Etihad's Alitalia grab not as loony as it looks

Etihad's imminent capital tie-up with perennial loss-maker Alitalia, Italy’s flagship carrier, is a sure road to burning a few hundred million euros in the coming years. But given the Abu Dhabi carrier's ambitions, the deal is not as loony as it looks. De facto control over the Italian carrier will help Etihad's ambition to become a leading player in global aviation.

The United Arab Emirates group is not guided by short-term financial results. It has not been founded to generate immediate returns on equity, but as an instrument of economic policy. Etihad is supposed to drive the long-term economic development of the Gulf region - meanwhile flattering the vanity of local rulers.

Etihad needs global partners to feed traffic into its Abu Dhabi hub. In 2003, the year the company was founded, most attractive peers were already engaged in global alliances. So the Abu Dhabi carrier must put up with what's left on the table: weaker carriers that would not survive on their own.

Aviation's regulations make full cross-continental takeovers impossible. Etihad is limited to taking minority stakes. But at struggling carriers on the brink of collapse, actual control does not necessarily equate with voting rights.

Thanks to Abu Dhabi's abundant cash reserves, Etihad can afford taking the long view. In late April, it stumped up another 300 million euros to keep struggling Air Berlin afloat, lifting its support for Germany's second-largest carrier to more than 800 million euros.

Limited cost synergies were generated by joint aircraft orders and training of pilots, but weren’t enough to stop Air Berlin's losses. Coordinating Air Berlin's and Alitalia's route network may help - a little. Re-directing parts of Alitalia's long-haul traffic to Abu Dhabi could be the most significant immediate benefit.

The main upside of the Alitalia deal is political. By rescuing an Italian icon, Etihad buys political capital in Rome. The rise of the Gulf carriers, which aren’t subject to European employment and social security laws, and enjoy tax advantages at home, has become a threat for European long-haul carriers. Pressured competitors like Lufthansa are lobbying for political intervention. Teaming up with Alitalia means that Etihad can hope to have the government of the euro zone’s third-largest member state on its side. That insurance is worth a premium.
- Etihad Airways on June 1 said it had set the terms for investing in loss-making airline Alitalia. In a joint statement, the two airlines said that they would proceed with final documentation to complete the transaction, once the board and stakeholders in Alitalia confirm acceptance of the terms. According to the statement, the tie-up has the backing of the Italian government.

- Etihad already has minority stakes in seven other airlines, among them Germany's Air Berlin, India's Jet Airways , Virgin Australia and Air Serbia.

- No details on the terms of the deal or the size of the investment were provided. Italian Transport Minister Maurizio Lupi told state television that Etihad was ready to invest around 600 million euros in Alitalia. He also said the deal would not involve creation of a separate company to hive off its bad debt.

- Abu Dhabi-based Etihad has been looking at the possibility of an investment in Alitalia since the start of the year. One source familiar with the talks told Reuters an agreement had been reached that would involve reducing Alitalia's payroll by up to 2,900 jobs.

- "We are delighted to be able to move forward with this process and look forward to the successful conclusion of the proposed transaction with Alitalia," Etihad Chief Executive James Hogan said in a statement.

Source: Reuters

Cheniere pay deal is Coca-Cola with added sugar

Cheniere Energy's employee equity plan is Coca-Cola's with added sugar. The board wants up to 16 percent of the $16 billion company's shares handed to the company's staff over five years. Chief Executive Charif Souki was also last year's best paid U.S. corporate boss, taking home $142 million. Shareholders can justifiably worry that they're losing out.

Coca-Cola in April ran into resistance over a similar broad-based long-term equity plan that could have brought an overhang of shares destined for staff equal to 14 percent of the total outstanding. Wintergreen Advisers led a campaign against the proposal. Although it passed at the beverage giant's annual meeting with Warren Buffett's Berkshire Hathaway abstaining, the company's largest shareholder subsequently voiced disapproval. Coke may now make changes.

At Cheniere, there are 8 million shares still to be allocated from a previous plan and the company wants to add another 30 million for the 2014 to 2018 period. That could mean substantial dilution for owners of the 238 million shares outstanding on April 14. A legal challenge to Cheniere's previous plan, which on Monday forced the company to delay its annual meeting by three months, suggests the new plan may not face an easy ride.

The scale of the plan is only part of the problem. It will pay out if shareholders collect an annual return of 9 percent. But it's based on a starting stock price of $35, barely half the current level. Even if the stock stays where it now is, employee stock grants in the first year alone could be worth almost $800 million, 5 percent of Cheniere's current market capitalization.

Using total return to investors as the only metric is also flawed. Performance relative to peers may better indicate the value added by executives. And net income or free cash flow, which depend less on market sentiment, are more reliable long-term yardsticks. Cheniere has yet to report a full-year profit in its 18-year history, and analysts don't expect it to do so until 2016.

Some investors may give Cheniere and Souki the benefit of the doubt. After all, over the past five years the stock has soared 15-fold as the company capitalized on America's shale gas boom. The share price has doubled in the past year alone. But the CEO and employees are already paid to do their jobs. They don't need a big slice of other investors' gains on top.

Source: Reuters

China: Flunking gaokao(college entrance examination) not end of the world

It's that time of the year again, when about 9 million students will take the gaokao (college entrance examination) seeking the scores that will get them about 7 million undergraduate seats in universities. This is not a contest where all can be winners. Irrespective of how good the students are, about 2 million of them will not be able to enroll in a university. That adds to the huge pressure on the students to get the highest possible marks and get into a university of their choice.

Higher education is an important ladder to social and economic mobility in China, and for children of poorer parents it may be seen as their only chance. Many parents invest money in extra tuition for their children, who are under tremendous pressure not to disappoint their families. Failure, for them, is not an option.

