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BRICS offer help to euro zone with strings attached
Published: 23 September 2011

Major emerging nations yesterday (22 September) said they may lend money to the International Monetary Fund or other global financial bodies to increase their firepower for fighting financial crises, but they could ask for more voting powers in the IMF.


Since the eurozone’s debt crisis erupted last year, the region’s governments have aimed to limit it to Greece, Ireland and Portugal, which have so far signed up to bailouts totalling almost €400 billion.

Spain and Italy had managed to keep their access to market funding under control through fiscal reforms.

But in recent weeks the situation has worsened. Due to the large size of the Spanish and Italian economies, pressure on the eurozone would increase dramatically if either country were to need financial assistance.

The world’s major economies yesterday (22 September) pledged to prevent Europe’s debt crisis from undermining banks and financial markets, and said the eurozone’s rescue fund could be bolstered.

IMF managing director Christine Lagarde has in recent days demanded heavy European efforts to recapitalise banks and called for a new short term fiscal spending to balance long-term consolidation.

The commitment by the so-called BRICS nations — Brazil, Russia, India, China and South Africa — fell short of expectations for more direct support to debt-crippled European countries.

Finance ministers of the group, meeting on the sidelines of an IMF gathering in Washington, called on the G20 nations to act swiftly and decisively to ease the euro-zone debt crisis, the same way they fought the global financial crisis in 2008.

The G20 group, which includes both emerging and developed economies, is the right forum for those discussions and should be strengthened, the ministers said.

Their call underscores a growing concern of major emerging economies about the escalating economic crisis in the developed world.

It also highlights a dramatic change of fortune between the two groups of nations, with developing countries offering financial help that could be used to ease the economic crisis of traditional powers.

Failure to act now could turn the euro zone’s debt problems into another global financial crisis that would engulf emerging economies, Brazil’s Finance Minister Guido Mantega warned.

“There is a risk that the sovereign debt crisis of some countries becomes another financial crisis,” Mantega told reporters in a joint news conference with other BRICS finance ministers and central bank chiefs.

“We eased the 2008 crisis by fast and coordinated actions within the G20. We need to do the same now.”

Direct support ruled out

It is not clear how the BRICS could provide funds to multilateral institutions nor how much money they plan to lend. Earlier this month, sources in the Brazilian government said Mantega would propose the group make billions of dollars available to the IMF.

In a statement issued after the meeting, the ministers said financial support would depend on individual country circumstances.

“There is (an) enormous amount of demand for resources at home for poverty reduction, so there is going to be a big, big tension between giving money to a multilateral institution for the purpose of restoring global stability and meeting our own aspirations at home,” said India’s central bank governor Duvvuri Subbarao.

Direct financial support to troubled European countries, another idea floated by Brazilian officials in the past few days, was not discussed in the meeting, South Africa’s Finance Minister Pravin Gordhan reportedly said.

That type of support, according to the Brazilian sources, could come through the purchase of bonds jointly issued by euro-zone members, the so-called eurobonds.

But Russia shot down the idea.

“It’s impossible, I am absolutely convinced about that,” Russia’s Deputy Finance Minister Sergei Storchak told reporters.

“Our state procedures do not allow for that. We don’t have a mechanism (for that), not in Russia, not in China, not in India. We all have different ways of making decisions, we cannot syndicate our money.”

Increase voting power

Any financial contribution to the IMF would probably come with conditions. The BRICS would most likely take the opportunity to increase their voting power in the institution. The next review of member countries’ quotas is scheduled for January, 2014.

“We are concerned with the slow pace of quota and governance reforms in the IMF,” the countries said in the same statement where they offered to help the fund. “This is needed to increase the legitimacy and effectiveness of the fund.”

About 80% of IMF credit outstanding for all members has been allocated to European Countries. Among programmes currently active, Greece, Ireland and Portugal account for two-thirds of the total non-precautionary IMF commitments – and this does not reflect the expected IMF contribution to the second Greek bailout.

