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<br /> With a whopping USD 51 billion drained off the country annually between 2004 and 2013, India has come 4th in annual black money outflows, as per a report by <keyword id="423404" type="ORGANIZATION" weightage="100" keywordseo="Global-Financial-Integrity">Global Financial Integrity</keyword> (GFI), a Washington-based research and advisory organisation.<br />
<br />
China has topped the list with USD 139 billion annual average outflows of illicit finances, followed by Russia (USD 104 billion per annum) and Mexico (USD 52.8 billion per annum).<br />
<br />
These illicit capital outflows branch out from tax evasion, crime, corruption and other unlawful activities. According to the report, a record USD 1.1 trillion flowed illicitly out of developing and emerging economies in 2013, the last year for which the data was made available. <br />
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In totality, during the 2004-2014 decade, more than half a trillion (USD 510 billion) went out of India, USD 1.39 trillion from China and USD 1 trillion from Russia.<br />
<br />
"This study clearly demonstrates that illicit financial flows are the most damaging economic problem faced by the world's developing and emerging economies," GFI President Raymond Baker, a long-time authority on financial crime, told ET.<br />
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"This year at the UN the mantra of 'trillions not billions' was continuously used to indicate the amount of funds needed to reach the Sustainable Development Goals. Significantly curtailing illicit flows is central to that effort," he added.<br />
<br />
Even though Sustainable Development Goals (SDGs) required countries to significantly reduce illicit financial flows by 2030, the international community has not yet agreed on goal indicators, the technical measurements to provide baselines and track progress made on underlying targets and subsequently the overall SDGs.<br />
<br />
The study is called 'Illicit Financial Flows from Developing Countries: 2004-2013', and through its report, GFI has recommended world leaders to focus on curbing opacity in the global financial system, so that these outflows can be restricted.<br />
<br />
To do so, public registries of verified beneficial ownership information should be established by governments. These registries need to be put on all legal entities and all banks should know the true beneficial owner(s) of all the accounts that are opened with them.<br />
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Multinational companies should be made to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries and staff levels on a country-by- country basis, and all countries should actively participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the OECD and the G20.<br />
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<a href="http://cdn.static-economist.com/sites/default/files/images/2014/05/blogs/banyan/500_india_rupee_notes_595.jpg"><em>Image source</em></a>

India comes 4th in annual black money outflows, reports say

<ul class="summary-list"><li>China is seeing huge volumes of cash leave its financial markets as the yuan declines against the dollar. </li><li>In the first six months of the year, China saw a net $101 billion in outflows from stocks, bonds and direct investment.</li></ul><p>China is seeing huge outflows of cash from its financial markets as the yuan continues to depreciate, and a major chunk of that is likely leaving under questionable circumstances. </p><p>In the first six months of the year, China saw a net $101 billion in outflows from stocks, bonds and direct investment, <a href="https://www.reuters.com/markets/europe/surging-dollar-tests-chinas-capital-controls-cash-flees-2022-10-17/">according to Reuters</a>, on pace for the biggest annual investor exodus since 2016.</p><p>But China labeled $45.2 billion in outflows as "errors and omissions," which likely indicates illegal or semi-legal channels, Reuters said.</p><p>The outflows come as the Chinese yuan has plummeted 11% against the US dollar so far this year amid the Federal Reserve's aggressive rate-hike campaign.</p><p>But instead of raising rates to keep up, China is setting itself apart by choosing to slash lending rates to reverse a souring economy while simultaneously contending with a housing market crash. </p><p>The overall balance of payments remains positive in China's favor as exports continue to outpace imports. But several clues are pointing to investors looking for new ways to move money out of China and get around capital controls.</p><p>The Bond Connect, which links mainland China with the more open market of Hong Kong and other global financial markets, saw outflows of $42 billion in August, up 34% from July and 19-fold since March, according to Reuters.</p><p>Meanwhile, in another potential sign of increased demand to get money out, queries about studying in Hong Kong jumped 41.5% between January and July versus a year ago.</p><p>In addition, the number of family offices in Singapore, a top destination for Chinese wealth, has soared, and purchases of dollar-denominated insurance products in Macau, which is also more open than the mainland, have gone up.</p>

Investors likely used shady methods to move $45 billion out of China as the yuan continues its decline

