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Article source: http://online.wsj.com/article/SB10001424052970203388804576612293049009736.html?mod=rss_economy

By GEOFFREY T. SMITH

Q: What’s all this about Greece’s bailout having to be revised?

A: The situation is much worse than people realized in July, when euro-zone leaders and the International Monetary Fund thought they had found a formula for bringing Greece’s debts down to a manageable level. The old assumptions don’t hold any more, so a new plan is needed.

Q: Haven’t I heard this one before?

A: Sort of. The July deal only became necessary when it became clear that Greece was missing most of the targets set out in the original bailout deal from 2010.

Q: What was agreed in July?

A: The official creditors—that’s the IMF and the governments of the euro zone—decided to carry on lending to Greece for longer, and to give it up to 30 years to repay, instead of the seven originally agreed. Also, representatives of the private-sector creditors, mainly banks, agreed to swap some of the bonds they hold now for new ones on terms that were likewise more favorable to Greece.

Q: What has gone wrong since then?

A: The world economy has slowed down, and the fear of a really widespread debt crisis in Europe has grown, making it a lot tougher for everybody with high debts. Inside Greece, things have gone from bad to worse. The government now expects the economy to shrink 5.5% this year instead of 3.9%. And the budget deficit will be 8.5% of GDP, instead of 7.6%. That’s forcing the government into deeper cuts in public spending, and more and more tax increases, which depress the economy still further in the short run.

Q. Sounds like a vicious circle, a deflationary spiral to hell akin to Germany circa 1931.

A. We prefer to say “adverse feedback loop” and we really prefer to leave that kind of analogy out of it, thank you.

Q: All right, then. The July deal was sort of controversial at the time, wasn’t it?

A: Yes. The deal involved asking private creditors for partial debt forgiveness, something no developed country has done since World War II. But at the same time, they had to dress it up in such a way as to make it look like Greece wasn’t defaulting on its debts.

Q. Why?

A: Because to set a precedent of letting a country in the euro zone default would inevitably cast all kinds of questions over other high-debt countries like Italy and Portugal, maybe even Belgium. That isn’t a path down which the Europeans want to go. Quite apart from that, the ECB won’t lend cash to Greek banks to fill their ATMs if all the banks can offer is worthless collateral. And no one wants to risk widespread civil disorder by going down that route, either.

Q: How did they finesse it in July, then?

A: Representatives of Greece’s private-sector creditors suggested a “voluntary” debt swap. The actual amount the banks were to forego through the debt swap was €13.5 billion ($18 billion), but to make it look more impressive they said it represented €37 billion in Net Present Value terms, or 21% of their total holdings.

Q. You’ve lost me. What do you mean, Net Present Value terms?

A. A euro today is worth more than a euro tomorrow, because you can reinvest the proceeds in the meantime. So, by stretching out the repayment term and by lowering the interest rates, the actual shortfall to investors over the full period is greater than the nominal €13.5 billion.

Q: And that didn’t help?

A: Greece still has more debt than it can ever repay. It needs to reduce the amount outstanding much further; ie, it needs debt forgiveness. As asking that from official lenders is still taboo, it has to ask bigger sacrifices from the remaining private creditors.

Q: Aren’t the IMF and EU loans supposed to be conditional? What happens if Greece doesn’t meet the targets?

A: The lenders have two choices: either they can soften the terms of the package again, or they can refuse to lend Greece the next dollop of aid—€8 billion that is due to be paid out this month—and wait for it to run out of money.

Q. When will that be?

A: The finance ministry says no earlier than December. Other officials have suggested it would be as early as mid-October. It depends on who you want to believe, and how many corners the government would cut by, say, delaying payment of public-sector wages or electricity bills etc.

Generally, the moment of truth comes when a country has to make a big debt repayment. It has to repay some short-term treasury bills in the next couple of months, but they are mostly held by domestic banks in whose interest it will be to roll them over rather than trigger a default. But it has to repay around €5 billion in bonds on Dec. 29, and it won’t get past that without a new IMF/EU deal.

Q: If they do agree to soften the terms again, will we have to wait for it to go through 17 parliaments again before it can happen?

