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WTO: Global crisis to hurt trade for up to 2 years

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Global trade will face lingering protectionism for up to two years, as the job market reels from the global financial crisis, World Trade Organisation Director-General Pascal Lamy said recently.

“We are not out of the woods in coping with this protectionist tensions,” Lamy told reporters in the Chilean capital Santiago during a visit. “We on the trade side know by experience that we still have one or two years of stress to live and to cope with.”

Lamy said the recovery in the global job market will lag that of the world economy by around 18 months.

BOJ may revise up CPI forecast but deflation to drag

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The Bank of Japan could say this month that consumer prices will stop falling next fiscal year, sources say, but analysts said it would keep its easing bias as a full-fledged escape from deflation is still a distant goal.

That would mark an upgrade to the BOJ’s current price forecast for the year to March 2012, sources familiar with central bank thinking said.

Economists say that while this is achievable, price momentum won’t be strong enough to signal a decisive end to deflation given the large gap between supply and demand.

The central bank has given slightly more positive views on the economy in recent weeks due to an export-driven recovery. The BOJ has also indicated it is open to further easing even as the economy improves because monetary policy would have a bigger impact.

The BOJ is faced with the delicate task of acknowledging improvements in the economy without giving the impression that it is ready to withdraw monetary easing. Still, one economist voiced concern that by raising its price forecast, the BOJ risked being misunderstood.

“If the BOJ upgrades this forecast they would be sending the wrong message to businesses and the foreign exchange market,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.

“It might signal less inclination to take further easing. I’m concerned Japan hasn’t done enough, because consumers and businesses are still operating with a deflation mentality.”

BOJ Governor Masaaki Shirakawa has said that the central bank would continue its efforts to beat deflation by maintaining its very loose monetary policy, but he gave no hints on whether additional easing measures were on the horizon.

Wholesale prices fell 1.3 percent in the year to March, the smallest drop in more than a year as falls narrowed for the seventh straight month, but this was largely due to rising energy and commodity costs, BOJ data showed.

Together with improvements in the economy, though, this may prompt the BOJ to revise up its consumer price forecast for the year to March 2012 in its twice-yearly outlook report due on April 30, sources said.

“Both wholesale and consumer prices are likely to stay on an upward bias in coming months,” said Junko Nishioka, chief Japan economist at RBS Securities.

“But this is unlikely to lead to a change in the Bank of Japan’s loose monetary policy as the BOJ focuses on the price trend rather than short-term moves.”

The BOJ currently expects deflation to last for three years until March 2012. It will review that prediction as well as its economic growth forecasts in its twice-yearly outlook report.

It may lift its consumer price forecast for the year to March 2012 to zero change or slight positive growth from a 0.2 percent drop forecast three months ago, the sources said.

Still, that remains far below the one percent consumer inflation that Finance Minister Naoto Kan said he wanted to see, and roughly the level that the BOJ itself sees as signifying desirable price growth.

Analysts also say slack domestic demand will continue to put downward pressure on consumer prices.

Domestic final goods prices, a component of the wholesale price index that loosely tracks the consumer price index, fell 0.7 percent in the year to March after falling 0.8 percent in February.

Deflation can be damaging to an economy as consumers put off spending if they expect prices to keep falling, which can in turn discourage companies from increasing capital spending. Deflation can also discourage borrowing, because real interest rates are higher than nominal rates.

Speaking in parliament, Shirakawa repeated that he expects annual consumer price falls to narrow as the nation’s output gap shrinks reflecting improvements in the economy.

He ruled out the possibility of the BOJ expanding its balance sheet through purchases of property or shares, when asked by a lawmaker whether that was an option.

At the BOJ’s mid-March policy-setting meeting, many board members played up the effectiveness of extra monetary easing even as the economy recovers and deflation eases, the minutes of the meeting showed.

At that meeting, the BOJ eased policy by doubling to 20 trillion yen ($214.6bn) the funds available to banks for three-month loans at its policy rate of 0.1 percent, following a drumbeat of government pressure.

If the BOJ were to ease again, possible options could include further expanding the three-month loans or other money-market operations to bring down short-term lending rates, economists say.

The BOJ introduced the three-month funding scheme in December after the government declared Japan was in deflation and prodded the central bank to do more to fight price falls.

A solid recovery in exports to Asia has driven Japan’s recovery since last year after it suffered its worst recession in many decades, but demand in Japan has remained weak except for stimulus-fuelled buying of durable goods, leaving prices under pressure.

Greece deal slashes contagion risk -UniCredit CEO

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Eurozone finance ministers approved a 30 billion euro emergency aid plan for debt-plagued Greece on April 11.

Together with at least 10 billion euros expected from the IMF in the first year, it could add up to the biggest multilateral financial rescue ever attempted.

“This has been a very important intervention,” Alessandro Profumo, the head of UniCredit , told Reuters Insider television. “In my opinion the contagion risk is dramatically lower today.”
 
He also ruled out a spillover to eastern Europe, a region where UniCredit is a major player. “Today we are not seeing specific risk (in eastern Europe),” he said.

“To talk of them (eastern European countries) as a single country is an incredible mistake.”

Profumo added that he expects the ECB to continue to phase out lending support to commercial banks this year despite the recent problems.

“Our view is that in the second half of the year there will be a gradual withdraw of this liquidity policy in order to move back to a more normal situation.”

Speaking earlier at an ECB conference he called for a joint private sector/government bailout plan to fund rescue packages in future crises.

“We think it is important to have a private/public partnership… and a stabilisation fund should be the right way to follow.”

“We think this fund can be funded by the banks and partially by the governments,” he added.

Brain drain, low investment hamper African science

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Africa’s contribution to the global body of scientific research is very small and does little to benefit its own populations, according to a report from Thomson Reuters.

Like India and China, Africa suffers from a “haemorrhage of talent”, the report said, with many of its best brains leaving to study abroad and failing to return.

“The African diaspora provides powerful intellectual input to the research achievements of other countries, but returns less benefit to the countries of birth,” Jonathan Adams, director of research evaluation at Thomson Reuters, said in a statement as the report was published.

Adams and colleagues, who use a Thomson Reuters database to track scientific publications, found that three nations dominate Africa’s research output – with South Africa leading by a long way, ahead of Egypt in second place and then Nigeria.

