The IMF has just come out with a new lending facility designed for countries that have a "strong track record" but are nonetheless experiencing balance-of-payments difficulties. Again, the IMF is presenting itself as adjusting with the times with this facility by hastening disbursement and removing conditionalities altogether for country borrowers that can avail of the so-called Short-Term Liquidity Facility (SLF). What remains to be seen is just how many countries qualify for this new facility to make it a usable one in these uncertain times. From the IMF website:
The IMF said it will create a new short-term lending facility to channel funds quickly to emerging markets that have a strong track record, but that need rapid help during the current financial crisis to get them through temporary liquidity problems.
In a press announcement, the IMF said the Short-Term Liquidity Facility (SLF) is designed to help emerging market countries with a track record of sound policies address the fallout from the crisis. The new facility, approved by the IMF's Executive Board on October 28, comes with no conditions attached once a loan has been approved and offers large upfront financing to help countries restore confidence and combat financial contagion.
"Exceptional times call for an exceptional response," said IMF Managing Director Dominique Strauss-Kahn. "The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position," he said.
Until recently, emerging markets were one of the few bright spots left in a world economy hit by massive deleveraging, failing banks, and corporate profit warnings. But now, the crisis is spreading beyond the advanced economies where it originated, with emerging markets all over the world suffering from the squeeze in global financial markets. The IMF has already reached outline financing agreements with Iceland, Hungary, and Ukraine, and is in advanced talks with several other countries.
The SLF will allow the IMF to help its members at a critical time. "Even countries that have excellent track records of implementing strong macroeconomic policies have been caught up in the global financial market crisis. They need support, and the IMF is ready to give it," Strauss-Kahn said.
"The SLF will support the authorities' efforts to reduce the impact of the crisis. Approval of a request for support under the SLF will help members fortify defenses against temporary capital account outflows, boost confidence and provide needed policy space," he said.
Despite the current surge in demand for IMF resources, there is a growing recognition that the Fund's traditional facilities may not be the optimal means of addressing short-term balance of payments pressures in every case.
"While existing Fund loan facilities offer flexibility, they are fundamentally used for countries that require both financing and policy adjustment [read: "structural adjustment"], and not for countries that despite strong initial macroeconomic positions and policies are facing short-term liquidity pressures. This facility addresses that gap in the Fund's toolkit of financial support," Strauss-Kahn said.
IMF First Deputy Managing Director John Lipsky told an October 29 news conference in Washington that the SLF "is designed to be easy to use and very rapid for those countries where use is appropriate."
The unique features of the SLF will address the needs of emerging market countries more directly than would a traditional IMF stand-by arrangement:
• Purpose. Provide large, upfront, quick-disbursing, short-term financing to help countries with strong policies and a good track record address temporary liquidity problems in capital markets. • Eligibility. Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens may qualify (the IMF's standard debt sustainability analysis should indicate a high probability that both public and private debt will remain sustainable). Policies should have been assessed very positively by the IMF's most recent country assessment. • Conditions. Financing is made available without the standard phasing and loan conditions of more traditional IMF arrangements. However, borrowers are expected to certify that they are committed to maintaining strong macroeconomic policies. • Size of loan. Disbursement of IMF resources can be up to 500 percent of quota, with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period.
OK, so the post title is idiotic (but catchy!) I can explain the former, though the latter is beyond the scope of this blog's coverage. Anyway, to no one's real surprise, the US Fed has cut the federal funds rate to 1.00%. Skeptics like myself naturally ask, "If several economic commentators attribute the housing crisis to Greenspan cutting this rate to 1.00% and keeping it there for a while after the Internet bubble burst, how can this action help? You can of course say that, having been burned bigtime before, banks will be more circumspect this time around. I certainly hope so, but there is always the possibility that as money flows more freely once again, there will be another bubble in the offing: tech stocks...real estate...heaven knows what next.
While we await the results of this latest Fed reflation play, something that seems to have brought more immediate benefits is the Federal Reserve establishing $30B swap lines with the likes of Brazil, Mexico, South Korea, and Singapore. There are surely political-economic reasons for choosing these countries; While it's true that Mexico and South Korea have had their share of troubles in recent times, Brazil and Singapore are on more solid footing relatively speaking. Dave Altig at the (newly resurrected!) Macroblog has a neat explanation of how these currency swaps work. Basically, a country having trouble obtaining FX funding swaps the domestic currency for a foreign currency at the prevailing exchange rate to help tide over its current FX funding needs. At an agreed date, the process is reversed, with the future exchange rate determined by the interest rate differential between both currencies.
Brad Setser has already spoken of how beneficial these swap lines have been to European countries, enabling them to avoid funding problems currently afflicting many developing countries despite the former having problems with their financial institutions that are, if anything, larger than those of many LDCs'. To the FRB press release, then:
Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.
These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.
Separately, the Federal Reserve welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF's role in helping countries address and resolve their ongoing economic and financial difficulties.
One of the principal discussions in IPE concerns hegemony, or if a single country still maintains the "rules of the game" which others must observe whether they like them or not (see the ever-useful "What is IPE?") It is of course no surprise that I am one of the naysayers in the argument over whether the US still maintains hegemony. OTOH, those of a different opinion that the US maintains this stature can reason that, by extending swap lines, the US can singlehandedly improve the economic fortunes of other countries. Certainly, the aforementioned countries with newly-established swap lines are now faring better. Here is news from South Korea:
South Korea's stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he's ready to take more steps to aid the economy.
The swap line is part of the Federal Reserve's efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government's $100 billion guarantee of bank debts to help lenders struggling to access foreign funds.
Korea's currency jumped 14 percent, the most in a decade, as policy makers' actions allayed concern the nation was headed for a repeat of 1997, when it needed an International Monetary Fund bailout to help repay offshore debt. The Fed's dollar provisions are part of increased global endeavors to thaw money markets, with Hong Kong and Taiwan lowering interest rates today following cuts yesterday by the U.S. and China.
``This is the strongest measure so far,'' said Chang In Whan, chief executive officer of KTB Asset Management Co. in Seoul, which manages the equivalent of $4.3 billion in equities. The Fed deal ``will create a buffer for Korea's foreign- currency supply and improve foreigners' confidence in the country,'' Chang said. ``It shows the Fed won't just sit back and watch overseas markets go down.''
Default protection costs on South Korean government debt fell by the most in more than four years. Five-year credit- default contracts on the country's external debt fell 130 basis points to 435, according to a Bloomberg survey of three dealers.
Singapore stocks led the surge in Southeast Asian equity markets on Thursday, with financials in the spotlight, as investors cheered the Federal Reserve's rate cut and a slew of government efforts to boost bank liquidity.
The benchmark Straits Times Index closed 7.8 percent higher at 1,801.91, with a heavy 1.84 billion shares changing hands.
It will be interesting to see what happens in Brazil and Mexico when their markets open.
I sometimes despair that we are revisiting the dark days of the Asian financial contagion. South Korea's plight has already been discussed [1, 2]; now let us turn our attention to Indonesia. Though Indonesia's fundamentals are reckoned to be much sounder this time around, there are several things roiling the country at the current time:
The default by the Netherlands-based Indonesische Overzeese Bank (Indover) had prompted some investors to ignore Indonesia’s relatively healthy economic fundamentals amid concerns that south-east Asia’s largest economy might be at risk of a sovereign default.
Credit default swap spreads over US Treasuries, regarded as a key indicator of a nation’s sovereign risk, have ballooned to 1,245 basis points, more than five times higher than a few months ago and several hundred basis points higher than the spreads for Vietnam and the Philippines.
Increasing liquidity pressures in the banking sector, pressure on government bonds, high interest rates, a prolonged billion-dollar solvency crisis in the business empire of Aburizal Bakrie, the welfare minister, and rumours of disunity in the government are exacerbating pressures driven largely by negative sentiment towards emerging markets.
However, the government has adopted a proactive approach to increasing liquidity in the banking sector and the country’s economy remains fundamentally robust. The country’s debt to gross domestic product ratio is among the lowest in the region at 28 per cent, while the banking sector remains well capitalised.
“Indonesia’s economy is in a lot better shape than 11 years ago [during the Asian financial crisis], said Fauzi Ichsan, an economist with Standard Chartered in Jakarta. “The question is how strong will it be in standing up to the deterioration of the global economy.”
In light of these difficulties, Indonesian President Susilo Bambang Yudhoyono (SBY) finds himself in the same position as any number of other LDC heads at the current time: pressed to find solutions in keeping bad times from getting worse. He understands that defending the rupiah is a reserve-depleting strategem that probably won't work in the long run. Then again, alternatives are limited. Hopefully, the Carpenters song Indonesians will be playing is "Only Yesterday" and not "Yesterday Once More." Bloomberg hints at plans in the offing to quell the forces battering Indonesia:
Indonesia's President Susilo Bambang Yudhoyono said the government plans to announce a policy tonight to boost the rupiah after the currency plunged as much as 29 percent in the past month. The rupiah fell as much as 8.7 percent today before recovering to trade down 0.9 percent at 11,050 against the dollar, the lowest since July 2001...
``The most effective measure would be'' the central bank selling dollars, said Aldian Taloputra, an economist at PT Mandiri Sekuritas in Jakarta. ``But this problem is of global scale, so what the government could do is to minimize the impact of the outflow...''
``We cannot always solve this through intervention,'' Yudhoyono told reporters in Jakarta today, referring to the central bank buying the local currency. ``If the decline is because of fundamental reasons, what we must solve is the fundamental reasons.''
The Jakarta Composite index has declined 59 percent this year. Government bonds have dropped 17 percent, according to data from HSBC Holdings Plc, the worst among 10 Asian nations. Overseas holding of bonds have declined 11 percent from a record in August.
The rupiah is declining even as the government said it expects the budget deficit to narrow to 1 percent of gross domestic product, from its previous forecast of 1.3 percent, on declining oil prices. Southeast Asia's biggest economy is forecast by the government to expand between 5.5 percent and 6 percent next year.
The government is also considering lowering subsidized fuel prices after crude oil futures fell to the lowest since May 2007, with the contract for December delivery dropping 93 cents to close at $63.22 a barrel in New York yesterday.
Indonesia's central bank had $57.1 billion of reserves as of Sept. 26. The nation paid back its last loan from the IMF in 2005, four years before schedule. The Washington-based institution had arranged a $25 billion package between 1997 and 2003 to help rescue Indonesia's banking system and rehabilitate the economy by restructuring private and government debt.
I hereby dub this week "Big Name Economists Try to Save the World" week. Hot on the heels of Joseph Stiglitz offering a five-point plan to fix the global financial crisis comes Jeffrey Sachs's own recipe for avoiding a global recession. Like Stiglitz, Sachs offers a rather Keynesian recipe. Notable wrinkles here are "pro-poor" measures such as low conditionality loans from the IMF and asking presumably loaded Middle Eastern countries to invest in other emerging markets. As if it weren't apparent before, we're in this together now. From the Financial Times:
Any co-ordinated expansion should include the following actions. First, the US Federal Reserve, the European Central Bank and the Bank of Japan should extend swap lines to all main emerging markets, including Brazil, Hungary, Poland and Turkey, to prevent a drain of reserves. Second, the International Monetary Fund should extend low-conditionality loans to all countries that request it, starting with Pakistan. Third, the US and European central banks and bank regulators should work with their big banks to discourage them from abruptly withdrawing credit lines from overseas operations. Spain has a role to play with its banks in Latin America.
Fourth, China, Japan and South Korea should undertake a co-ordinated macroeconomic expansion. In China, this would mean raising spending on public housing and infrastructure. In Japan, this would mean a boost in infrastructure but also in loans to developing nations in Asia and Africa to finance projects built by Japanese and local companies. Development financing can be a powerful macroeonomic stabiliser. China, Japan and South Korea should work with other regional central banks to bolster expansionary policies backed by government-to-government loans.
Fifth, the Middle East, flush with cash, should fund investment projects in emerging markets and low-income countries. Moreover, it should keep up domestic spending despite a fall in oil prices. Indeed, the faster a global macroeconomic expansion is in place the sooner oil prices will recover.
Sixth, the US and Europe should expand export credits for low and middle-income developing countries, not only to meet their unfulfilled aid promises but also as a counter-cyclical stimulus. It would be a tragedy for big infrastructure companies to suffer when the developing world is crying out for infrastructure investment.
Finally, there is scope for expansionary fiscal policy in the US and Europe, despite large budget deficits. The US expansion should focus on infrastructure and transfers to cash-strapped state governments, not tax cuts. This package will not stop a recession in the US and parts of Europe, but could stop a recession in Asia and the developing countries. At the least it would put a floor on the global contraction that is rapidly gaining strength.