A: Not necessarily. The parliamentary ratification process was necessary because of the changes to the European Financial Stability Facility, irrespective of the Greek deal. However, you can see that Northern European politicians are becoming more reluctant by the day to carry on—as they see it—throwing good money after bad, so any new deal that involves keeping Greece afloat, rather than letting it go hang, is going to run into political opposition somewhere.

Q: What chance is there of this ending without a major market meltdown?

A: Argh! My sciatica! Oh gosh, is that the time? I was due at the doctor’s 10 minutes ago. Sorry, I must go. What was the question again?

Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052970203388804576612990746936086.html?mod=rss_economy

BY DAWN WOTAPKA

Landlords in Northern California, New York, Washington, D.C., and a few other major markets were able to pass along hefty rent increases to tenants during the third quarter, despite signs of a weakening economy that could pinch future gains.

Average effective apartment rents, the amount paid after discounting, rose to $1,004 nationwide in the third quarter, up 2.4% from a year earlier, according to report scheduled for release Thursday by real-estate research firm Reis Inc.

Rental rates jumped 5.5% in San Jose, Calif., 4.5% in San Francisco and 3.7% in New York. Of the primary 82 markets tracked by Reis, …

Article source: http://online.wsj.com/article/SB10001424052970204294504576613243347667056.html?mod=rss_economy

By RIVA FROYMOVICH And MARCUS WALKER

BRUSSELS—New initiatives emerged Wednesday as part of efforts to quell Europe’s twin sovereign-debt and banking crises. Germany pushed a proposal to encourage the euro-zone’s national authorities to announce backstops in case their banks hit difficulties, and a senior International Monetary Fund official said the IMF could step in to help shore up the bonds of troubled euro-zone governments.

On a visit to Brussels, German Chancellor Angela Merkel said euro-zone governments should quickly agree on a system of backstops for banks that relies mainly on national support measures, but could also draw on the euro zone’s bailout fund.

“I think time is pressing. And therefore this should be decided on quickly,” Ms. Merkel said.

AP Photo/Yves Logghe

Antonio Borges, director of the IMF’s European Department.

German officials hope a coordinated demonstration by euro-zone governments that they have contingency plans for their banks in place will calm market fears of a banking crisis in the region.

Investors have grown increasingly worried that some euro-zone banks could collapse under the weight of their credit exposure to stricken euro members such as Greece. Lending between banks has dwindled since the summer, leaving many banks dependent on the European Central Bank for liquidity.

The idea for the IMF to step into the bond markets—probably via a separate legal vehicle created especially for the purpose—would address the other leg of the crisis: the risk of more countries facing financing problems because of rising borrowing costs. It would complement a plan by euro-zone governments to allow the euro-zone’s bailout fund to buy government bonds.

The head of the IMF’s Europe department, Antonio Borges, who announced the idea in Brussels, said it could prevent the crisis from worsening in countries such as Spain and Italy.

These countries, Mr. Borges said, had a problem of market confidence rather than of solvency. IMF bond-buying interventions could help solve that problem, he said. The IMF’s involvement in euro-zone secondary bond-market purchases would give an “additional element of credibility because of the conditionality the IMF requires,” he added.

Bond yields for Italy and Spain, the third- and fourth-largest economies in the 17-nation euro zone, have risen sharply since the summer as worries intensified about Europe’s ability to contain its crisis. Only bond purchases by the ECB have stopped the yields from rising further—but the ECB has made clear it is a reluctant buyer and wants governments to take over the role.

The IMF proposal is a long way from becoming fact: Some fund members believe Europe has enough resources of its own to handle the crisis and doesn’t need further help. Mr. Borges said the idea hadn’t yet been vetted by the fund’s government shareholders, and no formal requests have come from euro-zone members for additional financing. He said the fund could create a special-purpose vehicle to buy bonds under stress in secondary and primary markets.

IMF staff have floated variations of the idea in the past, including issuing bonds, but they failed to gain traction from the U.S. and other top shareholders.