<p class="source"><span>Reuters</span></p><p class="caption">A Chinese security guard stands in front of an advertisement of a joint Shanghai Pudong Development Bank-Citigroup credit card in the financial hub of Shanghai February 4, 2004.</p>Starting in September, Chinese banks will be required to report any overseas credit card transactions over 1,000 yuan, that's $147. This includes, but is not limited to, credit cards, debit cards, and cash withdrawals.<p>The banks will report that data to the State Administration of Foreign Exchange (SAFE) daily.</p><p>This a reminder that, though China has been quiet, all is not well. Officials are doing this because downward pressure on the yuan has been spurring capital outflows. Last month the People's Bank of China recoupled the yuan <a href="https://www.wsj.com/articles/china-hitches-yuan-to-the-dollar-buying-rare-calm-1495704606?mg=id-wsj">to the dollar to stabilize it.</a></p><p>"<span>Pressure on </span><span>the </span><span>Rmb [yuan] has made the authorities more cautious about capital outflow. The need to strengthen the regulatory framework has also led to </span><span>a </span><span>step-up in the crackdown of illegal FX [foreign excahnge] activities by SAFE," wrote analysts at CLSA.</span></p><p>This is also an attempt to crackdown on the purchase of financial products as the government tries in earnest to reform its financial system.</p><p>For example (from CLSA):</p><p>"<span>In insurance, Mainland Chinese have been active in buying policies from insurers in Hong Kong. While authorities have reiterated </span><span>they should no</span><span>t buy investment type products and Unionpay has banned such transactions, the H</span><span>ong Kong</span><span> insurance industry has found a loophole in Visa and Mastercard</span><span>s</span><span> issued by </span><span>M</span><span>ainland banks," the analysts wrote. "</span><span>However,</span><span> now that all cards issued </span><span>in China are subject to the </span><span>reporting requirement, it gives a means to the regulators to detect violation</span><span>s</span><span> in </span><span>the </span><span>purchase of financial products should they decide to go after these illegal activities."</span></p><p>Naturally, these two issues are connected. Ever since China announced that it would finally start cracking down on wealth management products, shadow banking, and all of the other messy debt in its financial system, analysts have been afraid of a liquidity crunch. It's part of the reason why <a href="http://www.businessinsider.com/moodys-downgrades-china-2017-5">Moody's downgraded China</a>'s credit rating last month.</p><p>In 2016, Chinese citizens spent $120 billion overseas, so this measure will likely have an impact on retailers, especially on the high end. This isn't to say that having to report foreign purchases will stop people from making them, but it certainly will make people think twice about conducting suspicious behavior or outright illegal activity.</p><p><span>Expect the Federal Reserve to watch this carefully. We learned last year that if China pukes, the whole world can get sick. And as recently as January, Fed Chair Janet Yellen said she was worried <a href="https://www.bloomberg.com/news/articles/2017-01-20/yellen-says-fed-not-behind-the-curve-backs-gradual-rate-rises">about China's financial system. </a></span></p>            <h3>NOW WATCH: <a href="http://www.businessinsider.com/what-us-looks-like-if-earth-ice-melted-animated-map-2017-5">Animated map shows what the US would look like if all the Earth's ice melted</a></h3>                                    Please enable Javascript to watch this video

China just went full-on Big Brother on its credit card system

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div><p></p></div></div>Good morning! Here are 10 things you should read about in markets today.</p><p><strong>Europe's latest growth forecasts are coming. </strong>The European Commission's forecasts for growth and inflation in the coming years are out at 10 a.m. London time (5 a.m. ET). Given the solid indicators recently, it's reasonable to expect big improvements in the projections.</p><p><strong>Two huge European cement firms just got permission to merge from the US. </strong>Holcim, a Swiss company, and Lafarge, which is based in Paris, <a href="http://www.businessinsider.com/r-cement-makers-holcim-and-lafarge-win-us-antitrust-approval-to-merge-2015-5#ixzz3ZEvN0tgv">on Monday won US antitrust approval to merge after they agreed to divest assets, the Federal Trade Commission said</a>.</p><p><strong>EU Commission chief Jean Claude Juncker says the <keyword id="6354868" type="COUNTRY" weightage="60" keywordseo="UK">UK</keyword> can't impose its agenda on the EU. </strong><a href="http://www.businessinsider.com/r-britain-cant-impose-its-agenda-on-eu-juncker-2015-5#ixzz3ZEvp42PR">Britain should get a fair deal in the European Union but cannot impose its agenda on the bloc's other 27 members, EU chief executive Jean-Claude Juncker said on Monday</a>, weighing in on a sensitive issue in a tight British election race.</p><p><strong>The latest UK election polling shows the main parties tied. </strong><a href="http://www.businessinsider.com/r-labour-and-conservatives-tied-again-ahead-of-uk-election-yougov-poll-2015-5#ixzz3ZEw8eUT0">Ahead of Britain's parliamentary election on Thursday, Prime Minister David Cameron's Conservatives and the opposition Labour Party are tied at 33%</a>, according to a YouGov opinion poll for the Sun newspaper published on Monday.</p><p><strong>Australia's central bank just slashed interest rates to 2%, an all-time low. </strong><a href="http://www.businessinsider.com/r-australia-central-bank-cuts-rates-to-record-low-20-percent-2015-5#ixzz3ZEwojpAy">Australia's central bank cut its cash rate a quarter point to an all-time low of 2% on Tuesday, aiming to spur a sluggish domestic economy</a> while keeping downward pressure on the local dollar. </p><p><strong>Venezuela is facing widespread electricity rationing. </strong>The government said last week that a plan to ration and otherwise adjust energy usage would go into effect to address increasing demand, which has been spurred on in part by a recent rise in temperatures. <a href="http://uk.businessinsider.com/venezuela-electricity-rationing-plan-2015-5#ixzz3ZExIZVVs">The measures of the rationing plan include reducing workday length for some public officials to six hours and the inspecting of factories and malls</a>.</p><p><strong>A Brazilian judge lifted the suspension on Uber in the country. </strong>A Brazilian judge on Monday <a href="http://www.businessinsider.com/r-brazil-judge-lifts-injunction-suspending-uber-ride-share-service-2015-5#ixzz3ZEwMdL5r">struck down an injunction issued last week calling for the suspension of the US-based Uber ride-sharing service</a> throughout the country.