“Africa’s overall volume of activity remains small, much smaller than is desirable if the potential contribution of its researchers is to be realised for the benefit of its populations,” said Adams.

The report found that part of the problem was down to a “chronic lack of investment in facilities for research and teaching” – a deficit the authors said must be remedied.

Adams said the reason behind this was not simply money: “The resources available in some African countries are substantial, but they are not being invested in the research base.”

In fields of research relevant to natural resources, however, the study found a relatively high representation of African research as a share of world publications.

South Africa’s 1.55 percent share of research in plant and animal science is the continent’s biggest share in any field, it said, with this output surpassing Russia’s 1.17 percent but well behind China’s 5.42 percent share in the same field.

The report pointed to a few examples of countries which, despite low output, produced much higher quality research than larger neighbours.

Malawi, for example, with one-tenth the annual research output of Nigeria, produces research of a quality that exceeds the world average benchmark while Nigeria hovers at around half that impact level, the report said.

“The challenges that the continent faces are enormous and indigenous research could help provide both effective and focused responses,” it added.

The study is part of a series showing the changing landscape and dynamics of scientific research around the world.

Previous studies found that China had more than doubled its output of scientific papers to rank second only to the US in terms of volume, while Russia’s influence in science and scientific industries was rapidly shrinking.

How the US cracked open secret vaults at UBS

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Investors the world over breathed a sigh of relief on October 16 when the Swiss government rescued UBS. But unbeknownst to them at the time, the bank faced a potentially devastating crisis on a very different front.

One day after the bailout, top executives from UBS and Swiss regulators were summoned to a closed-door meeting in New York by US officials who were conducting a wide-ranging tax fraud investigation that centred on the bank.

The UBS delegation, led by newly-appointed Group General Counsel Markus Diethelm, arrived armed with the results of an internal report highlighting instances of tax fraud within the bank, insiders told Reuters. The plan was simple: admit guilt, settle the case quickly and move on.

But Kevin Downing, the US Department of Justice Tax Division Attorney who had been investigating UBS since the middle of 2008, chose that meeting to drop a bombshell: he wanted the bank to disclose names of US tax evaders as a condition for a settlement.

That put UBS in the nightmarish position of either breaching nearly a century of Swiss bank secrecy or risking indictment in the US.

“UBS was already in a position of weakness from the credit crisis,” said one person who attended the meeting and spoke to reporters on condition of anonymity. “It became crystal clear at that meeting that without addressing the issue of client names, no settlement could be found.”

Interviews with insiders and a review of documents reveal previously undisclosed details about how the sprawling tax case was resolved – at several points in the process, for example, Secretary of State Hillary Clinton was involved.

The confrontation also pushed UBS closer to the brink than is commonly realised. And while the bank ultimately defused the situation by coughing up $780m and agreeing to hand over some client names, the damage to its huge and increasingly important wealth management operation still weighs heavily on the Swiss banking flagship.

In the months ahead, UBS’s new management team will try to stabilise its battered wealth management division, whose advisers have been bolting and taking clients with them.

All of this in turn has forced the bank to confront a broader, more existential question: what exactly is UBS today? An asset-gathering megabank or a leaner player, more attentive to its wealthy clients’ needs.

Swiss secrets
For UBS and other Swiss banks, the implications of the New York meeting on October 17, 2008 were hardly trivial.

Sharing bank client data would have been against UBS’s core principles: confidence, security and discretion, symbolised by the three keys of its 70-year-old logo. Doing so might also shatter wealthy clients’ trust in the bank – and in the whole Swiss financial centre.

Under scrutiny by the DOJ was the so-called US cross-border business of UBS. This consisted of wealth management services offered to American residents outside the US. It operated out of Switzerland and was separate from UBS’s New York-based Americas wealth management business.

In documents relating to the UBS case, the DOJ said the bank helped some 52,000 Americans hide billions of dollars of untaxed assets in secret Swiss accounts between 2000 and 2007. According to settlement documents, UBS sometimes used shell financial entities to hide the money, depriving the IRS of hundreds of millions of dollars of tax revenues.

The business was referred to by some UBS executives as “toxic waste” due to the risks it carried under US law. But UBS bankers, seemingly unaware of the legal consequences, made 3,800 trips to the US to visit these clients in 2004 alone.

The cross-border accounts were hardly a big part of the bank’s business. They added up to almost $20bn, or less than one percent of UBS’s total invested assets of about $2trn at the end of 2008.

The business was so small it was initially below the radar screen of Swiss financial regulator FINMA, at the time known as the Federal Banking Commission. The agency’s main concern back then was the systemic risks posed by UBS’s increasingly wobbly fixed-income division.

Passing on some UBS client data to the US was possible under certain strict conditions under an existing US-Swiss tax agreement. US authorities put in a request for the client data to Berne, but the process was cumbersome and slow and the Department of Justice grew increasingly impatient.

The investigation was launched by the SEC, which suspected that UBS had breached US securities law. But when the Department of Justice became involved, raising the prospect of criminal prosecutions, Swiss regulators became alarmed.

Their concerns grew in April 2008, when US authorities briefly detained Martin Liechti, the Zurich-based head of UBS’s cross-border business, while he was visiting Miami. Then in May, Bradley Birkenfeld, a former UBS financial adviser who famously admitted smuggling a diamond in a toothpaste tube on behalf of a client, was arrested. He began a 40-month sentence in January.

Those cases got the Swiss Federal Banking Commission’s attention. As the summer wore on, the agency started pressuring UBS to speed things up. But the bank, still in the throes of the financial crisis, was preoccupied with its own survival.

UBS had recently removed its all-powerful chairman, Marcel Ospel, who had blessed UBS’s big expansion into the US a decade earlier and fostered the risky US investments that eventually brought UBS to its knees. Peter Kurer, a well-known Swiss lawyer who had joined the bank in 2001 as its general counsel, replaced Ospel as chairman in April 2008.

Kurer took months to appoint Diethelm as UBS’s top lawyer. That lengthy process did not help the bank’s dealings with US authorities.

Diethelm, an ambitious former chief legal officer at Swiss Re, had made his name in the legal community by negotiating a multi-billion-dollar settlement between a group of insurers and a developer of the World Trade Centre.

But within weeks of taking on the job he found himself working for a nearly crippled lender that was facing indictment in the US.