It is thus not surprising that a recent report by the 21st Century Education Research Institute and the Social Sciences Academic Press identified links between examination pressure and suicides of students in China. At all levels, right through to the entry into a university, the scores obtained by students in exams under time constraints dominate their assessment.

It is well recognized that such exams can result in poor performances for some students compared with their abilities and school records. There are many reasons for that: lack of sleep from worry and/or last minute cramming before exams, uncontrollable nerves, ill-health, misreading questions in panic, blanking out - the list can go on.

The Western education system recognizes the importance of continuous assessment as a contributor to overall grades with exams playing a vital but not necessarily the most vital part. It is normal for students in the United Kingdom to go to graduate school based on undergraduate degree performance, without taking an entrance exam. To get into a university, there are alternative study routes from exam-focused "A" levels to national diplomas that contain a lot of coursework in the final results.

Another factor is how the country's education system presents the link between school leaving exams and future options. Most Western countries look at this as measuring what the students achieved in school, for example, the American High School Diploma, not a university entrance exam.

A variety of options follow. Some good high school graduates may go on a gap year before going to university and others make the choice to take foundation degrees at colleges or "AA" degrees at American community colleges, both of which could facilitate their entry into a university later. They can start professional programs or enroll in online courses (popular in the United States), and later in their career join university courses (popular in the UK) or a university in the US as a mature student.

Put simply, not getting into a university at 18 is not the end of the world for students. At the very least, exams can be retaken. A university is not closed off. In the US, although the official length of an undergraduate course is four years, the average time it takes a student to complete it is 5.5 years. Students benefit from a credit system per course, can marry, work part-time and be in the university a bit later in life. It need not happen immediately after school.

But in China, most students aiming to go to a university do see the failure to do so as the end of the world. They feel that it is all or nothing. They feel ashamed when compared with their successful peers. They feel that they have let down their parents.

Society needs to reflect on this attitude, especially when every year 2 million students cannot get into a university. Teachers and parents need to prepare students for other options. Yes, a poor result in gaokao is disappointing but it is the start of an alternative path. The setback can be overcome. More importantly, students must realize that suicide is not a permanent solution to a temporary problem. Parents in particular must make their children feel that they love them regardless of their performance in gaokao and remove the stigma of failure from them.

An increasing number of parents in China are opting for a fairer system by preparing their children for entry into foreign universities, especially in the US, the UK and Australia. These students can thus bypass gaokao. Also, the heads of some Chinese universities have said that they would consider students' school records and head-teacher reports during admission.

Besides, the authorities are planning to reduce the importance of studying English by canceling the language ability test to give students more time to study other subjects. That may ease some pressure from students, especially for those that find the study of a foreign language very challenging. But that does not address the reality - that not all can be winners and society needs to respect those that end up taking a different route. That is the core issue - not getting into a university does not make one a less valuable member of Chinese society.

Remember, two "college dropouts" - the late Steve Jobs and Bill Gates - changed the way we look at the world. And remember, not having a university degree is not the end of the world!

Source: ChinaDailyUSA

China deposits acceptance document of Doha Amendment to Kyoto Protocol with UN

China's Deputy Permanent Representative to the United Nations Wang Min on Monday deposited a document of China's Acceptance of the Doha Amendment to the Kyoto Protocol with UN Secretary-General Ban Ki-moon.

The Amendment, literally known as "Instrument of Acceptance of the Doha Amendment to the Kyoto Protocol" and believed to be a result of hard negotiations, maintains the principles of the United Nations Framework Convention on Climate Change, especially the principles of common but differentiated responsibilities, equity and respective capabilities and follows the emission reduction model of the Kyoto Protocol, and ensures there is no gap in law between the first and second commitment periods, according to a Chinese diplomatic source.

China hopes that developed countries accept the Doha Amendment as soon as possible to ensure its early entry into force. It also attaches great importance to addressing climate change, regarding this as an important part of its efforts to promote ecological progress and to build a beautiful country, including this in China 's national development plan and having conducted a range of adaptation and voluntary mitigation actions, said the Chinese diplomatic source.

The Chinese government has announced a 40 percent to 45 percent reduction of carbon dioxide intensity below 2005 levels by 2020 and is committed to making every effort to achieve this target.

Adopted on Dec. 8, 2012 in Doha, Qatar, the Amendment makes arrangements for the second commitment period of the Kyoto Protocol. It provides for quantified emission limitation and reduction commitments for Annex I Parties under the United Nations Framework Convention on Climate Change, with a view to reducing collectively their overall emissions of greenhouse gases by at least 18 percent below 1990 levels in the commitment period from 2013 to 2020.

Source: Xinhua

UNESCO sets up knowledge center in Beijing

The United Nations Educational, Scientific and Cultural Organization (UNESCO) set up its International Knowledge Center for Engineering Sciences and Technology (IKCEST) in Beijing on Monday.

The center will serve as a globally connected hub to assemble digital resources relating to engineering sciences and technology, build a public data service platform, provide consultation and assist scientific research and education for policy-makers and engineers, especially those from developing countries, said Pan Yunhe, deputy president of the Chinese Academy of Engineering (CAE).

The agreement for establishing the IKCEST was signed by CAE president Zhou Ji and Irina Bokova, director general of the UNESCO.

Source: Xinhua

China and Arab nations to make plan for closer ties at upcoming ministerial meeting. Present trade US$239 billion

 China and Arab nations will unveil a series of plans to upgrade relations at an upcoming ministerial meeting, according to Chinese Foreign Minister Wang Yi here on Monday.

At the sixth ministerial conference of the China-Arab Cooperation Forum on Thursday, the two sides will adopt a declaration, an action plan for 2014-2016, and a development plan for 2014-2024, Wang said in a bylined article published by Xinhua.