The IMF said Wednesday it might intervene in euro-zone bond markets, in what could be seen as a precautionary measure to help countries like Italy and Spain. Later in the day, an IMF official, tempering earlier comments, said the idea hadn’t yet been vetted by the fund’s membership, and there had been no formal requests from euro-zone members for additional financing. Photo: EPA.

Emphasizing the problems the sovereign-debt crisis has created for banks, the Belgian and French governments on Wednesday pushed ahead with plans to break up Dexia SA, which hit funding problems because of nervousness about its sovereign-debt exposure. French Finance Minister François Baroin told the French Parliament that state help for Dexia wouldn’t damage France’s top credit rating. “This won’t result in an increase of public debt, or as some claim, threaten France’s credit rating,” he said.

German officials hope a system of backstops for banks would help prevent Dexia-style funding problems from eroding confidence in other banks.

It would also give the euro zone more freedom to deal with Greece’s teetering debts—including possibly forcing holders of Greek bonds to take significant losses. Investors fear some European banks could struggle to digest the losses that would follow from a major Greek restructuring, unless the banks receive capital injections from national or European authorities.

France, which has been reluctant to agree to imposing deeper losses on Greek bondholders, suggested it was shifting its view. Mr. Baroin said the extent of private-sector involvement in bailing out Greece may need to be re-examined after the volatility in financial markets over the summer.

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Agence France-Presse/Getty Images

A demonstrator during a protest rally marking a 24-hour general strike, in Athens on Wednesday.

Ms. Merkel said euro-zone governments should define “common criteria” for when banks need more capital. Banks should seek to raise capital first from private investors, and then from national authorities if they can’t tap the market, she said. If national authorities don’t have the necessary resources, banks should turn to the currency bloc’s main bailout fund, the European Financial Stability Facility, she said.

German Finance Minister Wolfgang Schäuble was frustrated at the lack of progress in some countries when European finance ministers discussed the issue in Luxembourg early this week, according to people familiar with the matter.

France’s government, however, is reluctant to reactivate its banking bailout measures dating from 2008, according to people familiar with the matter. Paris is deeply worried it could lose its triple-A sovereign rating if rating firms decide the country can’t afford any costly new bank-support measures, these people say.

New steps to prop up French banks with taxpayers’ money could also hurt President Nicolas Sarkozy’s chances of re-election next spring, observers say.

—Ian Talley contributed to this article.

Write to Riva Froymovich at riva.froymovich@dowjones.com and Ian Talley at ian.talley@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052970203388804576612542935447106.html?mod=rss_economy

By JANET HOOK

Senate Democratic leaders on Wednesday proposed a new 5.6% tax on people earning more than $1 million a year to cover the cost of President Barack Obama’s $447 billion jobs plan, a move designed to stem Democratic defections from a top White House priority.

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Reuters

Mervin Sealy from North Carolina took part in a protest Wednesday at the Capitol, demanding Congress create jobs, not make budget cuts.

The millionaire tax would supplant the tax package Mr. Obama had proposed to offset the jobs bill’s cost, which had drawn fire from some fellow Democrats and almost all Republicans. The tax package included limits on upper-income families’ deductions for mortgage interest and charitable contributions.

The change does little to improve prospects for Mr. Obama’s bill becoming law. Some elements may see the light of day, including an extension and expansion of last year’s payroll tax cuts, but the bill as a whole is increasingly viewed as a dead letter. GOP leaders won’t bring it to a vote in the House, and even with the new tax proposal it is expected to be blocked by Republicans in the Democratic-controlled Senate.

WSJ Deputy Managing Editor Alan Murray and Evan Newmark discuss the politics of the proposed 5% surtax on millionaires put forth by Senate democrats. Photo of Illinois Sen. Dick Durbin: AP/J. Scott Applewhite

But the proposal is likely to live on as part of a concerted effort by the president and his party to take a populist message into the 2012 elections.

“It is time for millionaires and billionaires to pay their fair share to help this country thrive,” said Senate Majority Leader Harry Reid (D., Nev.) as he announced his proposal to charge individuals and households 5.6% of any income they earn over $1 million a year.