Hoping to come to the rescue in what was clearly becoming an untenable situation for UBS, the Swiss Finance Ministry sent a letter to its US counterparts to make clear that Berne was willing to find a solution to the UBS case despite the obvious legal constraints.

That did not sit well with US officials, who saw the letter as political interference, insiders say. The Swiss never got an official response. Instead, the next time US officials contacted the bank, on November 12, it was to inform UBS that Raoul Weil, its global head of wealth management, was being indicted.

“That was a clear message,” said a high-level Swiss source. “One can imagine that without the letter they would have at least delayed the indictment of Weil.”

Executives inside the bank feared that Chief Executive Marcel Rohner and Chairman Peter Kurer would be next, although neither had been named in court documents, these insiders say.

The indictment of Weil, who immediately stepped down from the executive board and has denied all wrongdoing despite remaining a fugitive in Switzerland, jump-started the negotiations.

In November, the Department of Justice asked UBS to submit a collateral consequences study, normally one of the last steps before an indictment of a company. “They said: we have now the authority from the highest level of government to proceed with an indictment,” the UBS source said.

Inside the Federal Reserve Bank of New York, officials were also alarmed. They feared the indictment of UBS could panic already jittery financial markets. But the NY Fed could not interfere in the DOJ’s affairs.

“UBS has to find a way to disclose the taxpayer names to DOJ in order to avoid the potentially catastrophic consequences of an indictment,” Thomas Baxter, the New York Fed’s general counsel, told a Swiss interlocutor, according to another person familiar with the discussions.

In December, UBS held an intense board meeting at which top executives examined alternatives and assessed risks. Kurer, who had recused himself because of pending UBS litigation, could not take part.

At the meeting, directors discussed the possibility of “Notrecht” – German for emergency law, which the government could use to bypass bank secrecy rules and rescue UBS.

But the board decided that the bank should act within the parameters of existing Swiss law. “UBS had to go back to the drawing board,” said one insider.

Was the Department of Justice really going to pull the trigger? Would it risk pushing over the cliff a bank with three times more employees than Lehman Brothers, about 27,000 of whom were based in the US?

No one knew for sure, but the Swiss decided not to take the risk. On a cold night on February 18, the Swiss government convened an emergency late evening cabinet meeting in Berne and gave its blessing to a hefty $780m criminal settlement.

More painful than the money, though, was an agreement by UBS to deliver about 280 names of serious US tax avoiders. The government had essentially traded nearly a century of Swiss bank secrecy for UBS’s survival.

This was done with the blessing of Swiss regulators, who had to draft an emergency regulation to bypass the court system to save UBS from the risk of failure.

A day after the settlement, the IRS shocked the Swiss government by demanding that UBS disclose the names of 52,000 possible US tax evaders. The Swiss had clearly failed to take both the criminal and civil investigation into UBS off the table, and pressure on their treasured bank secrecy laws continued.

The John Doe summons
Finding someone to take on the job of steadying the UBS ship amid financial turmoil and a US criminal investigation was not easy. “No one wanted to talk to us because of this thing,” said a senior UBS source.

In the weeks running up to the February 18 criminal settlement Kurer interviewed three candidates. One of them was German-born Oswald Gruebel, a former chief executive of Credit Suisse credited with turning around the second largest Swiss bank at a difficult time. Gruebel had retired with a bitter taste in this mouth after losing a battle to become chairman of the bank he had spent 22 years with.

On February 26, 2009, barely a week after the settlement of the criminal side of the UBS case, Gruebel agreed to take on the challenge. He immediately signaled a change of tune by announcing sharp cost cuts in an interview with local media. He said it would take him two to three years to rebuild the bank.

Kurer reluctantly left the bank and was replaced by former Swiss finance minister Kaspar Villiger. UBS was counting on Villiger’s political ties to help it settle the remaining leg of the US tax case, known as the John Doe summons.

A former trader of humble origins and no formal university education, Gruebel is an outsider in what remains a close-knit hierarchical world of Swiss banking. Born in East Germany in 1943, he fled through the Iron Curtain as a 10-year-old orphan and learned the ropes of the business on Deutsche Bank’s bond trading floor in the 1960s.

A straight-talking banker with a dry sense of humor, he is described as “cold” and “tough” by close aides and tends to avoid the limelight. Yet Gruebel is admired by peers as a fighter who possesses deep knowledge of investment banking, wealth management and commercial banking at a time when most banking executives tend to be specialised.

Uphill struggle
When Gruebel took the job of chief executive in February, the bank had just been stabilised thanks in part to a loan from the Swiss state. It was also safe from US criminal charges after its February settlement.

But UBS was by no means out of the woods. It still faced a civil tax litigation that threatened the confidentiality of thousands of US clients and led to an exodus of clients and financial advisers. And the bank remained far from profitable, losing over 21 billion Swiss francs in 2008, the biggest annual loss in Swiss corporate history.

The John Doe summons represented a real legal headache for UBS. While it had been possible to stretch Swiss law to settle charges of tax fraud, the summons breached new ground by targeting tax evasion, an area in which the Swiss do not offer international cooperation.

Insiders say that by early March, it was clear that without Swiss government intervention, UBS would face another damaging legal clash that threatened Switzerland’s relationship with the US.

While UBS continued talks with the IRS and the Department of Justice, the Swiss foreign ministry got in on the act, sending officials to visit the US State Department in late March. The following month, Swiss Finance Minister Hans-Rudolf Merz, who at the time also held the rotating post of Swiss president, met with US Treasury Secretary Tim Geithner in Washington.

By their own reckoning, the Swiss were in a weak negotiating position: on April 2, the Group of 20 nations had put them on a list of tax havens and the US administration was pressing ahead with legislation against illicit tax gains in offshore centres.

But they had a few things going for them. The US State Department was grateful for the nation’s diplomatic support – such as representing US interests in places like Cuba and Iran and helping to broker a deal that normalised relations between Turkey and Armenia. The pact was signed in Switzerland last October.

This, insiders said, helped create what they called a “certain atmosphere” that made it possible for Swiss Foreign Minister Micheline Calmy Rey to have numerous phone calls with US Secretary of State Hillary Clinton and to meet her face to face three times in the run-up to the August deal.