"China wants to reinforce cooperation with Arab states in both traditional sectors like energy, trade and infrastructure and emerging sectors like nuclear energy, space and new energy with a view to sharing development benefits and promoting common prosperity," he said.

He said Arab states, located at the western end of the economic belt along the Silk Road and the 21st-century maritime silk road, are "natural and important cooperation partners for China" in creating the belt and the maritime silk road.

"The two sides need to plan for the growth of their relations in the next 10 years around the priority of building the economic belt and the maritime silk road," he said.

The foreign minister called on the two sides to give mutual support on issues concerning each other's core and major interests, step up coordination and collaboration in regional and international affairs, and turn the balance of power in favor of developing countries.

He also expressed the will to intensify the people-to-people exchanges.

This year marks the tenth anniversary of the establishment of the Forum. Looking back at the development of the ties in the past decade, Wang hailed the two sides "have always treated each other with sincerity and trust and stayed the course of strategic cooperation."

As always, China supported Arab states in independently exploring development paths compatible with their national conditions and in restoring the legitimate rights of their nations, including Palestine's right to be an independent state, he said.

China is now the second biggest trading partner of the Arab world and the top trading partner of nine Arab states. During the past decade, trade volume between China and the Arab states risen from 25.5 billion U.S. dollars to 239 billion U.S. dollars.

The foreign Minister revealed that during the past decade, China's imports of crude oil from Arab states rose from 40.6 million tons to 133 million tons. The value of new engineering contracts signed by Chinese businesses in Arab states increased from 2.6 billion U.S. dollars every year to 29.1 billion U.S. dollars. The annual increase in non-financial direct investment by Chinese businesses in Arab states also grew from 17.2 million U.S. dollars to 2.04 billion U.S. dollars.

Wang urged the two sides to seize the opportunity and work together to counter challenges and achieve common development, as China is deepening reform while the Middle East is experiencing major changes, adjustments and transformation like never before.

"Let the tenth anniversary be a new starting point for China and Arab states to join hands, keep the momentum, and usher in a brighter future for China-Arab relations and the China-Arab Cooperation Forum," he said.

China is considering relaxing its "green card" policy

 China is considering relaxing its "green card" policy by lowering the application and approval threshold, a move to attract more foreign talent.

Authorities are deliberating revision to regulations on permanent residence for foreigners, considering more flexible and pragmatic application standards, the Organizational Department of the Central Committee of the Communist Party of China revealed on Monday.

China launched its green card system in 2004.

Under the system, the foreign family members of Chinese nationals and foreign people who have worked as elite talent or made large investments (at least 500,000 U.S. dollars), among others, can apply for permanent residence cards.

Nearly 5,000 foreigners had been granted Chinese green cards by 2012, according to a media report.

As of May 23, 1,306 foreigners had gained permanent residence in China through a foreign talent recruitment plan known as "1,000 talent plan" or through recommendations by central ministries and provincial governments, according to the department.

Source: Xinhua

China committed to foreign recruitment: vice premier

Chinese Vice Premier Ma Kai on Friday reiterated China's long-term strategic policy of recruiting skilled personnel from abroad.

Ma made the remarks during a meeting with foreign experts who are here to attend a seminar on exchanges in engineering technology between China and the United States.

He commended the role of the seminar in encouraging Chinese enterprises to innovate.

China will exercise a more open-minded human resources policy and create a more favorable environment for foreigners to carve out their business, the vice premier said, adding that the Chinese government sincerely welcomes foreign experts to work with the Chinese side and hopes the interaction will contribute to the development of China as well as the world.

Source: Xinhua

El Nino Seen as Probably Weak by (Some) Forecasters as Event Looms

El Nino this year will probably be weak, potentially reducing the impact of the event which typically brings drought to parts of Asia and rains to South America, said Commodity Weather Group LLC and AccuWeather Inc.

The chance of a weak pattern is 65 percent and the odds of a moderate one are 35 percent, said David Streit, CWG’s co-founder. The probability of a weak event is 80 percent, said Dale Mohler, a forecaster at AccuWeather. Streit and Mohler have been meteorologists for three decades.

El Ninos can roil world agricultural markets as farmers contend with dry weather or too much rain. Forecasters from the U.S. to the United Nations have warned that the event could happen this year, and Australia’s Bureau of Meteorology said last month the pattern may develop by August. ABN Amro Group NV says confirmation would bolster coffee, sugar and cocoa futures.

“It’s still a tough call on whether this will remain weak or reach moderate” levels, Streit from Bethesda, Maryland-based CWG said in an e-mail to Bloomberg. A weak event is more likely because of the weakening of the warm pool of water below the surface of the Pacific Ocean and “the difficulty in getting the trade winds to weaken significantly,” he said.

El Ninos, caused by the periodic warming of the tropical Pacific, occur irregularly every two to seven years and are associated with warmer-than-average years. The last El Nino was from 2009 to 2010, and since then the Pacific has either been in its cooler state, called La Nina, or neutral.

Weak Intensity

While the Standard & Poor’s GSCI index of eight agricultural commoditiesclimbed 10 percent this year, it’s declined 9 percent from an 11-month high at the start of May on signs of increasing world grain supplies.

El Nino will probably “set in during July and last six to eight months,” said Mohler from AccuWeather. “It should be of weak to perhaps moderate intensity.”

In 1997-1998, the strongest El Nino on record back to 1950 helped push the global mean temperature in 1998 up 1.2 degrees to what was then an all-time high of 58.1 degrees Fahrenheit (15 Celsius), according to the U.S. National Oceanic and Atmospheric Administration. The event in 2006-2007 caused droughts in the Asia-Pacific region, more than halving Australia’s wheat output and hurting Indonesia’s coffee harvest.

