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POLITICAL ECONOMY
Lagarde gets China nod ahead of IMF decision
by Staff Writers
Washington (AFP) June 27, 2011

France's Christine Lagarde picked up an endorsement from China Monday, raising her chances to become head of the International Monetary Fund despite grumbles from some nations over Europe's lock on the job.

The global crisis lender's executive board was expected to make the decision between Lagarde, France's finance minister, and Mexican central bank chief Agustin Carstens as early as Tuesday.

Since the race began in late May, 55-year-old Lagarde, put forward by Europe, has been the strong favorite, even though Washington, the IMF's key power, had not yet signaled its choice.

China's apparent confirmation of its backing for Lagarde showed that objections expressed by emerging economies to yet another European Fund executive director would probably have little effect on the final decision.

Speaking in London, China's central bank chief Zhou Xiaochuan said Beijing had already expressed "quite full support" for Lagarde's candidacy, according to Dow Jones Newswires.

"Of course we still do not know what the final situation will be. Currently, there doesn't seem to be anything unclear about it," he said.

Nevertheless, Carstens, 53, picked up endorsements from Australia and Canada on Friday, suggesting that the fight was not yet a "done deal," as Lagarde's backers have claimed since the outset.

The 187-nation Fund was left reeling after managing director Dominique Strauss-Kahn resigned on May 18, in the middle of tense negotiations over Greece's massive bailout and worries about the state of other economies in Europe.

Strauss-Kahn quit to fight charges in New York that he sexually assaulted a hotel maid, allegations which he denies.

His departure sparked a push by emerging economies for one of their own to head the Fund, after 65 years of Europeans under a tacit agreement with the United States, which locked up the presidency of the World Bank in return.

With their own crisis festering and the IMF's role crucial is addressing it, Europe's powers aggressively put forward Lagarde.

Despite his own strong qualifications, including a stint as the IMF number three, economist Carstens has failed to muster much concrete support from the developing world outside a bloc of smaller Latin American nations.

Other potential non-European candidates declined to stand, saying Lagarde had the job sewn up.

The IMF board said it wants to decide the position "by consensus" before the end of June.

If that cannot be achieved, the board would vote, and because they have by far the largest quotas in the Fund, Europe -- with 32 percent -- and the United States -- with 17 percent -- are the key players.

Carstens' endorsements from Australia and Canada, while significant, by comparison would add just 4.5 percent of the vote to whatever other support he could garner.

Though not an economist, Lagarde has gained wide respect as France's point-woman during its leadership of the G20 as well as in Europe debt talks.

But she remained vulnerable on two points.

First, critics say she will be too biased toward Europe's bailouts of Greece, Ireland and Portugal when the IMF needs to be tougher.

Lagarde rejected any conflict of interest last week in her presentation to the IMF board.

"I am not here to represent the interest of any given region of the world, but rather the entire membership," she said.

She also remains subject of a legal investigation over alleged abuse of power in France, an issue that raised concerns by some IMF officials, though she has said the probe will find nothing.




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China says local government debt at $1.65 trillion
Beijing (AFP) June 27, 2011 - Chinese local governments held $1.65 trillion in debt at the end of 2010, the state auditor said Monday, warning there was a risk some could default amid fears that bad loans will harm the economy.

Excessive borrowing by authorities to fund infrastructure and other projects has sparked concerns among China's leadership about the risks the loans pose to the financial stability of the world's second largest economy.

By the end of last year, local governments had 10.7 trillion yuan ($1.65 trillion) of debt, the National Audit Office (NAO) said in a statement, or about 27 percent of China's 2010 GDP of 39.8 trillion yuan.

"The ability of some areas and industries to repay debt is weak and potentially risky," the NAO said.

The announcement represents the first time China has given an overall figure for local government debt, according to the state-run Xinhua news agency.

The state auditor said some local governments had to make new borrowings in order to pay back old loans, and some are depending heavily on revenue from land sales to meet their repayments.

Auditors also found that 108.3 billion yuan of total borrowings had been issued or used improperly, citing methods such as providing fraudulent collateral or diverting the funds raised into capital or real estate markets.

Chinese banks last year loaned huge amounts to provincial financing vehicles -- intermediary agencies through which the governments take out borrowings because they are officially banned from assuming debt directly.

The credit was used to fund construction projects after Beijing called for nationwide efforts to spur the economy on the back of the global financial crisis.

The Asian nation has managed to power out of the crisis thanks to a stimulus package worth four trillion yuan and state-backed lending.

As a result, new loans nearly doubled to 9.6 trillion yuan in 2009. Last year, new lending fell to 7.95 trillion yuan but still exceeded the government's 12-month target.

The surge in credit has fuelled fears of inflation and bad loans, and the government is now moving aggressively to rein in lending activity.

It has hiked interest rates and increased the amount banks must keep in reserve over the past several months, as it tries keep a lid on consumer price rises and cool the economy amid concerns over overheating.

In May, however, the consumer price index in China rose 5.5 percent year on year -- way above the government full-year target of around four percent -- with many analysts expecting the rate to increase even further this month.

The NAO suggested that efforts should be made to "properly resolve" the current local government debt situation, based on a principle that says "the borrower must bear responsibility."

The provincial financing systems must be "cleaned up and regulated", it said.





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POLITICAL ECONOMY
EU wants Greek consensus on austerity cuts
Brussels (UPI) Jun 24, 2011
European leaders meeting in Brussels on the second day of a crisis summit over Greece want an all-party consensus in Athens over how a new financial rescue should work with austerity plans, but skeptical analysts see little chance of such harmony prevailing in the fraught political scene in the union's eastern flank. There was palpable relief in European capitals, in particular London, ... read more


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