In the end, at a crucial July 31, 2009 meeting, Clinton and Calmy Rey were able to agree a deal in principle to avert a damaging court case against UBS.

The Swiss, constrained by their red tape, could not guarantee the timing of the delivery of any client names. But the IRS was satisfied with reassurances that Swiss authorities would eventually do so.

A US State Department official said the US welcomed the deal “and the continued efforts by the Swiss government to ensure that its obligations under the UBS Agreement are met.” The State Department declined further comment for this story.

UBS and the US settled the civil leg of the case on August 19. There was no fine involved this time around, but a promise to hand over another 4,450 names within a year.

Two months later Gruebel played his ace: after weeks of secret contacts, he hired Robert McCann, a former head of wealth management at archrival Merrill Lynch, to be the new face of UBS’s battered American franchise.

Within three months of starting, McCann installed a brand new team of mostly ex-Merrill executives – known within the bank as the Wealth Management Americas Renewal Team.

Stopping the rot
It has taken Gruebel less than a year to show investors and clients that the bank has regained its financial footing. This involved some tough choices. Gruebel shrunk the bank’s workforce by 11,000, to 65,000. He also sold a crown jewel – Brazil’s wealth management unit Pactual – for $2.5bn just three years after buying it.

But the Swiss giant is still losing client money and withdrawals at its wealth management franchise accelerated in the fourth quarter of 2009. And investors balked when Gruebel said he saw no immediate recovery in inflows and predicted more withdrawals over the next few quarters.

Since the middle of 2008, a total of 225 billion Swiss francs have left the bank, according to calculations from Keefe, Bruyette and Wood’s analyst Matthew Clark. That is more than 11 percent of the bank’s combined wealth management assets of two trillion Swiss francs at the end of March 2008.

At the current rate, Morgan Stanley analyst Huw van Steenis reckons that rival Credit Suisse will surpass UBS in terms of wealth management assets by next year. “Credit Suisse Private Banking momentum means it could become larger than UBS in Swiss private banking going into 2011,” said Steenis, who expects UBS to lose a further 37 billion Swiss francs this year.

Gruebel recognised early on that the loss of credibility among wealth management clients was the single biggest issue he had to deal with. At first, clients were withdrawing their money strictly because of the credit crisis. But the breach of trust that followed the tax fraud scandal in the US only made the matter worse.

“Having done a fantastic job in building a global brand they were seriously damaged by the fact they went almost bust and did some serious missteps in public relations in the US tax affair,” said Michael Malinski, a specialist wealth management consultant who has 22 years of practical experience in the business. “If you are a potential client, unless there was a compelling reason to go with UBS, you would choose someone else.”

Even though UBS suffered the bulk of its client outflows outside America, Former Paine Webber President Joseph Grano, who ran the post-merger UBS PaineWebber wealth management business in the US before leaving in 2004, said he believes the Swiss bank’s brand name in the country is beyond repair.

Gruebel’s top priority is to stop the exodus of private client money. Some of the outflows are the result of clients choosing to remain with UBS financial advisers who have bolted the bank for greener pastures.

Ultimately, he must figure out what to do with the bank’s US wealth management business – the old Paine Webber franchise that it bought for $12bn in 2000 and which has been unprofitable ever since.

UBS tried to sell it repeatedly during the crisis, but could only attract low-ball offers.

With McCann on board, UBS believes it has a chance to make the business work. “If he can achieve that, keeping the unit or selling it will be a purely financial choice,” said Ray Soudah, founder of Millennium Associates, a Swiss-based M&A consultancy with a focus on wealth management.

More importantly, UBS has another tough decision to make. Given the current political and regulatory pressures in Switzerland, the bank cannot continue playing a big role in both investment banking and wealth management.

Swiss National Bank Chairman Philipp Hildebrand is drafting a proposal that would make it impossible for UBS or Credit Suisse to drag the economy down should another crisis hit the banking sector. And some Swiss political parties, including the radical ultra-nationalist SVP, the country’s biggest political force, have called in the past for forcing UBS to sell its investment banking business.

Gruebel, who helped shape the universal banking model in Switzerland, is not expected to give up on investment banking so easily. Nor will Credit Suisse.

But he may be forced to curb investment banking activities, which, unlike the wealth management business, are capital intensive. And in the current financial environment, capital remains an important commodity.

Angry Germans
Ongoing heavy pressure on Switzerland by cash-strapped Western nations seeking to recoup taxpayers’ undeclared cash is also not helping UBS. In the wake of its painful 2009 US tax settlement, all Swiss-based private banks are attempting to kick suspected US tax cheats out. But European governments are not sitting still waiting for this to happen.

Germany, whose citizens own a quarter of an estimated 726 billion Swiss francs of undeclared EU assets stashed in Switzerland according to Helvea analyst Peter Thorne, has been particularly virulent. On March 19, German prosecutors launched an investigation of Credit Suisse for allegedly aiding German clients to dodge taxes.

UBS is also the subject of a German inquiry, launched in February, that focuses on suspected fraud and tax evasion in that nation. None of this is helping the Swiss bank rebuild client trust at a time when Berne is trying to negotiate a sensitive new tax treaty with its German neighbours.

The Swiss giant is reacting to the international attacks on bank secrecy and offshore banking by narrowing its focus to the super-rich and to high-growth markets like Asia, a region where the Swiss wealth manager remains a leader. “In the US, UBS is just a shadow of itself. In Asia they are still the strongest. In Europe they are somewhat in between,” a former UBS executive said.

Even though the bank still offers private banking services to clients, it has quietly adopted a strategy of making it less attractive for small undeclared European accounts to stick with UBS, insiders say. Banking on a strictly-confidential basis is more costly for clients, who must now travel to Switzerland, at risk of being noticed by custom police, if they want to see how their investments are doing.

The bank has also adopted a new code of business conduct and ethics clearly stating that “UBS does not provide assistance to clients in acts aimed at breaching their fiscal obligations.”

And there are indications that unwanted client defections may be slowing. “Outflows persisted in the fourth quarter of 2009 but are well below the peak,” said analyst Matthew Clark. “Despite everything that happened to UBS, cumulative outflows only correspond to 16 percent of the wealth management business (ex-US),” he said.

“This is not a lot and this is a very resilient business,” he added. “Considering everything that has happened to UBS, its wealth management business has proven remarkably resilient and there is scope to see the glass half full.”