But Senate Minority Leader Mitch McConnell (R., Ky.) said he saw an ulterior motive behind the Democrats’ proposal. “I understand our Democrat friends want to jettison entire parts of the bill altogether—not to make it more effective at growing jobs, not to grow bipartisan support,” Mr. McConnell said. “No, they want to overhaul the bill to sharpen its political edge.”

Democratic leaders hope the changes will attract support from Democrats who expressed reservations about Mr. Obama’s plan, including oil-state senators who did not like its increased taxes on oil and gas companies.

There are still likely to be Democratic defections. Sen. Jon Tester (D., Mont.), in a tough fight for re-election in 2012, said he still objected to key provisions. Sen. Ben Nelson (D., Neb.) declined to comment but has repeatedly said he opposed tax increases. Sen. Joe Manchin (D., W.Va.) has argued the Obama bill costs too much, so the changes are unlikely to sway him.

The new 5.6% tax would take effect Jan. 1, 2013, and would apply to adjusted gross income. The $1 million threshold would be increased for inflation in future years. Democrats said the tax would raise $450 billion in the next 10 years, enough to cover the cost of the proposals Mr. Obama advanced in a bid to spur job creation.

Mr. Obama had proposed an array of tax changes, the largest of which was a limit on itemized deductions for families earning more than $250,000. That was controversial because it would curb politically popular tax breaks such as those taken against charitable contributions, home-mortgage interest and state and local property taxes.

The Senate bill would keep unchanged the core elements of Mr. Obama’s jobs proposal, including an extension of payroll tax cuts, increased spending on infrastructure projects and tax breaks for small businesses.

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Republicans have been trying to discredit the bill by highlighting divisions within Mr. Obama’s own party. They tried to force a Senate roll call vote on the measure Tuesday. Democrats blocked the maneuver, calling it a “political stunt.”

Sen. Orrin G. Hatch (R., Utah), ranking Republican on the Senate Finance Committee, noted that a similar millionaire surcharge was floated in 2009 and didn’t pass. “Given the weak state of our economy, they’d be wise to reject it again,” he said. “After all, whacking small businesses with this massive tax increase for another stimulus is bad for the economy and bad for job creation.”

In setting the income threshold at $1 million, Senate Democrats implicitly challenged a central tenet of Mr. Obama’s tax policy: that people earning more than $250,000 a year can afford to pay more taxes.

Sen. Chuck Schumer (D., N.Y.), a member of the Senate Democratic leadership, argued on Wednesday that tax increases should be targeted on higher incomes, contending that $250,000 doesn’t amount to great riches in high-cost states. In the past, the White House has expressed reservations about such proposals. Mr. Schumer said the administration had been consulted about the millionaire surcharge. “They’re fine with the idea,” he said.

The White House said Mr. Obama has always been willing to consider alternative measures. “How you pay for it, we’ve always said, was something we were open to negotiate and debate as long as it meets the president’s principles,” White House press secretary Jay Carney said on Wednesday. “And the Senate is taking action accordingly.”

—Carol E. Lee contributed to this article.

Write to Janet Hook at janet.hook@wsj.com

Article source: http://online.wsj.com/article/SB10001424052970203476804576612930412626412.html?mod=rss_economy

By PAUL HANNON

LONDON—The euro-zone economy is edging closer to a renewed bout of recession, with manufacturers and service providers reporting a decline in activity as consumers cut back spending.

That has prompted the International Monetary Fund to call on the European Central Bank to cut its key interest rate, reversing two hikes in April and July that now seem misjudged.

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MICHAEL GOTTSCHALK/AFP/Getty Images

An employee at the Goodyear Dunlop Tires Germany GmbH plant in the eastern German city of Fuerstenwalde.

It is far from clear that the central bank will oblige when its governing council meets Thursday, since data released last week showed the annual rate of inflation jumped to 3.0% in September from 2.5%, well above the target rate of just below 2.0%.

According to a survey of purchasing managers conducted by Markit Economics released Wednesday, the euro-zone economy contracted in September for the first time since the end of the last recession in mid-2009.

Markit Economics said its composite purchasing managers index for the currency area’s private sector fell to 49.1 from 50.7 in August. A reading below 50.0 indicates a contraction, and the PMI fell below that level for the first time since July 2009.