</p><p><strong>PIMCO no longer has the biggest bond fund in the world. </strong>In a statement on Monday, the company said monthly net outflows continued to decline in April, and it saw $5.6 billion (£3.7 billion) walk out the door. <a href="http://uk.businessinsider.com/pimco-total-return-fund-no-longer-worlds-biggest-2015-5">That brought the asset under management in fund, once run by Bill Gross, down to $110.4 billion. Meanwhile, Vanguard Total Bond Market Index Fund had $117.3 billion as at April 30</a>, according to data cited by Bloomberg.</p><p><strong>Morgan Stanley could lose nearly $300 million from a Deutsche Bank lawsuit. </strong><a href="http://uk.businessinsider.com/r-morgan-stanley-sees-292-million-loss-from-deutsche-bank-lawsuit-2015-5#ixzz3ZEy9CyRL">Morgan Stanley said on Monday it could lose more than $290 million (£191.7 million) from a lawsuit by Deutsche Bank over the quality of about $735 million of the Wall Street firm's mortgages</a>. Deutsche Bank in April last year filed a complaint that alleged Morgan Stanley had falsely represented the quality of the loans, the US bank said in a regulatory filing.</p><p><strong>Chinese stocks are down. </strong>While Japan's Nikkei is pretty much flat, up 0.06%, Hong Kong's Hang Seng is down 1.25%, and the Shanghai Composite has tumbled down 2.76%.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/chocolate-kinder-surprise-eggs-toys-2015-4">We got our hands on 'Kinder Surprise Eggs' - the global candy favorite that's still illegal in the US</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="JzcnlidDpB5a1Xs-qlzglXWaGqCUSWQA" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

10 things you need to know before European markets open

<p><span style="line-height: 1.5em;"><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div>Let's say you have a little spare cash - a couple hundred grand, maybe a million - burning a hole in your pocket. Maybe you've come upon it through questionable means. Or maybe you would prefer to keep it out of the grubby hands of various tax authorities. Or you don't want your spouse to know about it. Or your kids.</span></p>
<p dir="ltr">Fear not. With a little financial detergent, your dirty money can be rendered more or less untraceable.</p>
<p dir="ltr">It must be said that the flow of illicit capital is distorting the global economy, draining wealth from emerging nations and inflating the cost of assets in the developed world. Neither of which seems to deter people from doing it every day.</p>
<p dir="ltr">China leads the world in this ancient art. Between 2002 and 2011, some $1.08 trillion departed the country illegally, despite currency-control laws that require people to obtain a permit to exchange more than $50,000 a year worth of yuan into any foreign currency.</p>
<p dir="ltr">But this is a truly <a href="http://www.gfintegrity.org/report/2013-global-report-illicit-financial-flows-from-developing-countries-2002-2011/">international pastime</a>. During that same period, some $880.96 billion was spirited out of Russia, $461.86 billion left Mexico, $370.38 billion left Malaysia, $343.93 billion left India, $266.43 billion left Saudi Arabia, and $192.69 billion left Brazil. The total outflow, among 20 emerging economies, was $5.9 trillion, equivalent to $49 billion a month.</p>
<p dir="ltr">From corrupt politicians and drug cartels to tax cheats and alimony deadbeats, more or less everybody's doing it.</p>
<p><span style="line-height: 1.5em;">Americans wishing to spirit their cash offshore are increasingly finding their efforts thwarted by Washington's 2010 Foreign Account Tax Compliance Act, which requires foreign banks to turn over information about accounts held by US citizens. But plenty of avenues remain for the dedicated money launderer - particularly if he or she is willing to violate the law.</span></p>
<p dir="ltr">Here are the basics:</p>
<p dir="ltr"><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div></p>
<h2 dir="ltr">LESSON 1: THE PEOPLE'S REPUBLIC OF OFFSHORE</h2>
<p dir="ltr">Macau and Hong Kong are considered Special Administrative Regions of the People's Republic of China, and part of what makes them special is that they are great places to launder cash. Macau is the casino capital of the world, with seven times more gaming revenue than Las Vegas, and Hong Kong is home to plenty of compliant banks and other intermediaries willing to transfer funds anywhere in the world without asking too many questions, for a fee.</p>
<h3>First, Find Yourself A Junket</h3>
<p dir="ltr">Let's say you live or work in China and want to hide a massive bribe. First, you must convert it from yuan into another currency without the government knowing. The easiest way to do this is to contact a junket, an agent in mainland China who will give you casino chips for your cash, minus fees of up to 20%.</p>
<h3 dir="ltr">Hit The Casino</h3>
<p dir="ltr">Take the chips to a friendly, cooperative casino, where you can gamble with them, cash them in for Hong Kong or US dollars to then spend as you see fit, or deposit in a Hong Kong bank branch. Or, for extra safety, take them to a lawyer specializing in offshore laundering. Meanwhile, the casino will mix your chips with those from legitimate gamblers, and its accountants will book your $1 million as paid-out winnings.</p>
<h3 dir="ltr">A Whirlwind Tour</h3>
<p dir="ltr">Your bank or lawyer must wire-transfer the funds in such a way that the money crosses multiple borders, to frustrate detection or confiscation. For instance, the money might end up in a US trust managed by a shell company in Grand Cayman, owned by another trust in Guernsey with an account in Luxembourg managed by a Swiss or Singaporean or Caribbean banker who doesn't know who the owner is.</p>
<p dir="ltr"><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div></p>
<h2 dir="ltr">LESSON 2: LITTLE BLUE MEN</h2>
