Financial Times 20130117 Europe.pdf

EUROPE Thursday January 17 2013

The Brussels bugbear

From Churchill to Cameron, the Tories’ dilemma, Page 7

Time to leave: a British

europhile argues for

the UK’s exit, Page 9

World Business Newspaper

Militants

seize gas

workers in

Algeria

Banks beat expectations ● Boost from lower costs ● Dimon bonus halved

News Briefing

Goldman and JPMorgan’s

profits soar above forecasts

Boeing shares hit as

Dreamliners grounded

Shares in the group fell

sharply after All Nippon

Airways and Japan Airlines

became the first airlines to

ground 787 Dreamliners

because of safety concerns

over the passenger jet.

Page 13; Lex, Page 12;

Boeing fears backlash, Page 15;

www.ft.com/lexvideo

Obama tough on guns

The US president announced

sweeping plans to restrict

access to military-style guns

and to tighten background

checks, proposing the

toughest gun control laws in

two decades. Page 2;

Editorial Comment, Page 8

Bumi plc concerns

Bumi plc, the London-listed

coal miner is looking into

whether Nat Rothschild, who

helped create the company,

knew about alleged financial

wrongdoing at its Indonesian

businesses at the time of the

original 2010 deal. Page 13

Doughnut expansion

Dunkin’ Donuts and Krispy

Kreme both plan to open

stores in new areas of the

American consumer market

as the enduring popularity

of the snack defies a shift to

healthier eating. Page 13

Cleric in reform push

A moderate Islamic cleric

who has taken over the

heart of Islamabad with

thousands of followers to

press for political reform

failed to garner the support

of Pakistan’s main

opposition parties. Page 6

Mob boss shot dead

The man reputed to be

Russia’s top criminal boss

was shot and killed by a

sniper in Moscow, in what

law enforcement officials

said was a dispute with a

Georgian gang. Page 6

China back on track

A revival of investment in

China’s stalled high-speed

rail network is expected to

help break a run of two

years of slower growth when

Beijing reports fourth-quarter

figures tomorrow. Page 5

Monti cuts rouse ire

As Italy approaches general

elections, popular anger is

growing over spending cuts

and tax increases imposed by

Mario Monti’s government,

undermining his bid to

remain prime minister. Page 4

GOP ‘dead’ in US state

A Republican strategist and

pollster says the GOP is

“dead” in California

following the party’s

overwhelming defeat in

November’s election, and

warned that the most

populous US state was “10

years ahead of the rest of

America”. Page 2

HK tackles pollution

Hong Kong’s government

will spend up to $1.3bn on

subsidies to phase out old

diesel commercial vehicles to

improve air quality.

Page 6; David Pilling, Page 9

Iran seeks reforms

Mahmoud Ahmadi-Nejad, the

president of Iran, has called

for structural reforms to

counter damage international

sanctions have inflicted

on the economy. Page 5

By Borzou Daragahi and

Guy Chazan in London

Gunmen believed to be Islamist

militants kidnapped dozens of

expatriate workers yesterday at

a natural gas facility in south-

eastern Algeria jointly operated

by BP and Statoil. Reports said

up to three people were killed in

the dawn raid.

There are fears that the hos-

tage-taking is in retaliation for

France’s intervention in neigh-

bouring Mali, aimed at pushing

Islamist groups back from their

advances on the south of the

country.

Algeria has long feared that

an upsurge in militant activity

could threaten its oil and gas-

rich southern region. The coun-

try is the third-largest gas sup-

plier to Europe and one of the

world’s biggest producers of liq-

uefied natural gas.

Local news outlets reported

that Algerian military personnel

were trying to negotiate with

the kidnappers. A member of an

Islamist group calling itself the

Masked Brigade claimed respon-

sibility, saying it was in revenge

for Algeria’s support for the

French campaign.

Some local media reported

that up to 41 foreigners had

been seized. There were conflict-

ing accounts about the national-

ities of those snatched but

Japanese, French, US, Norwe-

gian and Irish nationals were

among the hostages, according

to diplomats and media.

The UK Foreign Office said

Britons were caught up in the

incident, without giving details.

“The ongoing incident has

involved several British nation-

als,” a spokesman for David

Cameron, prime minister, said.

The US state department said

several Americans were among

the hostages. Hillary Clinton,

secretary of state, has spoken

with Algeria’s prime minister

Abdelmalek Sellal about the

attack. The kidnapping could

lead to more pressure for Wash-

ington to provide greater sup-

port for the French operation.

By Tracy Alloway and

Tom Braithwaite in New York

Goldman Sachs put the brakes

on bonuses in the fourth quar-

ter, propelling the investment

bank’s profits to their highest

level in three years and defying

the tepid global economy and

new regulations.

The bank cut pay by 11 per

cent to $1.98bn, helped by hun-

dreds of job cuts. Remuneration

as a percentage of revenues fell

to 21 per cent for the period,

one of the lowest ratios since

Goldman went public in 1999.

As Wall Street’s reporting

season kicked off yesterday,

earnings at both Goldman and

JPMorgan Chase trumped ana-

lysts’ forecasts, with Goldman’s

profits almost tripling to $2.8bn,

thanks to lower expenses, mod-

estly improved markets and

higher asset prices that helped

boost the value of the bank’s

own investment portfolio.

Pay at JPMorgan’s invest-

ment bank division increased 21

per cent to $2.2bn against the

year-ago quarter, rising in line

with revenue growth.

But the bank halved chief

executive Jamie Dimon’s 2012

bonus to $10m after manage-

ment failings that allowed the

bank to rack up more than $6bn

in trading losses last year.

JPMorgan still reported net

income of $5.7bn, up sharply

from $3.7bn last year. Remuner-

ation as a percentage of reve-

nues was flat at 29 per cent.

While Goldman reported

improved revenues in its invest-

ment banking and market-

making businesses, where it

advises on deals and trades on

behalf of clients, much of the

fourth-quarter profit rise came

from the bank’s own portfolio;

revenue in its “principal trans-

actions” business surged 135

per cent to nearly $2bn.

The proposed Volcker rule

prohibits banks from making

short-term trades for their own

accounts but still allows them

Jamie Dimon: chief executive’s bonus was halved to $10m after JPMorgan racked up more than $6bn in trading losses last year

Banking on growth

to make longer-term invest-

ments such as buying property

or company stakes.

Goldman reported a $334m

gain on the value of its invest-

ment in China’s ICBC in the

quarter.

“What put us in a position to

achieve the ROE [return on

equity] really were the steps we

took over the last two years in

terms of managing expenses,

and being quite disciplined,”

said Harvey Schwartz, Gold-

man’s chief financial officer.

Trimming expenses is one of

the main levers banks can pull

to compensate for more modest

revenues, and many from Citi-

group to Morgan Stanley have

recently cut pay and jobs.

At JPMorgan, two internal

reports into the bank’s “London

whale” affair, in which deriva-

tives traders incurred large

trading

Net income Q4 2012

losses,

were

also

released yesterday.

Mr Dimon said he respected

the board’s decision to cut his

bonus. He said the trading

losses were “very close to being

a non-issue” from a financial

perspective but acknowledged

“there are other investigations”

by regulators and law enforce-

ment

$5.7bn

$2.8bn

agencies

that

could

prompt more action.

Shares in Goldman jumped

3.7 per cent to $140.60 in after-

noon trading in New York,

their highest level since May

2011.

Annual % change

Pay Q4 2012 190%

53%

JPMorgan

was

Annual % change

0.63 per cent at $46.63.

$2bn

$7bn

11%

21%

Lex, Page 12

Wall Street adjusts, Page 16

Source: companies

Mali conflict, Page 3

Germany creates pile of golden opportunities

Michael Steen and

Jack Farchy on the

Bundesbank’s plans

for one of the biggest

bullion shipments ever

publicly announced

– to their new home in the

vaults below the Bundesbank’s

1960s office block in an unfash-

ionable corner of Frankfurt.

Each bar weighs 12.5kg.

Simultaneously, an operation

will start to repatriate 300

tonnes of Germany’s 1,500

tonnes of gold on deposit at the

New York Federal Reserve, this

time probably by aircraft in

small batches of three to five

tonnes in order to be able to

insure it, gold traders said.

It is the first time the Bundes-

bank has decided to tell the

world that it is about to move

lots of gold around ahead of

time. In doing so, it is following

in the footsteps of some odd bed-

fellows, including Venezuela,

Iran and Libya, who were typi-

cally trying to get ahead of

possible asset seizures as a

result

2000 and 2001 it decided to bring

home 940 tonnes of gold bullion

from the Bank of England to

save money on the storage fees

that the UK central bank levies,

unlike its French and US

counterparts.

But the Bundesbank did so at

a time when its gold holdings at

foreign central banks were a

closely guarded secret. That

only came to light late last year

in a leaked report by federal

auditors into the Bundesbank’s

gold holdings.