A change in voting power could have a decisive impact on the distribution of funds allocated to groups of countries.

The BRICS group also called on developed countries to adopt “responsible” policies that avoid creating excessive global liquidity — a growing complaint from countries such as Brazil, which has suffered from excessive dollar inflows since the United States started its aggressive monetary easing.

In exchange, the BRICS promised to do what is necessary to secure economic growth, maintain financial stability and contain inflation.

EurActiv with Reuters

Treasuries Fall on Speculation G-20 Will Act on European Crisis
Cordell EddingsSep 23, 2011 11:26 am ET

Sept. 23 (Bloomberg) — Treasuries declined, pushing yields on benchmark 10-year notes up from a record low, on speculation Group of 20 leaders will act to present the European debt crisis from worsening.

Thirty-year bonds pared their biggest weekly gains in almost three years as global equity markets recovered. Investors have sought refuge in U.S. government debt on concern the global economy is on the brink of another recession. The Federal Reserve said on Sept. 21 that it would buy longer-term debt to lower borrowing costs because there are significant risks to the economy.

“Treasuries are coming off some as equities are performing better and there has been no more bad news to speak of,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There is constructive chatter out of Europe about a potential rate cut, but the flight to quality motivation in the market remains the dominant theme.”

Ten-year yields rose 8 basis points this week to 1.80 percent at 11:18 a.m. New York, the first increase in yields in six days according to Bloomberg Bond Trader prices. The yield fell earlier to a record low of 1.67 percent.

The 30-year bond yield rose 6 basis points to 2.86 percent. The yield is down 45 basis points this week.

The S&P 500 rose 1 percent, after losing as much as 0.7 percent earlier.

Group of 20 finance chiefs pledged to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis. Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a statement late yesterday in Washington. Many urged Europe to implement a July promise to expand the powers of its rescue fund, Japanese Finance Minister Jun Azumi said.

–Editor: Dave Liedtka

Kelompok-kelompok negara maju berjanji menangkal krisis ekonomi baru setelah bursa saham global tumbang kemarin. Dalam pertemuan G20 itu, para menteri keuangan dan gubernur bank sentral berkomitmen meningkatkan koordinasi internasional untuk merespon tantangan yang dihadapi dalam ekonomi global.

“Kami berkomitmen untuk mengambil langkah-langkah yang perlu untuk menjaga stabilitas sistem perbankan dan pasar finansial bila diperlukan,” bunyi komunike G20 tersebut.

Pernyataan bersama ini keluar setelah bursa saham global dunia rontok, kemarin. Pelemahan bursa global ini masih berlanjut hingga sekarang.

Hingga pukul 10.25 WIB, indeks Nikkei sudah turun sebesar 2,07% ke level 8.560,29. Begitu juga dengan indeks Hang Seng yang turun 1,24% ke lvel 17.690. Sementara Indeks Harga Saham Gabungan (IHSG) sudah turun 1,1% ke level 3.332, 04.


G-20 Vows to Tackle ‘Renewed’ Global Risks

By Scott Rose and Cheyenne Hopkins – Sep 23, 2011 11:35 AM GMT+0700

G-20 Vows to Tackle Global Challenges, Press Europe

Sept. 23 (Bloomberg) — Group of 20 finance chiefs pledged to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis after concern the world is on the brink of another recession sent stocks tumbling. Bloomberg’s Linda Yueh reports on Bloomberg Television’s “First Look” with Linzie Janis. (Source: Bloomberg)

Group of 20 finance chiefs pledged to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis after concern the world is on the brink of another recession sent stocks tumbling.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a statement late yesterday in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.

The previously unplanned communique suggests authorities are alert to worries among investors, while they stopped short of outlining fresh policies to buoy growth. The worsening European debt turmoil and threat of a U.S. slump yesterday pushed the MSCI All-Country World Index of 45 nations into a bear market for the first time in more than two years.