The G7 has just made a very terse statement which goes like this:
We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.
The mighty yen is attributable in part to the continuing unwinding of the carry trade. Given the low interest rates on yen borrowing that have existed for quite some time to combat domestic deflation, many speculators have used the yen as funding currency to obtain higher yielding ones such as the Australian and New Zealand dollars, pocketing the interest rate differential. With risk aversion setting in, the carry trade is going the way of the dodo. The super-strong yen is hurting the prospects of Japan's export industries, and this is now causing further concern for G7 officials. From Reuters:
The Group of Seven warned on Monday the surging yen posed a threat to financial and economic stability, the latest coordinated effort by the world's richest nations to curb the worst financial crisis in 80 years...Japan was in focus with a brief G7 statement singling out the yen, fanning speculation of the first Bank of Japan currency intervention in four years...
The yen's rapid 12 percent ascent against the dollar has threatened Japanese exports as the world's second-largest economy lurches toward recession...The dollar, however, is rising against major currencies, except for the yen, so there was some skepticism about whether any coordinated action on the economy would be forthcoming.
Meanwhile, three of Japan's top lenders -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- were said by Japan's media to be looking to raise cash to offset share losses...Prime Minister Taro Aso said after an emergency meeting the government would expand a scheme that allows banks access to public funds and tighten rules on short-selling shares.
Will (or can) the G7 get together and launch a Plaza Accord-style joint agreement to weaken the yen? Or, will Japan try to go it alone and intervene for the first time in four years? Lest we forget, it has the world's second largest pile of reserves at a trillion plus dollars. Then again, intervening may be a drop in the bucket in this day and age. It will be interesting to watch, although the expected size of any effective effort may preclude one from being launched. Here are some other comments to consider collected again by Reuters:
- "The G7 statement showed the group's willingness to stabilise foreign exchange rates, particularly to curb excessive volatility in yen moves, with an eye on a possible joint currency intervention," former Bank of Japan official Eiji Hirano.
- "Given the panicky and irrational movements of the yen of late, the Japanese authorities may conduct intervention independently," - Kazuyuki Kato, Mizuho Trust & Banking.
- "Launching intervention independently is like a drop in the bucket, and like fighting against the whole world," Ryohei Muramatsu, Commerzbank, Tokyo.
Bloomberg chips in a contrary quotation from "Mr. Yen" himself, Eisuke Sakakibara:
``Issuing such a statement is a sign of failure to intervene,'' said Eisuke Sakakibara, a professor at Tokyo's Waseda University who was the Finance Ministry's top currency official from 1997 to 1999. ``The Japanese government may have consulted with their counterparts in the EU and the U.S. and they couldn't persuade them to intervene.''
Certainly, things are getting really bad in Japan with the Nikkei reaching a twenty-six year low at 7,162.90. Bloombergadds that the Dow Jones was at 965.97 back then and Michael Jackson's Thriller wasn't even released yet (yes, it is a milestone of sorts). The lyrics of the title song are oddly appropriate for Japan with its current situation: You're fighting for your life inside a killer, thriller tonight...
Dear readers, I hope you visit this blog in the belief that I get a reasonable number of things right. Before many did, I called for Iceland to approach the IMF. Here's further proof: I was correct in believing that Ukraine would beat Hungary to the IMF's doorstep, reasoning that the latter would last longer due to its recourse to EU funding as a freshly minted member. It now transpires that the IMF has announced $16.5B worth of lending to Ukraine, with Hungary waiting in the wings:
The IMF said it has reached a tentative agreement with Ukraine to lend the eastern European country $16.5 billion to help it combat a series of economic problems tied to the international financial turmoil and announced broad agreement with Hungary on a set of policies designed to bolster near-term stability...
The IMF is moving quickly to help emerging markets battered by fallout from global financial turmoil and the sharp slowdown in the economies of advanced industrialized countries. It is in discussions with several other countries about possible new lending programs. The 185-member institution has more than $200 billion of loanable funds and can draw on additional resources through two standing borrowing arrangements with groups of IMF member countries.
On October 25, a 43-nation conference of Asian and European nations issued a statement calling for new rules to guide the global economy following the financial crisis triggered initially by the subprime meltdown in the United States. The Asia-Europe Meeting in Beijing, China, called on the IMF to take a leading role to aid crisis-hit countries. "Leaders agreed that IMF should play a critical role in assisting countries seriously affected by the crisis, upon their request," the statement said.
IMF Managing Director Dominique Strauss-Kahn said an IMF staff mission and the Ukraine authorities had reached agreement, subject to approval by IMF Management and the Executive Board, on an economic program supported by a $16.5 billion loan under a 24-month Stand-By Arrangement. Consideration by the Board would follow approval of legislative changes to Ukraine's bank resolution program.
"Ukraine has developed a comprehensive policy package designed to help the country meet the balance of payments needs created by the collapse of steel prices, and the global financial turmoil and related difficulties in Ukraine's financial system. The authorities' program is intended to support Ukraine's return to economic and financial stability, by addressing financial sector liquidity and solvency problems, by smoothing the adjustment to large external shocks and by reducing inflation," Strauss-Kahn said. "At the same time, it will guard against a deep output decline by insulating household and corporations to the extent possible."
"The IMF is moving expeditiously to help Ukraine, and this program is focused on the essential upfront measures needed to maintain confidence and economic and financial stability. The strength of the program justifies the high level of access, equivalent to 800 percent of Ukraine's quota in the Fund," Strauss-Kahn added.
On Hungary, the IMF said that an IMF staff mission and the Hungarian authorities, in close consultation with the European Union (EU), have reached broad agreement on a set of policies that will bolster the Hungarian economy's near-term stability and improve its long-term growth potential. The authorities' program will ensure fiscal sustainability and strengthen the financial sector.
"A substantial financing package in support of these strong policies will be announced when the program is finalized in the next few days. Participants will include the IMF, the EU, and some individual European governments, together with regional and other multilateral institutions," Strauss-Kahn noted.
"With Hungary's commitment to strengthened economic policies, we expect that banks and other financial institutions operating in the country will continue to provide adequate financing. "The Fund's assistance, in the form of a Stand-By Arrangement, will be considered by the IMF's Executive Board for approval under the Fund's expedited procedures. The policies Hungary envisages justify an exceptional level of access to Fund resources," Strauss-Kahn added...
Strauss-Kahn, who helped spearhead the international response to the global financial turmoil during the IMF-World Bank Annual Meetings in Washington on October 10-13, has emphasized the IMF's readiness to lend quickly to member countries that need help during the ongoing crisis through its emergency financing procedures...
What will be interesting to watch is if famed IMF conditionalities will be lessened this time around as promised by Dominique Strauss-Kahn. With the IMF standing accused of, among other things, causing thousands of tuberculosis fatalities in Eastern Europe post-Soviet era, this is certainly a sensitive issue. On this, the Economistadds:
In part, their reluctance is a sign of the stigma of an IMF bail-out. The delay can cost valuable time while countries scramble to find other sources of help. Governments also worry about the damaging domestic political fallout of being forced to accept tough conditions as part of a rescue package. Critics have argued that the IMF is overly hung up on conditionality—although, in countries like Pakistan and Ukraine, which have enormous deficits, the need for conditions is clear. More generally, however, the fund needs to be flexible and it has indeed rethought its approach in recent years. It now aims to impose policy prescriptions only when absolutely critical to a programme’s success. Details emerging from the talks with Iceland suggest these guidelines are being followed: there appear to be no punitive strings attached. That will help the IMF dispel concerns that it is too rigid in its ideology.
Nobel Laureate Joseph Stiglitz has come up with five items on his "to do" list in order to fix the current financial crisis. While most of these prescriptions concern American policymaking, we'll cut him slack as it is a TIME article. Never let it be said that Stiglitz fails to think big. The Economist has faulted him in the past for prescribing remedies that are, if anything else, too ambitious. Here, I would like have liked more discussion from Stiglitz about how steps 2 and 3 are going to be funded. After all, he is an economist, and "there's no such thing as a free lunch" remains operative. In step 5, he calls for a new global regulator. Here I have two questions. First, why can't we work with the current set of institutions like the Bretton Woods twins, the Bank of International Settlements, and so on? Second, why does he cite the French as inspirational in promoting new regulatory regimes when they are self-serving more often than not?
1 Recapitalize banks. With all the losses, banks have insufficient equity. Banks will have a hard time raising this equity under current circumstances. The government needs to provide equity. In return, it should have voting stakes in the banks it helps. But equity injections also bail out bondholders. Right now the market is discounting these bonds, saying there is a high probability of default. There needs to be a forced conversion of this debt to equity. If this is done, the amount of government assistance that will be required will be much reduced.
It's good news that Treasury Secretary Paulson seems to finally realize that his original proposal of buying what he euphemistically called distressed assets was flawed. That Secretary Paulson took so long to figure this out is worrying. He was so bound by the idea of a free-market solution that he was unable to accept what economists of all stripes were telling him: that he needed to recapitalize the banks and provide new money to make up for the losses they incurred on their bad loans.
The Administration is now doing this, but three questions are raised: Was it a fair deal to the taxpayer? The answer to that seems fairly clear: taxpayers got a raw deal, evident by comparing the terms of Warren Buffet's injection of $5 billion into Goldman Sachs, and the terms extracted by the Administration. Second, is there enough oversight and restrictions to make sure that the bad practices of the past do not recur and that new lending does occur? Again, comparing the terms demanded by the U.K. and by the U.S. Treasury, we got the short end of the stick. For instance, banks can continue to pay out money to shareholders, as the government pours money in. Thirdly, is it enough money? The banks are so nontransparent that no one can fully answer the question, but what we do know is that the gaps in the balance sheet are likely to get bigger. That is because too little is being done about the underlying problem.
2 Stem the tide of foreclosures. The original Paulson plan is like a massive blood transfusion to a patient with severe internal hemorrhaging. We won't save the patient if we don't do something about the foreclosures. Even after congressional revisions, too little is being done. We need to help people stay in their homes, by converting the mortgage-interest and property-tax deductions into cashable tax credits; by reforming bankruptcy laws to allow expedited restructuring, which would bring down the value of the mortgage when the price of the house is below that of the mortgage; and even government lending, taking advantage of the government's lower cost of funds and passing the savings on to poor and middle-income homeowners.
3 Pass a stimulus that works. Helping Wall Street and stopping the foreclosures are only part of the solution. The U.S. economy is headed for a serious recession and needs a big stimulus. We need increased unemployment insurance; if states and localities are not helped, they will have to reduce expenditures as their tax revenues plummet, and their reduced spending will lead to a contraction of the economy. But to kick-start the economy, Washington must make investments in the future. Hurricane Katrina and the collapse of the bridge in Minneapolis were grim reminders of how decrepit our infrastructure has become. Investments in infrastructure and technology will stimulate the economy in the short run and enhance growth in the long run.
4 Restore confidence through regulatory reform. Underlying the problems are banks' bad decisions and regulatory failures. These must be addressed if confidence in our financial system is to be restored. Corporate-governance structures that lead to flawed incentive structures designed to generously reward CEOs should be changed and so should many of the incentive systems themselves. It is not just the level of compensation; it is also the form — nontransparent stock options that provide incentives for bad accounting to bloat up reported returns.
5 Create an effective multilateral agency. As the global economy becomes more interconnected, we need better global oversight. It is unimaginable that America's financial market could function effectively if we had to rely on 50 separate state regulators. But we are trying to do essentially that at the global level.
The recent crisis provides an example of the dangers: as some foreign governments provided blanket guarantees for their deposits, money started to move to what looked like safe havens. Other countries had to respond. A few European governments have been far more thoughtful than the U.S. in figuring out what needs to be done. Even before the crisis turned global, French President Nicolas Sarkozy, in his address to the U.N. last month, called for a world summit to lay the foundations for more state regulation to replace the current laissez-faire approach. We may be at a new "Bretton Woods moment." As the world emerged from the Great Depression and World War II, it realized there was need for a new global economic order. It lasted more than 60 years. That it was not well adapted for the new world of globalization has been clear for a long time. Now, as the world emerges from the Cold War and the Great Financial Crisis, it will need to construct a new global economic order for the 21st century, and that will include a new global regulatory agency.
This crisis may have taught us that unfettered markets are risky. It should also have taught us that unilateralism can't work in a world of economic interdependence.
In case you missed them, here's a short take on two stories which have been featured on this blog. First, as predicted so many days ago, Iceland has reached an agreement with the IMF functioning as lender of last resort. From the IMF press release:
The IMF announced an initial agreement with Iceland on a $2.1 billion two-year loan to support an economic recovery program to help the island restore confidence in its banking system and stabilize its currency.