Worryingly, a second straight month of declining new orders suggests that fall may not be a one off, and the economy could contract again in October.

Figures also published Wednesday by the European Union’s official statistics agency Eurostat showed retail sales fell 0.3% in August from July, driven by a huge drop in Germany, the currency area’s largest economy.

Those figures underlined the weakness in domestic demand that has hobbled the euro-zone economy since the end of the recession in mid-2009. Unemployment has remained high and real wages have fallen, while the currency area’s deepening fiscal crisis has sapped confidence.

“It looks as if the European debt crisis has now also infected the consumer,” said Peter Vanden Houte, an economist at ING Bank. “With employment perspectives deteriorating, fiscal restraint setting in and confidence shaken by dwindling stock markets, there is little hope to see any swift pick-up in consumption.”

In its latest review of Europe’s economic prospects, the IMF said it couldn’t rule out another recession in the currency area. With that risk in mind, the Fund called on the ECB and other European central banks to “keep monetary policy accommodative or even ease further as risks to growth and financial stability persist and inflationary expectations remain well anchored.”

The ECB may not agree that inflationary expectations are well anchored. Its governing council has long feared that rising energy and food prices would lead workers to demand and get higher wage rises, leading employers to hike their prices to cover increased labor costs, thus generating a second round of inflation.

“While an ECB interest rate cut is a possibility on Thursday, latest comments by policy makers suggest that it is more likely than not that the central bank will keep the interest rate at 1.50% for now,” said Howard Archer, an economist at IHS Global Insight.

The pickup in the inflation rate in September will have fueled that fear, despite the weak outlook for consumer demand and the apparent lack of bargaining power for workers in a jobs market that features a 10.0% unemployment rate.

The bright spots in the euro-zone economy are few, but the purchasing managers’ survey delivered one piece of good news. Growth in Ireland’s services sector picked up in September, suggesting that the strong growth recorded in the first half of the year may not be as fleeting as some economists had feared given the slowdown in the country’s main export markets.

Write to Paul Hannon at paul.hannon@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052970203388804576612270656537448.html?mod=rss_economy

By GEOFFREY T. SMITH

Q: What’s all this about Greece’s bailout having to be revised?

A: The situation is much worse than people realized in July, when euro-zone leaders and the International Monetary Fund thought they had found a formula for bringing Greece’s debts down to a manageable level. The old assumptions don’t hold any more, so a new plan is needed.

Q: Haven’t I heard this one before?

A: Sort of. The July deal only became necessary when it became clear that Greece was missing most of the targets set out in the original bailout deal from 2010.

Q: What was agreed in July?

A: The official creditors—that’s the IMF and the governments of the euro zone—decided to carry on lending to Greece for longer, and to give it up to 30 years to repay, instead of the seven originally agreed. Also, representatives of the private-sector creditors, mainly banks, agreed to swap some of the bonds they hold now for new ones on terms that were likewise more favorable to Greece.

Q: What has gone wrong since then?

A: The world economy has slowed down, and the fear of a really widespread debt crisis in Europe has grown, making it a lot tougher for everybody with high debts. Inside Greece, things have gone from bad to worse. The government now expects the economy to shrink 5.5% this year instead of 3.9%. And the budget deficit will be 8.5% of GDP, instead of 7.6%. That’s forcing the government into deeper cuts in public spending, and more and more tax increases, which depress the economy still further in the short run.

Q. Sounds like a vicious circle, a deflationary spiral to hell akin to Germany circa 1931.

A. We prefer to say “adverse feedback loop” and we really prefer to leave that kind of analogy out of it, thank you.

Q: All right, then. The July deal was sort of controversial at the time, wasn’t it?

A: Yes. The deal involved asking private creditors for partial debt forgiveness, something no developed country has done since World War II. But at the same time, they had to dress it up in such a way as to make it look like Greece wasn’t defaulting on its debts.