The probability of an El Nino is around 85 percent and the event should develop by late June, said Donald Keeney, a meteorologist at MDA Weather Services in Gaithersburg, Maryland. The chance of a weak pattern is 35 percent, for a moderate one 50 percent and a strong one 15 percent, he said.

There are signs an El Nino is imminent, presaging changes to global weather patterns, the UN’s World Meteorological Organization said April 15. The U.S. Climate Prediction Center said May 8 that the chances of El Nino developing during the Northern Hemisphere summer exceed 65 percent.

Source: Bloomberg

Libya's new premier Maiteeq takes office amid strife

 Libya's new prime minister Ahmed Maiteeq on Monday held his first cabinet meeting at the premier's office after police forces helped him take over the building.

The North African country is struggling with turmoil and a political crisis as outgoing premier Abdullah al-Thinni has refused to hand over power to Maiteeq who was elected by parliament in a chaotic vote last month.

Thinni had resigned in April but has said he received conflicting orders from Libya's divided parliament over the legitimacy of Maiteeq's election and would continue in his post until the General National Congress (GNC) assembly resolved the dispute.

Maiteeq arrived at the prime minister's office late in the evening escorted by police cars, witnesses said. Thinni had moved earlier to another government building, his spokesman said.

In a brief statement after a cabinet meeting, Maiteeq denounced clashes between militant Islamists and army forces that had erupted in eastern Benghazi, killing around 20 people.

Standing behind his cabinet, the businessman vowed to make improving security and fighting terrorism a top priority.

There was no immediate comment from Thinni after Maiteeq's statement was read live on television. The cabinet's tenure might be short-lived as Libya is preparing for elections later this month.

First Deputy Parliamentary Speaker Ezzedin al-Awam told Reuters on Monday that Thinni had told him he had not handed over officially the prime minister's office to Maiteeq.

Parliament is at the heart of a growing confrontation among rival political parties and brigades of former rebels who refuse to disarm and have allied themselves loosely on competing sides of a split congress.

Four decades of authoritarian rule by Muammar Gaddafi and three years of unrest since his ousting have left Libya with few institutions and no real army to impose state authority on former fighters and Islamist militants who often use their military muscle to make demands.

Those rivalries have come closer to open confrontation since last month after Khalifa Haftar, a renegade former general, began a self-declared campaign with renegade forces to purge Islamist militants he says the government has failed to challenge.

Maiteeq, a businessman backed by independents and Islamist lawmakers, was appointed by GNC members after a chaotic vote contested by rival factions as illegitimate.

Source: Reuters

Russia says Ukraine situation worsening, submits U.N. resolution

 Russia on Monday circulated a draft U.N. Security Council resolution calling for humanitarian corridors in eastern Ukraine but said that Western council members raised so many questions about the text that Moscow would now contemplate what its next move would be.

The 15-member council met briefly behind closed doors to discuss the one-and-a-half page draft resolution, which calls for an end to the worsening violence in southeastern Ukraine and for safe and unhindered humanitarian aid.

"There was some positive reactions from some members of the council. However, others were asking so many questions that if we were to try to answer them then we would be talking about things for weeks," Russian U.N. Ambassador Vitaly Churkin, president of the Security Council for June, told reporters after the meeting.

"We have not yet decided what out next move is going to be in terms of working on this resolution," he said.

Ukraine and its Western allies accuse Moscow of fueling a pro-Russian uprising that threatens to break up the former Soviet republic of 46 million people. Russia denies orchestrating the unrest and says Ukraine's attempts to end it by military force are making the situation worse.

"We must be clear that the crisis in Ukraine is a political security crisis. It's not a humanitarian crisis," British U.N. Ambassador Mark Lyall Grant told reporters.

Lyall Grant and his French counterpart, Gerard Araud, said there were key elements missing from the Russian draft.

"There were things missing like the reference to the territorial integrity and sovereignty of Ukraine for instance, the right of Ukraine to defend its territorial integrity," said Araud, adding that a U.N. report on the humanitarian situation was needed as he was unaware "there was a major crisis."

The United States called the Russian proposal hypocritical because at the same time armed fighters and weapons were entering Ukraine from Russia and Russian-backed separatists were attacking new targets and holding hostage monitors from the Organization for Security and Cooperation in Europe (OSCE).

"So if they are going to call for or would support a reduction in tensions and a de-escalation, it would be more effective for them to end those activities," U.S. State Department spokeswoman Jen Psaki said in Washington.

Russian Foreign Minister Sergei Lavrov said earlier on Monday that Western nations had assured Russia the situation in Ukraine would improve after its May 25 presidential election but that "everything is happening in exactly the opposite way."

"People are dying every day. Peaceful civilians are suffering more and more - the army, military aviation and heavy weapons continue to be used against them," Lavrov said.

U.N. Secretary General Ban Ki-moon spoke to newly elected Ukrainian President Petro Poroshenko over the weekend and urged him to initiate a dialogue with Russian President Vladimir Putin, Ban's spokesman Stephane Dujarric said on Monday.

Source: Reuters

EU tells France and Italy to keep budget promises

 The European Commission told France and Italy on Monday to stick to their pledges to curb spending while reforming their economies, showing little sign of wavering on EU budget rules.

In its annual policy recommendations to governments around Europe, the Commission sought to strike a fine balance between pushing for budget cuts and stimulating a fragile economy at a time of record unemployment.

The balance is important because the EU has to uphold the credibility of its recently sharpened budget rules and at the same time respond to the rise of extremist parties, which drew new strength in European Parliament elections in May.

"If we keep public finances sustainable, if we keep structural reforms on track, then there is room for more growth and jobs," Commision President Jose Manuel Barroso told journalists.