All Swiss banks appear to be counting on the government to find a solution to the “Schwarzgeld” or black money, as the untaxed money belonging to Westerners is commonly known in Switzerland.

But the stakes remain exceptionally high. In February, Gruebel said UBS alone holds about 140 billion francs of potentially undeclared assets of Western European origins. Rival Credit Suisse said for it the amount was 100 billion Swiss francs.

Even so, the highest end of the market appears safe for UBS and other Swiss banks. That is because the super wealthy use lawyers to minimise the tax impact through sophisticated watertight tax avoidance structures rather than stashing cash in a secret bank account, or they come from emerging countries that are less sensitive about tax evasion issues.

“Tax evasion is not a problem of the big guys,” said one seasoned Swiss banker.

China state firms hand in plans to exit property sector

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China’s agency overseeing big state-owned businesses has received plans from 78 state companies spelling out how they intend to sell out of the nation’s heady property market, according to sources.

The China Securities Journal also reported that the state-owned Assets Supervision and Administration Commission (SASAC) was compiling a general plan to achieve the divestment, intended to help cool fast-rising real estate prices.

“In the specific implementation, divestment from commercial real estate will come first,” said the newspaper, citing an interview with an unidentified SASAC official.

But the official said asset sales could be complicated and “would be a process,” said the paper. The official gave no specific deadline.

In March, SASAC ordered the 78 bigger state companies whose core business is not property to submit plans on how they intend to retreat from the sector.

The effort is part of a broader government campaign to rein in fast-rising housing and land prices.

State-owned enterprises from arms manufacturers to tobacco producers have expanded into property development in recent years, attracted by big profits but bidding up prices in the process.

In March, two state companies won land auctions in Beijing that smashed price records, generating a public outcry.

World Bank lending hits record $100bn

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The World Bank stepped up lending in July 2008 at the request of member countries as demand from developing countries increased in the face of a worsening world recession and sharp drop in global trade.

The bulk of the lending since the onset of the crisis in 2008, about $60.3bn, was to middle-income countries, which struggled to borrow on global financial markets. Typical lending for these countries had averaged about $15bn a year before the crisis.

Meanwhile, loans and grants through the bank’s fund for the world’s poorest countries reached $21.2bn during the crisis. This compares to about $12bn a year prior to the crisis.

Kyle Peters, World Bank director for country services, said such demand was natural for countries facing economic stress.

“A lot of countries wanted to make sure that social safety nets were expanded both in terms of the amount of support and the number of people who needed them,” he told reporters.

As governments saw their revenues shrink due to the fall in global demand, countries turned to the World Bank for budget support to avoid cuts in spending for social programmes.

Credit strains
Since July 2008, the World Bank supported 497 projects to promote economic growth, fight poverty, and support the private sector, including $28bn in infrastructure financing, the institution said in a statement. Commitments to shore up troubled financial sectors also increased as banks in emerging and developing countries faced credit strains.

In particular, countries such as Latvia and Hungary, which were not borrowers from the World Bank when the crisis struck, resumed borrowing from the institution as their economies were rocked by the financial turmoil.

World Bank President Robert Zoellick has warned that as the world emerges from the crisis, the economic recovery will be uneven and countries will “face recurring and new challenges”.

To cope with increased demand the World Bank has asked member countries to replenish its coffers in a general capital increase to be decided at meetings of the World Bank and the IMF.

Emerging market economies have said they are willing to raise their contributions in exchange for a greater stake in the development institution.

Peters said uncertainty about the global economic recovery was behind the increased demand for World Bank support.

“It is a very mixed picture across different regions and even across countries, as illustrated by the demand, which is much stronger than we had before the crisis,” Peters said.

He said it was important that governments do not crowd out private businesses by borrowing too much in domestic markets – thereby pushing up the cost of credit for companies.

“We are trying to keep our lending up to help them not crowd out their private sectors who also need financing for recovery,” Peters said.

“Without a capital increase, we would have to come down more sharply and we will be unable to provide the same level of support we have in the past 18 months if the recovery stalls,” he added.

World Bank set to approve S Africa utility loan

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The World Bank is set to approve a controversial $3.75bn loan to help South African state utility Eskom develop a coal-fired power plant despite objections from the US and environmental groups.

Eskom has argued it has no immediate alternative but to develop the 4,800-megawatt Medupi coal-fired plant in the northern Limpopo region to ease chronic power shortages in South Africa and ensure power supplies to neighbouring states.

While $3bn of the loan will fund the bulk of the coal-fired plant, the remainder of the financing will go toward renewables and energy efficiency projects.

“We believe this project is important for South Africa and South Africans and we expect it will be well received by the board,” World Bank spokesman Peter Stephens told reporters.

Arguing that the World Bank should be promoting clean energy sources, the United States is expected to withhold support for the loan at Thursday’s meeting of the World Bank board, made up of member countries.

It is unclear whether Britain, which has threatened not to back the loan, will support the project in the end after a recent visit to London by South African President Jacob Zuma in which he lobbied British officials to support the loan.

Regardless of US opposition and possible British opposition, the loan is expected to be approved. The question is whether they attach conditions to the loan that compels Eskom to meet certain criteria on energy efficiency and extending electricity to the poor.

The opposition to the Eskom loan has raised eyebrows among those who note that the two advanced economies are allowing development of coal powered plants in their own countries even as they raise concerns about those in poorer countries.

The South African plant is using the same “cleaner coal” technology used in the US and other developing countries to lower carbon emissions.

Meanwhile, environment and development groups stepped up pressure on the World Bank ahead of the meeting not to finance the project.

In a letter endorsed by 125 organisations, the groups argued that the project will not bring electricity to the poor but will benefit large mining houses and smelters.

In a complaint submitted to the World Bank’s independent complaint body, the Inspection Panel, on behalf of residents living near the Medupi plant claimed that the project violated World Bank policies.

“This coal loan is not about alleviating poverty or supporting sustainable development and the World Bank has no business making it,” environmental group Friends of the Earth said in a statement.

Lawmaker’s concerns
In a letter to World Bank President Robert Zoellick on March 26, three senior Democrats, including John Kerry, Barney Frank and Patrick Leahy, who chair congressional panels, raised concerns about the loan and the bank’s rationale for supporting a project that will be a major polluter.