The Bundesbank’s formal rea-

son for the latest move is that it

is catching up with history. The

gold was never dispatched from

German soil: the country

emerged after the second world

war with no gold and built up

reserves through trade sur-

pluses at the foreign central

banks. Keeping the gold there as

a foreign currency reserve made

sense, if it ever needed to be

converted.

Now that Paris shares the

euro there is no reason to store

gold in France, said Carl-Ludwig

Thiele, a Bundesbank board

member.

The bank, however, still

wants to keep a significant

stock of gold in New York.

Mr Thiele denied that the

Bundesbank, which prides itself

on its fierce independence, was

bowing to public pressure fol-

lowing an outbreak of public

angst about the safety of the

bullion in foreign vaults. But he

conceded that “in Germany, a

lot of emotion is attached to the

topic of gold reserves”.

Criminal masterminds and

Hollywood scriptwriters have

been put on notice.

Germany’s central bank is

planning to shift 54,000 gold

bars worth €27bn from Paris

and New York to its base in

Frankfurt, one of the biggest

publicly announced shipments

of the precious metal on record.

Not to make it too easy for

anyone planning a series of

heists, the Bundesbank declined

to say exactly how it would

transport the gold, or exactly

when.

But between now and 2020, all

374 tonnes of gold bars stored at

the Banque de France will have

been moved – probably by truck

international

sanctions.

But this is not the

biggest gold move-

ment ever by the

Bundesbank. In

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FINANCIAL TIMES THURSDAY JANUARY 17 2013

WORLD NEWS

Obama takes fight to Congress

with tough proposals on guns

Republicans are

warned that

California shows

the way to go

“Congress too must act, and

Congress must act soon.”

To prevent mass shoot-

ings, the president said

Congress should require

background checks for all

gun sales, reinstate the ban

on high-capacity magazines,

renew and strengthen the

ban on assault weapons,

and create serious penalties

for gun traffickers.

President Bill Clinton

passed an assault weapon

ban in 1994 but it expired in

2004. Supporters were un-

able to extend it.

Pushing an assault

weapon ban through the

Republican-controlled

House of Representatives

will be very difficult.

In an appeal to Republi-

cans, Mr Obama said that

Ronald Reagan, one of the

staunchest defenders of the

Second Amendment, on the

right to bear arms, wrote to

Congress in 1994 urging

them to support a ban on

assault weapons.

Analysts said that, even if

this part fails, the other ini-

tiatives the president

announced could have a

huge impact.

“The assault weapons ban

renewal was expected and

it’s probably going to be the

Reform agenda

President sets the

agenda for a more

resolute second

term – and incites

wrath of the NRA,

writes Anna Fifield

of the recent $100,000 dona-

tions was from Harold Sim-

mons, a Texas-based billion-

aire who donated $15m to

super-Pacs that sought to

defeat President Barack

Obama last November.

Mr Davis acknowledged

that California had “become

more liberal. . . Part of that

is because of Hollywood;

part of it is because of San

Francisco. I don’t know that

the Republican party has

drifted right, but its visible

elements [on cable news

channels] are how the party

as a whole is perceived”.

Mr James faces an uphill

struggle, with the top two

Democratic candidates rais-

ing millions of dollars to

finance their campaigns.

Wendy Greuel, the city

controller, and Eric

Garcetti, a city council

member, have each raised

more than $4m: Ms Greuel,

a former executive at the

DreamWorks film studios,

has received backing from

her former employers, while

Mr Garcetti has been sup-

ported by Michael Lynton,

the chairman of Sony Pic-

tures, among others. Both

candidates, and the third

Democrat runner Jan Perry

– who has been backed by,

George Takei (Mr Sulu from

Star Trek) – enjoy strong

support from Los Angeles

unions and employees of

US politics

An openly gay

lawyer is seeking to

lead the party back

to relevance in the

state, writes

Matthew Garrahan

President Barack Obama

announced sweeping plans

yesterday to restrict access

to military-style guns and

ammunition and immedi-

ately to tighten background

checks, proposing the

toughest gun control laws

in two decades.

Mr Obama is seeking to

move quickly and harness a

desire for change following

the Sandy Hook school

shooting last month.

But he is also setting the

stage for a fight in Congress

and with the pro-gun lobby.

The National Rifle Associa-

tion, which has aggres-

sively campaigned against

Mr Obama before and after

the Sandy Hook killings,

pre-empted his statement

by releasing a television

advert branding Mr Obama

as an “elitist hypocrite”.

“Are the president’s kids

more important than

yours?” the narrator asks in

the advert, showing a

lunchbox featuring the

presidential seal. “Then

why is he sceptical about

putting armed security in

our schools when his kids

are protected by armed

guards at their schools?”

The White House con-

demned the advert. “Most

Americans agree that a

president’s children should

not be used as pawns in a

political fight,” said Jay

Carney, Mr Obama’s press

secretary. “But to go so far

as to make the safety of the

President’s children the

subject of an attack ad is

repugnant and cowardly.”

In presenting his propos-

als, Mr Obama stood on a

stage with children who

had written letters to him

following Sandy Hook, ask-

ing for laws to be changed.

“While there is no law or

set of laws that can prevent

every senseless act of vio-

lence completely, no piece

of legislation that will pre-

vent every tragedy, every

act of evil,” he said, “if

there is even one thing we

can do to reduce this vio-

lence, if there’s one life that

can be saved, then we’ve

got an obligation to try.”

He outlined 23 actions he

then signed as executive

orders to immediately try to

improve gun safety. This

includes requiring federal

agencies to make data avail-

able to the federal back-

ground check system and

encouraging states to share

data with this system.

He has also directed the

attorney-general to review

categories of individuals

prohibited from having a

gun, required federal law

enforcement to trace guns

recovered in criminal

probes, and review safety

standards for gun locks and

gun safes.

Mr Obama also called on

Congress to “do its part”.

“To make a real and last-

ing difference,” he said,

A leading Republican strat-

egist and pollster says the

party is “dead” in Califor-

nia following its over-

whelming defeat in Novem-

ber’s election.

Frank Luntz, a communi-

cations strategist who has

worked for Rudolph

Giuliani and Michael

Bloomberg, respectively the

past and current New York

city mayors, told the Finan-

cial Times that the most

populous US state was “10

years ahead of the rest of

America”.

Mr Luntz said demo-

graphic changes in Califor-

nia, which has a fast-grow-

ing Latino population, were

being replicated across the

US – but had been ignored

by Republican leaders.

Democrats won a “super-

majority” in both houses of

the California state legisla-

ture for the first time in 80

years in November’s elec-

tion, while none of the big

cities across the state is

controlled by Republican

mayors.

The party that gave the

US the political careers of

Richard Nixon and Ronald

Reagan “is dead in Califor-

nia. . . It just hasn’t realised

it’s time to fall over,” said

Mr Luntz. “California has

an important role to play as

an example of where Amer-

ica is headed if Republicans

don’t

‘To make a real and

lasting difference,

Congress too must

act, and Congress

must act soon’

‘New leadership is

important . . . I want

to keep the city out

of bankruptcy’

Kevin James

LA mayoral candidate

toughest part of the pack-

age to sell,” said Robert

Spitzer, an expert on the

politics of gun control at

the State University of New

York Cortland.

“The paperwork and more

mundane stuff – on high

capacity bullets and back-

ground checks – could be

very important and have a

big impact,” he said, noting

that Mr Obama was moving

swiftly. “It’s going to be dif-

ficult but the public wants

action and if they can capi-

talise on that, they can get

a lot done,” he said.

The speed with which Mr

Obama has acted – his

announcement comes just

33 days after the Sandy

Hook shootings – and the

uncompromising language

he has been using show the

president acting with a

higher degree of resolve as

he enters his second term.

He had been widely criti-

cised, especially by liberals,

during his first term for not

showing enough resistance

to Republican pressure on

issues such as healthcare

and the US’s finances.

“He is in the process of

defining his second term

with issues that he empha-

sises and the stances he

adopts,” said Bill Galston, a

Clinton-era adviser now at

the Brookings Institution.

“As I see the year unfold-

ing, it will be dominated by

three controversies: fiscal

policy, guns and immigra-

tion. What this means is a

year of high-decibel conflict

on multiple fronts,” he said.

various leading media com-

panies.

Whoever wins will run a

city with a creaking trans-

port system, ballooning

public pension liabilities

and regular budget deficits.

“The fate of California is

tied to the fate of Los Ange-

les because the city is on

the verge of bankruptcy,”

said Jeff Corless, Mr

James’s campaign manager.