Q. Why?

A: Because to set a precedent of letting a country in the euro zone default would inevitably cast all kinds of questions over other high-debt countries like Italy and Portugal, maybe even Belgium. That isn’t a path down which the Europeans want to go. Quite apart from that, the ECB won’t lend cash to Greek banks to fill their ATMs if all the banks can offer is worthless collateral. And no one wants to risk widespread civil disorder by going down that route, either.

Q: How did they finesse it in July, then?

A: Representatives of Greece’s private-sector creditors suggested a “voluntary” debt swap. The actual amount the banks were to forego through the debt swap was €13.5 billion ($18 billion), but to make it look more impressive they said it represented €37 billion in Net Present Value terms, or 21% of their total holdings.

Q. You’ve lost me. What do you mean, Net Present Value terms?

A. A euro today is worth more than a euro tomorrow, because you can reinvest the proceeds in the meantime. So, by stretching out the repayment term and by lowering the interest rates, the actual shortfall to investors over the full period is greater than the nominal €13.5 billion.

Q: And that didn’t help?

A: Greece still has more debt than it can ever repay. It needs to reduce the amount outstanding much further; ie, it needs debt forgiveness. As asking that from official lenders is still taboo, it has to ask bigger sacrifices from the remaining private creditors.

Q: Aren’t the IMF and EU loans supposed to be conditional? What happens if Greece doesn’t meet the targets?

A: The lenders have two choices: either they can soften the terms of the package again, or they can refuse to lend Greece the next dollop of aid—€8 billion that is due to be paid out this month—and wait for it to run out of money.

Q. When will that be?

A: The finance ministry says no earlier than December. Other officials have suggested it would be as early as mid-October. It depends on who you want to believe, and how many corners the government would cut by, say, delaying payment of public-sector wages or electricity bills etc.

Generally, the moment of truth comes when a country has to make a big debt repayment. It has to repay some short-term treasury bills in the next couple of months, but they are mostly held by domestic banks in whose interest it will be to roll them over rather than trigger a default. But it has to repay around €5 billion in bonds on Dec. 29, and it won’t get past that without a new IMF/EU deal.

Q: If they do agree to soften the terms again, will we have to wait for it to go through 17 parliaments again before it can happen?

A: Not necessarily. The parliamentary ratification process was necessary because of the changes to the European Financial Stability Facility, irrespective of the Greek deal. However, you can see that Northern European politicians are becoming more reluctant by the day to carry on—as they see it—throwing good money after bad, so any new deal that involves keeping Greece afloat, rather than letting it go hang, is going to run into political opposition somewhere.

Q: What chance is there of this ending without a major market meltdown?

A: Argh! My sciatica! Oh gosh, is that the time? I was due at the doctor’s 10 minutes ago. Sorry, I must go. What was the question again?

Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052970203388804576612990746936086.html?mod=rss_economy

By RIVA FROYMOVICH And IAN TALLEY

BRUSSELS—The International Monetary Fund could create a special financing tool to buy bonds in private markets as a way to help stem the euro zone’s debt crisis, a senior IMF official said Wednesday.

However, Antonio Borges, head of the IMF’s Europe Department, said the idea hadn’t yet been vetted by the fund’s membership and there have been no formal requests from euro-zone members for additional financing.

Such a plan could aid countries such as Spain and Italy, which face rising costs for financing in capital markets. Mr. Borges said these countries have a problem of market confidence rather than solvency. IMF bond-buying interventions could help solve that problem, he said. The IMF’s involvement in euro-zone secondary bond market purchases would give an “additional element of credibility because of the conditionality the IMF requires,” he said.

Mr. Borges said the idea is for the fund to create a special purpose vehicle to buy bonds under stress in secondary and primary markets.

Shortly after the IMF’s top Europe official made the comments at a news conference in Brussels, IMF headquarters in Washington issued a clarification from Mr. Borges. “We do not have any additional requests for support from European members, and we are not contemplating any market involvement with the EFSF,” he said in a statement. The European Financial Stability Facility, or EFSF, is the euro zone’s €440 billion ($580 billion) bailout fund.

Economists and market participants have said Europe’s bailout fund may not be powerful enough to tackle the massive debt requirements of Italy and Spain, two of the euro zone’s biggest economies.

