The IMF program for Cyprus has been released (here and here).  Growth is projected to fall 13 percent over the next two years, though the discussion of risks implicitly acknowledges that a larger decline is likely (many private analysts expect a decline of 15 percent this year alone).  Given that the program contains 6.6 percent of fiscal consolidation measures during 2013-14, and a major deleveraging of the financial system is underway, skepticism is warranted.  The Fund also acknowledges that should these downside risks materialize, or program implementation slip, government debt (which is forecast to peak at 126 percent of GDP in 2015) becomes unsustainable. The programs have buffers, but financing looks inadequate.  Coming after a negotiation where the Troika publicly promoted one financing gap (17 billion euros) knowing that the actual gap was far larger (shortly after agreement on the program, the gap was revised to 23 billion euros) further undermines confidence in these projections.  The next review, slated for September 15, likely will have to confront these issues.

A showdown is looming at the World Bank over whether to discontinue or water down the Bank’s annual “Doing Business” Report.  As reported here, and blogged about here, and here, China is leading the charge against the report, which is one of the Bank’s most controversial and influential projects.  The U.S. government has been lobbying in favor of Doing Business, but so far has failed to generate the degree of high-level support from other G-20 countries or thought leaders that will likely be needed to save the report.  A committee established by the Bank and headed by South African Planning Minister (and former finance minister) Trevor Manuel to assess the future of Doing Business will report as early as next week.  Based on comments from advisors to the Manuel Committee, it looks as if its conclusion will be negative.  After the report is received, President Kim will make his recommendation, which could involve eliminating the report or gutting it through presenting its results qualitatively or in buckets that reduce the transparency that is at the core of the exercise.

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The most recent Pew Survey on European attitudes (summary table below) shows that support for the European integration project is dropping.  My colleagues at CFR are far more able than I am to address the broader political ramifications of this shift.  A few points though on the link between economic growth, public opinion, and support for the European reform agenda.

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Jaret Seiberg has an excellent summary of Ben Bernanke’s speech and Q&A today on financial sector regulation and reform.  This follows on Dan Tarullo’s speech Friday that highlighted the need for additional capital aginst short-term wholesale funding, an earlier Jeremy Stein discussion on liquidity regulation and the value of price-based regulation (rather than quantitiative limits on bank size favored by some in Congress), and similar comments by the OCC.  We now have as clear a signal as possible that U.S. regulators are ready, in Seiberg’s words, “to go beyond Basel 3 to impose to additional capital requirements on the biggest banks…[using]…a combination of a more restrictive leverage limit, a capital surcharge based on reliance on short-term debt, and a long-term debt requirement.” It also underscores the divergent approaches toward reform in the U.S. and Europe, where, against the backdrop of weak growth and credit constraints, the pressures appear to be leading to a slower, more bank-friendly path.

Does the large drop in the U.S. labor force participation rate justify a monetary policy that is easier, for longer, than suggested by our models or the Fed’s current description of its policy?  Chris Erceg and Andy Levin, two senior researchers at the Fed now on leave at the IMF, argue yes.  Their analysis will provide fuel to the monetary policy doves who argue the Fed is failing to meet its employment mandate, and points to a battle ahead.  But it doesn’t really settle questions about whether monetary policy is an effective tool for bringing these workers back into the work force, or whether it can be done without creating inflationary pressure (which speaks to other leg of the Fed’s mandate). Still, their paper is an important read.

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House Republicans want to tie an increase in the debt ceiling due in September/October to a concrete process for corporate tax reform, as reported here and here.  One idea is to couple  a short-term debt limit increase to a mandate for the House to pass a tax-reform plan. The debt limit would increase further when the House passes its plan, and again when the Senate passes a plan.

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Ken Rogoff and Carmen Reinhart (R&R) have a good piece in the Financial Times today, “Austerity is not the only answer to a debt problem.” This, along with other pieces (for example, here and here), is moving the debate over their work in the right direction. On the one hand, recognition that debt still matters, and too much debt (whether the result of or the cause of low growth) is damaging to our politics and our economics. On the other hand, rejection of the idea that there is a universal growth “cliff” when debt exceeds 90 percent of GDP that is at work across countries (an idea their earlier work promoted, unfortunately).  R&R go on to argue that while fixing our debt problem is a central challenge, that doesn’t mean we need aggressive austerity today (though additional stimulus needs to be carefully decided on).

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I’d like to think that the ECB will surprise us tomorrow with a package that includes both a rate cut and measures to increase the flow of credit to the periphery.  That could produce a meaningful easing of financial conditions and a weakening of the euro, both of which are constructive for euro-area growth.

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Cyprus today passed the €10 billion EU-IMF bailout deal by a 29 to 27 vote, so it will receive its first installment of aid next month.  Capital controls (though eased a bit) will remain in place until at least the fall, when the bank restructuring is completed.  New financing gaps are likely to emerge quickly, as the economic assumptions still look too rosy, but the risk of default has diminished for now.