Verbal support without any concrete action is no longer convincing,” said Joe Lau, an economist at Societe Generale (GLE) SA in Hong Kong. “Investors are now looking for viable credible actions from policy makers and, given the amount of nervousness and uncertainty out there, that may not even be enough.”

While stocks came off their lows after the G-20 statement was released during the Asian day, the MSCI Asia Pacific Ex Japan index headed for its lowest close since June 2010.
Europe’s Pledge

The euro region vowed in the G-20 statement to increase the flexibility of the European Financial Stability Facility and to “maximize its impact” by the time the group next meets Oct. 14-15. Some officials signaled earlier in the day they may use leverage to increase the firepower of the EFSF, which was designed to stem the sovereign-debt crisis.

The G-20 officials cited “financial system fragility” and “heightened downside risks from sovereign stresses” among the threats to growth. They said they will ensure banks are adequately capitalized and have access to liquidity, while reiterating an aversion to volatility in currency markets.

The statement was released as the International Monetary Fund and World Bank prepare to start their annual meetings today, with data this week highlighting economic weakness around the globe.

U.S. consumer confidence dropped last week to its lowest point since the recession ended in 2009, and the output of European service companies and manufacturers this month shrank for the first time in more than two years. FedEx Corp. (FDX), an economic bellwether delivering goods from financial documents to pharmaceuticals, cut its full-year profit forecast as demand dropped in the U.S. and Asia.
‘Danger Zone’

“The world is in a danger zone,” World Bank President Robert Zoellick told reporters. Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian warned a fresh financial crisis is brewing, and Royal Bank of Scotland Group Plc predicted a euro-area recession will begin in the fourth quarter.

European authorities have drawn the most criticism for failing to contain a debt crisis that began in Greece two years ago and has since left that country on the verge of default, Portugal and Ireland requiring bailouts, and speculators threatening to dump the bonds of Italy and Spain.

In a sign of growing international irritation, U.K. Prime Minister David Cameron and five other G-20 leaders yesterday wrote to French President Nicolas Sarkozy to demand European governments “act swiftly to resolve the euro crisis” and consider “all possible options to ensure long-term stability in the world’s second-largest international currency.” Sarkozy is the current G-20 chairman.
ECB May Act

The European Central Bank may act to address risks to growth as soon as next month should economic data disappoint, Governing Council member Luc Coene said in an interview yesterday. An interest-rate cut isn’t ruled out, and the extension of long-term loans to banks is another possibility, he said.

U.S. Treasury Secretary Timothy F. Geithner predicted Europe will act “with more force” to end its troubles.

For now, European parliaments are focused on approving a plan to widen the scope of the 440-billion euro ($593 billion) EFSF to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash- strapped governments.
Ratification Ire

The ratification process, which has so far been completed by just six nations, has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to prevent the turmoil spreading beyond Greece. Curbing the scope of policy makers to do more is the suspicion that taxpayers in AAA-rated countries such as Germany and Finland would balk at stumping up even more rescue money.

Speculation has grown that Europe may eventually ratchet up the fund’s spending power through leverage, with European Union Monetary Affairs Commissioner Olli Rehn and French Finance Minister Francois Baroin indicating yesterday they may be willing to do so. One proposal is for the facility to use the bonds it sells as collateral to borrow more cash from the ECB.

Another idea is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.
Leveraging Up

“It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective,” Rehn said. Baroin said separately that policy makers “need the right firewall to prevent contagion” and can discuss giving the fund “the necessary strength.”

In a sign that faster-growing economies may be willing to support the weaker ones, finance officials from Brazil, Russia, India, China and South Africa — the so-called BRICS — said in a statement they are “open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to financial stability.”

There may be limits to what they’re willing to do. China can support the European and global economies only “at the margin” and Europe must find its own the solution to its crisis, Chinese central bank Deputy Governor Yi Gang said in Washington.


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