State finances have stabi-

lised, with Jerry Brown,

California’s governor, pro-

jecting a budget surplus by

the end of next year. New

taxes backed by voters and

swingeing spending cuts

have restored the state’s fis-

cal health, but Los Angeles,

like many other cities

across California, continues

to struggle. Stockton, Mam-

moth Lakes and San Ber-

nardino have all filed for

bankruptcy protection fol-

lowing the housing market

collapse, which has hit

property tax revenues.

Mr James told the Finan-

cial Times his opponents in

the mayoral race were “city

hall insiders” who were

responsible for fiscal woes.

“New leadership is impor-

tant. . . I want to keep the

city out of bankruptcy.”

The Republican party

needed to modernise, he

added, pointing to figures

such as Ted Olson, a lead-

ing conservative lawyer

who has led the fight

against Proposition 8, the

California ballot initiative

that banned gay marriage.

“There are Republican

figures that are stepping up

to provide a more inclusive

message, and I embody

that.”

Barack Obama hugs Grant Fritz, who had written to the president about gun control, after signing executive orders

get

their

act

Reuters

together.”

Some Republicans are

pinning their hopes on an

openly gay lawyer and talk-

radio host to lead the party

back to relevance in the

Golden State. Kevin James

is running for mayor of Los

Angeles and has received

backing from a political

action committee (super-

Pac) started by a Republi-

can advertising executive.

“How many state-wide

Republican offices do we

have? None,” said Fred

Davis, founder of the Better

Way LA super-Pac and a

former chief media strate-

gist for John McCain, the

Arizona senator and former

presidential candidate.

“How many major city

mayors or visible elected

officials do Republicans

have [in California]? None.

You can either write off

California or you can try to

find a super-intelligent,

electable Republican candi-

date and work to get him

[Los Angeles] mayor, which

is a very visible office.”

The election for mayor of

the second-largest city in

the US will be held in May

following a primary in

March. Mr James is the

lone Republican in a field of

three Democrats. His rivals

are backed by local labour

unions and contributions

from Hollywood executives.

Mr Davis said the super-

Pac, which is barred under

election rules from co-ordi-

nating its efforts with Mr

James’s campaign, recently

received two $100,000 dona-

tions, and hopes to raise

several million dollars. One

Proarms lobby

NRA urged to tone down rhetoric

Traditional supporters of the

National Rifle Association on

Capitol Hill are urging the

powerful progun lobby

group to tone down its

rhetoric as Washington

begins a contentious debate

on White House

recommendations to curb

gun violence, writes

Stephanie Kirchgaessner in

Washington .

An outside lobbyist for the

NRA, who asked not to be

named, said conservative

Democrats, known as Blue

Dogs, were urging the gun

group to “tone it down a

little bit”.

The advice comes as the

organisation is stepping up

its opposition to any limit on

guns, beginning with a new

television commercial that

focuses on the president’s

children and calls Mr Obama

a hypocrite for allowing

them to be protected by

“armed guards” while he is

opposed to the NRA’s call

for armed guards in every

school.

Another person who

previously worked for a

company representing the

NRA said the client could be

tricky because there was

often “absolutely no room

for compromise”.

“If you represent the NRA,

they aren’t really looking for

advice because they have a

position that is clearly

articulated and clearly

defined,” the person said.

Nevertheless, the group

spends millions of dollars

engaging inhouse and

outside lobbyists to do its

bidding.

The group’s top lobbyists

in Washington include

Crossroads Strategies, a

group spearheaded by

Stewart Hall, a former aide

to Senator Richard Shelby

and former top executive at

Ogilvy Government relations.

Among other issues,

Crossroads (which is not

affiliated with the

conservative political group

founded by Karl Rove) has

lobbied for a bill to prohibit

the Department of Justice

from tracking the purchase

of multiple rifles and

shotguns.

Other lobbyists include

Prime Policy Group, a lobby

shop owned by WPP of

Britain. Sir Martin Sorrell,

WPP’s chief executive,

declined to comment on the

group’s representation of the

NRA. But a person close to

Prime Policy said there had

been no change in

representation and that

the company’s work is

limited to monitoring activity

for the NRA on Capitol Hill.

“There is not going to be

any serious restrictions put

on guns in my opinion,” said

the person, pointing to the

strong opposition to any

restrictions by the majority

of Republicans and some

Democrats in the House of

Representatives.

“A majority of Americans

are against this [gun

restrictions]. This is not an

organisation [the NRA] that

is out of the mainstream,”

the person added.

The NRA is also

represented by SNR Denton,

a global law firm that

lobbied among other issues

against a proposed law to

ban the sale or transfer of

ammunition magazines that

hold more than 10 rounds.

On its website, the firm has

said it is committed to

operating in a way that

promotes business goals

while advancing “the well

being of the communities in

which we work and live”.

It is also represented by

Schockey Scofield Solutions

and C2 Group.

Editorial comment, Page 8

Gun control – key moments

www.ft.com/theworld

Weapons for sale at a recent

gun show in Utah

US chiefs press for retirement reform

By James Politi

in Washington

ages and baby-boomers

retire.

“Medicare and Social

Security were not designed

to cope with America’s new

demographic realities.

[Chief executives] are call-

ing for gradual changes

that will modernise these

programmes and preserve

the safety net for future

generations of retirees,” Mr

Loveman said.

As well as proposing to

raise the eligibility age for

Medicare from 65 and for

Social Security from 67, the

lobby group is recommend-

ing changing the pension

benefit formula to make it

more progressive, and more

means-testing of health ben-

efits, which would lead to

higher premiums for the

wealthy.

It is also backing a less

generous measure of infla-

tion to calculate cost of liv-

ing adjustments, and pro-

posing to inject more pri-

vate competition into the

pension and elderly health-

care system.

It insists that any benefit

cuts to both programmes

would affect only people

aged 55 or younger. The

proposals could help cajole

some Democrats, who often

resist cuts to Medicare and

Social Security, into being

more open to them as part

of a broad deficit reduction

deal.

Chief executives sup-

ported higher tax rates for

the wealthy during talks

over the fiscal cliff at the

end of last year, providing

crucial support for the Dem-

ocratic

unclear how far they will go

in proposing reductions in

Social Security or Medicare

as part of any debt ceiling

plan.

Mr Obama supported one

of the Roundtable’s recom-

mendations – the inflation

change – during last

month’s fiscal cliff talks,

though ultimately it did not

get enacted after Congress

opted for a smaller deal

rather than a larger deficit

reduction package.

But many of the other

proposals will be hard to

stomach for the president,

and many Democrats bar-

ring the most centrist mem-

bers of the party.

Mr Obama did support a

small increase in the Medi-

care eligibility age from 65

to 67 during 2011 negotia-

tions over the debt limit,

but those backroom talks

also failed, and the presi-

dent has not put it on the

table again.

The 2010 bipartisan deficit

commission co-chaired by

Alan Simpson and Erskine

Bowles did not suggest any

increase in the Medicare

age, but proposed Social

Security retirement at 69.

Chief executives of the larg-

est US companies are press-

ing Congress and the

Obama administration to

increase the eligibility age

for Medicare and Social

Security, the popular health

and pension schemes, to

70, as part of spending

reforms.

The Business Roundtable,

a lobbying group represent-

ing blue-chip corporations,

presented the proposals

yesterday, as Washington

grapples with its latest fis-

cal crisis over the need to

raise the country’s borrow-

ing authority.

The plan by Gary Love-

man, chief executive of Cae-

sars Entertainment, and

Randall Stephenson, chief

executive of AT&T, who led

the effort on behalf of the

Roundtable, is in some

areas more aggressive than

measures floated in Wash-

ington.

It highlights the deep con-

cern in corporate America

about the finances of the so-

called “entitlement” pro-

grammes as the population

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position

during

those talks.

But the Roundtable’s

effort could also encourage

Republicans – who have

openly talked about sup-

porting cuts to big govern-

ment programmes but been

criticised for being short on

specifics – to offer more

details.

Republicans in the House

of Representatives were set

for their annual retreat

beginning yesterday, where

the focus will be on reach-

ing consensus on their

strategy for talks in the

next six weeks over the

debt ceiling.

Republicans are demand-

ing deep spending cuts in

exchange for a higher US

borrowing limit, but it is

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Los Angeles Times

Polling figures

Democratic candidates

running for LA mayor

$4m

Sum raised by each of top

two Democratic candidates

$100,000

Donation to superPac

backing Kevin James

$15m

Texas billionaire’s donation

to antiObama superPacs

FINANCIAL TIMES THURSDAY JANUARY 17 2013

★ †

MALI CONFLICT

French troops bolster flagging ground campaign

Fighting stepped

up against rebels

Hollande insists

action is ‘legitimate’

and the terrorists would be

in a position of force, not

just to submit the Malian

population to a regime it

did not want but to put

pressure on all the coun-

tries of west Africa.”