"The only way to do it is to continue with the necessary fiscal consolidation."


TIGHT REIN

France, whose economy barely grew over the last two years, is an example of the difficulty facing many governments, implementing unpopular structural reforms of pensions or labour laws and keeping a tight rein on public spending.

President Francois Hollande's Socialist Party came third in European elections in May, trailing behind the far-right National Front which took first place and the conservative UMP party as French unemployment hit record highs.

The poor result, which makes it difficult for Hollande to push through any unpopular reforms, also has negative implications for France's credit rating, Moody's agency said.

Hollande is pinning his recovery hopes on plans to phase out 30 billion euros ($40 billion) in payroll taxes on companies in exchange for commitments to hire and invest in France.

Prime Minister Manuel Valls last week promised further tax cuts for low-earning and middle-class households, saying one reason for the rise in support for the National Front was anger at years of tax rises.

But lower taxes mean less revenue at a time when Paris needs to cut its budget deficit to below 3 percent of gross domestic product by the end of 2015 to be in line with EU law. It can hardly expect to get more time because it has already received a two-year extension.

The Commission said that Paris still had time to act to hit the deficit goal, but also asked France to provide more detail on how it aims to bring down the deficit by 2015.

For now, the reduction in the structural deficit - which strips out one-offs, for example - was well below what was needed, it said.

"Moreover, risks to the government's targets are tilted to the downside. In particular, part of the additional measures for 2014 announced in the programme remains to be adopted and the planned amount of savings for 2015 is very ambitious," it said.

"Additional efforts should be spelled out in the forthcoming amending budget law for 2014."


UNBLOCK ITALY

Italy appears to be in a stronger position than France to implement reforms because Prime Minister Matteo Renzi's party won a landslide victory in the European election.

This, coupled with market expectations of policy action by the European Central Bank this week, pushed Italian borrowing costs for five-year bonds to record lows last week.

However, the Commission called on Italy to "reinforce the budgetary measures for 2014 in the light of the emerging gap relative to the Stability and Growth Pact requirement, namely the debt reduction rule."

Renzi has pledged to present a package of measures called

"Unblock Italy" by the end of July to try to get the economy moving after a two-year recession.

The legislation would eliminate complicated authorisation procedures for all sorts of economic initiatives and unblock programmes that have been held up for 40 years.

The package adds to an already packed reform agenda for Renzi, who has promised to reform the electoral system, abolish the Senate as an elected chamber and overhaul labour rules, the public administration and the tax system.

So far the most significant measure he has managed to turn into law has been a cut in income tax which will boost pay-packets of low-paid workers by up to 80 euros a month over the second half of this year.

But even though Italy, unlike France, has its budget deficit already safely within EU limits, its debt is the second-biggest in Europe at 135 percent of GDP, which makes it vulnerable to fickle market sentiment.

This leaves the euro zone's third-biggest economy very little room for manoeuvre also in terms of deficit, EU Economic and Monetary Affairs Commissioner Olli Rehn said.

"Italy needs to make an adequate structural effort to tackle its high debt, which is its main vulnerability. It is the structural effort, annually, done by Italy - that's what is important," Rehn said.

Opposition politicians said the EU's call for budget tightening was a slap in the face for Renzi and meant Italy faced further austerity. Economy Minister Pier Carlo Padoan tweeted that the country was on the right path.

"The Commission appreciates Italy's reforms, we knew the debt was high, we will accelerate our reforms and privatisations to reduce it in a sustainable way," he said in the tweet.

The Economy Ministry later issued a statement saying the Commission's assessment did not take into account the government's plans for spending cuts and privatisations which it had not yet fully detailed.

Source: Reuters

Greek PM may replace finance minister in reshuffle -officials

Greek Prime Minister Antonis Samaras will reshuffle his cabinet as early as this week in a bid to wrest back political momentum, and his widely respected finance minister could be among those set to depart, government officials told Reuters on Monday.

Samaras, whose conservative party lost the EU election last month to the radical leftist Syriza, is expected to use the reshuffle to show Greeks he has heeded their message at the ballot, which was seen as a test of faith in the government.

All eyes are on whether economist Yannis Stournaras, who has led negotiations with Greece's EU/IMF lenders and is credited with spearheading the country's return to fiscal discipline after it nearly went bankrupt, will remain as finance minister.

Four government officials said Samaras was discussing whether to keep Stournaras in the job, with one official saying it had been decided that he would leave, though the others cautioned that no final decision had been made yet.

Stournaras himself is eager to leave the finance ministry after the twin successes of returning Athens to the bond market after four years and reporting a primary budget surplus, though he is also considered best placed to lead crucial debt relief talks later this year, two other senior officials told Reuters.

"The finance ministry, which is crucial, and ministries handling social policies are expected to be the portfolios most affected," one of the four government sources said.

"It makes sense for Stournaras to leave after completing a series of tasks, with things coming full circle in terms of saving the country and achieving the bailout targets. But handling the debt talks also remains an open issue."

If he were to leave, Stournaras is expected to go to the Bank of Greece, where governor George Provopoulos's term expires on June 21, two of the government officials said.

"The key decision in the reshuffle is that of the position of the finance minister. We should expect an announcement from Thursday onwards," one of the other government officials said.

None of the four sources said who might replace Stournaras.

Stournaras himself has so far said nothing on the issue other than that it was Samaras's decision. Asked last week whether he would draft the budget later this year, he said:

"This is for the prime minister to decide."

Party officials say the reshuffle could also offer Samaras an opportunity to lure back defecting lawmakers to provide more explicit support to the ruling coalition, which has only a two-seat majority in the 300-seat parliament.

Former coalition lawmakers who are now independent are among those considered potential candidates for various ministerial posts.