Following review by the IMF's management, the agreement could be presented to the IMF Executive Board for approval in early November. Iceland would be able to draw $833 million immediately after Board approval.
"Iceland has put together an ambitious economic program, which aims to restore confidence to the banking system, to stabilize the krona through strong macroeconomic policies, and to help the country achieve medium-term fiscal consolidation following the collapse of its banking system," said IMF Managing Director Dominique Strauss-Kahn. "I believe these strong policies justify the high level of access to Fund resources—equivalent to 1,190 percent of Iceland's quota in the IMF—and deserve the support of the international community.
"The authorities' program is focused on the essential upfront measures needed to restore confidence and economic and financial stability. The overarching goal is to support Iceland's effort to adjust to the economic crisis in a more orderly and less painful way," Strauss-Kahn said.
Meanwhile, the earlier furore over IMF Managing Director Dominique Strauss-Kahn having an affair with an IMF staffer should be quelled somewhat by the findings of an Executive Board inquiry that he did not abuse his authority. What remains to be seen is if this episode undermines Strauss-Kahn further down the road. Will he still command respect from IMF staff in particular and the wider global governance community in general?
Based on the facts established by the external counsel's report, and the advice provided by the General Counsel and the Ethics Officer regarding the applicable standards of conduct, the Board has concluded that there was no harassment, favoritism, or any other abuse of authority by the Managing Director.
Nevertheless, the Executive Board noted that the incident was regrettable and reflected a serious error of judgment on the part of the Managing Director, as he has acknowledged and for which he has apologized. The Executive Board stressed that the personal conduct of the Managing Director sets an important tone for the institution and, as such, must be beyond reproach at all times.
The Executive Board took note of the concluding observations by the external counsel with respect to best practices, and will take them into account in the work underway in the Fund to review the standards of conduct applicable to the Managing Director, the staff, and the members of the Executive Board.
The Board would like to thank all those who have cooperated with this inquiry. It considers that this matter is now closed, and looks forward to continuing to work with the Managing Director and staff on the daunting challenges facing the membership.
Errant finance and errant romance--there is a strange congruity at work here aside from the obvious alliterative one.
UPDATE: Also see TIME discussing the fallout from the affair from the standpoint of Europeans wishing to push through changes at the IMF--especially Sarkozy:
But many leaders-particularly French President Nicolas Sarkozy, and British Prime Minister Gordon Brown-want to go beyond that activity and place the IMF at the center of a reformed, unified, and better-regulated global finance system. Sarkozy has gone so far as to call for the "moralization of finance markets" and "re-foundation of capitalism". Though the most rabid adepts of laissez-faire systems like the U.S. are expected to rebuff such efforts to impose international strictures, Strauss-Kahn's profile as a respected economist and market-friendly leftist leaves him in a rare spot: The head of an international agency about to extend its powers that political and business leaders on both sides of the Atlantic and Asia feel they can deal with.
That credibility, however, seriously suffered from the uproar over Strauss-Kahn's affair. That will leave him with the difficult challenge of taking up the leading role many global politicians now call for the IMF to assume, even as many of his own staffers-particularly women-continue to regard Strauss-Kahn with resentment and disdain. Proving his reformist talents in a time of crisis as he also demonstrates unimpeachably monogamous behavior will not only be vital for Strauss-Kahn to up the IMF's role in a re-regulated international finance system; it may also be essential to his hopes to win the Socialist candidacy to challenge Sarkozy for the Elysee in 2012.
"The risk for Strauss-Kahn is that this thing may be dragged out again as campaigning starts to raise questions about his responsibility and stability," says Laurent Joffrin, editor of the left-leaning daily Liberation. That threat is especially true given Strauss-Kahn's long-standing reputation in France as a man with formidable and proven powers of seduction.
This post is a timely one for very unfortunate reasons. As you probably know, Hungary, Ukraine, and Belarus have entered discussions with the IMF for lender of last resort funding. One of the points the IMF is emphasizing with this round of crises is that it will be sparing with the use of politically unpopular conditionalities. (I hope so.) Think of these conditionalities as similar to loan covenants. For instance, you may lend money to an errant relative provided that he cuts spending on alcohol and looks for gainful employment. Like other lenders, the IMF is interested in getting paid back. Accordingly, it has used conditionalities that it believes are conducive to placing a borrowing country in a position to make repayments and improve its financial outlook.
Unlike many other lenders, however, the IMF's status as lender of last resort allows it further discretion than most over a country's economic policies. Among other things, conditionalities have included targets for budget deficits, current account deficits, and inflation. A common assertion made by (usually left-leaning) critics of the IMF is that its conditionalities include strict limits on national spending that have resulted in cuts in health and education expenditures. Insofar as these cuts have resulted in adverse social effects, the IMF is implicated.
Something that recently caught my attention was an academic study concerning how IMF lending during the post-Soviet era is said to have resulted in increased difficulties with tuberculosis in Eastern European countries through the mechanism described above. The chart to the left is taken from this study of Eastern European countries. The IMF has famously been faulted for exacerbating crises by ignoring the social effects of its policies--policies which may have instead worsened matters via instability-inducing social dislocations. If true, this study would serve as more ammunition for the IMF's legion of critics (admittedly including myself on occasion) at a time when it is about to swing into motion in a big way.
The IMF offers many points of contention as to why this particular study has doubtful conclusions. In quoting several studies with the IMF imprimatur for counterarguments, I think few critics will be convinced. However, one thing that strikes me as curious is that the authors do not appear to have incorporated the most important study variable of all: spending on health. A Millennium Development Goal that Eastern Europe is having difficulty meeting is halting and reversing the incidence, prevalence, and death rates associated with tuberculosis by 2015 (see target 6.9). Accordingly, the study's authors are considering if this goal has been hindered by IMF lending conditionalities. The following line of argumentation must hold:
[IMF lending in Eastern European countries][led to cuts in public health expenditures],[resulting in increased tuberculosis problems].
Notice the three brackets I have placed. What the IMF points out is that the middle part of the argument has gone missing in the study cited, leading to an argument in this form:
[IMF lending in Eastern European countries][resulted in increased tuberculosis problems].
Notice how omitting the middle bracket makes the argumentation uncertain. Some might even say it sounds like a conspiracy theory. In the specification of their regression model, the authors have used the presence of IMF lending as an independent variable together with control variables such as democratization, occurrence of military or ethnic conflict, urbanization, population dependency ratios, and population education levels. (Control variables account for possible alternative causes of tuberculosis problems.) Each in turn, they use tuberculosis incidence, prevalence, and mortality rates as the dependent variable. As you can read in their study, "IMF program participation was associated with increases in tuberculosis incidence, prevalence, and mortality by 13.9%, 13.3%, and 16.6%, respectively."
Firing back at the IMF, David Stuckler, one of the study's authors, cites a whole list of variables they also incorporated in post-hoc tests. However, throwing in the kitchen sink does not address the study's Achilles heel which the IMF pointed to above: changes in health expenditures are not accounted for. Although "government spending as a percentage of GDP" is considered, this clearly isn't identical to changes in health expenditures during the period in which IMF lending was present.
Thus returning to the question posed in the title, I cannot offer a definitive answer here based on this study. The process by which IMF lending led to increased problems with tuberculosis is not given adequate exposition. OTOH, while the IMF points out a fundamental flaw with the paper, it doesn't offer conclusive proof that it is not complicit here, either. Another of the study's authors, Sanjay Basu, makes a pretty strong statement in a Huffington Post interview:
Question: Are you able to say what the increased mortality rates mean and what the increased incidence rates mean in terms of overall numbers?
Basu: In a statistical sense, you can say how many statistical deaths have resulted. In terms of deaths, it was on the order of tens of thousands. In terms of incidence of new cases, it was on the order of hundreds of thousands. Of course, these are all jumbled in reality, but in a statistical sense, that is part of the effect due to the IMF programs.
Associating IMF programs with thousands of deaths from tuberculosis is no laughing matter. To make such an assertion stick requires that a study be nearly unimpeachable. At this point in time, I am unconvinced that it is for reasons given above. That a main variable of interest is omitted doesn't inspire confidence. To their credit, the authors move in the preliminary direction of using a path analysis or structural equation model (SEM) instead of a regression model. The advantage of the likes of SEM over regression is that the former can handle different levels of variables. In plain English, instead of just considering two of the brackets above as the authors do with regression, SEM can consider all three brackets simultaneously. Again, however, what's in the middle bracket is important here--public health spending, not government spending as a percentage of GDP or any other variable.
If the authors are serious about fending off what are legitimate criticisms, then they should earnestly work towards addressing them to convince us that methodological issues are ironed out.
Don't miss the CFR's Sebastian Mallaby commenting on the prospects for a 21st Century Bretton Woods at the November 15 G-20 summit called at the behest of the White House. For those of you who are familiar with Mallaby's writing, it comes as no surprise that he's not quite sanguine on its prospects. He cites China and the US as pivotal figures and the Europeans as peripheral ones. Plus, unlike the original Bretton Woods, key issues on the table do not include currencies. Here is an excerpt from the Wall Street Journalarticle:
Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a "G-20 meeting," ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation -- how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.
If the Europeans shrink from demanding that China cease pegging to the dollar, it's perhaps because they anticipate the concession that would be asked of them. China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system -- meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence. When you strip out the blather about bank transparency and such, this is the core bargain that needs to be struck. Naturally, the Europeans aren't proposing it.
It will be up to the two great powers -- the U.S. and China -- to fashion the deal that brings China into the heart of the multilateral system. Here, too, is an echo of the first Bretton Woods, for underneath the camouflage of a multilateral process there was a bargain between two nations. Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF's design and structure. Today the U.S. must play Britain's role, and China must play the American one.
There's a final twist, however. In the 1940s the declining power practiced imperial trade preferences; the rising power championed an open world economy. When Franklin Roosevelt told Winston Churchill that free trade would be the price of postwar assistance, he was demanding an end to the colonial order and the creation of a level playing field for commerce. "Mr. President, I think you want to abolish the British empire," Churchill protested. "But in spite of that, we know you are our only hope."
In these days of globe-spanning economic turmoil, socialist ideologies are making something of a comeback. The excesses of laissez-faire are leading those hurt by it to now seek protection. Karl Polanyi called it the "double movement," defined asthe continuing tension and conflict between the efforts to establish, maintain, and spread the self-regulating market and the efforts to protect people and society from the consequences of the working of the self-regulating market. Although I am not a Polanyi fan, you may say that today's newspaper headlines are endless variations on this theme: citizens have been hurt by the credit crunch, causing country x to implement policies y and z.
Being of the non-ideological sort, I can see how things can swing to the opposite extreme after a period of laissez-faire. An undoubted hero of the anti-globalization movement is none other than Venezuela's Hugo Chavez. Still, how can it be that a country blessed with abundant energy reserves finds itself in the midst of recurrent power outages? Venezuela provides a cautionary tale for those hankering for a worldwide Bolivarian Revolution. Proletarians are hurting:
Despite having some of the world's largest energy reserves, Venezuela is increasingly struggling to maintain basic electrical service, a growing challenge for leftist President Hugo Chavez. The OPEC nation has suffered three nationwide blackouts this year, and chronic power shortages have sparked protests from the western Andean highlands to San Felix, a city of mostly poor industrial workers in the sweltering south.
Shoddy electrical service is now one of Venezuelans' top concerns, according to a recent poll, and may be a factor in elections next month for governors and mayors in which Chavez allies are expected to lose key posts, in part on complaints of poor services. The problem suggests that Chavez, with his ambitious international alliances and promises to end capitalism, risks alienating supporters by failing to focus on basic issues like electricity, trash collection and law enforcement.
"With so much energy in Venezuela, how can we be without power?" asked Fernando Aponte, 49, whose slum neighborhood of Las Delicias in San Felix spent 15 days without electricity -- leading him to block a nearby avenue with burning tires in protest. Just next door, Carmen Fernandez, 82, who is blind and has a pacemaker, says she has trouble sleeping through sultry nights without even a fan to cool her.
Experts say Venezuela for years has skimped billions of dollars in electrical investments, leaving generation 20 percent below the level necessary for a stable power grid and increasing the risk of national outages. Officially Venezuela has a capacity of 22,500 megawatts for a population of 28 million people, but a sizeable proportion is not working, analysts say.
Neither a Randian nor a Chavista be, I say. Countries lurching from one ideological extreme to the other would be an unwelcome phenomenon. Cycling through Friedmanites and Bolivarians doesn't seem to to solve much, does it?
There are good reasons why you probably haven't heard of the Asia-Europe Meeting (ASEM). Aside from gaining limited attention from Asia specialists in the academic community [that'd be us], these conferences did not usually amount to much more than UN-esque talk shops. I do not need to say that times have changed; the 7th ASEM Summit in Beijing is proving to be a rather livelier affair. Having accumulated an almost unfathomable $1.9 trillion in reserves, China's margin of safety is no small beer. Also, it has caused Europeans and Asians to take notice.