Anxious to maintain

broad political backing for

his action in the region,

where France has a history

of interventions, he said it

had “no economic or politi-

cal calculation” but was

“solely in service of peace”.

Germany said yesterday

it was sending two trans-

port aircraft to help ferry

troops from the Ecowas

group of west African states

to Mali to join the opera-

tion. Britain has contrib-

uted military transport

planes and the US is also

offering logistical support.

Mali forces have been

twice over-run in the past

week by the well-trained

rebels who control the

north of the country. West

African soldiers due to join

the fight have yet to arrive

in Mali, where they will in

any case not be ready for

immediate combat.

Admiral Édouard Guil-

laud, France’s military chief

of staff, said ground opera-

tions began on Tuesday

night and French troops

would be soon be engaged

in fighting. “I can’t say if it

will be in one hour or 72

but, yes, certainly we’ll be

fighting directly.”

The admiral told Europe 1

radio that French troops

would be fighting “side-by-

side” with the Malian army,

which is understood already

to have had the support of

French special forces and

which he acknowledged

was of mixed effectiveness.

Malian soldiers were

pushed out of the central

town of Diabaly on Monday,

where Islamists are dug in.

Mali also lost control of

another frontline town,

Konna, last Thursday dur-

ing a rebel advance that

prompted President Dion-

counda Traore to ask

France for urgent military

help. France, which like

other western countries is

concerned that northern

Mali has become a haven

for jihadists, responded

with air strikes. Despite

reports by Malian officials

at the weekend that the

army had chased the rebels

out of Konna, the town

remains in Islamist hands.

Admiral Guillaud said the

aim of the ground operation

was to “dislodge [the rebels]

from where they are” but

he said where they were

mixed with the local popu-

lation French forces would

not engage in fighting but

seek to isolate them.

Reports from Diabaly,

which is about 250 miles

northeast of Bamako, sug-

gest the Islamist militants

dispersed among inhabit-

ants after taking the town.

France announced on

Tuesday it planned to have

2,500 soldiers in Mali. A

tank company arrived by

road from Ivory Coast.

Jean-Yves Le Drian,

French defence minister,

said the campaign was “dif-

ficult”, and that while oper-

ations in the east were

going well it was harder in

the west, where Diabaly is,

“where there are the tough-

est groups, the most fanati-

cal and best armed”.

By Xan Rice in Lagos and

Hugh Carnegy in Paris

France has stepped up its

military action in Mali,

launching a ground offen-

sive against Islamist rebels

in a bid to bolster Malian

troops who are struggling

to push back insurgents

threatening to advance on

the capital, Bamako.

The move took France’s

intervention in its former

colony into a potentially

dangerous phase, after its

initial emphasis on airborne

attacks against al-Qaeda-

linked militants in support

of Mali’s army.

President François Hol-

lande reiterated France’s

commitment to defeat the

rebels and restore Mali’s

territorial integrity, insist-

ing that the action he

authorised last week was

“legitimate and necessary”.

He told journalists in

Paris: “Mali would have

been entirely conquered

Why France decided to act

www.ft.com/mali

Podcast on what is at stake

www.ft.com/worldweekly

Read the Mali blogs on

www.ft.com/theworld

Hollande’s choice, Page 9

Malian soldiers await a visit by President Dioncounda Traoré at an air base in Bamako

Reuters

Revenge attacks

by militants

pose challenges

for Algeria

intervention, and neither

will Algeria,” said Ahmed

Bin Gedo, head of interna-

tional relations at the Supe-

rior National School for

Public Works in Algiers.

“Some of the risks are that

we enter a stalemate. It

might end up being a dec-

ades-long war, resources

will be lost, lives will be

lost, and it could also poten-

tially spill over the border.”

Algeria has been monitor-

ing northern Mali, which

has served as a magnet for

Arab and Algerian Islamist

militants. Pushed to the

south, they have regrouped

in Mali and prepared for

possible attacks across

north Africa. Three alleged

militants were killed on

Monday crossing into

Algeria from near the Liby-

an-Niger border.

Algerian authorities have

been criticised for failing to

prepare for the Islamist

threat in Mali, and for

not preventing the kidnap-

ping last year of seven offi-

cials from their consulate in

Gao.

Algerian opposition politi-

cians and media have

accused the government of

President Abdelaziz Boutef-

lika of relying too heavily

on a halfhearted strategy of

backroom negotiations with

local players as the primary

means for addressing the

Mali crisis.

One former North African

official alleged that Algeria

funnelled weapons and

money to Ansar Eddine, an

Islamist group, in hopes

that it would do Algiers’

bidding.

The government has also

been pilloried in the Alge-

rian press for allowing

France back into the region.

“How can Algeria allow

the French army to return

with its weapons to our air-

space after it left it 45 years

ago?” said an editorial on

Tuesday in the independent

newspaper el-Khabar.

Algeria “has a paranoid

vision since [the Nato cam-

paign] on Libya, seeing it as

a French-Qatari plot”, said

Jean-Pierre Filiu, an Alge-

ria specialist at the Insti-

tute of Political Studies in

Paris. “On the other hand,

the peace agreement it

negotiated in Mali crum-

bled.”

Algerian officials have

insisted that some sort of

diplomatic negotiation was

the only way to ultimately

resolve the crisis, which is

rooted as much in ethnic

quests for autonomy as

Islamist militant ambitions.

“The issue of north Mali

will not be resolved mili-

tarily,” an Algerian official

told the news website Tout

sur l’Algeria. “There will be

no definitive and lasting

solution outside of political

dialogue with the represent-

atives of the populations of

the north [of Mali]. After

the military phase, and

once the terrorist threat has

been eliminated, the politi-

cal solution will return with

force.”

Additional reporting by

Leyla Doss in Cairo

Gas facility

Intervention leaves

Algiers facing great

politicalandsecurity

problems, write

Daragahi and

Heba Saleh

The attack by Islamist mili-

tants on Algeria’s In Ame-

nas gas facility yesterday

highlights Algeria’s precari-

ous position in relation to

the French-led intervention

on its oil and gas-rich

southern flank.

The “Masked Brigade”, a

group thought to have ties

to al-Qaeda in the Maghreb

(AQIM), claimed responsi-

bility for the attack in a call

to the official news agency

of Mauritania, describing it

as retaliation for Algeria’s

support for the French

intervention.

But the relatively rare

attack coincided with vows

of revenge against France

and its allies in the Mali

operation.

The sprouting of an

Islamist mini-state in north-

ern Mali and the subse-

quent French-led military

operation have posed the

greatest political and secu-

rity challenge to Algeria in

years.

The country’s security

forces spent years pushing

Islamist militants, includ-

ing members of AQIM,

towards the country’s

southern border, and fear

the fighters could return.

For now, Algiers appears

to be employing a multifac-

eted diplomatic strategy,

supporting the internation-

ally recognised government

in Bamako and opening its

airspace to French over-

flights while calling for con-

tinued dialogue with the

Islamist rebels.

If the intervention suc-

ceeds, Algiers could emerge

with a solution to a fester-

ing problem it has been

unable to resolve despite

discreet negotiations with

Islamists.

But if the operation goes

awry, it could affect its rela-

tions with Bamako, provoke

the militants and anger a

public already wary of any

French military presence in

the region.

Many analysts are gloomy

about the outcome. “Mali

will not benefit from this

SPAIN

TUNISIA

Algiers

MOROCCO

ALGERIA

LIBYA

In Amenas

NIGER

MALI

500 km

★

FINANCIAL TIMES THURSDAY JANUARY 17 2013

WORLD NEWS

Recession

erodes

Monti’s

prospects

Research reshapes debate on global trade policy

more openness on trade.

Because the supply chain

for products is now often

global, exporters’ success in

international markets

depends not just on their

capacity to make the fin-

ished product but on their

ability to import the materi-

als used in its manufacture.

For goods produced glo-

bally, high tariffs and other

barriers on imports act as a

tax on exports, jeopardising

economies, and jobs, rather

than protecting them. “Pro-

tection measures against

imports of intermediate

products increase costs of

production and reduce a

country’s ability to compete

in export markets,” the

OECD and WTO said.

“Policies that restrict

access to foreign intermedi-

ate goods and services also

have a detrimental impact

on a country’s position in

regional and global supply

chains.”

Eurosceptics in Britain

might point out that the

“value-added” trade figures

show UK exporters are

more reliant on the US con-

sumer, and less on the EU,

than previously thought.

But looser links with

Europe might damage the

UK’s trade with the US. If

Americans are buying

goods made of parts from

other European countries,

then non-membership of the

EU would raise the cost of

the final product.

