellwether for glo-
South Korea
GDP
(annual
% change)
Exports, rolling
12-month sum
(annual % change)
10
30
8
20
6
10
4
0
2
0
-10
2010
2011
2012
Source: Thomson Reuters Datastream
  FINANCIAL TIMES
FRIDAY JULY 27 2012
★
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