IMF calls for action as euro zone crisis festers

TOKYO (Reuters) - The IMF prodded the world's rich countries for swifter action on Thursday as Europe's debt crisis drags on while the United States and Japan show scant progress handling their budget deficits.
Christine Lagarde, managing director of the International Monetary Fund, said political wrangling added to economic uncertainty, slowing growth in both advanced and emerging economies. The IMF cut its global growth forecast this week for the second time since April.
"We expect action and we expect courageous and cooperative action on the part of our members," Lagarde told reporters ahead of the IMF's twice-yearly meetings in Tokyo.
The slowdown has not spared emerging market economies, which were instrumental in pulling the global economy out of recession in 2009. Brazil cut interest rates on Wednesday and South Korea on Thursday.
"Developing countries, which have been the engine of growth, will not be immune the increased uncertainty in the global economy," said World Bank President Jim Yong Kim.
"The economic announcements emanating in recent weeks have been sobering. Everyone is vulnerable in times of uncertainty but especially the poor who have few, if any, safety nets and resources and live from day to day."
The IMF has expressed frustration with Europe's piecemeal response to its debt crisis and warned that a recent respite in borrowing costs for debt-laden countries such as Spain may prove short-lived unless euro zone leaders come up with a comprehensive and credible plan.
In its financial stability report on Wednesday, the IMF said that without swift policy action, including the triggering of the European Central Bank's bond-buying program, the premium that investors demand to hold Spanish and Italian debt instead of safer German bonds would nearly double.
Standard & Poor's cut its rating on Spain on Wednesday to a level just above junk territory, and Moody's may soon follow.
The IMF has said it stands ready to support a European bailout for Spain, should Madrid ask. Reuters reported on October 1 that Spain was ready to seek help, but that Germany was blocking an aid request because it preferred to combine a Spanish rescue with additional assistance for other struggling countries such as Greece.
Jose Vinals, the head of the IMF's monetary and capital markets department, warned that countries must not withhold help if Spain were to ask the European Central Bank to buy its bonds under a new bailout program, known as OMT for Outright Monetary Transaction.
"If it were to be the case that they decide to activate this mechanism and they can submit to the proper degree of conditionality, it would be essential that the creditor countries do not negate this activation of the OMT for Spain or for any of the countries," Vinals told Reuters.
TRUE MONETARY UNION
Japan's finance minister, Koriki Jojima, called the euro zone's debt and financial sector problems the biggest risk to the global economy and said it was crucial for Europe to quickly implement agreed steps to resolve the crisis.
"We hope that European countries will overcome conflicts in opinions and strengthen their efforts to unite together and establish a monetary union in the true meaning," he said.
But Japan also drew criticism from the IMF for failing to come up with a medium-term plan to address its own debt difficulties. In its financial stability report, the IMF said Europe's troubles provided a "cautionary tale" for Japan that waiting to address its towering debt - estimated at more than twice its annual gross domestic product - could be costly.
European officials are keen to ensure their region is not the sole topic of discussion, and want more attention placed on the difficulties Washington faces addressing its "fiscal cliff" of automatic spending cuts and tax increases that will take effect early next year unless Congress acts.
The IMF projected that the fiscal contraction would amount to more than 4 percent of total U.S. economic output and plunge the world's biggest economy back into recession.
The Fund itself is struggling to muster the sort of decisive action that Lagarde wants to see from world leaders. Its 188 member countries meet on Friday and Saturday, and will fall short of a goal to implement voting reforms that would give large emerging economies greater say and elevate China to the No. 3 spot in IMF power.
A territorial dispute between Japan and China added another element of disharmony. China's top central bank and finance ministry officials backed out of the meetings and sent deputies to Tokyo instead. Lagarde said she hoped the world's second- and third-largest economies could resolve their differences "harmoniously and expeditiously."
"I think they lose out by not attending the meeting," she said of the Chinese officials. "And they will be missing something great."
(Writing by Emily Kaiser; Editing by Tim Ahmann

In third debate, Brown and Warren ditch Cherokee controversy

Wednesday night's debate between Massachusetts Senate candidates Scott Brown and Elizabeth Warren contained a first: There was no mention of Warren's claim to Cherokee heritage.