They said while developing countries should not be constrained by a lack of access to energy “we cannot ignore the reality that our planet is hurtling toward potentially catastrophic climate change.”

The lawmakers said the World Bank loan contract should include a commitment by Eskom to update the Medupi plant with additional environmental protection as new technology becomes available, and should insist that Eskom upgrade the environmental standards of its other power facilities.

In his April 5 response, Zoellick told the lawmakers the World Bank had worked with the South African government to significantly improve the Eskom project over the past year, guided in part through discussions with the US Treasury.

In the letter, he said without the new power plant South Africa would face rolling blackouts similar to the ones that crippled its economy in 2008. He said South Africa had taken an “early and strong position” on cutting carbon emissions and scaling up renewable investments.

“We have conducted due diligence on all aspects of the project and have concluded that the projects development and poverty reduction merits, along with the need to support South Africa in meeting its energy crisis, should lead us to submit the project to our board for their consideration,” he added.

Volcker: Taxes likely to rise eventually to tame deficit

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The US should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker has announced.

Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.

Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the US budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.

Spain trims consumer aid in electric car plan

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The efficient rollout of a network of charging points for electric cars will also help to reduce Spanish consumers’ electricity bills, according to Prime Minister Jose Luis Rodgriguez Zapatero.

“The electric car can contribute to reduce the cost of power as it will increase the use of generation and distribution infrastructure,” Zapatero said at the government’s presentation of its strategy to develop the electric car in Spain.

Spain’s socialist government has grouped together six of its ministries, major car manufacturers, energy companies and infrastructure groups, which pledge to build a network to serve an expected 250,000 plug-in cars by 2014.

A network of charging points for electric cars could utilise excess power generated by Spain’s many wind farms at off-peak times and currently wasted due to lack of demand.

Spain’s capacity to export cheap wind energy has been hampered by a lack of interconnection with the rest of Europe through France, to which it has a capacity to export just 1.4 gigawatts of power.

The government will invest 590 million euros and replace public sector conventional vehicles with electric ones to meet the target for 250,000 plug in cars in 2014, 85 percent of which are expected to belong to commercial fleets and 15 percent to private owners.

Tact needed as Saudi takes lead Gulf monetary role

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The world’s top oil exporter and biggest Arab economy wants a cohesive Gulf political and economic bloc that it can lead and which would also counter rival Iran’s sway in the region.

But its insistence on dominating the monetary union, with a planned single Gulf Arab currency, risks adding to disgruntled voices in the six-member Gulf Cooperation Council.

Two states, Oman and the UAE, have already dropped out of the monetary union.

“The Saudis will definitely dominate the currency union and eventually get more political influence, which will have a geopolitical impact,” said Mustafa Alani of Dubai-based Gulf Research Centre.

That was natural in a union comprised of one big state and five smaller ones, he said.

“This is the problem for the GCC and the source of the existing sensitivity and mistrust: The belief that the big brother is trying to dominate us.”

Saudi central bank chief Muhammad al-Jasser was recently named to head a forerunner to a regional central bank, the Riyadh-based Gulf monetary council, underlining the kingdom’s sway in a single currency project. His term will last a year.

Riyadh, a US ally, is already home to many Gulf entities including the GCC General Secretariat, an executive body similar to the European Commission.

The monetary council will mainly work on the regulatory framework of a Gulf central bank and push for more coordination of monetary and foreign exchange policies to pave the way for the launch of a single currency. But any strengthening of the Gulf union would also bring more political cohesion to the bloc.

That could serve Gulf states, several of whom have marginalised Shi’ite populations, in efforts to counter non-Arab, Shi’ite Iran. Saudi Arabia has voiced concerns over Iran’s sway in neighbouring Iraq as well as in Lebanon.

“The GCC has not always shown a great coordination when it comes to its foreign policy. The existence of a consensus within the GCC will help to limit the influence of Iran in the region,” said Khaled al-Dakhil, a prominent Saudi political writer.

“We have seen some consensus within GCC towards the UAE-Iranian dispute about Abu Musa islands and toward Iran’s nuclear ambitions,” he added, referring to a longstanding territorial dispute over Gulf islands.

Changing ties
The Gulf monetary union, designed to emulate the euro zone, has been delayed by old political rivalries. The UAE, the second largest Gulf Arab economy, quit the project after heads of state chose to base the central bank in Riyadh, dealing a serious blow to a plan that had been languishing since 2001.

Diplomatic ties between Saudi and the UAE have remained strained ever since. Now only Bahrain, Kuwait, Qatar and Saudi Arabia are forging ahead with the project.

Last year, the GCC abandoned a 2010 deadline for issuing common notes and coins, and the monetary council has said fixing new dates for launching the single currency was not a priority.

“Saudi Arabia is telling other GCC countries that if this Gulf economic entity was to ever see the day, then its centre of gravity will have to be here in Riyadh not in Dubai or Abu Dhabi. The Saudis want to dictate the pace of change,” a Riyadh-based Western diplomat said.

That dominance will increase pressure on Riyadh to deliver on the project and to prevent any more defections. Recently improved ties between Qatar and Riyadh have helped keep Qatar on board, analysts say.

“There is a form of an alliance building up between Saudis and Qataris. Qatar has a very active foreign policy so it is a bonus to the Saudis. Losing Qatar would pose a serious problem to the monetary union,” Dubai-based Alani said.

Kuwaiti analyst Ali al-Nimesh, whose country has made luring the UAE and Oman back a main aim, said it was not wrong for Saudi to play a leading role, but the union should be inclusive.

“There is no Gulf currency without the UAE and Oman. The UAE is the second largest oil producer in the Gulf after Saudi. It is also commercially active in export and import and free trade zones and in Gulf tourism. Oman is not less important,” he said.

Oman, which opted out in 2006, is seen as close to Iran and jealously protective of its cultural identity from the influence of Saudi’s austere brand of Wahhabi Islam.

Dakhil said Saudi dominance had been natural when its smaller neighbours, including a younger UAE, looked to Riyadh as a natural mentor. But the UAE now wanted more equality.

Those who back the Saudi push to dominate decision-making in the GCC point to its large native population, its ability to defend Gulf Arab interests as a member of the G20, and a higher concentration of native workforce in its financial system.