Let us begin with the Europeans asking China to participate more fully in the upcoming US-sponsored meeting. Are the Europeans finally letting an LDC have full say in global economic governance? From Reuters:
The European Union wants China, with the world's biggest stash of currency reserves, to play a full part at a crisis summit that U.S. President George W. Bush is convening next month to help shape global financial reforms and tackle the economic imbalances at the root of the crisis.
French President Nicolas Sarkozy said he hoped the ASEM summit would agree on a joint position for the November 15 talks. "I have wanted this meeting," Sarkozy said referring to the Bush summit, "and I hope that we can come up with a common set of initiatives so that the same causes don't produce the same effects," Sarkozy told Hu ahead of the formal ASEM sessions.
German Chancellor Angela Merkel said China was receptive to taking part an international drive for new rules to avert a repeat of the present crisis. "There's support over here for the idea that we need order in financial markets and a financial market constitution with international character," Merkel, who had earlier met Hu, said. "I think China will make its contribution to the stabilization of the world economy," she told reporters.
More interestingly, other Asian economies are soliciting more guarantees of support from China. Although the region already has a system of currency swaps in place worth some $80 billion (we should call it Chiang Mai Initiative Plus or CMI+ to acknowledge the switch from bilateral swaps previously in place), many are now doubting if that amount will suffice given the magnitude of today's problems. The CFR's Brad Setser has highlighted how instrumental swap lines have been in keeping industrialized countries afloat. Further turmoil may mean that Asian countries will lean on them as well:
On Friday morning, the ASEAN group of Southeast Asian states agreed at talks with Japan, China and South Korea to upgrade a long-established $80 billion web of currency swap lines among central banks in the region. The purpose is to allow a country facing a foreign exchange crisis to rapidly call up financial firepower by swapping its currency for those of its neighbors, or for dollars.
The aim would be to sell the borrowed money in the foreign exchange market to stem pressure on the currency under attack and so avert a repeat of the market meltdown that plunged several Asian countries into deep recession a decade ago.
Asia has fared better during the latest bout of turbulence on global markets. ASEAN's leaders expressed confidence that the group's financial sector remained "solid and sound."
"Nevertheless, precautionary actions are needed to send a clear and unequivocal signal that ASEAN is resolute and better prepared than 10 years ago when the financial crisis hit the region in 1997," ASEAN said after its own pre-summit talks. ASEAN groups Cambodia, Malaysia, Indonesia, Singapore, Vietnam, Philippines, Laos, Thailand, Myanmar and Brunei.
Governments worry that banks throughout the region will come under pressure as global economic conditions worsen. South Korea, even though it has $240 billion in currency reserves, had to unveil a $130 billion bailout package for its banks on Sunday.
"Leaders at the meeting shared the need of stepping up regional cooperation to cope with the global financial crisis and to coordinate policies," South Korea's presidential office said after the talks with ASEAN that endorsed beefing up the swaps scheme.
For what it's worth, don't forget that China was reluctant to make a major financial commitment to Pakistan. Still, countries which were badly affected by the 1997 Asian financial crisis--Thailand and the Philippines--are unsurprisingly pushing hard for an expanded agreement at ASEM:
Thailand said on Wednesday it would propose that Asian countries expand a short-term liquidity support scheme to at least $150 billion at a meeting in Beijing this week. In May, East Asian finance ministers agreed to create $80 billion in currency swaps to replace existing arrangements of mainly bilateral swaps, called the Chiang Mai Initiative.
Olarn Chaipravat, a Thai deputy prime minister in charge of economics, told Reuters Thailand would propose "an implementation of the proposed multilateralisation and expansion of the short-term liquidity support scheme, or the Chiang Mai Initiative, to at least 150 billion U.S. dollar equivalents". He would also propose "the pooling of sovereign wealth funds to invest in long-term Asian equities and bonds ... to finance infrastructure projects across Asia up to 200 billion U.S. dollar equivalents".
Olarn said in an interview he would propose a pooling of reserves around the region to facilitate trade, investment and tourism during an expected recession in the West. "Last, and the most important, I would propose that Asian countries put up initially 10 percent of our combined foreign reserves, an initial down payment of 350 billion U.S. dollar equivalents," he said. It would be held in what he called Asian convertible currencies, he said, adding: "This will be the beginning of the Asian financial community." Southeast Asian leaders meet in Beijing this week to discuss measures to deal with the global financial crisis.
The Association of South East Asia Nations (ASEAN), along with China, Japan and South Korea, will have an opportunity to discuss ideas from various members as they gather for a two-day Asia-Europe summit opening on Friday. Last week, Philippine President Gloria Macapagal Arroyo announced a plan to set up a regional fund to help countries cope with the credit crisis. She said the World Bank had committed to initially provide $10 billion to a fund to buy toxic debt and recapitalise banks in the region hit by the crisis. The World Bank said it had not made such a commitment and other countries seemed taken aback.
The IMF is now in the negotiating stages with several countries affected by the credit crunch. The troubles of these countries have been discussed elsewhere on this blog. Anyway, the introduction to the recent IMF release goes like this:
The International Monetary Fund (IMF), which has announced its readiness to lend billions of dollars to support nations hit by fallout from the global financial turmoil, is holding talks with several countries about possible new lending programs.
"I have been on the phone with leaders in several capitals who have asked the Fund for assistance. We now have mission teams in some of these countries assessing their needs and, where asked to do, discussing programs that could be supported by an IMF loan," says IMF Managing Director Dominique Strauss-Kahn.
The IMF is currently discussing possible loan packages for Hungary, Iceland, Pakistan, and Ukraine. It is also in discussions with a number of other countries about possible financing needs, and is providing confidential policy advice to governments in emerging and developing economies on how to adapt to the current turmoil. It said on October 22 that it would also begin discussions with Belarus.
With the exception of mentioning Belarus, there's new here. So what do I mean by "a kinder, gentler IMF?" Use "IMF conditionality" as a search term and you will see that loan covenants prescribing austerity measures and the like have been accused of nearly everything from social instability to further impoverishing the already destitute. Given that Western countries have taken the opposite tack to their credit crunch woes by pump-priming their economies, it is of little surprise that the IMF is promising to take it easy on conditionalities this time around. It would be hypocrisy for the IMF to do otherwise and economic fashions do change. Besides, isn't un grande seducteur Dominique Strauss-Kahn a French Socialist Party member? The IMF release continues...
Strauss-Kahn says that although some policy conditions will still be attached to loans from the IMF, the conditions will be fewer and more targeted than in the past. Given that the IMF is a financial institution, its lending has to be accompanied with some policy conditions, he adds.
However, he told IMF staff recently that "conditionality has to be defined as what is needed to achieve the goals of the program... it should not attempt to fix the world." These measures must be directly related to achieving the goals of the program, he emphasized. "This is the way for us to be recognized by the membership as addressing the needs they have and not the agenda we have."
I surely hope so: "fewer and more targeted" do not necessarily mean "less onerous." Just how politically onerous these conditionalities are will determine the willingness of others to approach the IMF.
Laissez-faire reached full flower in Anglo-Saxon nations as Margaret Thatcher and Ronald Reagan came into office, providing fertile ground for libertarians and rational choice theorists alike. Accordingly, thinktanks espousing a minimal role for government--the "nightwatchman state" they call it--and a maximal role for market mechanisms gained favor in the UK and the US. In time, such models of political economy became more prominent in other countries, whether through imitation or pressure (via IMF and World Bank lending conditionalities.)
Nowadays, the troika of "liberalization," "privatization," and "deregulation" are no longer the mantras for change they once were in the Thatcher/Reagan eras. Whereas they used to be the rallying cry for unleashing capitalism's dynamism, they now symbolize its excesses. Obama, for one, styles himself as the candidate for change by promising to reverse this ideology. So it is no surprise that thinktanks which espouse such beliefs are waging a largely unsuccessful effort in the battle of ideas. Models of governance come in and out of fashion. Who can say if today's aspiring leaders will one day be looked with the same disdain as "Sunny Jim" Callaghan and Jimmy Carter were prior to being turfed from office by Baroness Thatcher and Ronald Reagan?
For now, however, let us inspect some conservative thinktank commentary in a world where Keynesian horses roam free once again. In some ways, it's like hawking leisure suits (or being John McCain)--not exactly in touch with today's fashions:
(1) Nigel Hawkins at the Adam Smith Institute believes that a wave of further British privatization is inevitable given the UK's strained finances. Auntie privatized? Heaven forbid:
Privatization - Reviving the Momentum calls for a new wave of privatizations, which could net the exchequer in excess of £20bn. Given the worsening state of the economy and the increasing tightness of the public finances, the report notes that such an inflow of funds would be very welcome. In addition to the revenues generated for the government, a new wave of privatizations would also deliver significant operational benefits. Previous privatizations have delivered a wide range of improvements, including increased investment, lower prices, greater choice and better service for customers – as well as underpinning billions of pounds worth of economic activity. The leading privatization candidates identified by the report include the Royal Mail, Channel 4, BBC Worldwide, Scottish Water, Northern Ireland Water, Glas Cymru, the National Air Traffic Control System, as well as government stakes in British Energy and the Nuclear industry.
(2) Back in America, Peter Wallison of the American Enterprise Institute (AEI) raps government-sponsored enterprises Fannie Mae and Freddie Mac for past excesses, while predicting worse is to come from government conservatorship:
Perhaps worst of all, the takeover of Fannie and Freddie by a government conservator does not end the problem. In fact, it might open a new and more costly era. In a statement to the House Financial Services Committee on September 25, James B. Lockhart III, director of the agency that serves as both regulator and conservator of Fannie and Freddie, insisted on meeting the affordable-housing goals required by HUD regulations: "The market turmoil of this year resulted in a tightening of underwriting criteria . . . thereby reducing the availability of traditionally goal-rich, high loan-to-value home-purchase loans. . . . I will expect each enterprise to develop and implement ambitious plans to support the borrowers and markets targeted by the goals."
If this is what a Republican administration says about the use to which Fannie and Freddie will be put in conservatorship, one can only imagine what a Democratic administration might do.
(3) The Heritage Foundation's James Gattuso increases the polemic factor by suggesting that, if anything else, the Bush administration did not go far enough down the road of deregulation. Had it done so, the current situation would have been mitigated:
In the wake of the financial crisis gripping the nation, it is tempting to blame "deregulation" for triggering the problem. After all, if the meltdown were caused by the ill-advised elimination of necessary rules, the answer would be easy: Restore those rules.
But that storyline is simply not true. Not only was there was little deregulation of financial services during the Bush years, but most of the regulatory reforms achieved in earlier years mitigated, rather than contributed to, the crisis.
This, of course, does not mean that no regulatory changes should be considered. In the wake of the current crisis, debate over the scope and method of regulation in financial markets is inevitable and, in fact, necessary. But this cannot be a debate over returning to a regulatory Nirvana that never existed. Any new regulatory system would be just that--complete with all the uncertainty and prospects for unintended consequences that define such a system. Policymakers must not pretend otherwise.
(4) Finally, one of rational choice's architects, William Niskanen, offers libertarians words of comfort at the Cato Institute:
There are three precedents for blank-check authorizations on this scale, and none is reassuring. One is the Gulf of Tonkin Resolution that authorized the Vietnam War. The next allowed Richard Nixon to impose wage and price controls and a 10% surcharge on imports. The third authorized the Iraq War. Our political system cannot maintain a balance of power between the Administration and Congress on such important matters when the authorizing laws are so unbalanced.
My first piece of advice to Congress: Don't be rushed. Very few decisions of any importance need to be made within days, even in an election year. In any election year two-thirds of incumbent senators are not running for reelection. They could provide a valuable forum for reviewing any important proposal from the Administration, while their colleagues and all the members of the House run to keep their jobs.
My second: Ask a bipartisan group of respected former government officials who have faced similar problems before to review the conditions that led to an Administration's proposal, evaluate the proposal, and consider and evaluate feasible alternatives to it. For the recent financial crisis I would have recommended a panel that included Alan Greenspan, Paul Volcker, William Isaacs and Lawrence Summers.
And what do I tell fellow libertarians? Stand your ground. You do not win elections, but you influence them. Work across party lines if you want to have any effect. The number of voters who have generally libertarian political preferences is larger than the vote difference between the major parties. On important issues libertarians must be among the best informed and be willing to support the position of whichever major party is most consistent with their beliefs.
I certainly don't consider myself a libertarian, but I too cringe at some of the more extreme measures being pushed threatening centralization of unwarranted power in the hands of government, unfashionable as it is to say. Then again, the degree to which "market fundamentalism" has helped bring about the current mess is an open question.