The changes in the nature

of global trade are particu-

larly important to smaller

companies, which are nim-

ble enough to profit from

supply chains becoming

more global so long as their

home countries have an

open trade policy. “To com-

pete globally, firms need to

maintain lean inventories

and still respond quickly to

demand, which is not possi-

ble when their intermediate

inputs suffer unpredictable

delays at the border,” the

report said. Existing meas-

ures of trade balances have

changed little since the era

of David Ricardo, the Brit-

ish economist famous for

his argument that both

exporter and importer can

benefit from trade because

countries have a compara-

tive advantage in producing

different goods and serv-

ices.

But when Ricardo wrote

his treatise on comparative

advantage almost 200 years

ago, goods tended to be

composed of parts from one

country. While his theory

still holds, the reality of the

production

conn, a China-based Tai-

wanese company, which

assembles the iPhone and

transports it to the US.

In 2009, the bill for the

components for the busi-

nesses, none of which was

based in China, was $172.46.

The manufacturing cost lev-

ied by Foxconn was $6.50.

But in the bilateral trade

figures, this was repre-

sented as a $178.96 credit to

China for each phone.

Foxconn’s involvement in

the production of the

iPhone showed up as a $2bn

credit on the trade balance

of the world’s second-larg-

est economy even though

most of this $2bn was trans-

ferred to companies abroad

– including to the US,

where manufacturers

received $10.75 for supply-

ing parts for each iPhone.

Under the “value-added”

method, China’s trade bal-

ance would be credited with

just $73m, reducing the

trade surplus with the US.

World economy

Valueadded data

boost case for

removal of tariffs

and other barriers,

write Claire Jones

and Chris Giles

The message yesterday

from the world’s leading

authorities on trade was

clear: official data no longer

reflect the realities of the

global economy.

The World Trade Organi-

sation and the Organisation

for Economic Co-operation

and Development were

equally explicit in pointing

out that their more accu-

rate “value-added” figures

changed the debate on trade

policy. The “value-added”

approach used by the WTO

and OECD in their year-

long research project high-

lights the fragmented and

global nature of manufac-

turing processes. The

research adds weight to

arguments in favour of

Measure by measure

US trade deficit with China

2009

Share of UK exports to the US

2009

process

has

Value added

21%

Gross

$176bn

changed markedly.

Looking at how the

iPhone is made shows why

the most commonly used

measure of trade balances,

based solely on the gross

flow of goods and services,

fails to reflect the economic

effect of trade.

According to research by

economist Yuqing Xing,

Apple’s product is made by

nine businesses based in

five countries – including

the US. All of the compo-

nents are delivered to Fox-

Gross

16%

faith in Mr Monti’s mix of

austerity

General election

The technocrat

prime minister is

blamed for Italy’s

persistent economic

problems, writes

Guy Dinmore

and

economic

reforms.

Since Mr Berlusconi sur-

rendered office to the

former EU commissioner,

the Milan stock market has

gained 17 per cent while the

“spread” – the yield gap

between benchmark Italian

and German bonds – has

halved.

It would seem that the

worse the economy gets

then stronger are the hopes,

at least of the international

community, that “Super

Mario” will keep his pro-

gramme on track. With pub-

lic debt hitting a record of

more than €2tn – second

only to Greece in the euro-

zone as a percentage of

GDP – Mr Monti is seen as

the guarantor that Italy will

adhere to the fiscal res-

traints imposed by Brussels

to avert a euro meltdown.

“I have no worries about

this election,” said a Euro-

pean ambassador in Rome,

confidently predicting that

Mr Monti would play a sig-

nificant role in the next

government, most likely as

finance minister in a coali-

tion led by the Democratic

party.

But in Mr Monti’s camp

there is no such compla-

cency. One veteran politi-

cian, speaking privately,

expressed deep disappoint-

ment at the poll numbers,

fearing that a poor result on

February 25 would put the

centrists in a weak position

to negotiate a coalition with

the Democrats.

Riccardo Barbieri, econo-

mist for Mizuho Interna-

tional, says the main risk is

that economic and struc-

tural reforms in the next

parliament will fall short of

what is needed to restore

growth and reduce debt.

“Given its links to the

trade unions, the Demo-

cratic party would find it

difficult to support the

sweeping public sector

restructuring and further

liberalisation of the labour

market advocated by Mr

Monti,” Mr Barbieri added.

Meanwhile, planned

health sector cuts are on

hold. Lorenzo Sommella,

director of the San Filippo

Neri hospital, explained

that Mr Monti’s decision to

bring Enrico Bondi, head of

the government’s “spending

review”, into his new politi-

cal movement has delayed

the process.

Mr Sommella described

Mr Bondi’s initial plan, now

dropped, to close the entire

hospital as “absurd”. But it

still risks losing 120 of its

540 beds.

Share of UK exports to major

EU economies*

2009

Value added

terms

$131bn

Gross

39%

Value

added

28%

Editorial Comment, Page 8

Leaving EU, Page 9

Apple credit, Page 14

San Filippo Neri, one of

Rome’s largest public hospi-

tals, is festooned with ban-

ners protesting against gov-

ernment cutbacks, while

women across Italy have

been warned not to plan to

give birth on February 12

when specialist doctors

have scheduled a strike.

As Italy approaches gen-

eral elections late next

month, popular anger is

growing over public sector

spending cuts and tax

increases imposed by Mario

Monti’s government, under-

mining his bid for a second

stint as prime minister lead-

ing a newly formed centrist

alliance.

Now in its seventh quar-

ter, Italy’s longest postwar

recession is taking its toll

and Mr Monti is largely tak-

ing the blame, despite his

efforts to justify the unpop-

ular measures that Italy’s

“emergency” forced him to

adopt.

“I had to jump on to a

derailed train that was

heading for the precipice,”

Mr Monti has said of his

leap from economics profes-

sor to appointed technocrat

14 months ago.

Blaming the record of his

predecessor, Mr Monti’s

campaign is shifting the

focus of his attacks away

from “extremists” on the

left, to the centre-right led

by former Silvio Berlusconi,

former prime minister. This

week Mr Monti derided him

as the “Pied Piper of Hame-

lin who deluded” Italians in

his three election victories,

admitting that he too had

succumbed to the spell of

the billionaire media mogul

by voting for him in 1994.

Although Mr Monti is fast

learning the lessons of poli-

tics – in his latest U-turn he

suggested that his much

hated property tax could be

reduced – polls show he is

making little impact. Mr

Berlusconi is closing the

gap with the centre-left

Democrats but Mr Monti is

trailing well behind, vying

for third place with the

eurosceptic Five Star Move-

ment led by Beppe Grillo, a

stand-up comedian.

Economic statistics do lit-

tle to support Mr Monti’s

claim that there is light at

the end of the tunnel.

Youth unemployment hit

37.1 per cent in November

2012, up seven points from

when Mr Monti took office

a year earlier and despite

reforms passed last July

intended to boost labour

mobility. Consumer spend-

ing has registered its big-

gest postwar fall, while

plummeting industrial pro-

duction is 25 per cent below

its pre-2008 highs.

Despite the grim picture –

which masks some silver

linings including strong

export growth and a declin-

ing budget deficit – inves-

tors, at odds with ordinary

Italians, continue to put

Sources: OECD; WTO

* Germany, France, Italy, Spain, Ireland and Netherlands

Bringing home the bullion

an glob

bank global

gold holdings

Bundesbank global

g lding

gold holdings

gold ho

ings

New York

Jan 2013

Jan2013

Jan 2013

Of the

1,500

tonnes held …

London

All

445

tonnes will

remain

Bundesbank

Bundes

desb

und

sbank

bank

300

tonnes will be

transferred

back

…

33,3

3,391

3 3

3 391

391

Paris

All

tonnes held

tonnes h ld

eld

374

tonnes will be

transferred

back

in total

in tot l

tal

t t

German gold reserve locations

Estimated number

of shipments needed

to transport 300

tonnes of gold from

New York to Frankfurt

Now and future

Paris

London

11%

13%

Largest ocial gold holdings

% of global total

37%

New York

45%

Oth er

he r rs

O th

Oth er

he r rs

50%

31%

Frankfurt

Germany

11%

26%

2012

2020

Photo: AP

Sources: Bundesbank; FT research; World Gold Council

FT graphic by Natalie Croker

Goldfinger foiled as Berlin takes back its bullion

earned abroad in the form

of trade surpluses, which,

until the collapse of Bretton

Woods agreement in 1971,

were converted by the

US Federal Reserve into

gold.

The share of foreign hold-

ings is now down to about

70 per cent following a

large, yet secret, transfer of

gold from its account at the

Bank of England to Frank-

furt a decade ago.

The “storage plan”

announced yesterday will

result in half of Germany’s

gold reserves being stored

at the Bundesbank in

Frankfurt and the other

half split between the New

York Federal Reserve and

the Bank of England, both

of which are near gold trad-

ing centres.

“To hold gold as a central

bank creates confidence,”

Carl-Ludwig Thiele, a Bun-

desbank board member,

said at a press conference.