Samaras, who has led an unwieldy right-left coalition of his New Democracy conservatives and Socialist PASOK party since 2012, has been on the back foot since Syriza triumphed in the EU vote, propelled to victory by voters' angry about austerity measures imposed at the behest of EU/IMF lenders.

Last week, Deputy Prime Minister Evangelos Venizelos confirmed that a reshuffle was on the cards but gave no details.

Source: Reuters

The European Union Needs more non-bank finance

  The European Union needs more non-bank finance. Banks are on the back foot. On their own, they won’t be able to fund the jobs and growth the EU is desperate for. Non-bank finance needs to take up the slack.

The European Central Bank and Bank of England have made a good start by identifying the importance of reviving securitisation - the process of packaging loans into bond-like securities which can then be traded on the market. The two central banks have just published a joint paper describing blockages in the system which have all but killed EU securitisation since the financial crisis.

But securitisation is only one piece of the non-bank finance landscape. Similar leadership is needed to invigorate venture capital, equity investment, bond issues for small companies, shadow banking and so forth.

Following the financial crisis, securitisation – in common with other types of market-based finance - has had a bad name. This is only partly deserved. Securitisation certainly shares the blame for the U.S. subprime crisis that triggered the global credit crunch. Banks didn’t just originate mortgage loans and sell them off to third-party investors – something sometimes described as “plain vanilla” securitisation. They engaged in increasingly exotic and wild practices.

Not only did the banks lend to borrowers who were unable to service their loans. They constructed opaque financial instruments – sometimes securitisations of securitisations – in the hope of jacking up promised returns.

What’s more, the institutions that bought the securities often weren’t suitable owners. Sometimes, they were highly-leveraged short-term investors who were only able to buy these instruments because the banks selling them the paper were effectively acting as lenders of last resort. Sometimes, banks hung onto the securities themselves. As a result, when the subprime market exploded, the banking industry was dragged down too.

Securitisation was supposed to diversify risk away from banks. It did nothing of the sort. Why then, one might ask, are the ECB and the BoE keen to revive these weapons of mass financial suicide? Partly because the EU securitisations have been declared guilty by association with the United States. In fact, they are largely innocent. Default rates on EU consumer securitisations between 2007 and 2013 were only 0.05 percent, according to Standard & Poor’s. The equivalent for the U.S. was 18.4 percent.

It is ironic, given this comparative record, that the U.S. market has rebounded while the EU one is virtually dead. But the state of EU banks, particularly those in the euro zone, makes it important to breathe life into the market. As a consequence of the credit crunch and the subsequent euro crisis, banks are rightly being more tightly regulated. They are also shrinking. If finance doesn’t come from some other sources, Europe could be condemned to years of slow growth.

Securitisation is a good alternative source of funding, provided it develops in a controlled way. It allows banks to keep making new loans while still shrinking their balance sheets. It can also transfer credit risk to lowly-leveraged investors who don’t have to be propped up by the taxpayer if there’s another downturn.

The ECB and BoE have come up with a series of proposals for letting this market develop in a healthy way. Most of what they advocate involves unblocking arcane parts of the financial system’s plumbing. But the big proposal is to distinguish between plain vanilla and more exotic securitisations, and then regulate the former less harshly.

While this is an excellent initiative, it should only be seen as part of the solution to Europe’s “bankcentricity.” That is to say, Europe is far more dependent than America is on banks to finance business activity. A broad-based approach is needed to develop healthy non-bank finance.

Other debt securities have an important role to play. Large companies have little trouble issuing bonds in the EU. But that’s not so for smaller companies. Europe would benefit from a bigger junk bond market: more “mini-bonds” - where smaller companies tap the market for cash; and more private placements

- where bonds are sold to investors outside the formal market environment.

There’s also scope to expand lending by non-banks. The two most promising avenues are peer-to-peer lending, where internet sites match borrowers with lenders; and shadow banking, a broad term for non-bank lending which, though it has become something of a dirty word since the crisis, would be valuable if properly regulated.

Non-bank finance doesn’t just mean non-bank debt. Europe doesn’t just suffer from bankcentricity; it also suffers from

“debtcentricity.” The economy would be more resilient if companies relied more on equity.

In that vein, European policymakers need to see what they can do to encourage both more issuance of equity on stock markets and more venture capital for startups and rapidly growing companies. One policy change could be to remove the bias in the tax system that stems from the fact that interest payments on debt are tax-deductible but equity dividends are not.

The ECB and BoE will be important actors in ending the EU’s bankcentricity. The ECB is the pre-eminent financial regulator for the euro zone; while the BoE is the equivalent for the City of London, Europe’s financial centre. But politicians also need to get on the stage. Heads of government should make developing healthy market-based finance a priority for the new European Commission which takes office next year.
 Banks are on the back foot. On their own, they won’t be able to fund the jobs and growth the EU is desperate for. Non-bank finance needs to take up the slack.

The European Central Bank and Bank of England have made a good start by identifying the importance of reviving securitisation - the process of packaging loans into bond-like securities which can then be traded on the market. The two central banks have just published a joint paper describing blockages in the system which have all but killed EU securitisation since the financial crisis.

But securitisation is only one piece of the non-bank finance landscape. Similar leadership is needed to invigorate venture capital, equity investment, bond issues for small companies, shadow banking and so forth.

Following the financial crisis, securitisation – in common with other types of market-based finance - has had a bad name. This is only partly deserved. Securitisation certainly shares the blame for the U.S. subprime crisis that triggered the global credit crunch. Banks didn’t just originate mortgage loans and sell them off to third-party investors – something sometimes described as “plain vanilla” securitisation. They engaged in increasingly exotic and wild practices.