<p dir="ltr">You remember the Smurfs, those adorable little blue creatures? In financial circles, "smurfs" aren't so innocent. They're everyday folks who help the big guys launder their cash by making tons of tiny bank deposits and transfers in order to move money without detection.</p>
<h3 dir="ltr">Find Yourself A Smurf</h3>
<p dir="ltr">After arranging a smurf deal by phone or email, you'll be asked to have the cash couriered to a smurf's residence (probably not a mushroom in the forest, but you never know). The smurf will then deposit small amounts of your cash into an account every day for weeks or months - or years - avoiding watchful eyes by keeping the numbers small.</p>
<h3 dir="ltr">Make A Withdrawal</h3>
<p dir="ltr">Along the way, you can ask your smurf to withdraw some cash - which has since been rendered untraceable - for a shopping spree. But don't go crazy. Better to have a bank wire-transfer the money to your offshore accomplices or your shell companies.</p>
<h3 dir="ltr">Beware Of Cocky Smurfs</h3>
<p dir="ltr">Smurfs are supposed to stay under the radar. That's what makes them smurfs. But the rise of internet banking had made smurfing even more lucrative, and some top practitioners became so big they began to draw attention. For years, Hong Kong's most prolific money launderer was a teenager named <a href="http://www.reuters.com/article/2013/04/07/us-hongkong-laundering-idUSBRE9360CH20130407">Luo Juncheng</a>, who originally opened a Bank of China account with a $500 deposit. During the next eight months, he made nearly 5,000 deposits, and more than 3,500 withdrawals electronically, moving $1.67 billion offshore before attracting notice. He was sentenced to 10 years in prison in 2013 - bad news for the smurf, and his clients.</p>
<p dir="ltr">Other smurfs come to attention of authorities through their flamboyant lifestyles. In March, another Hong Kong resident, <a href="http://www.bbc.com/news/uk-england-birmingham-26479124">Carson Yeung</a>, was sentenced to six years for laundering $91.27 million through his bank accounts between 2001 and 2007. A former hairdresser who'd since bought the UK's Birmingham City football team, he claimed he had accumulated hundreds of millions of dollars in profits from stock trades, a hair salon, and gambling.</p>
<p><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div></p>
<h2 dir="ltr">LESSON 3: GOING CORPORATE</h2>
<p dir="ltr">The real big shots don't bother with casinos, crooked bank managers, junkets, or smurfs. They manage to transfer millions, or billions, without handling cash or involving banks at all, instead funneling their money through corporate deals (bribes, kickbacks, and embezzlement schemes), which are exempt from currency controls.</p>
<h3 dir="ltr">How To Over-Invoice</h3>
<p dir="ltr">Let's say you're a government official or corporate executive, and you want to receive a $1 million bribe or kickback for giving a lucrative and excessively priced contract to a foreign or local business. You approve the contract, and its payment, and pad the consideration by a few million, which includes $1 million for yourself.</p>
<p dir="ltr">The client puts your $1 million overpayment into a shell company in an offshore jurisdiction, where your ownership can remain anonymous. You are then free to invest or spend the money. The business writes it off as an expense, paid out to an offshore consultant.</p>
<p dir="ltr">Or perhaps you'd prefer that your $1 million be used to buy an asset offshore for you, or that it be paid out gradually in salaries or fees to family members. Either way, you're good to go.</p>
<h3 dir="ltr">How To Under-Invoice</h3>
<p dir="ltr">It's the same thing in reverse. Simply sell your goods or services to a business at a price that is less than the goods or services are worth. Then, out of the embezzled funds, you get $1 million directly from the company that got the bargain. These funds can be placed directly into anonymous offshore account or into an asset of your choice.</p>
<p><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div></p>
<h2 dir="ltr">LESSON 4: SAY IT WITH DIAMONDS</h2>
<p dir="ltr"><span style="line-height: 1.5em;">They are a girl's best friend and a government regulator's worst nightmare.</span></p>
<h3 dir="ltr">Tartar Control</h3>
<p dir="ltr">Let's say you want to bring $1 million into the US without detection by tax authorities. One UBS whistleblower <a href="http://www.nytimes.com/2008/06/20/business/20tax.html?_r=0">testified</a> that clients were urged to buy diamonds for cash, then smuggle them overseas in toothpaste tubes to fool authorities. The gems can then be sold for cash, to private dealers, once you rinse off the Colgate.</p>
<h3 dir="ltr">Stamps And Plastic</h3>
<p dir="ltr">Another technique is to transfer your funds to anonymous debit cards. And if you want to go old-school, collectible stamps still have their fans.</p>
<p dir="ltr">In May, Credit Suisse <a href="http://www.businessinsider.com/credit-suisse-criminally-charged-in-tax-case-2014-5">admitted</a> guilt to such activities and others - such as shredding documents and keeping transactions below the US $10,000 reportable limit - to help American clients avoid taxes, paying a fine of $2.6 billion. But nobody really thinks they're the only ones.</p>
<p dir="ltr"><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div></p>
<h2 dir="ltr">LESSON 5: TROUBLE AHEAD?</h2>
<p><span style="line-height: 1.5em;">The would-be launderer should take note: Crime still pays, but the costs are on the rise. A gigantic crackdown in the West, and a similar one against corruption in China, will abate illicit money flows in the long run. In the short term, however, both crusades appear to have escalated the exodus of cash.</span></p>
<p dir="ltr">According to the <a href="http://www.reuters.com/article/2014/01/28/us-tax-havens-idUSBREA0R1KF20140128">UN</a>, the largest recipient of FDI (Foreign Direct Investment) in 2013 was the British Virgin Islands, an archipelago with 23,000 residents. About $92 billion in foreign cash washed up there, more than India and Brazil combined. Other havens receiving massive "investments" included the Cayman Islands, Liechtenstein, Monaco, Andorra, and Vanuatu.</p>