Earlier this year, euro-zone leaders agreed to expand the bailout fund’s financing capacity and to allow it to buy bonds in private markets. All national parliaments have agreed, except Slovakia and the Netherlands; those two countries are expected to approve the terms later this month. Currently, only the European Central Bank can intervene in secondary bond markets.

According to officials familiar with the matter, the Group of 20 industrialized and developing nations are working on a “Plan B” to backstop European efforts. Some G-20 officials fear that Europe won’t be able to move fast enough to prevent a global financial crisis and are drafting proposals to boost IMF resources and create new short-term financing tools. One option could make permanent a cash pool originally meant to be temporary, potentially giving the IMF a total firepower of at least $1.3 trillion. Other options also under consideration include issuing IMF bonds in the private market or to emerging markets, or direct cash loans from those countries.

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AP Photo/Yves Logghe

Antonio Borges, director of the IMF’s European Department.

Last month, IMF Managing Director Christine Lagarde said the fund needed to boost its resource pool in response to the euro crisis. She said one possibility was for short-term financing to regions, rather than just countries.

There may be political challenges to expanding IMF resources and lending tools, however.

The U.S. Treasury, the IMF’s biggest shareholder, has repeatedly said that Europe has enough resources to handle its own crisis and that there is no need for additional IMF funding. Given that advanced economies are still struggling to recover from the 2008 crisis and to cut their budgets, any new funding for the IMF would likely have to come from major emerging economies such as China.

Key emerging-market nations have said they are open to making additional lending resources available through the IMF. The fund estimated that China and other emerging markets hold between $1 trillion to $2.3 trillion in excess foreign-exchange reserves that could be put to use elsewhere in the world.

Fund-watchers said emerging economies see financing an expanded IMF resource pool as an opportunity to gain more power at the IMF.

Meanwhile, Mr. Borges said that the size of Greece’s second bailout package, now estimated at €109 billion, is “outdated.”

“All figures were extremely tentative,” he said, adding that the next program will have to place greater emphasis on generating economic growth instead of focusing mainly on Greece’s balance sheet.

Mr. Borges said that a new program for Greece is necessary in order to avoid revising the Greek program targets and policy conditions “every three months,” as has been the case with its first bailout.

The IMF said Wednesday it might intervene in euro-zone bond markets, in what could be seen as a precautionary measure to help countries like Italy and Spain. Later in the day, an IMF official, tempering earlier comments, said the idea hadn’t yet been vetted by the fund’s membership, and there had been no formal requests from euro-zone members for additional financing. Photo: EPA.

Last year, Greece signed up to a €110 billion loan with fellow euro-zone members and the IMF in exchange for dramatic fiscal and economic reforms.

“We have to accept the plan won’t be put in place” as it stands, Mr. Borges said. Still, he stressed that the Greek government must agree to promised reforms to receive the loans.

Negotiations on the disbursement of the sixth tranche of the first bailout are in no rush, he said, despite initial statements from the Greek finance ministry that it faced a mid-October payment deadline.

Euro-zone finance ministers also said Monday at a meeting in Luxembourg that Greece had enough cash to last it through mid-November.

“The key message is that we are not in any particular hurry,” said Mr. Borges, adding that he is confident the talks will reach a “positive conclusion.”

The troika review of Greece’s economy is now expected in the second half of October.

Mr. Borges highlighted European banks at particular risk to the ongoing euro-zone debt crisis. He said that all large regional banks should be recapitalized in order to boost market confidence. The recapitalization should come from governments if not the private sector, he said. Otherwise, Europe could face a credit crunch, he added.

Bank resolutions must take a more pan-European approach, so that the cycle of national bailouts to troubled banks, which in turn puts government balance sheets under stress, is cut. He called for a European resolution mechanism and deposit insurance fund.

“These are all feasible,” said Mr. Borges, although it will be difficult to put in place because of political obstacles.

Singling out Dexia, which has come under acute stress this week, Mr. Borges said France and Belgium have no choice but to work together to resolve the issue.

—Matina Stevis in Brussels contributed to this article.