“Has the UAE managed the repercussions of the global crisis better than Saudi Arabia?” Saudi economist Mohammed al-Jadeed said.

Jawad al-Anani, an economist who had held ministerial portfolios in Jordan, said a prolonged absence of the UAE from the monetary union would erode Saudi influence in the region.

“The UAE’s absence will dilute the gains for Saudi Arabia as a leader of this project. It will expose more what GCC has achieved in 30 years, which to the exception of a perfectible customs union, remain very little,” Anani said.

China’s influence silences Asia on yuan peg

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China’s increasing regional influence will keep Asian governments from pressuring the world’s fastest growing economy into letting its currency strengthen for fear of economic or political repurcussion.

China has repeatedly said a decision on unshackling the yuan would depend on domestic conditions, after effectively pegging it to the US dollar for the past 20 months, even while it is under threat by Washington of being labled a “currency manipulator” in April.

Policymakers from Bangkok to Tokyo told Reuters they are unwilling to challenge China on its currency, giving Beijing some diplomatic breathing room in the face of pressure from the US, the euro zone, the IMF and others who have said the yuan is undervalued.

The yuan has been flat at 6.83 per U.S. dollar since mid 2008. Since a recovery began in March 2009 though, increasing capital flows have been pushing up other Asian currencies between seven to 27 percent.

That has given Chinese exporters an edge over their competitors and tied the hands of policymakers who have been forced to keep intervening in markets to weaken their currencies.

The Asian officials interviewed separately over the past week were reticent to speak about yuan policy even on the condition of anonymity, keeping to their long-held practice of non-interference in Asia.

They also were worried about straining bilateral trade and diplomatic relations with China which has become strategically important.

“We used to say when the United States sneezes, Japan would catch a cold. Nowadays, when China sneezes, Japan catches a cold. Japan’s economy has become that much more reliant on Chinese growth,” a senior Japanese government official involved with financial diplomacy told reporters.

The official said Japan, which has a third of its overseas production in China and hence is vulnerable to rising costs there, is increasingly worried about signs of rising asset prices in China, though did not want to publicly discuss the issue.

“We don’t see much point telling China what their problem is because they themselves are well aware of it.”

Sympathy with China
Japan’s export growth to China, on a three-month rolling basis, was at the quickest since 1985 at 55 percent in February, more than three times export growth to the US.

This is precisely the dynamic that policymakers do not want to upset.

“Policymakers are likely asking themselves, do we really need to upset China the way the U.S. has and get all sorts of retaliatory actions, at a time when China … is becoming a source of demand for Asian exports,” said Sanjay Mathur, Asia economist with Royal Bank of Scotland in Singapore.

“There is zero gain in upsetting China.”

Japan’s deputy finance minister publicly called on Beijing to hear calls for a more flexible yuan, though said sanctions against China would be wrong. Similarly, the Indian commerce minister said China’s currency policy created problems for domestic exporters, but stopped short of calling for an end to the peg.

David Mulford, a former US Treasury official who was directly involved with a decision in 1988 to label South Korea and Taiwan “currency manipulators,” believes the issue of China’s exchange rate has become too politicised by the US government, and other governments in Asia as a result do not want to get involved.

If emerging markets like China keep growing at a much faster pace than advanced economies such as the United States, then the intensity of disputes in trade and exchange rates will increase.

“If this spread is maintained for just a few years, the impact will become more political,” said Mulford, now vice-chairman international at Credit Suisse.

South Korea actually aligns itself with China’s position on the yuan: fast currency appreciation is economically dangerous.

“Koreans don’t so much have complaints about China’s currency peg but rather feel sympathetic with their concern that a fast appreciation of the yuan could end up shutting down factories, laying off workers and causing social unrest,” a high ranking financial authority said.

Senior officials in India, which is not as dependent on exports like Japan and Korea, said they were not confident pressure they could apply on Beijing would be successful in speeding up currency reform.

“If the US can’t get China to change its stance on the yuan, I don’t see India making much headway either,” an official who deals with currency policy said.

India’s $1.2trn economy is expected to post the second-highest growth in Asia this year, Reuters polling shows.

For now, Asian governments, especially those dependent on exports, have decided to absorb the disadvantage of having strengthening currencies. If capital flows attracted by their rising currencies keep pouring into the region though, the pain will increase.

Manu Bhaskaran, chief executive of Centennial Asia Advisors and former consultant to the Singapore government on economic matters, said until China lets the yuan strengthen, Asian policymakers will have to keep intervening in markets to contain currency strength.

“Everyone is hurt by a weak RMB,”he said, referring to the renminbi, or yuan.

Taiwan using China trade deal to sell foreign FTAs

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Taiwan has leveraged its goal of a landmark trade deal with China to open talks with Japan, the US and other powers on free trade deals expected to boost the long-isolated island economy, officials have declared.

Appealing to countries that have been barred by Taiwan’s political rival China from signing FTAs with the island, Taiwan has hinted to wary foreign governments that Beijing is unlikely to protest once the two sides sign their own trade deal.

Taiwan has talked to Japan, the US and Singapore, with Europe and the Association of Southeast Asian Nations also on the list, Hu Chung-ying, deputy minister of the Council for Economic Planning and Development, told reporters.

China, which seeks to limit Taiwan’s international profile, has shown no signs of protesting, officials say. It previously asked other nations to avoid FTAs with the island at the risk of jeopardising their own ties with the massive Chinese market.

Taiwan’s export-reliant $390bn economy has said it lags emerging competitors such as South Korea that enjoy lower trade tariffs because of their FTAs with major world trade partners.

“We’ve approached target economies to let them know we are really interested in doing this and invite their consent to start discussion with us,” said Huang Chih-peng, director general of Taiwan’s Bureau of Foreign Trade, in a separate interview.

Taiwan and China, following two years of detente after six decades of hostilities, are negotiating an economic cooperation framework agreement to drop tariffs in hundreds of sectors.

The deal is expected to boost Taiwan’s economy and let Beijing show the island political goodwill, with hopes of eventual reunification.

“We’re telling the other side that this is not just for you, it’s also to strive for talks with other countries, that we are already door knocking,” Huang said.

The US is Taiwan’s top trading partner, accounting for 17 percent of all imports and exports, according to foreign trade bureau statistics. Japan is second at 16 percent. Hong Kong is third and mainland China next.