<p dir="ltr">But the money doesn't necessarily stay there. In 2014, the Chinese overtook the Russians as the largest buyers of New York City condos. Other laundered money is used to purchase London mansions, yachts, securities, art, and luxury estates around the world.</p>
<p dir="ltr">These funds also dominate stock and bond markets. By 2012, tax havens <a href="http://www.gfintegrity.org/tax-havens-are-the-biggest-foreign-investor-in-the-united-states-not-china/">held</a> about 29% of the total foreign investment (corporate, bonds, stocks) in the US. By comparison, China held only 7% of assets.</p>
<p dir="ltr">But the hard reality for launderers is that "good" banks are harder to find every day, and so are jurisdictions providing complete anonymity. As a result, some very big fish are starting to get caught in the dragnet. One <a href="http://www.insidespanishfootball.com/118278/judge-insists-lionel-messi-must-face-tax-fraud-charges/">high-profile case</a> in is now underway in Spain, where the world's greatest soccer superstar, Lionel Messi, and his father stand accused of laundering $5.56 million (4.2 million euros) worth of sponsorship dollars. They deny all allegations.</p>
<p dir="ltr">Meanwhile, the third Smurfs movie - said to be a thorough reboot - is being prepared for a <a href="http://www.hollywoodreporter.com/news/sony-shifts-goosebumps-smurfs-movie-700571">2016 release</a> after the first two films grossed a total of nearly $1 billion worldwide. It sounds like a fine investment opportunity.</p>
<p><em><a href="Mr.%20Eddie%20White,%20334-293-2260">Diane Francis</a> is editor at large with The National Post and a professor at Ryerson University's Ted Rogers School of Management.</em></p>

A Beginner's Guide To Laundering Money

<p><span style="line-height: 1.5em;"><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div><p></p></div></div></span></p><p><span style="line-height: 1.5em;">Rampant inflation, political unrest, debt defaults and a possible "contagion" within Europe's financial sector - that's what Greece's new government might trigger if it does not get its way in its negotiations with the rest of Europe's finance ministers right now.  </span></p><p><span style="line-height: 1.5em;"><a href="http://uk.businessinsider.com/greeces-finance-minister-wont-back-down-in-eurogroup-negotiations-2015-2">Greece is taking a hard line</a>, saying it won't compromise, so it's worth asking, what exactly will happen if Greece walks away without a deal, and <a href="http://uk.businessinsider.com/greece-is-running-out-of-cash-2015-2">runs out of euro-backed cash in a few weeks time</a>?</span></p><p><span style="line-height: 1.5em;"><span style="line-height: 1.5em;">The election of far-left Syriza in Greece has started a game of chicken with the rest of Europe. Syriza want Greece's debt burden reduced, and an abandonment of its current bailout deal (with its austerity conditions). Much of the rest of Europe wants nothing of the sort - they want Greece to honor its debts.</span></span></p><p><span style="line-height: 1.5em;">That deal is incredibly unpopular in Greece, where many people blame it for their current economic depression. But the agreement is also what keeps the government funded, <a href="http://uk.businessinsider.com/greece-is-running-out-of-cash-2015-2">and without it there's really not much money left</a>.</span></p><p><span style="line-height: 1.5em;">Greece's finance minister is <a href="http://uk.businessinsider.com/greece-eurogroup-meeting-troika-bailout-varoufakis-16-jan-2015-2">mired in negotiations</a> with his counterparts from the rest of the eurozone, but they're not looking promising right now.</span></p><p><span style="line-height: 1.5em;">Morgan Stanley gives these probabilities of what will happen in the days and weeks ahead:</span></p><ul><li><span style="line-height: 1.5em;"><strong>Greece eventually goes back to the bailout programme: 55% likelihood.</strong> In this scenario Greece gets no haircut on its debts (which the government wants), it gets its international funding but also has to implement continued austerity and economic reforms.</span></li><li><span style="line-height: 1.5em;"><strong>Greece has a "staycation": 25% likelihood.</strong> This would mean Greece implements capital controls - strict rules that halt the outflows of money from banks - like Cyprus did during its 2013 crisis. </span></li><li><span style="line-height: 1.5em;"><strong>Greece leaves the eurozone: 20% likelihood.</strong> Without European assistance, the life support Greece's banks are on is pulled away. It's hard to say exactly what the risk of a Greek banking collapse is to the rest of Europe. </span></li></ul><p>The Economist Intelligence Unit puts the Grexit risk at more like 40%. No country has ever left the euro before, so there are huge unknowns here. </p><p>What we do know is that Greece has a lot of repayments to make in the next few months. Here's how that looks (the numbers mean millions of euros):</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"></div><p></p></div></div></p><p>On top of the possible sudden disappearance of the bailout money, <a href="http://uk.businessinsider.com/greeces-tax-revenues-slumped-23-below-target-in-january-2015-2">Greek tax revenues have also tumbled, down 23% below the budget target in January</a>. </p><p>So what happens if Greece can't fulfil these payments? <span style="line-height: 1.5em;">Capital Economics, a consultancy that won the Wolfson prize in 2012 for its plan of how Greece could leave the euro, Barclays and Oxford Economics have all discussed this in recent research notes:</span></p><ul><li><span style="line-height: 1.5em;"><strong>The drachma would be back.</strong> The euro would be effectively abandoned, and Greece would return to the drachma, its previous currency <span>(it might take a new name)</span>. The drachma would likely tumble in value against the euro as soon as it was issued, and how much the government could print quickly would be a big issue.