Being the world's largest retailer, Wal-Mart poses an outsized target for activists on traditional corporate social responsibility (CSR) fronts: labor and the environment. With regard to labor, Wal-Mart's strong preference for non-unionized labor is one of the major grievances alongside allegations of hiring undocumented migrants and sex discrimination. Wal-Mart fighting the Chinese government's insistence to allow union membership--albeit a state-sponsored, highly non-activist sort--is well-known as it creates a precedent others may follow elsewhere. With regard to the environment, Wal Mart's supply chain literally spans the globe. Hence, its supplier selection, product packaging and distribution have a significant effect on the environment. Does Wal-Mart's famous stinginess encourage a "race to the bottom" among its suppliers?
A few months ago, I discussed Wal-Mart's efforts to take on green challenges with regard to its China operations. Wal-Mart has brought the issue to the forefront again as of late; for example with CEO Lee Scott discussing it on the company's investor relations webpage. What's driving Wal-Mart's recent push on these issues? Let's consider the following -
Wal-Mart wants to create a "halo effect" of being green to attract investors;
Being heavily invested in China, Wal-Mart wants to distance itself from various product safety scares ranging from defective toys to melamine-tained milk products;
The company is responding to its plentiful critics to shed its image as a CSR villain
Efficiency gains from going green such as using less energy and packaging should benefit the firm's bottom line;
Wal-Mart wants to gain the most benefits from the current slowdown as consumers tighten their belts by portraying itself as a consciencentious choice.
All these probably hold to a certain extent. What we will be better placed to judge in the near future is if Wal-Mart has made significant changes to its business practices. Although there will always be some who are dead set against the very idea of Wal-Mart, more pragmatic sorts should welcome the possibility of Wal-Mart raising its CSR consciousness. It certainly appears that Wal-Mart is placing a large burden on its suppliers in meeting these standards. Given that Wal-Mart's Chinese partners are already having difficulty coping with a global slowdown--witness the Chinese government reintroducing export incentives--it will be incumbent upon Wal-Mart to demonstrate that its commitments are becoming longer term. That is, if Wal-Mart wants Chinese firms to adopt green practices, then it should make assurances that it's going to do business with them beyond the near future.
Wal-Mart, the world's biggest retailer, yesterday told its Chinese suppliers to meet strict environmental and social standards or risk losing its business. "Meeting social and environmental standards is not optional," Lee Scott, Wal-Mart's chief executive, told a gathering of more than 1,000 suppliers in Beijing. "A company that cheats on overtime and on the age of its labour, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honour its contracts - will ultimately cheat on the quality of its products."
Wal-Mart has been pursuing a drive to improve its reputation on environmental and social issues over the past three years, in response to growing criticism in the US over issues including labour conditions in its supplier factories.
The directive, which will be codified in a Wal-Mart suppliers' agreement, comes at a difficult time for China-based manufacturers, caught between rising production costs and the effect of the global financial crisis on consumer demand in their largest overseas markets.
The requirements include a clear demonstration of compliance with Chinese environmental laws, a 20 per cent improvement in energy efficiency at the company's 200 largest China suppliers, and disclosure of the names and addresses of every factory involved in the production process. The company will require a 25 per cent rise in the efficiency of energy-intensive products, such as flat-screen TVs, by 2011.
Mr Scott said the retailer also wanted to move away from the short-term focus that has characterised its relationships with Asian suppliers. "We have traditionally purchased in a very transactional manner," said Mr Scott. "We need deeper, longer-term relationships with suppliers so it is not based on the last penny."
Some suppliers grumbled about the conditions spelled out by Wal-Mart, which has a reputation for driving hard bargains. It is estimated that each year the company sells about $30bn-worth of China-made goods, giving it enormous negotiating power over suppliers. "It's going to make things a lot worse," said one manufacturer at the meeting, who asked not to be identified. Others were more relaxed. "If they don't like it, they are not going to be doing business with Wal-Mart," said one US-based Wal-Mart supplier who sources components from China.
Also see the Environmental Defense Fund (EDF) describing its participation in Wal-Mart's China effort.
Western fears about Russia may increase given the trio of stories below concerning (1) the use of SWF money to buy into local companies, (2) attempts to create a gas cartel, and (3) plans to establish an oil reserve. Fears of communism have long since given way to Russia deploying its abundant natural resources to accomplish geopolitical objectives. As a large producer of energy, being able to influence global prices commanded by such commodities would certainly be a welcome outcome for Russia. It wants to be enabled, not hobbled, by oil and gas.
(1) Russia's SWF, the National Wealth Fund, is now allowed to put money into the debt and equity of Russian firms. As you'd expect from a TASS news agency report, there is little mention of propping up the country's bourses given that foreign investors are fleeing the country in droves. If you think like me, it's Russia merely asserting more ownership over the commanding heights less constained by Western pressures:
Russian Prime Minister Vladimir Putin has signed a ruling to allow the government to invest the National Wealth Fund on the Russian stock market, the government's press service reported Tuesday. Under the ruling, the National Wealth Fund, which accumulates a portion of the government's oil and gas tax revenues, may be invested in Russian companies' stocks and bonds, as well as in unit investment funds. The Russian government plans to deposit 175 billion rubles [around $6.7B] from the National Wealth Fund with state-owned Vnesheconombank, which will invest that money in domestic stocks, according to earlier reports.
(2) Plans for a natural gas cartel have long been mooted by countries such as Venezuela. As per an earlier post on Opegasur, the problems in establishing such a cartel are logistical: unlike oil tankers which can easily be rerouted, natural gas pipelines take time to build and are not easily rerouted. Although liquified natural gas (LNG) would make it easier to surmount such logistical difficulties, it's not entirely sure that the countries proposing this effort would be able to make a large-scale switch to LNG. Is it grandstanding, vaporware, or both? From the Associated Press:
Russia, Iran and Qatar made the first serious moves Tuesday toward forming an OPEC-style cartel on natural gas, raising concerns that Moscow could boost its influence over energy markets spanning from Europe to South Asia. Such an alliance would have little direct impact on the United States, which imports virtually no natural gas from Russia or the other nations.
But Washington and Western allies worry that closer strategic ties between Russia and Iran could hinder efforts to isolate Tehran over its nuclear ambitions...In Europe — which counts on Russia for nearly half of its natural gas imports — any cartel controlled by Moscow poses a threat to supply and pricing. Russia, which most recently came into confrontation with the West over its five-day war with Georgia in August, has been accused of using its hold on energy supplies to bully its neighbors, particularly Ukraine...
The 27-nation European Union expressed strong opposition to any natural gas cartel Tuesday, with an EU spokesman, Ferran Tarradellas Espuny, saying: "The European Commission feels that energy supplies have to be sold in a free market."
Together Russia, Qatar and Iran account for nearly a third of world natural gas exports — the vast majority supplied by Russia — according to U.S. government statistics. The three hold some 60 percent of world gas reserves, according to Russia's state-controlled energy company Gazprom...
A gas cartel could extend [Russia and Iran's] reach in energy and politics, particularly if oil prices bounce back to the highs seen earlier this year, prompting renewed interest in cleaner-burning natural gas and other alternative fuels. Tuesday's gathering in Tehran appeared to be the most significant step toward the formation of such a group since Iran's supreme leader, Ayatollah Ali Khamenei, first raised the idea in January 2007.
"Big decisions were made," said Iranian Oil Minister Gholam Hossein Nozari. His Qatari counterpart, Abdulla Bin Hamad al-Attiya, said at least two more meetings were needed to finalize an accord, according to the Iranian Oil Ministry's Web site. No timeframe was given.
Calling the grouping the "big gas troika," the chief executive of Russia's state-controlled energy company Gazprom, Alexei Miller, said it would meet three or four times a year. "We are consolidating the largest gas reserves in the world, the general strategic interests and — what is very important — the high potential for cooperation on three-party projects," Miller said...
Experts say a natural gas cartel would not have the same influence on prices as OPEC has on oil since natural gas is not subject to the same severe fluctuations. "There's always some worry when these guys get together that they'll try to replicate OPEC, but they know that's not doable," said Robert Ebel, senior adviser to the Energy and National Security Project at the Center for Strategic and International Studies in Washington. "They can try to get more control over gas, but it's not OPEC."
That's because gas, unlike oil, is traded on much longer-term contracts, of as much as 25 years. "Gas is a regional commodity and oil is an international commodity," Ebel said. "If you want to buy a tanker of crude, you can buy one at today's prices. When you want to build a natural gas pipeline, you have to have two things: enough gas to justify building a pipeline that will operate for 25 years, and ... customers that will agree to buy that gas at a range of prices for 25 years..."
Liquefied natural gas — a rapidly growing segment of the market — could be traded as a commodity similar to oil at some point in the future, and the move by Russia, Iran and Qatar appears to anticipate that, said Konstantin Batunin, an analyst with Moscow's Alfa Bank.
(3) In light of crude oil falling below $70 a barrel, Russia is now contemplating the creation of an oil reserve to influence oil prices in coordination with OPEC. I am certain that painful memories of the aftermath of the Asian financial crisis when oil was temporarily driven below $10 a barrel are partly behind this idea. Eventually, low energy prices made it seek IMF support. With another global slowdown in progress, Russia is wary of a repeat experience. From Reuters:
Russia may create an oil reserve to influence global prices, the country's top energy official said on Wednesday, as OPEC's Secretary General prepared for his first ever meeting with a Russian president. The resurrection of a decade-old idea of inventories comes as another sign of Russia's growing ties with OPEC, which has unnerved global consumers already worried by talks between Russia, Iran and Qatar to create an OPEC-style gas cartel.
"The Ministry of Energy is considering creating an oil production reserve, which would allow it to work more efficiently with prices on the market," said Russian Deputy Prime Minister Igor Sechin, who oversees the energy sector. Asked how big the reserve should be, Sechin told reporters: "Enough to reach efficient pricing parameters" [efficient for whom?] Russia is the biggest oil producer outside OPEC and the world's second-largest exporter after Saudi Arabia.
OPEC Secretary General Abdullah al-Badri, who arrived in Moscow on Tuesday, said he would meet Russian President Dmitry Medvedev to discuss the exchange of market data and would not raise the issue of oil production cuts. "I will meet the president this afternoon. I will not ask Russia for a cut ... But I will ask for data on markets," Badri said ahead of the first ever meeting between OPEC and the head of the Russian state.
Badri said he liked the reserve idea: "Russian reserves can help global oil shortages ... This idea is good. It is a technical matter. We will have to discuss it." Other top OPEC officials have this week called on Russia and other non-member states to join OPEC in cutting production. The organization will hold an extraordinary meeting on Friday and is widely expected to reduce its deliveries to global markets. Moscow agreed to reduce exports several times earlier this decade in tandem with OPEC, but market watchers then said the pledge never materialized as private companies raised shipments instead.
Russia has long toyed with the idea of an oil reserve, which could allow it to become a swing producer. But the expensive and logistically difficult plan was never implemented as the government and private companies failed to reach a compromise.
The current oil production scheme in Russia does not allow the country to change its flows significantly. The head of the International Energy Agency (IEA), attending the same industry conference as Badri, said he was worried by Russia's production outlook as the country heads this year for its first annual output decline in a decade.
"We see worrying signs in some producing countries, including Russia, in the ability to invest enough to meet demand," IEA Executive Director Nobuo Tanaka said. "We see Russian supply growth slowing, with all projects declining in production over the next decade. Further government incentives would be welcome to increase production," he said.
Russian oil firms have called on the government to ease taxes and slash export duties in November, one month earlier than planned, because of a steep price decline this month.
I was on a KLM flight to Birmingham once when the stewardess offered me and the Englishman next to me newspapers. As I was in the seat closer to the aisle, I had first crack at the last copy of the Financial Times. Instead of taking the remaining English language newspaper, the International Herald Tribune, he just smirked and said, "American--no thanks." This chap displayed a common British disdain for things American. Why this is so I cannot tell. In addition to a shared language, the British are rather similar to Americans in many not-so-desirable ways of consumerism run amok. Just as Americans are supposedly the fattest people on Earth, the Brits are the fattest people in Europe. Just as American household debt is over 100% of GDP, ditto in the UK.
A few days ago, I had an article commenting on how traditional American values of thrift and sacrifice have gradually been replaced by a debt-loving culture where financial planning is some sort of running gag. In contrast to my past co-passenger, I find much virtue in reading the IHT. Recently, it ran a similar feature suggesting traditional British virtues are becoming paramount once again of austerity and reserve. Much has been made of the emergence of "chav culture": vulgar and aggressive behavior infused with a dose of Stateside bling. Like Americans, Britons are becoming more acquainted with consumerism's limits--i.e., "foreclosure" and "bankruptcy" as the grips of recession take hold.