Write to Riva Froymovich at riva.froymovich@dowjones.com and Ian Talley at ian.talley@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052970203388804576612542935447106.html?mod=rss_economy

By COREY BOLES

WASHINGTON—Senate Democrats proposed a 5% surtax on people earning more than $1 million a year to pay for the $447 billion cost of President Barack Obama’s job-creation bill, in a move designed to shore up their party’s support for the measure.

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U.S. Senate Majority Leader Sen. Harry Reid, left, speaks as Sen. Charles Schumer listens during a news conference Oct. 5 on Capitol Hill.

The proposal would replace the range of tax deductions for wealthy people, oil companies and other businesses that the president had proposed to end to offset the cost of the job-creation initiatives in his plan.

WSJ Deputy Managing Editor Alan Murray and Evan Newmark discuss the politics of the proposed 5% surtax on millionaires put forth by Senate democrats. Photo of Illinois Sen. Dick Durbin: AP/J. Scott Applewhite

Democratic leaders said they hoped to bring the revised plan to the Senate floor next week for debate. But assuming they keep all of their votes, they would need at least seven Republicans to vote in favor of any effort just to start debate on the legislation.

It’s also not clear that the changes would win over all the Democrats who have been opposed to the package. Sen. Joe Manchin (D., W.V.) has voiced objections to the spending portion of the bill, so changing how it is paid for would be unlikely to sway him. Sen. Ben Nelson (D., Neb.) has repeatedly said he would oppose any tax increases given the current economic malaise.

Sen. Charles Schumer (D., N.Y.) said the surtax would impact any income earned by people above $1 million annually. It would also impact dividends and capital gains, he said. The New York Democrat initially said it would be in place for 10 years, but an aide to the lawmaker later said the measure would be implemented permanently. If agreed to, the surtax would take effect from Jan. 1, 2012, the aide said.

Senate Majority Leader Harry Reid (D., Nev.) said the measure would raise enough revenue to fully offset the budgetary impact of the president’s jobs bill. That package includes a range of initiatives including tax breaks for individuals and businesses, a continuation of jobless benefits for the long-term unemployed, aid to states and local governments to rehire public-sector workers, and significant investments in transportation-infrastructure projects.

The lawmakers were silent on the issue of how the new tax would be balanced against existing Democratic policy of allowing the Bush-era tax cuts to expire Jan. 1, 2013, for individuals earning more than $200,000 a year and couples earning more than $250,000 a year.

It would appear that policy still exists, meaning under Democratic plans, people earning more than $200,000 a year would still see their base rates increase, while those earning more than $1 million would also be caught by the new measure.

Mr. Schumer did say that in many parts of the country, households earning around $250,000 a year would be considered middle class and not wealthy. He said it was “hard to ask more” of households in that income range.

“Many of them are not rich, and in large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that is associated with wealth in America,” Mr. Schumer said.

He also said that a large number of small-business owners would be impacted if taxes were increased on people earning between $250,000 to $300,000.

—Janet Hook

contributed to this article.

Write to Corey Boles at corey.boles@dowjones.com

Corrections Amplifications

Senate Democrats’ surtax would replace the range of tax deductions for wealthy people, oil companies and other businesses that the president had proposed to eliminate. Along with every Democratic vote, at least seven Republican votes would be needed to start debate on the plan if it reaches the Senate floor. An earlier version of this article incorrectly said the president proposed the tax deductions and that Democrats would need four GOP votes.

Article source: http://online.wsj.com/article/SB10001424052970203476804576612930412626412.html?mod=rss_economy

BY BEN CASSELMAN

U.S. businesses hired more workers in September than August, according to a report Wednesday, but the growth remained far too slow to bring down the high unemployment rate.

In further worrying signs for the labor market, separate reports Wednesday showed that layoffs surged in September and that services businesses aren’t hiring more workers despite the sector’s relatively strong growth.

Private-sector employers added 91,000 jobs last month, up from 89,000 in August, according to payroll processor Automatic Data Processing Inc. and Macroeconomic Advisers LLC, a consulting firm. The estimate has a mixed record predicting the government’s official jobs numbers, which are …

Article source: http://online.wsj.com/article/SB10001424052970203388804576612620688816568.html?mod=rss_economy