</span></li><li><span style="line-height: 1.5em;"><strong>It would have to be fast, with capital controls. </strong>There would be people trying to pull their money out of Greece's banks <em>en masse</em>. The Greek government would have to make that illegal pretty quickly. The European Central Bank drew up Grexit plans in 2012, and might be dusting them off now.<br /></span></li><li><span style="line-height: 1.5em;"><strong>European life support for Greek banks would be withdrawn. </strong>Greek banks can currently access emergency liquidity assistance from the ECB, which would be removed if Greece left the euro.<br /></span></li><li><span style="line-height: 1.5em;"><strong>Likely unrest and disorder.</strong> Barclays expects that this sudden economic collapse would "aggravate social unrest", and notes that historically similar moves have caused a 45-85% devaluation of the currency. Capital Economics suggests that the drop could be more mild, closer to 20%, and Oxford Economics says 30%.</span></li><li><span style="line-height: 1.5em;"><strong>Greece would resume economic policymaking.</strong> Greece's central bank would probably start doing its own QE programme, and the government would likely return to running deficits, no longer restrained by bailout rules (though investors would probably want large returns, given the risk of another default).</span></li><li><span style="line-height: 1.5em;"><strong>Inflation would spike immediately,</strong> but both Capital Economics and Oxford Economics say that should be temporary. It might look a bit like Russia this year - with the new currency in freefall until it finds its level against the euro, prices inside Greece would rise at dramatic speed. The inflation might be temporary, however, because with unemployment above 20%, Greece has plenty of spare labour slack to produce more.</span></li></ul><p>The short-term effects would be painful and fast, but Oxford Economics analysts note that Greece "might be better off leaving the Eurozone in the long term". Capital Economics similarly argues that a well-managed exit "could even end up as a favourable economic development for both Greece and the rest of the euro-zone". </p><p>And for the rest of Europe and the world, Wells Fargo analysts think that the effects may be manageable: </p><p style="padding-left: 30px;">Obligations to "official" creditors such as the IMF, the ECB and the governments of other European economies account for the vast majority of Greece's $500 billion worth of external debt, so these institutions would bear the brunt of foreign losses from a Greek default. Foreign bank exposure to Greece totals only $46 billion, which is widely dispersed among countries, so the direct effects of Grexit on the private sector in other countries should be manageable, at least in theory. Of course, financial markets may react negatively if Greece were indeed to leave the Eurozone, and we worry that contagion could spread to other European countries.</p><p>In 2011 and 2012, Greece's fate seemed closely tied to the rest of Europe. Losing Greece would have signalled the first domino falling, followed by perhaps Portugal, perhaps Spain or Italy, unravelling the whole project.</p><p>Right now, however, Greece looks like its own separate case, and very few people think that Grexit would force that chain reaction.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/largest-ice-glacier-calving-filmed-2015-1">This Video Of The Largest Breakage Of Ice From A Glacier Ever Filmed Is Absolutely Frightening</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="NqbHJucjpzcqR3obKs3FqeMQRi8yolxr" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

Here's what happens if Greece is forced out of the euro

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div><p></p></div></div>Janet Yellen spoke at the IMF on Wednesday about financial stability. </p><p>Here's the full text of Yellen's prepared remarks. </p><p style="padding-left: 60px;"><strong>Finance and Society</strong></p><p style="padding-left: 60px;">Let me begin by thanking the organizers for inviting me to participate in this important dialogue on the role of finance in society. The financial sector is vital to the economy. A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues.</p><p style="padding-left: 60px;">Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage. Leverage, interconnectedness, and maturity and liquidity transformation escalated to dangerous levels across the financial system. The result was the most severe financial crisis and economic downturn since the Great Depression. Almost 9 million Americans lost their jobs, roughly twice as many lost their homes, and all too many households ended up underwater on their mortgages and overburdened with debt. To be sure, some individuals and families borrowed unwisely, but too often financial institutions encouraged the behavior that resulted in such excessive debt.</p><p style="padding-left: 60px;">In my remarks today I will discuss some important reasons why the incentives facing financial institutions were distorted and the steps that regulators are taking to realign those incentives.