Unless there's more to the neoliberal model than loading up on ginormous boatloads of debt, then you can count me out. Excesses are excesses precisely because they need to be worked off. With the UK in the grips of a recession, that time is now:
The expensive stores along Bond Street and Sloane Street have fallen eerily quiet. So have the cheaper ones scattered all over town, the Monsoons and the Topshops and the Next outlets - ubiquitous staples of the insatiable British shopping diet. Britons, like everyone else, are coming down from their huge spending spree.
But mass consumer culture is relatively recent here. Britain's modern identity was forged in part by postwar values like thrift, prudence and living within your means. Even as alarm courses through the country like an electric current, there is a parallel thought in the air.
It is this: Perhaps the downturn, however difficult, will usher in a return to that elusive concept, traditional British values. Perhaps the last 15 years or so will be considered a sort of madness, an anomaly, a strange dream. Perhaps people will lower their widely inflated expectations and stop their habit of wanting things - whatever they are almost does not matter - that are flashier, bigger and better.
"I think there is a mood of austerity," Vince Cable, finance spokesman for the Liberal Democrat party, said in a recent speech, talking about society as a whole as well as the banking system. "A reaction against greed, excess, waste, tax cheating and selfish, self-indulgent behavior."
Already, people are losing their jobs and houses, and businesses are failing across Britain; the downturn is going to be very bad. But what is striking about the past era is that much of the incredible boom in consumer spending was stimulated by people who, even in good times, could not afford the things they were buying.
Buoyed by easy credit and inflated property prices, the British public spent itself into debt, a total of £1.44 trillion, or $2.56 trillion, of it. Britons now owe, on average, 180 percent of their disposable income. One-third of consumer debt in all of Europe is held by people in Britain, said Chris Tapp, deputy director of Credit Action, which counsels people about how to handle debt.
Audrey Hurren, a retired secretary of 65 who was waiting for the subway in central London the other day, put it a different way. "I think it wouldn't do any harm at all for some of the younger generation to be less greedy," she said. "It's not a very nice thing to say, but maybe they could behave a little more sensibly."
Hurren was raised just after World War II believing that if you couldn't afford it, you didn't buy it. By contrast, she said, her granddaughters have more than she ever dreamed of, and are still dissatisfied. "They don't appreciate anything - it's easy come, easy go," she said. "They get a mobile phone; if they don't like it, they throw it away and get a new one."
In an interview, Tapp said that different generations were likely to respond to the downturn, which is now being called a recession in Britain, in different ways. People in their 30s and younger, too young to remember the last recession in the early 1990s, have grown up in a world "where credit has always been cheap and easy and available," he said. For them, there is no precedent for frugality.
The austerity of the late 1940s and early 1950s, and the privations of the 1970s - when electricity was briefly rationed and the country put on a three-day work week to save fuel - are stories to read about in books. "The idea of saving up for what you buy - that's what you did when there weren't any credit cards," Tapp said.
In the boom years, the so-called soft sections of London newspapers grew fat on articles about ever more expensive goods and services geared toward the conspicuously consuming masses. But suddenly, even the papers are talking as if they have woken up with a jolt after a long drug-and-sugar binge.
"I am happy to observe that the decades of vulgar excess are finally over," the columnist India Knight wrote in The Times of London. "There is a strong collective sense of us all coming back down to earth. It's like a huge national reality check and, unwelcome as it may be, there is a possibility that it will result in us straightening out our priorities."
The left-leaning Guardian, whose detractors lampoon it as the kind of newspaper that encourages you to "knit your own lunch," has begun printing guides to surviving in the new age of austerity: cultivating an urban garden, cooking with leftovers, using less energy.
The Times recently featured an article about how to make old clothes newly fashionable by, for instance, cutting the sleeves off coats (and wearing the coats over long-sleeved sweaters). Another article, in the Sunday Times, offered tips on "Fifty Ways to be a Recessionista."
The author David Kynaston, whose book "Austerity Britain" discusses the privations of the post-World War II era, said that until the mid-1980s - the Thatcher era - Britain was "careful, cautious, understated, naturally socially conservative."
But, he added in an interview, "In the 1980s, there was essentially a psychic shift in how to use money. What went out the window was the old puritan self-consciousness, even a sense of guilt, about money."
After the recovery following the recession in the early 1990s, everything changed even faster. Spending was glorified; so was borrowing. Banks began offering 125 percent mortgages. Credit card debt soared. In a recent book, the psychiatrist Oliver James complained that the country was suffering from "affluenza."
People got used to more expensive things. Organic food was presented as a necessity for good health; supermarkets emphasized "luxury" ranges of foods. Britons abandoned traditional seashore vacations and began flying to Europe. Upmarket sandwich shops appeared across London, replacing the old, humble ones. The need for new gadgets at home soared.
All of that feels expendable now, Allison Burton, a 31-year-old hairdresser, said in an interview. She mentioned a friend whose husband had just lost his job. "She wrote down what their outgoings were and managed to save herself a grand a month," Burton said, by doing things like switching to a less-expensive cable-channel package.
Stores are now marketing themselves on the basis of cost rather than quality or exclusivity. Supermarkets have unveiled new no-frills foods and pledged to match their rivals' low prices. Tesco has refashioned itself as "Britain's biggest discounter."
Lindie Parry, 25, a transportation project manager walking down Victoria Street with her husband, James Bain, 40, said she had begun shopping at less-expensive supermarkets. Bain said that people were remembering that they could often get free coffee at work - not as good as Starbucks, but coffee nonetheless - and that bringing lunch from home was cheaper than buying it in a shop. "It was great while it lasted," Parry said of the boom time, "but nothing lasts forever."
There's a set of photos on Flickr cataloging a mock memorial outside the Bank of England - "In Loving Memory of the Boom Economy." Blatcher, we hardly knew ye.
You don't need to tell me that it's hard to know what to invest in nowadays. It must be doubly difficult for sovereign wealth funds (SWFs) tasked with getting returns above those offered by traditional reserve assets like the sovereign debt of industrialized countries. Just ask China's CIC. Today, however, we feature another sovereign wealth fund coming under criticism. Unlike China where debate about state decisions are muzzled once they reach a certain level, South Korea is more democratic in nature--to a point. SWF Radar pointed me in the direction of this Korea Timesarticle noting that South Korea's SWF, the Korea Investment Corporation (KIC), is now being criticized by that country's lawmakers for investing in Merrill Lynch. If you will recall, KIC chipped in $2 billion early this year to help keep the bank afloat.
Many things have happened since then. Merrill Lynch has since been acquired by Bank of America. More importantly, the value of KIC's equity holdings have kept dropping along with the global sell-off in equities. Especially now that Korea is trying to put out fire after fire at home, it's galling that its SWF is coming a cropper:
Lawmakers battered the Korea Investment Corporation (KIC) for its huge investment losses at a National Assembly audit, Tuesday. One of them said KIC has no reason to exist as trade account turned into a deficit. Rep. Kim Hyo-seuk of the main opposition Democratic Party (DP) criticized KIC which lost 850 billion won [about $630M at current exchange rates] in its investment in Merrill Lynch. ``It recorded 32.5 percent investment loss in nine months,'' the lawmaker added. He said KIC should be totally banned from investing in stocks.
``The KIC fund is composed of the foreign exchange reserves of the Ministry of Strategy and Finance and the Bank of Korea. It isn't like sovereign funds of other countries. Stability should be its first priority,'' the lawmaker said. He said KIC shouldn't use foreign exchange reserves for stock investments.
Rep. Kang Sung-jong, also of the DP, pointed out that Merrill Lynch was KIC's first direct investment since its launch. He compared the $2 billion investment to picking a fruit that is just about to rot. He also criticized that KIC does 62 percent of its investment through an outside management firm. ``KIC has 69 people, including executives, and 36 among them are investment professionals. However, these professionals have made only one investment so far, Merrill Lynch."
Rep. Na Seong-lin of the governing Grand National Party said KIC has no reason to exist. ``KIC was set up based on the overly positive outlook on foreign exchange reserves and the wrong premise that the trade account surplus will continue,'' the lawmaker said. ``Now that it has been proved that the premises can't continue, KIC seems to have lost the reasons for its existence.''
The lawmaker said sovereign wealth funds are generally set up by exporters of oil or raw materials, or with a government account surplus. ``Once the national pension starts payment en masse, government finance is expected to be in deficit. The current account deficit has also been continuing since November 2007.'' He also criticized KIC for making too much indirect investment as it increases the asset management commission burden on the central bank and the finance ministry.
I keep coming across an Associated Pressreport that states outgoing US President Bush is set to host an "international aid summit" today. Visiting the White House page listing the summit's schedule of events, it turns out that the AP mistitled the article. You would invite a lot of criticism if you viewed development as synonymous with aid; indeed, there are those like William Easterly who say that aid detracts from rather than bolsters development. Thankfully, this summit is not focused on gathering more aid as Bush himself makes clear.
Moreover, it is not apparent to me why Bush would like to emphasize aid in relation to the other topics to be covered at the summit alike HIV/AIDS and good governance. To say the US is falling short on the aid commitments established at the Gleneagles summit of 2005 would be an understatement. While the US is indeed the world's largest donor, its contributions as a percentage of GDP are dead last among OECD development assistance committee (DAC) members.
Ah well, it's always good to hear a counterpoint, so here's the White House blurb on today's events. Unsurprisingly, emphasis is being placed on demonstrating results (which places the burden of proof on recipients) instead of on meeting aid targets (which places the burden of proof on donors):
"For decades, the success of development aid was measured only in the resources spent, not the results achieved. Yet, pouring money into a failed status quo does little to help the poor, and can actually delay the progress of reform. We must accept a higher, more difficult, more promising call. Developed nations have a duty not only to share our wealth, but also to encourage sources that produce wealth: economic freedom, political liberty, the rule of law and human rights."
– President George W. Bush, 3/22/02
On October 21, President George W. Bush will deliver remarks at the White House Summit on International Development in Washington, D.C. Attended by Secretary of State Condoleezza Rice, Liberian President Ellen Johnson Sirleaf, musician and activist Bob Geldof, National Security Advisor Stephen Hadley, and other public and private-sector leaders, the Summit will focus on the Administration's core principles that have transformed the U.S. approach to international development by linking assistance with results. This approach is producing historic, life-saving results for millions around the globe.
The French are famed for government poking its nose in nearly every aspect of economic life; dirigisme, they call it. France's current status as the rotating head of the EU at a time of international turmoil seems to have awakened two of the country's recurrent ambitions (let's set aside those of DSK for the moment): the creation of "national champions" to export a French brand of business and to further its interests in global economic governance. Let us go through some of these efforts, though keep in mind that some seem far-fetched:
(1) The troika of Sarkozy, Bush, and EC President Jose Manuel Barroso have proposed a series of meetings to fashion a revised global financial order. These fellows met at Camp David recently to set the groundwork for this effort. Together with Barroso, Sarkozy is pressing an agenda that may test the limits of American willingness to abrogate what's left of the neoliberal order. From Bloomberg:
Sarkozy and Barraso are pressing Bush for a G8 agenda that includes stiffer regulation and supervision for cross-border banks, a global ``early warning'' system and an overhaul of the International Monetary Fund. Talks may also encompass tougher regulations on hedge funds, new rules for credit-rating companies, limits on executive pay and changing the treatment of tax havens such as the Cayman Islands and Monaco.
(2) Eariler on, I mentioned that European carmakers were petitioning EU countries to see them through these times of trouble via concessional loans and the like. To no one's surprise, France (and to a lesser extent Germany) have been the quickest to respond with pledges of support:
German and French carmakers, which have asked the European Commission for €40bn ($53bn) in cheap loans, are eligible to tap their governments’ banking rescue plans, according to government officials. Both the German and French finance ministries said on Monday that the financing arms of carmakers could use the state guarantees for new lending of up to €400bn and €320bn respectively.
“Car banks can definitely participate in the scheme,” said the German ministry. A French official said: “If you are a bank specialised in providing credit for the purchase of cars you need access to the wholesale markets like any other bank.”
The financing arms account for more than 15 per cent of operating profits at the European carmakers, according to analysts at Morgan Stanley, and car manufacturers have a large short-term refinancing need because of the credit they offer their customers.
(3) I suppose it's nothing special as almost every other OECD country has done so, but the French are also providing capital to (naturellement) their largest banks:
The shares of France’s main banks soared on Tuesday after the government said it would inject €10.5bn ($14bn) into the six largest players in an effort to shore up their balance sheets and ensure they continued to provide credit to consumers and businesses. The move was indispensable if banks were to be “in a position to properly finance the economy”, said Christine Lagarde, finance minister, on Monday night.