Not only did the banks lend to borrowers who were unable to service their loans. They constructed opaque financial instruments – sometimes securitisations of securitisations – in the hope of jacking up promised returns.

What’s more, the institutions that bought the securities often weren’t suitable owners. Sometimes, they were highly-leveraged short-term investors who were only able to buy these instruments because the banks selling them the paper were effectively acting as lenders of last resort. Sometimes, banks hung onto the securities themselves. As a result, when the subprime market exploded, the banking industry was dragged down too.

Securitisation was supposed to diversify risk away from banks. It did nothing of the sort. Why then, one might ask, are the ECB and the BoE keen to revive these weapons of mass financial suicide? Partly because the EU securitisations have been declared guilty by association with the United States. In fact, they are largely innocent. Default rates on EU consumer securitisations between 2007 and 2013 were only 0.05 percent, according to Standard & Poor’s. The equivalent for the U.S. was 18.4 percent.

It is ironic, given this comparative record, that the U.S. market has rebounded while the EU one is virtually dead. But the state of EU banks, particularly those in the euro zone, makes it important to breathe life into the market. As a consequence of the credit crunch and the subsequent euro crisis, banks are rightly being more tightly regulated. They are also shrinking. If finance doesn’t come from some other sources, Europe could be condemned to years of slow growth.

Securitisation is a good alternative source of funding, provided it develops in a controlled way. It allows banks to keep making new loans while still shrinking their balance sheets. It can also transfer credit risk to lowly-leveraged investors who don’t have to be propped up by the taxpayer if there’s another downturn.

The ECB and BoE have come up with a series of proposals for letting this market develop in a healthy way. Most of what they advocate involves unblocking arcane parts of the financial system’s plumbing. But the big proposal is to distinguish between plain vanilla and more exotic securitisations, and then regulate the former less harshly.

While this is an excellent initiative, it should only be seen as part of the solution to Europe’s “bankcentricity.” That is to say, Europe is far more dependent than America is on banks to finance business activity. A broad-based approach is needed to develop healthy non-bank finance.

Other debt securities have an important role to play. Large companies have little trouble issuing bonds in the EU. But that’s not so for smaller companies. Europe would benefit from a bigger junk bond market: more “mini-bonds” - where smaller companies tap the market for cash; and more private placements

- where bonds are sold to investors outside the formal market environment.

There’s also scope to expand lending by non-banks. The two most promising avenues are peer-to-peer lending, where internet sites match borrowers with lenders; and shadow banking, a broad term for non-bank lending which, though it has become something of a dirty word since the crisis, would be valuable if properly regulated.

Non-bank finance doesn’t just mean non-bank debt. Europe doesn’t just suffer from bankcentricity; it also suffers from

“debtcentricity.” The economy would be more resilient if companies relied more on equity.

In that vein, European policymakers need to see what they can do to encourage both more issuance of equity on stock markets and more venture capital for startups and rapidly growing companies. One policy change could be to remove the bias in the tax system that stems from the fact that interest payments on debt are tax-deductible but equity dividends are not.

The ECB and BoE will be important actors in ending the EU’s bankcentricity. The ECB is the pre-eminent financial regulator for the euro zone; while the BoE is the equivalent for the City of London, Europe’s financial centre. But politicians also need to get on the stage. Heads of government should make developing healthy market-based finance a priority for the new European Commission which takes office next year.

Source: Reuters   by Hugo Dixon

Nikkei led Asian shares higher on Tuesday, supported by solid U.S. and Chinese manufacturing data

 Nikkei led Asian shares higher on Tuesday, supported by solid U.S. and Chinese manufacturing data, while the euro dragged its feet near a 3 1/2-month low on expectations of fresh monetary easing by the Euro-pean Central Bank.

Japan's Nikkei rose 1.0 percent to hit a two-month high while MSCI's broadest index of Asia-Pacific shares outside Japan was flat, not far from one-year high hit last week.

Asian shares were bolstered by the U.S. Institute for Supply Management's manufacturing activity index May rising to 55.4 in May from 54.9 in April.

The data initially caused some confusion in U.S. trade because the ISM initially announced a far weaker 53.2 and took nearly three hours to issue a correction.

In the end, though, the corrected figure was nearly in line with expectations. Coupled with other data showing a rise in construction spending, it suggested a healthy recovery after the first quarter's weather-related contraction.
The data followed a gauge of China's factory activity showing expansion at the fastest pace in five months in May, helping to lift MSCI's world index to a 6-1/2-year intraday high about 1.5 percent away from its lifetime record set in late 2007.

"On the whole, the world's economy is looking up, growing at a moderate pace," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

As solid gains in equity prices undermined the allure of safe-haven assets, gold flirted with four-month low of $1,240.65 an ounce hit on Monday, having fallen for five days in a row. It last traded at $1,244.79.

Silver also stood near one-year low of $18.60 hit on Friday, changing hands at $18.74.

The yield on the 10-year U.S. Treasuries posted the largest daily advance in more than six weeks on Monday, jumping back to 2.53 percent compared to 11-month low of 2.40 percent hit on Thursday.

Global bond yields had fallen sharply in the past few weeks partly on expectations that the European Central Bank will adopt a series of easing measures at its meeting on June 5.

Such expectations have driven the euro down, and the common currency stood at $1.3596 , just a hair above its 3 1/2-month low of $1.3586 hit on Thursday.

In contrast, the dollar index <.DXY> rose to its highest level since Feb 13 at 80.681, and last stood at 80.631, helped by the solid U.S. data.

Against the yen, the dollar rose to 102.49 yen overnight, its highest in a month, though the currency is still stuck in a familiar range.

The dollar's resurgence put some emerging market currencies under pressure.