</p><p style="padding-left: 60px;"><strong><span style="line-height: 1.5em;">The Important Role of the Financial Sector</span></strong></p><p style="padding-left: 60px;">Before discussing the incentives that contributed to the buildup of risk at financial institutions, I would like to highlight the important contributions that the financial sector makes to the economy and society. First and foremost, financial institutions channel society's scarce savings to productive investments, thereby promoting business formation and job creation. Access to capital is important for all firms, but it is particularly vital for startups and young firms, which often lack a sufficient stream of earnings to increase employment and internally finance capital spending. Indeed, research shows that more highly developed financial systems disproportionately benefit entrepreneurship.1</p><p style="padding-left: 60px;">The financial sector also helps households save for retirement, purchase homes and cars, and weather unexpected developments. Many financial innovations, such as the increased availability of low-cost mutual funds, have improved opportunities for households to participate in asset markets and diversify their holdings.2 Expanded credit access has helped households maintain living standards when suffering job loss, illness, or other unexpected contingencies.3 Technological innovations have increased the ease and convenience with which individuals make and receive payments.4</p><p style="padding-left: 60px;">The contribution of the financial sector to household risk management and business investment, as well as the significant contribution of financial-sector development to economic growth, has been documented in many studies.5 Such research shows that, across countries and over time, financial development, up to a point, has disproportionately benefited the poor and served to alleviate economic inequality.6</p><p style="padding-left: 60px;"><strong>Distorted Incentives in the Financial Sector</strong></p><p style="padding-left: 60px;">Despite these benefits, as we have seen, actions by financial institutions have the potential to inflict harm on society. Instead of promoting financial security through prudent mortgage underwriting, the financial sector prior to the crisis facilitated a bubble in the housing market and too often encouraged households to take on mortgages they neither understood nor could afford. Recent research has raised important questions about the benefits and costs of the rapid growth of the financial services industry in the United States over the past 40 years.7</p><p style="padding-left: 60px;">A combination of responses to distorted incentives by players throughout the financial system created an environment conducive to a crisis. Excessive leverage placed institutions at great risk of insolvency in the event that severe, albeit low-probability, problems materialized. Overreliance on fragile short-term funding by many institutions left the system vulnerable to runs. And excessive risk-taking increased the probability that severe problems would, in fact, materialize. Moreover, regulators--and the structure of the regulatory system itself--did not keep up with changes in the financial sector and were insufficiently attuned to systemic risks. Once concerns began to develop about escalating losses at large firms, insufficient liquidity and capital interacted in an adverse feedback loop. Funding pressures contributed to "fire sales" of financial assets and losses, reducing capital levels and heightening liquidity pressures--culminating in the near collapse of the financial system in late 2008.</p><p style="padding-left: 60px;"><strong>Capital and liquidity</strong></p><p style="padding-left: 60px;">Several factors encouraged excessive leverage, including market perceptions that some institutions were "too big to fail."8 Financial institutions also had an incentive to engage in regulatory arbitrage, moving assets to undercapitalized off-balance-sheet vehicles. The complexity of the largest banking organizations also may have impeded market discipline. In addition, financial intermediation outside of the traditional banking sector grew rapidly in the years up to 2007, leaving gaps in the regulatory umbrella. And conflicts in the incentives facing managers, shareholders, and creditors may have induced banks to increase leverage.9</p><p style="padding-left: 60px;">To strengthen banks' resilience, the Federal Reserve and the other banking agencies have substantially increased capital requirements. Regulatory minimums for capital relative to risk-weighted assets are significantly higher, and capital requirements now focus on the highest-quality capital, such as common equity. In addition to risk-based standards, bank holding companies and depositories face a leverage ratio requirement. Also, significantly higher capital standards--both risk-weighted and leverage ratios--are being applied to the most systemically important banking organizations. Such surcharges are appropriate because of the substantial harm that the failure of a systemic institution would inflict on the financial system and the economy. Higher capital standards provide large, complex institutions with an incentive to reduce their systemic footprint. We are also employing annual stress tests to gauge large institutions' ability to weather a very severe downturn and distress of counterparties and, importantly, continue lending to households and businesses. Firms that do not meet these standards face restrictions on dividends and share buybacks. As a result of these changes, for the largest banks, Tier 1 common equity--the highest-quality form of capital--has more than doubled since the financial crisis.</p><p style="padding-left: 60px;">New liquidity regulations will also improve incentives in the financial system. Prior to the crisis, institutions' incentives to rely on short-term borrowing to fund investments in riskier or less liquid instruments were distorted in two important ways. First, many investors were willing to accept a very low interest rate on short-term liabilities of financial institutions or on securitizations without demanding adequate compensation for severe-but-unlikely risks, such as a temporary loss of market liquidity. Perhaps these firms expected government support or simply considered illiquidity a very remote possibility. Second, institutions' attempts to shift their holdings once concerns about credit or liquidity risk arose created a fire-sale dynamic that amplified declines in market values, causing unanticipated spillovers onto other institutions and across markets.10</p><p style="padding-left: 60px;">Recently implemented regulations aim to strengthen liquidity. For example, a new liquidity coverage ratio requires internationally active banking organizations to hold sufficient high-quality liquid assets to meet their projected net cash outflows during a 30-day stress period. A new process--the Comprehensive Liquidity Analysis and Review--sets supervisory expectations for liquidity-risk management and evaluates institutions' practices against these benchmarks. A proposal for a net stable funding ratio would require better liquidity management at horizons beyond that covered by the liquidity coverage ratio. A proposed capital surcharge for the largest firms would discourage overreliance on short-term wholesale funding. Also, the Securities and Exchange Commission has adopted changes in regulations that may help avoid future runs on prime money market mutual funds (that is, money funds that invest primarily in corporate debt securities). And reforms in the triparty repo market have reduced risks associated with intraday exposures.