The capital will come in the form of subordinated loans that are repayable after other debts have been met, do not dilute existing shareholders and do not require a change in dividend policy. Nevertheless, subordinated debt can nonetheless be used to increase the banks’ tier one capital ratios, a main measure of balance sheet strength. The loans will be provided at base rate plus 400 basis points...
The Bank of France, which also acts as the country’s banking regulator, is expected to raise from 25 per cent to 35 per cent the proportion of tier one capital than can be a hybrid of equity and debt instruments. Officials in Paris insisted the state was providing the loans not because the banks in question were in difficulty but because the government wanted to ensure that they were able to continue to provide credit for households and companies.
(4) And last but not least is--I kid you not--Sarkozy proposing that France set up its own sovereign wealth fund (SWF)! Is it just me or does France not even run a current account surplus that would enable it to build up the reserves its putative SWF would draw from? Neither blessed with abundant natural resources nor windfall-generating export industries, it is beyond me where France will get funding. France hasn't run a current account surplus since 2004, and those that it did run before were hardly in the Gulf oiler/Asian exporter league.
Speaking of dirigisme, things get even more jingoistic. Sarkozy suggests shares in European companies should be bought at cut-prices to ensure that their ownership doesn't fall into the hands of...those dratted furriners. It has always boggled me how France wants to punch above its weight in international diplomacy yet adopts a beggar-thy-neighbor attitude at heart. From agricultural subsidies to yoghurt protectionism--you name it. Perhaps it's better to just get used to this sort of thing as the global credit crunch worsens. "We are all French national champions now." From the Associated Press:
French President Nicolas Sarkozy suggested Tuesday that European nations should set up their own sovereign wealth funds to prevent European companies falling into foreign hands as share prices plummet.
"I don't want European citizens to wake up in several months and find European companies belonging to non-European capital, which bought at the share price's lowest point," he told the European Parliament.
"All of us here should think about the opportunity to set up sovereign wealth funds in each of our countries," Sarkozy added. "And maybe these national sovereign wealth funds could eventually coordinate to form a business response to the crisis."
Sarkozy is suggesting that state funds act as political investors to head off foreign purchases of European companies — the latest sign of governments are considering greater state intervention in the face of the current financial crisis.
UPDATE: Unsurprisingly, the WSJ op-ed section takes a dim view of Sarkozy's proposal, calling it a "sovereign wealth dud."
I am one of those who thought that the reserve accumulation of LDCs in recent years has been a huge opportunity cost. If nothing else, the current crisis is making me reassess that view as LDCs are being whacked hard by the credit crunch. Nobody is getting away scotch-free this time around. In addition to what South Korea has spent propping up its financial sector, it now has chipped in another $3.8 billion to safeguard its construction sector. With regard to South Korea, it already boggles me that we're asking if its $235B in reserves (6th largest in the world) are "enough." What more can I say about Russia, then, with its $530B stash (3rd largest in the world)? In less than a quarter, it has already gone through a tenth of its reserves because of forex intervention to stabilize the ruble and measures to prop up an ailing banking system. Like with Mexico, Russia fears its reserve burn rate is unsustainable even given its humongous size:
Russia must use caution in deploying its foreign exchange reserves to battle the effects of the global economic crisis, after spending nearly a tenth of its total in two months, Finance Minister said on Tuesday.
The reserves, the world's third largest, are now at $530.6 billion, down $66.9 billion since early August. The rating agencies have said Russia's reserves are a key factor for the country's investment grade rating,
The call on the cash pile is rising because the country has to support its currency, fund high budget social spending and finance a $210 billion financial system rescue plan, a challenging task at a time of declining oil prices.
"The gold and forex reserves have fallen by $50 billion," Finance Minister Alexei Kudrin told fellow finance ministers from former Soviet states. "We need to be careful when we use this stabilizing influence. Gold and forex reserves allow us to guarantee the currency rate stability," he added. Reserves have fallen mostly because of heavy interventions by the central bank over the past months. The regulator has managed to keep the currency stable versus the dollar/euro basket at around 30.40.
But as ordinary Russians track their savings through the dollar rate officials have to intervene almost daily to persuade the population that the rouble will not weaken. "No rouble devaluation is planned," Kudrin's deputy Sergei Shatalov told reporters in the Armenian capital of Yerevan, where he was traveling as part of President Dmitry Medvedev's delegation.
As the dollar continued its rally versus the euro on global markets, its rate versus the rouble rose to the highest level since February 2007 of 26.5 while exchanges rates on the streets were as high as 28. Traders said, however, they haven't seen signs of central bank's interventions in the past two days.
The reserves are poised to fall by a total of $74 billion in the next weeks. Russia has earmarked $50 billion to help its companies refinance foreign loans, another $6.7 billion to buy local stocks and $17.3 billion in subordinated loans for the country's largest banks.
The money will mainly flow via state agent, Development Bank, known in Russian as VEB, whose head said on Tuesday he had already received $97 billion in refinancing applications. Russian companies have borrowed aggressively abroad to fund growth and acquisitions in the past years and now struggle to refinance loans as capital markets are shut.
"Banks have applied for twice as much as companies -- $64 billion from the banks and $33 billion from companies," Vladimir Dmitriyev told reporters adding that the first 10 applications would be cleared in the near future. He also said the bank may start investing state funds in the stock market this week.
Kudrin said the Finance Ministry will withdraw from refinancing banks, leaving that role to the central bank's new system of collateral free loan auctions, which began on Monday.
As an aside for my fellow migration watchers, the Reuters article concludes with Russia warning that its slowdown is going to dent the earnings of migrant workers of those from the CIS. It is not commonly known that Russia is the world's second largest migration destination after the US, although (I hope) IPE Zone readers are better informed than most:
[Kudrin] also told finance chiefs of the Commonwealth of Independent States (CIS), a loose grouping of ex-Soviet republics, that they would be affected by a slowdown in Russia's construction industry, which employs migrants from all over the region. "The industry is overheated and will suffer a decline in demand and many who only just started their projects feel it already," Kudrin said.
Accountants have long been stereotyped as dull, suit-clad bean counters. Despite revelations that pretty wild accounting shenanigans contributed to the downfalls of Enron, WorldCom, and Parmalat, the profession hasn't exactly shed its dowdy image. For what it's worth, Playboy's feature during the time was the "Women of Enron" and not the "Women of Arthur Andersen" despite both firms meeting the Great Auditor in the Sky. Fast-forward a couple of years and today's subprime debacle presents another opportunity for accountants to gain some real street cred. Heaven knows off-balance sheet financing was not killed off by Enronitis.
Today's controversies concern the valuation of assets on bank's balance sheets, especially those related to real estate. Bank write-downs around the world already amount to half a trillion dollars and counting. Many banks allege that mark-to-market rules which compel them to value assets according to what they can be sold for on the open market (hence the term "mark-to-market") are worsening their situation. Extremely bearish sentiment is causing these assets to be unfairly undervalued, or so they say. Thus, many banks are pressuring their governments to relax rules pertaining to mark-to-market valuation.
Like most everything else, there is a political economy of accounting. Financial industry lobbying has been behind the European Commission asking the International Accounting Standards Board (IASB) to give in a little on what assets need to be marked to market. The EC has applied pressure on the IASB in the basic form of "well, if you don't give in a little, then we'll create an accounting standards body of our own." Something which has long been advocated is unification of accounting standards worldwide to reduce opportunities for regulatory arbitrage, or that financial institutions would prefer to set up their headquarters in a place where regulations are not so stringent. Doing so would boost paper earnings figures ("the bottom line") and perhaps allow a more gung-ho attitude towards risk.
American politicians have mooted an easing of such rules, although it hasn't gone as far in lobbying terms as the Europeans have now gone to implement these as the Wall Street Journalnotes below in allowing some reclassifying of securities to evade having to realistically value certain assets. You may initially think that reducing the amount of write-downs would help European banks. However, it is entirely possible that this accounting sleight of hand will mean that these impaired securities will be kept on bank's balance sheets for a longer period of time, thus prolonging the problem. Resorting to "mark-to-make believe" is not a novel solution during times of crises related to popping asset bubbles, as Kirkegaard and Posen of the Peterson Institute (nee IIE) suggest:
Allowing losses to be covered up will only prolong the credit-crunch, as it lets banks and other companies deny and hide their problems. This is precisely what kept Japan in crisis throughout the 1990s, and what led to the US Savings and Loan crisis in the mid-1980s. In both of these cases and others, removing discipline by regulatory forbearance—having regulators suspend the market-based criteria in hopes the market will turn around—led to accumulation of more bad assets and continuing decline in asset values.
Furthermore, should we really believe that there will ever again be a liquid market, let alone higher prices, for many of the mortgage-backed securities that are at the heart of this crisis absent government intervention to restructure these securities? That banks gaining a ‘virtual capital injection' by a redefinition of their losses will suddenly start to buy more of these assets rather than all selling them? That others will buy them at inflated prices where they have not at current discounts?
The problem is not just that US housing prices have fallen, which should have been priced in, but that the risk attributes, opacity, and legal complications inherent in these securities make them illiquid and toxic. Suspending mark-to-market does not change that reality.
To say I am skeptical of the EC's move is putting it mildly. Nevertheless, it appears this political football will be played and played hard with respect to mark-to-market. If it's any consolation, I seriously doubt that Playboy will soon come out with the "Girls of IASB [!]:
European banks could soon find it much easier to avoid write-downs thanks to changes in accounting rules being pushed through by European policy makers. In moves that analysts say could boost earnings but make it harder to discern the financial health of banks, the European Union and international accounting standard-setters are loosening so-called mark-to-market accounting rules, which require banks to value investments at the price they would get if they sold them immediately.
The changes will allow banks to reclassify some assets as long-term investments, a shift that will grant them a great deal more leeway in deciding what those assets are worth -- and how much they have lost in the latest bout of financial turmoil. The new accounting rules are "one of the many weapons being deployed to fix the banking crisis," Belgian Finance Minister Didier Reynders said in an interview.
Analysts say it is difficult to estimate how much banks could reclassify among their hundreds of billions of dollars in loans and other investments. Yet not having to value some assets at the current market price "could have a material impact on earnings," said Morgan Stanley analyst Michael Helsby.
The rule changes touch on an issue that has become highly controversial amid the global financial crisis. Bankers have complained that mark-to-market rules are making their finances look worse than they are by forcing them to value their assets at market prices at a time when markets aren't working. But loosening the rules could allow them to hide serious problems.
The new rules will bring European accounting standards more in line with those in the U.S., where reclassification of assets to and from trading books is permitted in rare circumstances. In Europe, which lacks an overarching regulator like the U.S. Securities and Exchange Commission, banks could have an easier time bending these rules to their advantage, analysts say.
"Given the current weak accounting enforcement in EU countries, any proposal permitting certain exceptions in 'rare' circumstances is open to abuse," wrote J.P. Morgan analyst Sarah Deans in a recent report. Ms. Deans points out that the International Accounting Standards Board, a body that sets standards for more than 100 countries, has indicated that the current financial crisis could be considered a rare circumstance.
The IASB made some changes last week, allowing banks to reclassify assets such as loans and receivables. The IASB said it expedited its decision following requests from EU officials, who wanted to see the measure put in place quickly. EU officials say that by month's end, the IASB changes could be broadened to include complex derivatives, a type of investment on which banks have already suffered tens of billions of dollars in write-downs.
Ms. Deans and other analysts say the reclassifying of assets reduces consistency and transparency of financial statements between banks and among countries, which may ultimately dent investor confidence. That's in part because banks have some flexibility to value assets if they are not marked to market. By assigning unduly high values to assets, banks would simply be postponing losses, rather than alleviating them.
During the Asian financial crisis of about a decade ago, South Korea faced difficulties due to large-scale foreign borrowing. Trouble arose when the country had to service these loans as a current account shortfall caused by waning exports pressured the local currency. Consequently, these foreign borrowings became much dearer to service given a weakening Korean won. When the ROK's reserves were well and truly depleted, it was time to turn to the IMF.
Fast forward to the present time and the story appears similar, with a few exceptions. First, Korea's reserves are much healthier now as its exports were strong during the intervening years. At last count, South Korea has $235 billion in reserves to face the current situation with. Second, there are now regional safeguard mechanisms which should kick in if matters worsen, forestalling a seemingly unlikely trip to the IMF. However, the main problem that remains unsolved is Korea's reliance on foreign borrowing, especially in comparison to other countries in the region. As export markets like the US dry up and the won weakens yet again, it will be interesting to see how things play out.