Potential FTA partners will see from the China-Taiwan trade deal, expected to be signed by June, that political tensions have eased, Huang said.

Beijing claims sovereignty over the self-ruled island more than 60 years after the Chinese civil war, but China-friendly Taiwan President Ma Ying-jeou has brokered landmark trade agreements with China since taking office in 2008.

Central bank autonomy in spotlight post-crisis

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Here and there around the world, governments are urging central banks to ease the pain of belt-tightening – and ward off the risk of an economic relapse – by taking their time to shrink balance sheets that have billowed during the financial crisis.

The risk for markets is clear: if supine central banks are unwilling to stand up to domineering politicians, investors will take fright at the threat of inflation and bid up interest rates, short-circuiting the very recovery that governments crave.

Yet it’s fair to ask in the light of experience whether the conventional wisdom is right that independence is the be-all and end-all for a central bank.

After all, the lax monetary policies long followed by the independent Federal Reserve were a root cause of the US credit bubble, critics contend.

In China, by contrast, major monetary policy decisions are made not by the People’s Bank of China but by the State Council, or cabinet, yet China has largely managed to enjoy low inflation alongside breakneck economic growth.

“I don’t believe in absolute independence at central banks,” said Mario Blejer, a former head of the Argentine central bank.

Cooperation
Blejer said he would put more emphasis on the technical capabilities and political savvy of a central bank rather than its degree of autonomy from the government.

“I don’t think independence for a central bank means that it can have an overall economic policy which is different from the line of the government,” Blejer told reporters in Frankfurt.

The issue is far from academic in the case of Argentina, where President Cristina Fernandez recently sacked her central bank chief for refusing to hand over more than $6bn of foreign exchange reserves to repay government debt.

So what if a government ordered its central bank to raise its inflation target to four percent from two percent, as the IMF’s chief economist, Olivier Blanchard, suggested in a provocative recent paper?

“I think the central bank would have to tolerate that,” said Blejer, currently a member of the monetary policy committee of the Bank of Mauritius. “It cannot be that a central bank would say ‘we’re not in favour of your policy’ and would continue to do whatever they want.”

Stephen Roach, chairman of Morgan Stanley Asia, says there comes a point when central banks have to take steps that might offend politicians: they must be the ultimate police of economies and financial markets.

Roach’s worry is that they have fallen down on the job.

“There are no independent central banks left in the world today despite what they like to say in the West. And I think that is a real tragedy,” Roach said in Beijing recently.

“Politicians don’t have the political will to stop inflation or asset bubbles,” he said. “And nowhere was the failure greater than in my own country, the United States, where the Federal Reserve has been repeatedly compromised by political pressures.”

Necessary but sufficient?
The Fed is in good company. Barely a day goes by without Japan’s finance minister or other senior politicians berating the Bank of Japan for its failure to quell deflation.

Haruhiko Kuroda, a former vice-finance minister who now heads the Asian Development Bank, is among the critics.

“In Japan, even now prices are still declining so price stability is not yet realised. So the central bank in Japan should do more to regain price stability,” he said in an interview during a recent visit to Beijing.

Does that mean the BOJ should do the government’s bidding? A 1997 law granted the central bank greater autonomy, but two government representatives on its monetary policy committee can still request that a vote be postponed. And there is a presumption that government and central bank will be on the same policy page.

Choosing his words carefully, Kuroda said independence is a good thing, but the BOJ cannot be “aloof” from the responsibility a central bank has to keep the price level steady.

“In maintaining price stability, the independence of the central bank is, if not sufficient, probably a necessary condition,” he mused.

Investors certainly prefer the shield of independence.

In Asia, government interference has been less invasive than in Argentina, but New Delhi was leaning for a time on the Reserve Bank of India not to tighten too quickly, before it became clear that inflation was heading for double digits. The central bank raised interest rates by a quarter-point last Friday.

And in Seoul, the government has invoked its right for the past three months to send a vice-finance minister to attend central bank meetings for the first time since 1999. Coincidence or not, the Bank of Korea has kept interest rates unchanged.

Manu Bhaskaran with Centennial Asia Advisors in Singapore described the Bank of Korea as a highly credible central bank and said it would be a pity if that reputation was weakened.

Dubai in $9.5bn debt offer, no new Abu Dhabi aid

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The Dubai government unveiled plans to recapitalise its indebted Dubai World flagship and repay Nakheel bonds in full, injecting what it said was $9.5bn in new funding, but without new aid from Abu Dhabi.

In a statement, the government said $5.7bn in remaining funds from a loan made by Abu Dhabi would provide the lion’s share of the overall $9.5bn and would also include what it called “internal Dubai government resources”.

“There is no new money from Abu Dhabi,” said a government official on a conference call. “This proposal is based on amounts remaining from the loans provided previously by the government of Abu Dhabi and from internal resources from the government.”

Dubai World said the total amount of debt held by creditors excluding the Dubai Financial Support Fund was $14.2bn at the end of December. Those creditors would receive 100 percent principal repayment through the issuance of two tranches of new debt with five and eight-year maturities, it said.

The Nakheel bond payback offer came as a surprise, as does the absence of a more visible role by wealthy neighbour Abu Dhabi, which has already pledged $10bn in aid to debt-struck Dubai. The government said the bond repayment depended on creditors accepting the proposal.

Dubai World, the Gulf Arab emirate’s flagship conglomerate, which includes the QE2 ocean liner and Barneys department store among its high-profile assets, said last year it would delay repaying $26 bn in debt linked mainly to property units Nakheel and Limitless World.

The government said it was also offering to recapitalise Dubai World through the equitisation of the government’s $8.9bn claim and a commitment to fund up to $1.5bn in new funds.

Turning to property giant Nakheel, the government said it would inject $8bn in new funds and that it would equitise $1.2bn of the government’s claim.

Bank creditors will be asked to restructure their debt at commercial rates, the government said. Trade creditors would be offered a significant cash payment and a tradable security, the statement said.

“Assuming sufficient support for the proposal, the 2010 and 2011 Nakheel Sukuk will be paid as they fall due,” the statement said.

Core creditors representing 97 banks met recently to finalise months of talks on how Dubai World can restructure the debt, about a quarter of Dubai’s estimated total debt of $101bn.