The controversy over Warren's ancestry has been a major sparring point up until now, with Brown, the Republican incumbent who won his seat in a special election in 2010, accusing his challenger of falsely identifying as a minority in order to receive preferential treatment. But both candidates seemed to be happy to leave the subject behind and talk policy during their third debate: With the two neck and neck—Brown leading Warren 47 to 43 percent, according to a WBUR/MassInc poll—Brown's attacks haven't changed the race's dynamic and have resulted in some perceiving him as a bully.
The audience at Springfield Symphony Hall, however, didn't shy away from cheering, hissing and jeering, despite the rules of etiquette laid out by moderator Jim Madigan of WGBY-TV.
"I'm losing control," Madigan said with a sigh halfway through the debate.
Even without talk of Warren's heritage, the candidates did manage to squeeze in a few debate "zingers" amid the exchange of views on job creation, taxes, women's issues and foreign policy.
After Warren repeated her favorite line, that the middle class has been "hammered" by tax breaks for the wealthy and loopholes for elites and corporations, Brown shot back: "When you talk about getting hammered, Professor Warren, I suggest you put down the hammer," he said to both groans and applause, "because your policies hurt the middle class."
Warren didn't hold back, either. Calling her opponent a warden of the wealthy and the powerful, she declared: "Instead of working for the people of Massachusetts, [Brown] has chosen to work for Grover Norquist."
Brown responded by saying that he did not mind the association.
Finally, during a discussion of women's issues, Brown labeled himself a pro-choice moderate, but Warren lambasted the senator's voting against equal-pay legislation.
"We should not be fighting about equal pay in 2012. This was an issue that was settled years ago, until the Republicans," she said, casting a harsh glance in Brown's direction, "brought it back."
Although the candidates backed off of the more personal attack lines, the race remains tight and shows no sign of losing intensity leading up to Election Day. On Wednesday, Warren showed no hesitation to keep nationalizing her Senate bid by connecting it to the national race, despite recent polls that show a closing gap between President Barack Obama and Republican challenger Mitt Romney.
Despite consensus in the media and polling that Obama faltered in his first debate last week, Warren felt comfortable declaring support for the president while comparing her opponent to Romney.
Throughout the debate, Brown seemed unwilling to step up and defend his party's national ticket, even as it is gains momentum. Such is the strategy in a deep blue state, where the president still leads by high double digits.

US security warning over China telecom firms

House Intelligence Committee says US companies should avoid doing business with China's two leading technology firms.

A US House Intelligence Committee has warned that US companies should avoid doing business with China's two leading technology firms because they pose a national security threat to the country.

The panel, in a report to be issued on Monday, says US regulators should block mergers and acquisitions by Huawei Technologies Ltd and ZTE Corp, who are among the world's leading suppliers of telecommunications equipment.

Reflecting US concern over cyber-attacks traced to China, the report also recommends that US government computer systems not include any components from the two companies because that could pose an espionage risk.

"China has the means, opportunity, and motive to use telecommunications companies for malicious purposes," the report says.
"The investigation concludes that the risks associated with Huawei's and ZTE's provision of equipment to US critical infrastructure could undermine core US national-security interests."

The recommendations are the result of a year-long probe, including a congressional hearing last month in which senior Chinese executives of both companies testified, and denied posing a security threat.

A US executive of one of the companies said the firm co-operated with investigators, and defended its business record.

Huawei is a "globally trusted and respected company," William Plummer, vice president for external affairs, said.

The bipartisan report is likely to become fodder for a presidential campaign in which the candidates have been competing in their readiness to clamp down on Chinese trade violations.
'Currency manipulator'
Republican presidential candidate Mitt Romney, in particular, has made it a key point to get tougher on China by designating it a currency manipulator and fighting abuses such as intellectual property theft.

The committee made the draft available to reporters in advance of its public release, but only under the condition that they not publish stories until the broadcast on Sunday of a CBS "60 Minutes" report on Huawei.

In the CBS report, the committee's chairman, Republican Mike Rogers, urges US companies not to do business with Huawei.

The panel's recommendations are likely to hamper Huawei and ZTE's ambitions to expand their business in the US.
The companies' products are used in scores of countries, including in the West, and both deny being influenced by China's communist government.

The report says the committee received information from industry experts and current and former Huawei employees suggesting that Huawei, in particular, may be violating US laws.

It says that the committee will refer the allegations to the US government for further review and possible
investigation.
Bribery allegations
The report mentions allegations of immigration violations, bribery and corruption, and of a "pattern and practice" of Huawei using pirated software in its US facilities.

Huawei is a private company founded by a former Chinese military engineer, and has grown rapidly to become the world's second largest supplier of telecommunications equipment, operating in more than 140 countries.

ZTE Corp is the world's fourth largest mobile phone manufacturer, with 90,000 employees worldwide.

While their business in selling mobile devices has grown in the US, espionage fears have limited the companies from moving into network infrastructure.

The report says the companies failed to provide responsive answers about their relationships and support by the Chinese government, and detailed information about their operations in the US.

It says Huawei, in particular, failed to provide thorough information, including on its corporate structure, history, financial arrangements and management.

"The committee finds that the companies failed to provide evidence that would satisfy any fair and full investigation. Although this alone does not prove wrongdoing, it factors into the committee's conclusions," the report says.
'Political distraction'
In Washington, Huawei executive Plummer said on Friday that the company co-operated in good faith with the investigation, which he said had not been objective and amounted to a "political distraction" from cyber-security problems facing the entire industry.

All major telecommunications firms, including those in the West, develop and manufacture equipment in China and overlapping supply chains require industry-wide solutions, he added. Singling out China-based firms would not help.

Plummer complained that the volume of information sought by the committee was unreasonable, and that it had demanded some proprietary business information that "no responsible company" would provide.

In justifying its scrutiny of the Chinese companies, the committee contended that Chinese intelligence services, as well as private companies and other entities, often recruit those with direct access to corporate networks to steal trade secrets and other sensitive proprietary data.

It warned that malicious hardware or software implants in Chinese-manufactured telecommunications components and systems headed for US customers could allow Beijing to shut down or degrade critical national security systems in a time of crisis or war.

The committee concluded that Huawei likely has substantially benefited from the support of the Chinese government.

Huawei denies being financed to undertake research and development for the Chinese military, but the committee says it has received internal Huawei documentation from former employees showing the company provides special network services to an entity alleged to be an elite cyber-warfare unit within the People's Liberation Army.