The Brazilian real fell to two-month low of 2.2770 to the dollar also due to the worsening economic outlook in the biggest economy in South America and uncertainty on the central bank's currency intervention programme.

The South African rand also hit a two-month low of 10.6960 to the dollar on Thursday, hurt by a recent raft of weak data. In Asia the Indonesian rupiah hit a three-month low of 11,785 to the dollar on an unexpected trade deficit in April.

In Asia, the Australian and Indian central banks hold policy meetings later in the day, though neither of them is expected to change its policy rate.

China's non-manufacturing PMI rises to 55.5 in May(from 54.8 in April)

China's non-manufacturing activity further expanded in May, with the sector's purchasing managers' index (PMI) rising to 55.5 from 54.8 in April, official data showed on Tuesday.

The non-manufacturing PMI, compiled by the National Bureau of Statistics and the China Federation of Logistics and Purchasing, tracks activity in sectors including construction, software, aviation, railway transport and real estate.

The rise marks the second straight month of improvement, following a 0.3-point rebound in April and a decline in March. In January, the index hit its lowest level in more than a year at 53.4.

A PMI reading above 50 indicates expansion, while a reading below 50 reflects contraction.

Tuesday's reading came after strengthened manufacturing data freshly released on Sunday. Latest official survey showed China's manufacturing PMI increased to 50.8 in May, hitting a five-month high and adding to signs of a stabilizing economy.

Source: Xinhua

Stephen Roach: China Sets America’s Mental Trap. The U.S and Chinese "asymmetrical rebalancing" by Stephen Roach

The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break.

Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases of long-term assets), began as a noble endeavor – well timed and well articulated as the Fed’s desperate antidote to a wrenching crisis. Counterfactuals are always tricky, but it is hard to argue that the liquidity injections of late 2008 and early 2009 did not play an important role in saving the world from something far worse than the Great Recession.

The combination of product-specific funding facilities and the first round of quantitative easing sent the Fed’s balance sheet soaring to $2.3 trillion by March 2009, from its pre-crisis level of $900 billion in the summer of 2008. And the deep freeze in crisis-ravaged markets thawed.

The Fed’s mistake was to extrapolate – that is, to believe that shock therapy could not only save the patient but also foster sustained recovery. Two further rounds of QE expanded the Fed’s balance sheet by another $2.1 trillion between late 2009 and today, but yielded little in terms of jump-starting the real economy.

This becomes clear when the Fed’s liquidity injections are compared with increases in nominal GDP. From late 2008 to May 2014, the Fed’s balance sheet increased by a total of $3.4 trillion, well in excess of the $2.6 trillion increase in nominal GDP over the same period. This is hardly “Mission accomplished,” as QE supporters claim. Every dollar of QE generated only 76 cents of nominal GDP.

Unlike the United States, which relied largely on its central bank’s efforts to cushion the crisis and foster recovery, China deployed a CN¥4 trillion fiscal stimulus (about 12% of its 2008 GDP) to jump-start its sagging economy in the depths of the crisis. Whereas the US fiscal stimulus of $787 billion (5.5% of its 2009 GDP) gained limited traction, at best, on the real economy, the Chinese effort produced an immediate and sharp increase in “shovel-ready” infrastructure projects that boosted the fixed-investment share of GDP from 44% in 2008 to 47% in 2009.

To be sure, China also eased monetary policy. But such efforts fell well short of those of the Fed, with no zero-interest-rate or quantitative-easing gambits – only standard reductions in policy rates (five cuts in late 2008) and reserve requirements (four adjustments).

The most important thing to note is that there was no extrapolation mania in Beijing. Chinese officials viewed their actions in 2008-2009 as one-off measures, and they have been much quicker than their US counterparts to face up to the perils of policies initiated in the depths of the crisis. In America, denial runs deep.

Unlike the Fed, which continues to dismiss the potential negative repercussions of QE on asset markets and the real economy – both at home and abroad – China’s authorities have been far more cognizant of new risks incurred during and after the crisis. They have moved swiftly to address many of them, especially those posed by excess leverage, shadow banking, and property markets.

The jury is out on whether Chinese officials have done enough. I think that they have, though I concede that mine is a minority view today. In the face of the current growth slowdown, China might well have reverted to its earlier, crisis-tested approach; that it did not is another example of the willingness of its leaders to resist extrapolation and chart a different course.

China has already delivered on that front by abandoning a growth model that had successfully guided the country’s economic development for more than 30 years. It recognized the need to switch from a model that focused mainly on export- and investment-led production (via manufacturing) to one led by private consumption (via services). That change will give China a much better chance of avoiding the dreaded “middle-income trap,” which ensnares most developing economies, precisely because their policymakers mistakenly believe that the recipe for early-stage takeoff growth is sufficient to achieve developed-country status.

The US and Chinese cases do not exist in a vacuum. As I stress in my new book, the codependency of China and America ties them together inextricably. The question then arises as to the consequences of two different policy strategies – American stasis and Chinese rebalancing.

The outcome is likely to be an “asymmetrical rebalancing.” As China changes its economic model, it will shift from surplus saving to saving absorption – deploying its assets to fund a social safety net and thereby temper fear-driven precautionary household saving. Conversely, America seems intent on maintaining its current course – believing that the low-saving, excess-consumption model that worked so well in the past will continue to operate smoothly in the future.

There will be consequences in reconciling these two approaches. As China redirects its surplus saving to support its own citizens, it will have less left over to support saving-short Americans. And that is likely to affect the terms on which the US attracts foreign funding, leading to a weaker dollar, higher interest rates, rising inflation, or some combination of all three. In response, America’s economic headwinds will stiffen all the more.

It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.

Source: Project-Syndicate      by Stephen Roach former Chief Economist at Morgan
                                                Stanley,and Chairman of Morgan Stanley Asia