“ [We] build trust at home

and have the possibility to

exchange gold at short

notice into foreign currency

abroad.”

Although Mr Thiele

sought to deflect sugges-

tions that the Bundesbank

was reacting to public fears

about the safety of German

gold in foreign vaults, his

formal reasons – the end of

the cold war and the birth

of the euro – did little to

answer why the bank was

changing strategy now.

During the cold war,

which ended 22 years ago,

the Bundesbank had

wanted to stash its gold

“as far to the west as possi-

ble” in case Soviet tanks

rolled in, according to Mr

Thiele.

The decision to remove

every last bar of German

gold from the Banque de

France in Paris was linked

to the fact that France is no

longer a source of foreign

exchange as both nations

share the euro, which they

have done since 1999.

More recently, however, a

German populace worried

by a potential break-up of

the euro started asking wild

questions about the gold

holdings.

The issue was then super-

charged by a report by the

federal Court of Auditors

that criticised the Bundes-

bank for having insufficient

access to the gold in foreign

vaults to test and count it.

“What I still find surpris-

ing is that we don’t have

any control over our own

gold,” said Rolf Baron von

Hohenhau, president of the

Bavarian taxpayers’ associ-

ation, who staged an online

campaign dubbed “bring

our gold home”.

“We need to know if it’s

really gold or is it some-

thing covered with gold?”

Mr von Hohenhau said he

welcomed the repatriation

of the 674 tonnes of gold as

a start but it was still too

little and that the great

majority of the bullion

should be in Germany.

“There is no good reason

why Germany should be the

only country keeping most

of its gold abroad,” he said.

Speaking at an event

alongside Bill Dudley, presi-

dent of the New York Fed,

in November, Alexander

Dombret, another Bundes-

bank board member, said

the discussion about gold

reserves in Germany had

become “bizarre” and

“driven by irrational fears”.

“You can be assured that

we are confident that our

gold is in safe hands with

you,” he said.

“The days in which Holly-

wood Germans such as Gert

Fröbe, better known as [the

actor who played] Goldfin-

ger, and [fictional Die Hard ]

East German terrorist

Simon Gruber, master-

minded gold heists in US

vaults are long gone.

“Nobody can seriously

imagine scenarios like

these, which are reminis-

cent of a James Bond movie

with Goldfinger playing the

role of a US Fed accounting

clerk.”

Perhaps not. Yet, just two

months later, the Bundes-

bank is no longer taking

any chances.

At yesterday’s press

conference, 20 bars of gold

were on display amid tight

security, along with an

ultrasound and X-ray

device used to test the

gold’s authenticity. It was

exactly the sort of meticu-

lous stewardship the Court

of Auditors praised the

Bundesbank for in its

domestic gold holdings –

and criticised it for failing

to undertake abroad.

Bundesbank

Public opinion has

driven the moving

of gold bars worth

€27bn back to

Frankfurt, writes

Michael Steen

No one would quite admit

it, but the announcement

yesterday by the Bundes-

bank that it was undertak-

ing a huge transport opera-

tion to move gold bars

worth €27bn from Paris and

New York to Frankfurt sig-

nalled that the proudly

independent central bank

was, for once, heeding pub-

lic opinion.

Having built up the

world’s second-biggest gold

currency reserves after the

US since 1951, when it had

no holdings, postwar Ger-

many has never kept most

of its gold on its own

territory.

Before German reunifica-

tion, as much as 98 per cent

of the precious metal was in

foreign vaults, partly

because it was also being

Losing hope?

Italy business confidence index

(below 100 pessimists

outnumber optimists)

More at FT.com

110

● Beyondbrics

What are the likely

economic spillover effects

of the conflict in Mali?

www.ft.com/beyondbrics

Boland discuss recent

glitches involving Boeing’s

new aircraft

www.ft.com/lexvideo

100

● Smalls exposed

Small caps in the US

have hit their fifth high of

the year, but James

Mackintosh warns that if

the current rally peters

out small caps look

particularly exposed

www.ft.com/shortview

● The French in Mali

Why has France intervened

militarily and what’s at stake?

www.ft.com/worldweekly

2007

● Boeing – further

turbulence ahead?

Stuart Kirk and Vincent

Source: Thomson Reuters Datastream

Big names remain tightlipped

Cameron faces fresh criticism over Europe vote proposal

Mario Monti has

considerable support from

Italy’s business community,

but some big names are

absent or silent, writes Guy

Dinmore in Rome .

Corrado Passera,

economic development

minister under Mr

Monti and former

banker, dropped

out of the

centrist alliance

at the last

minute. Some

suggest

disagreement over

political strategy.

Emma Marcegaglia,

former head of

Confindustria business

lobby, also opted out.

Others prefer neutrality,

keen not to spoil future ties

with Pier Luigi Bersani, the

Democrats’ leader and likely

next prime minister. The

head of a major bank said

many business leaders

thought it “made little

difference” if Mr Bersani or

Mr Monti won, because

their reform agenda would

be similar. Italy was in a far

deeper crisis a year

ago and in more

need of Mr Monti,

pictured, then

than now, he

said.

Still, Mr

Monti’s political

vehicle, Civic

Choice, was set up

and funded by Ferrari’s

Luca Cordero di

Montezemolo and includes

Alberto Bombassei, head of

Brembo brakes company

and former Confindustria

deputy chief, as a candidate

for parliament.

By George Parker and

Elizabeth Rigby in London

on the line in a referendum

– if the Tories win the next

election – has brought with-

ering criticism from within

the cabinet and from the

opposition Labour party.

Vince Cable, the business

secretary and a Liberal

Democrat member of the

coalition government, will

today warn of the potential

damage to the UK economy

of a plebiscite.

“This is a terrible time to

have the diversion and

uncertainty which build-up

to a referendum would

entail,” he is expected to

say.

Mr Cable claims the

debate is creating uncer-

tainty for inward investors,

citing surveys showing that

50 per cent cited Britain’s

unfettered access to the sin-

gle market as a core reason

for investing in the UK.

“Uncertainty is the

enemy of investment,” he

will say. “At a time of

extreme fragility in busi-

ness confidence, such

uncertainty would add to

the sense of unresolved cri-

sis and weaken Britain’s

ability

EU. “He’s taking Britain to

the edge of an economic

cliff for purely narrow,

party political reasons.”

Mr Miliband said he was

not in favour of an in-out

referendum, warning that

speculation on Britain’s

future relationship with

Europe would put up a

“closed for business sign”.

Criticism of Mr Cam-

eron’s plan to reclaim pow-

ers from Brussels – Tory

MPs have identified policies

including employment law,

fisheries and regional policy

– have also brought warn-

ings from EU capitals that

he will not succeed.

“Being a member of the

EU, and especially in the

single market, you cannot

pick the raisins out of the

bun,” said Jyrki Katainen,

Finland’s prime minister.

Meanwhile, Frans Tim-

mermans, Dutch foreign

minister, distanced himself

from Mr Cameron’s Amster-

dam address. “The Nether-

lands is not in favour

of opt-outs,” he said.

After two weeks of sus-

tained criticism from Wash-

ington, EU capitals, Tory

grandees and political oppo-

nents over a speech that

has yet to be made, Mr

Cameron met Tory cabinet

ministers and leading euro-

sceptic MPs, urging them to

rally behind him. Amid sug-

gestions that eurosceptic

ministers might be allowed

to campaign for a British

exit in a referendum, Mr

Cameron told colleagues he

was confident he could

strike a better deal and he

expected them to campaign

for a Yes vote.

An official at 10 Downing

Street said: “A future Con-

servative cabinet will, of

course, abide by collective

responsibility on this as on

other issues.” Eurosceptic

MPs emerged from Number

10 saying they were quietly

happy with Mr Cameron’s

approach.

Additional reporting by

Matt Steinglass in Amster-

dam and Peter Spiegel in

Brussels

David Cameron, Britain’s

prime minister, is facing

renewed claims that his

proposed referendum on the

EU would scare off inves-

tors and hit the economy,

as he attempted to rally

Tory cabinet ministers and

eurosceptic MPs behind his

Europe policy.

Mr Cameron will deliver

his long-awaited Europe

speech in Amsterdam

tomorrow and told his team

he expected all cabinet

ministers to back Britain’s

continued EU membership

in a future referendum.

But his plan to put Brit-

ain’s future EU membership

deliver

reform inside the EU.”