</p><p style="padding-left: 60px;"><strong>Large, complex institutions and too big to fail</strong></p><p style="padding-left: 60px;">In the aftermath of the crisis, the Congress tasked the banking regulators with challenging and changing the perception that any financial institution is too big to fail by ensuring that even very large banking organizations can be resolved without harming financial stability. Steps are under way to achieve this objective. In particular, banking organizations are required to prepare "living wills"--plans for their rapid and orderly resolution in the event of insolvency. Regulators are considering requiring that bank holding companies have sufficient total loss-absorbing capacity, including long-term debt, to enable them to be wound down without government support.11 In addition, the Federal Deposit Insurance Corporation has designed a strategy that it could deploy (known as Single Point of Entry) to resolve a systemically important institution in an orderly manner.</p><p style="padding-left: 60px;">The crisis also revealed that risk management at large, complex financial institutions was insufficient to handle the risks that some firms had taken. Compensation systems all too frequently failed to appropriately account for longer-term risks undertaken by employees. And lax controls in some cases contributed to unethical and illegal behavior by banking organizations and their employees. The Federal Reserve has made improving risk management and internal controls a top priority. For example, the Comprehensive Capital Analysis and Review, which includes the stress tests that I mentioned, also involves an evaluation to ensure firms have a sound process in place for measuring and monitoring the risks they are taking and for matching their capital levels to those risks. Also, supervisors from the Fed and other agencies have pressed firms to improve their internal controls and to make their boards of directors more directly responsible for compensation decisions and employee conduct.</p><p style="padding-left: 60px;"><strong>Changes to Regulatory and Supervisory Focus</strong></p><p style="padding-left: 60px;">As I noted, the financial crisis revealed weaknesses in our nation's system for supervising and regulating the financial industry. Prior to the crisis, regulatory agencies, including the Federal Reserve, focused on the safety and soundness of individual firms--as required by their legislative mandate at the time--rather than the stability of the financial system as a whole. Our regulatory system did not provide any supervisory watchdog with responsibility for identifying and addressing risks associated with activities and institutions that were outside the regulatory perimeter. The rapid growth of the "shadow" nonbank financial sector left significant gaps in regulation.</p><p style="padding-left: 60px;">In response, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) expanded the mandate and authority of the Federal Reserve to allow it to consider risks to financial stability in supervising financial firms under its charge. Within the Federal Reserve System, we have reorganized our supervision of the most systemically important institutions to emphasize what we call a "horizontal perspective," which examines institutions as a group and in comparative terms, focusing on their interaction with the broader financial system. We also created a new office within the Fed to identify emerging risks to stability in the broader financial system--both the bank and nonbank financial sectors--and to develop policies to mitigate systemic risk. The Dodd-Frank Act created the interagency Financial Stability Oversight Council, chaired by the Treasury Secretary, and the Federal Reserve is a member. It is charged with identifying systemically important financial institutions and systemically risky activities that are not subject to consolidated supervision and designating those institutions and activities for appropriate supervision. And it is charged with encouraging greater information sharing and policy coordination across financial regulatory agencies.</p><p style="padding-left: 60px;"><strong>Where We Stand</strong></p><p style="padding-left: 60px;">My topic is broad, and my time is short. Let me end with three thoughts. First, I believe that we and other supervisory agencies have made significant progress in addressing incentive problems within the financial sector, especially within the banking sector. Second, policymakers, including those of us at the Federal Reserve, remain watchful for areas in need of further action or in which the steps taken to date need to be adjusted. And, third, engagement with the broader public is crucial to ensuring that any future steps move our financial system closer to where it should be. Active debate and discussion of these issues at this conference and in other forums is important to improve our understanding of the challenges that remain.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/how-floyd-mayweather-spends-his-money-boxing-2015-4">Here's how Floyd Mayweather spends his millions</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="NiaGVpdDqdBR4NCmtjL5odLe14N1R4Hp" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

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