Ed Miliband, the Labour

leader, told the Financial

Times that Mr Cameron

“should be listening to the

CBI [employers’ group] and

not Nigel Farage”, a refer-

ence to the leader of the UK

Independence Party which

wants Britain to leave the

Notebook, Page 8

Case for leaving, Page 9

FINANCIAL TIMES THURSDAY JANUARY 17 2013

★

WORLD NEWS

Worst is behind

us, says Egypt’s

designated

bank governor

Revival of investment in fast lines stokes demand and fuels economic optimism

Rail helps China back on track

By Simon Rabinovitch

in Bazhou, China

tially in no rush to restart

construction. In December

2011 it published a report

that blamed dozens of offi-

cials and businesses by

name for causing the

deadly bullet train crash

through lax application of

safety standards. Railway

plans also suffered after-

shocks from the corruption

investigation that led to Liu

Zhijun’s removal from

office as railway minister

two years ago.

But in early 2012, as the

depth of the economic slow-

down became clearer, Wen

Jiabao, China’s premier,

signalled it was time for rail

investment to resume. He

visited train manufacturers

and railway construction

sites, giving the industry a

vote of confidence.

That was quickly trans-

lated into budget increases

for the railway ministry,

from Rmb400bn at the start

of the year to more than

Rmb600bn ($96.5bn) by the

end of the year. Investment

shot up in the second half,

rising 80 per cent from a

year earlier in September

and October.

With high-speed trains

now running a little more

slowly than before, with

few apparent glitches, Mr

Wang says China’s railway

boom is set to run for years

to come. “Our rail system is

still far from sufficient and

building more high-speed

lines is a necessity.”

He noted that China had

93,000km of track for a pop-

ulation of 1.3bn, whereas

the US has nearly three

times that amount of track

– 230,000km – for a popula-

tion that is a quarter of

China’s, at 300m.

Construction has fallen

quiet again recently in

Bazhou but that is because

of the deep winter freeze in

the country’s north. A secu-

rity guard at the foot of a

30m-high rail bridge that

had been built just before

the cold weather arrived

said that workers were

expected to return in full

force after the Chinese

lunar new year festival in

February.

The railway boom has

also started to change the

daily commutes of urban

residents throughout China,

with central planners

approving more than 60

underground and light-rail

lines last year. Beijing this

month opened four new or

extended lines, which were

brimming with passengers

within hours.

Looked at purely from the

perspective of Chinese

growth, though, there is

one big disadvantage. As

the size of the rail network

expands, the rate of

increase in new investment

will inevitably decline

because so much has

already been built. Mr Peng

says that 2013 could in fact

mark the peak for rail

construction.

“Right now, this is the

strongest moment for

investment,” he says. “But

later on this year we will

start to see some con-

straints. Growth will slow.”

Additional reporting by

Emma Dong

Full speed ahead

What a difference a year

makes for China’s high-

speed rail ambitions, and

for the Chinese economy.

After being abandoned

and left to lie dormant, the

scrubby farm fields around

Bazhou in northern China

have sprouted rail bridges,

raised track beds and neat

rows of workers’ dormito-

ries. The fields are well on

their way to becoming a

link in the country’s rapidly

expanding high-speed rail

network.

It is a sharp turnround

from late 2011 when China

slammed the brakes on its

rail programme, suspending

almost all new investment

after a bullet train crash

killed 40 people and raised

questions about the quality

of the track that had

already been laid.

That revival of rail invest-

ment and infrastructure

spending, which started

around the middle of last

year, was a crucial factor in

China’s economic recovery.

When Beijing reports

growth figures tomorrow, it

is expected to show the

economy accelerated in the

fourth quarter, breaking a

run of nearly two years of

slower growth.

Full-year growth in 2012

probably fell short of 8 per

cent, the lowest in more

than a decade, but the

momentum in the final

quarter has fuelled investor

optimism that China will

again be the world’s strong-

est-performing big economy

this year, helping to make

up for the struggles in the

US and Europe.

“The end of 2011 was

probably the worst in terms

of the amount of money

spent on infrastructure. It

nearly came to a halt,” says

Ken Peng, an economist

with BNP Paribas in Bei-

jing. “The bounceback in

infrastructure investment

was clearly the main driver

of the rebound.”

Investment accounts for

nearly half of China’s gross

domestic product, making it

as big an engine of growth

as consumption and exports

combined. Railway con-

struction is only about 2 per

cent of that but its impor-

tance is far greater, stoking

demand for steel and help-

ing shape business senti-

ment.

A small city a little more

than an hour’s drive from

Beijing, Bazhou was at the

sharp end of the cancella-

tion of rail projects in 2011.

It was meant to serve as a

station on a line connecting

the cities of Tianjin and

Baoding, but the workforce

laying the track fell over-

night from 600 to 20.

“When they stopped

building rail it led to thou-

sands of companies, includ-

ing state-run steelmakers,

cutting production,” says

Wang Mengshu, deputy

chief engineer at the China

Railway Tunnel Group.

“These companies appealed

to the central authorities

and said, ‘if we don’t get

back to building rail, we’ll

be finished and workers

won’t get paid’.”

The government was ini-

500 km

that we should not see

more weakness in the

Egyptian pound and that

the market should stabilise

at this level. But the queue

for dollars is still getting

bigger and the fear is that

this will increase the

downside pressure on the

pound,” says Mohamed

Abu Basha, economist at

Cairo-based EFG-Hermes,

the investment bank.

Mr Ramez blames the

panic that spread in the

currency markets in

December on “destructive”

rumours about the banking

sector, which remains

healthy and liquid after

having weathered the

global financial crisis.

Among his priorities as

governor, Mr Ramez says,

will be to provide greater

transparency to the

markets and openness to

investors.

“We reached all the

shocks you can think of,”

he says, speaking in

Interview

Hisham Ramez

Central banker

IMF loan and fiscal

reforms will give

confidence boost

to the battered

economy, he tells

Roula Khalaf

MONGOLIA

Harbin W.

Existing high speed rail

(300 km/h or above)

CHINA

Beijing

Dalian

Baoding

Tianjin S.

Bazhou

Zheng-

zhou E.

Ji’nan W.

Yellow

Sea

Egypt’s newly designated

central bank governor says

signs of an easing of

pressure on the local

currency are emerging,

with retail demand for the

pound pointing towards

stabilisation in the

currency market.

In an interview with the

Financial Times, Hisham

Ramez, whose appointment

was announced last week,

insisted that the “worst is

behind us”, as he predicted

that fiscal reforms and an

expected 4.8bn loan

agreement with the

International Monetary

Fund would restore

confidence in the country’s

economy.

Mr Ramez, who is a

former deputy central bank

governor, was plucked by

Islamist President

Mohamed Morsi for the job

from Commercial

International Bank, the

country’s biggest private

lender, and takes over

officially next month.

He will be starting his

job amid currency market

jitters, with the Egyptian

pound losing more than

5 per cent of its value

against the dollar in

recent weeks after the

depletion of more than half

the country’s foreign

exchange reserves over the

past two years of political

turmoil.

The country of more

than 80m people, nearly

half of them living in

poverty, has seen its

economy suffer since the

2011 revolution that ousted

Hosni Mubarak as

president. Foreign

investment has all but

dried up and tourism

receipts have plummeted

because of frequent

eruptions of violence.

Mr Ramez is a respected

banker whose appointment

was greeted as a good sign

by the business

community. He has been

reassuring local and

foreign investors that

political and economic

stability will be restored

and says that in the almost

daily auctions that the

central bank has been

holding, in a limited and

controlled attempt at

devaluation, sellers of

foreign currency were also

now coming in.

Economists, however,

say that so far his message

is not resonating

sufficiently, with demand

for dollars still far

outpacing supply.

“The central bank is

trying to send the message

Xi’an N.

Nanjing S.

Shanghai

Wuhan.

Ningbo

Changsha S.

Guang-

zhou S.

TAIWAN

Shenzhen

Futlan

South

China Sea

93,000km

Length of rail track in China,

serving its 1.3bn population

New underground and light

rail lines approved last year

‘The economy is . . .

functioning, people

are working, Egypt

is a safe place’

Hisham Ramez

Rmb200bn

Rise in rail ministry’s budget

from start to end of 2012

Right lines: a highspeed

train in Hunan. Most new rail

investment was suspended

in 2011 after a fatal crash

raised questions about the

quality of China’s track

London on the sidelines of

a conference. “We have

economic problems but the

population is getting more

understanding about the

problems and the economy

is still functioning, the

people are working, Egypt

is a safe place.”

Dismissing fears of a

currency collapse, he says

arguments that the pound

should have been devalued

last year are “debatable”

but supporting the

currency was also

necessary to avoid panic

“across the board” after

the revolution.

“Maybe yes a

devaluation could’ve

started a year ago . . . it’s

debatable . . . it could have

made things much easier

now,” he says.

Mr Ramez has not been

involved in negotiations

with the IMF on a $4.8bn

loan that would boost

confidence and bolster

foreign exchange reserves

(down to $15bn from $36bn

in 2011). However, he says

the signs are that a deal is

“near” and appears

confident that the

government is now on

track to implement its

economic plan.

There is now “a will” for

raising sales taxes . . .

Egyptians “understand”

that subsidies should be

reformed to focus on the

needy, he says.

High costs deter foreign investors

By Jamil Anderlini in Beijing

estment for the first time

this year.

Analysts said the drop in

foreign investment was

partly the result of rising

costs for producers in China

and the relative attraction

of other economies.

“For 20 years China has

been the major recipient of

foreign direct investment in

the developing world but

rising costs from higher

wages and currency appre-

ciation are seeing multina-

tionals look to expand else-

where,” wrote Trinh

Nguyen, an economist at

HSBC, in a recent report.

“India, Indonesia and

Vietnam stand to benefit

most as they have large

labour forces and strong

domestic markets.”

In large part because of

China’s one-child policy, the

size of the country’s work-

force is expected to peak in

the next two to three years.

Difficulty finding work

has already helped push up

wages in some parts of the

country by up to 40 per cent

annually. Other costs, such

as complying with environ-

mental regulations, as well

as rising commodity prices,

have made low-end manu-

facturing less attractive.

Beijing is scheduled to

release gross domestic prod-

uct data tomorrow that are

expected to show that the

Chinese economy expanded

by about 7.7 per cent last

year, the slowest pace since

1999. The World Bank said

yesterday it expected China

to grow by about 8.4 per

cent this year.

The economy is not

expected to return to the

double-digit growth rates of

the past three decades.

Foreign direct investment

into China fell in 2012 for

the first time since the

depths of the global finan-

cial crisis in 2009 as the Chi-

nese economy expanded at

its slowest pace in 13 years.

Rising labour costs also

made other investment des-

tinations more attractive.

Total foreign direct inves-

tment into the country was

$111.7bn last year, 3.7 per

cent lower than 2011, accor-

ding to figures released yes-

terday by China’s ministry

of commerce.

Outbound Chinese direct

investment meanwhile

jumped 28.6 per cent from a

year earlier to a record

$77.2bn.

Spurred on by the govern-

ment, more Chinese compa-

nies are looking at invest-

ing in a wide range of sec-

tors abroad. At current

growth rates, outbound Chi-

nese investment could

exceed inbound foreign inv-

Chinese salary costs discourage investment

Wages and FDI inflows

(average annual % growth)

% of total world FDI inflows

China

Developing

southeast Asia

Wage

FDI

1998-2004

2005-2011

1995

2000

Source: HSBC Global Research

www.ft.com/china

Myanmar reaches ‘stage two’ of its transition

AhmadiNejad seeks reform

to offset impact of sanctions

Policy to be revealed

at donor gathering

two-day gathering in the

capital, Naypyidaw.

The conference will be led

by Mr Thein Sein and cabi-

net ministers and will

include local business lead-

ers.

Donors are expected to

sign a non-binding agree-

ment with the government

that will form the basis of

aid plans. Yangon-based

diplomats said the so-called

Naypyidaw Accord symbol-

ised “stage two” of the

emergence from decades of

isolation under the military.

In the accord the govern-

ment will pledge to

strengthen the rule of law,

promote transparency in

aid management and public

administration, and acceler-

ate political reforms. “This

is a critical moment for

Myanmar,” said one south-

east Asian diplomat.

“They have to show they

are getting across the

issues, that they are getting

their house in order. Donors

need to see there is a real

sense

able within three years,

aimed at building what the

government calls “sound

foundations for medium

and longer-term develop-

ment”. Ultimately, the

report says, the changes

will transform Myanmar

into a “modern, developed

and democratic country”.

The reforms detailed in 10

sectors, ranging from bud-

get processes, tax and trade

to investment, telecoms,

transport, health and educa-

tion, feature broad goals

and detailed objectives.

For example, in telecoms

the report sets an ambitious

target of 80 per cent mobile

penetration by 2015 – up

from less than 9 per cent

now. Mobile phone services,

the report noted, “can help

people access financial serv-

ices with the ability to save

and send money safely”.

On fiscal and tax reform,

the government promises to

make a priority of enacting

laws that give operational

autonomy to the central

bank.

On bank lending the gov-

ernment is more specific,

suggesting it will end

restrictions on mortgage

finance and lift the one-year

limits on commercial bank

lending. More significantly,

it commits itself to allowing

the use of “moveable

assets”, possibly including

commodities and cars, as

collateral for bank lending.

Under previous regimes,

bank credit was almost non-

existent and mortgage lend-

ing was all but banned.

After many years in

which sanctions blocked

much western aid, donor

governments and organisa-

tions such as the World

Bank are likely to commit

“billions of dollars” to assis-

tance programmes, noted a

western diplomat.

However, several aid offi-

cials and diplomats said the

conference would be marred

by the escalation of the mil-

itary’s campaign against

ethnic rebels in northern

Kachin state and reports of

civilian casualties and dis-

placement of villagers.

Nevertheless, the govern-

ment will emphasise peace

initiatives at the confer-

ence. It has privately told

diplomats it is hoping for a

return to the negotiating

table with Kachin’s rebels,

the only one of 11 ethnic

groups to reject peace talks.

By Najmeh Bozorgmehr

in Tehran

Iran’s central bank, causing

the national currency, the

rial, to lose more than half

its value.

Currency fluctuations

have exacerbated high

inflation and youth unem-

ployment rates, which offi-

cially stand at 27.4 per cent

and 28.6 per cent but

are believed to be far

higher.

The economic crisis, for

which many economists

blame the president’s popu-

list policies as well as sanc-

tions, has forced companies

either to stop production or

to run factories far below

capacity. Iran’s chamber of

commerce said recently

that two-thirds of Iranian

industry had been shut

down.

Meanwhile, domestic

media have reported that

banks are in a critical con-

dition, with overdue loans

reaching 104 per cent of

total deposits.

Among the proposals put

forward by Mr Ahmadi-

Nejad, who faces stiff oppo-

sition from a parliament

dominated by his oppo-

nents, was reform of the

banking sector and decen-

tralisation of the economy

to boost poorer, rural

regions of the country and

reverse rural migration to

the cities.

“People who weave car-

pets should not sit on a

straw mat. A nation which

is sitting on a sea of wealth

[natural resources] should

not be poor,” Mr Ahmadi-

Nejad told parliament.

However, analysts said

the president’s proposals

did not sound feasible,

partly because his second

term ends in June and he is

constitutionally

By Gwen Robinson

in Bangkok

Iran’s president has called

for structural reforms to

counter the damage inter-

national sanctions have

inflicted on the country’s

oil-dependent economy,

warning that existing meas-

ures would not work in the

long term.

Addressing parliament yes-

terday, Mahmoud Ahmadi-

Nejad said bowing to sanc-

tions over Iran’s nuclear

programme was not an

option.

However, he said that

existing measures to coun-

ter sanctions on foreign

trade were not in Iran’s

“medium and long-term”

interest and were not help-

ing revive the stricken

economy.

“The one who attacks is

the winner. We should not

be in a passive position,”

Mr Ahmadi-Nejad said.

International pressure on

Tehran increased last year

when the EU banned oil

imports from Iran and the

US imposed sanctions on

Myanmar is set to unveil

the most comprehensive

outline yet of its timetable

for reform over the next

three years in proposals

that range from granting

autonomy to the central

bank to lifting a ban on

motorcycles in Yangon, the

former capital.

The reforms, in a 45-page

document, will be presented

this weekend to the first

main gathering of donor

governments and organisa-

tions since President Thein

Sein came to power in 2011.

Donors will in turn pledge

to “align assistance” with

national and local priori-

ties, consult communities

and use “conflict-sensitive

and inclusive approaches”.

More than 400 people,

including representatives of

30-plus governments, aid

groups and organisations

such as the World Bank,

UN agencies and the Inter-

national Monetary Fund,

are expected to attend the

priorities

and

awareness

how

achieve them.”

The basis of the accord is

a document called “frame-

work for economic and

social reforms”, drafted by

the ministry of national

planning and economic

development as well as

state-funded think-tanks.

The report outlines pro-

posals, including a series of

“quick win” reforms achiev-

banned

from running again.

They said Mr Ahmadi-

Nejad was making a popu-

list appeal to the poor as

power struggles intensified

ahead of the presidential

poll. He is believed to be

cultivating a close ally to

succeed him, although he

denied in parliament that

there was any ulterior

motive to his appearance.

Selection of proposed changes

● Possible creation of

value added tax

● Autonomy for central bank

● Lifting oneyear limit on

commercial bank lending

● Allowing mortgages

● Removal of exchange

restrictions on imports

● Clarification of new

foreign investment law

● Reduce costs associated

with investment regulations

● More public funding of

rural health needs

● Removal of supply chain

barriers and more funding

to boost agriculture

● Full liberalisation of the

mobile phone market

● Boost energy provision

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