Bloomberg discusses the ROK's efforts to shore up confidence in the country's banking system despite its sizable external obligations and slowing export industries:
South Korea will guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets. The government will provide tax benefits for long-term equity and bond investors, while the Bank of Korea will buy repurchasing agreements and government bonds to boost won liquidity, the heads of the finance ministry, central bank and financial regulator said in a statement from Seoul. Policy makers held an emergency meeting on Oct. 17 to hammer out the plan.
South Korea is struggling with Asia's worst-performing currency, a shortage of U.S. dollars and a stock market that has lost 38 percent this year. The guarantee on bank debts comes after Standard & Poor's said last week it may cut the credit ratings of the nation's largest lenders, which triggered the worst plunge in the won since the International Monetary Fund bailed the nation out in December 1997.
``They have to do that because the market was pushing them by attacking the Korean won,'' said V. Anantha-Nageswaran, chief investment officer for Asia Pacific at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager for the wealthy. ``They know what the stakes are. The currency could completely careen out of proportion.''
The government and state-run lenders including Korea Development Bank will guarantee as much as $100 billion of external debt taken up by Korean banks from Oct. 20 to June 30 next year, according to today's statement. The guarantee is valid for three years.
South Korea joins countries in Europe, along with Hong Kong and Australia, in providing state backing to banks to help fund lending amid a global financial crisis. ``We will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market,'' Finance Minister Kang Man Soo told reporters in Seoul, at a press briefing with central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the Financial Services Commission.
S&P, in a report released Oct. 15, said South Korea's banks face a more than 50 percent chance the credit crunch could threaten their foreign-currency funding. Domestic lenders have $235.3 billion of foreign-currency liabilities, with about $32.7 billion due to mature in the fourth quarter, according to the Financial Supervisory Service.
``Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans,'' Moody's Investors Service said in an Oct. 16 report. That's forced them to rely on the wholesale [interbank] market for about 44 percent of their total funding, with international markets accounting for as much as 12 percent, the ratings company said.
The fog of imminent default is producing inconsistent reports on Pakistan from various news sources. Earlier, I thought Pakistan would be successful in playing off two countries vying for regional influence against each other--the US and Pakistan. China now appears reluctant to make a large commitment to Pakistan, perhaps fearing that it may become another client state of dubious value alike North Korea. Hence, Asif "Give Me $100 Billion" Zardari and his new economic advisor, Shaukat Tarin, have drawn up a game plan for soliciting badly needed foreign exchange as the country encounters balance of payments difficulties. Unsurprisingly, the desirability of approaching various lenders varies according to the level of domestic political pain Pakistan must endure. In terms of increasing painfulness:
China is hesitant. Although it is famous for doling out cash with few preconditions to repressive regimes with abundant natural resources, Pakistan isn't too attractive to the PRC in that department;
The Islamic Development Bank, the UK's Department for International Development, the Asian Development Bank, and the World Bank have been approached by Pakistan. The nation's status as the world's second-largest Islamic nation after Indonesia makes the Islamic Development Bank a logical port of call. Meanwhile, Pakistan's status as a Commonwalth member may make some DfID funding available to it, although the UK's own financial mess may limit its abiilty to bankroll other cleanup operations. Regional lender the ADB and the World Bank also look set to help Pakistan out;
The International Monetary Fund is called the lender of last resort for a good reason. If Pakistan still comes up short in stabilizing its financial situation after approaching the above lenders, then it will have to borrow from the IMF regardless of the ultimate political cost. Though always controversial, its handling of the Asian financial crisis and follow-on episodes in Russia and Argentina have made the IMF appear even more penalizing from the point of view of many LDCs. It would surprise few if famed loan conditionalities involving belt-tightening and other domestically unpopular measures make a notable reappearance.
Pakistan, perceived as the world's riskiest borrower, may seek the help of the International Monetary Fund to avoid default on its debt obligations, said Shaukat Tarin, financial adviser to the prime minister. The South Asian country may need as much as $6 billion to shore up its foreign-currency reserves after they dwindled more than 74 percent in the past year to about $4.3 billion. Pakistan has $3 billion in debt servicing costs in the coming year. Standard & Poor's, doubting the nation's ability to repay debt, cut the long-term foreign-currency rating on Oct. 6 to seven levels below investment grade, and said it may lower it again.
Pakistan may need as much as $4.5 billion to tide over the crisis and is working on a few plans, including seeking loans from the World Bank, the Asian Development Bank and U.K.'s Department for International Development, Tarin said in an interview today. ``If I don't feel the comfort level with the multilateral agencies and our bilateral friends in three to four weeks, then I'll have to write to the IMF,'' he said via mobile phone. A default is ``out of the question.''
A delegation from Pakistan will meet IMF officials in Dubai tomorrow and Oct. 21 for a ``routine economic review,'' he said. Pakistan has already presented its economic stabilization plan to the IMF, including removal of subsidies, tighter monetary policy and steps toward reducing the fiscal deficit, he said. ``If this plan is acceptable to them, only then we will have the IMF program,'' he said.
Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note. Multilateral and bilateral aid may not be timely enough, S&P said on Oct. 6. Surging import costs widened the nation's balance of payments deficit, sending the local currency to a record low last week.
The current economic crisis is the deepest faced by the nuclear-armed nation since 1999, when it came close to defaulting on its debt and reserves plunged to less than $1 billion. Pakistan ended its three-year, $1.5 billion loan program with the IMF in December 2004. ``The balance-of-payments position is grim as some short- term obligations are coming up,'' said Syed Suleman Akhtar, an economist at Foundation Securities Pvt. in Karachi. ``There's been no concrete commitment yet.''
The global credit-market crisis triggered a capital outflow from emerging markets, with Pakistan's benchmark Karachi Stock Exchange KSE 100 Index losing more than a third of its value this year. The bourse kept trading restrictions in place and sought police protection to thwart a repeat of violence on July 16, when hundreds of protesters stoned the exchange and shouted anti-government slogans.
Pakistan faces the politically unpopular decision to seek an IMF bailout after China rebuffed its neighbor's request for cash, the New York Times reported yesterday. The U.S. and other nations are preoccupied with the financial crisis, and Saudi Arabia, a traditional ally, refused to offer oil concessions, the newspaper said. China may offer a soft loan of $500 million to the nation, the Financial Times reported, citing a finance ministry official it didn't identify.
Pakistan has sought about $1.5 billion from the World Bank, $1.6 billion from ADB and about 500 million pounds ($864 million) from the U.K.'s DFID, apart from a request for $500 million from the Islamic Development Bank, Tarin said.
The South Asian country's balance of payments deficit widened to the quarter to Sept. 30 to $3.95 billion from $2.27 billion a year earlier, while the current-account deficit reached a record $14 billion in the year ended June 30, according to data provided by the government.
Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding have more than tripled since August to 2,453.7 basis points, according to CMA Datavision. That means it costs $2.45 million annually to protect $10 million of the country's debt from default for five years. The cost reached a record $3.07 million on Oct. 6.
It is disconcerting that just as the IMF looks set to embark on any number of rescue operations in Asia, Europe, and perhaps South America, its managing director is now embroiled in a distracting controversy of the sordid Monicagate/Troopergate variety. I am sure that persons in positions of power abuse their authority from time to time; it's just that some of them have the misfortune of having the spotlight shine brighter on them at inopportune moments. In the article below, the Wall Street Journal reports Strauss-Kahn's married ex-subordinate girlfriend may have received an outsized severance package as the IMF was downsizing. If you will recall, few countries running into balance of payments difficulties in recent years [see chart] meant that the IMF had difficulty sustaining its operations [1, 2, 3]. What is under contestation is whether she was given a large package due to her affair with Strauss-Kahn and/or was fired as retribution:
The International Monetary Fund has launched an investigation into whether its chief, Dominique Strauss-Kahn, abused his position in connection with a sexual relationship with a subordinate, in a case that could roil a key global institution at a crucial moment in the world financial crisis.
The IMF said it has retained the firm of Morgan, Lewis & Bockius LLP to conduct the investigation, which is expected to be completed by the end of the month. The probe was sought by the longest-serving member of the IMF's governing board, A. Shakour Shaalan, who represents Egypt and other Arab countries, with advice from the representatives of Russia and the U.S.
"There was an allegation concerning improper behavior of a personal nature on the part of the managing director," said Masood Ahmed, the IMF's chief spokesman. "All allegations, particularly relating to senior management, need to be investigated."
In a statement, Mr. Strauss-Kahn said: "I have cooperated and am continuing to cooperate with outside counsel to the Fund concerning this matter." He said the "incident which occurred in my private life" took place in January 2008. "At no time did I abuse my position as the Fund's managing director."
Mr. Strauss-Kahn, a 59-year-old former French finance minister, is regarded as one of Europe's most accomplished economic policy makers. In September 2007, he was elected managing director of the IMF, which provides economic advice and sometimes loans to its 185 member countries.
The handling of the investigation of Mr. Strauss-Kahn is provoking sharp criticism within the IMF because not all of the 24 members of the board had been made aware of the allegations and the investigation until Friday, after this newspaper made inquiries. Some internal critics charge that the members who had knowledge of the allegations could have been in the position to use that information as leverage in policy and funding disputes with Mr. Strauss-Kahn. An IMF official said it was necessary to limit the number of people who knew about the investigation in order to protect privacy.
The probe comes 15 months after the president of the World Bank, Paul Wolfowitz, resigned under pressure because of alleged favoritism to a World Bank employee with whom he had a long-standing relationship. The imbroglio deeply split the World Bank staff -- as well as finance ministries around the world -- into Wolfowitz supporters and detractors.
The IMF investigation concerns Mr. Strauss-Kahn's relationship with Hungarian-raised Piroska Nagy, at the time a senior official in the IMF's Africa department. According to several individuals familiar with the matter, Mr. Strauss-Kahn in December 2007 began approaching Ms. Nagy, who is married, for an affair. The two exchanged emails about a possible intimate relationship, which these people said commenced early this year during a conference in Europe.
Shortly afterward, Ms. Nagy's husband, Mario Blejer -- a prominent Argentine-born economist who has worked at the IMF, the Central Bank of Argentina and the Bank of England -- found email evidence of the affair, they said, and the relationship apparently ended. Mr. Blejer and his wife hoped to keep the incident quiet while they worked out their problems, said several individuals with knowledge of the incident. Robert Litt of Arnold & Porter, Ms. Nagy's lawyer, said his client "doesn't comment on her personal life."
After word of the affair became known within the IMF, Aleksei Mozhin, Russia's representative, spoke with Mr. Blejer. Mr. Shaalan, the Egyptian board member, was notified around July, an IMF official said. Mr. Shaalan conferred with Mr. Mozhin, as well as with Meg Lundsager, the U.S. representative on the IMF board, and IMF general counsel Sean Hagan.
In late August, the IMF retained Morgan, Lewis. By mid-September, Mr. Strauss-Kahn had formally informed the law firm that he would cooperate with the investigation and encouraged others at the IMF to do so. Ms. Lundsager and Mr. Mozhin declined to comment. Mr. Hagan was unavailable.
The probe is intensifying as the IMF is trying to focus its energies on helping developing countries withstand the global financial crisis. One issue for investigators is whether Mr. Strauss-Kahn showed favoritism to Ms. Nagy at the IMF, or sought retribution. Ms. Nagy resigned from the IMF in August as the IMF was reducing the size of its work force by nearly 600 slots. She is now working as an economist at the European Bank for Reconstruction and Development in London, a regional development agency.
The investigators are looking at whether Ms. Nagy's severance package was outsized for a person of her position and tenure. Ms. Nagy was an Africa specialist, and in April 2008 led an IMF mission to Ghana to discuss that country's economic policies.
In the World Bank controversy, the question of whether Mr. Wolfowitz's girlfriend received a big bump in salary as a result of their relationship was at the heart of the dispute.
And yes, I was tempted to call this post "Mr. Loverman II". All I have to say is that given the Wolfowitz episode and now this one with Strauss-Kahn, calls for changing the way heads of the World Bank and IMF are selected should be heeded. As you probably know, it's customary that the US selects the World Bank president while Europe chooses the IMF managing director. Not only does this reinforce perceptions of developing countries that these institutions are supposedly there to help them favor the interests of developed countries, but their choices are quite frankly embarrassing. These are supposed to be multilateral financial institutions, not "The Love Boat," dammit [I feign righteous indignation].
10/21 UPDATE: The IMF site has a press release stating the investigation should be completed by month's end. Also, Strauss-Kahn has apologized to IMF staffers for this incident. French President Nicolas Sarkozy is supposed to be dismayed about this distraction as the French are helping draw up a new pact for international financial regulation. The latest rumor is that the WSJ reporting on this incident may be down to transatlantic politics:
A “one-night stand” and an angry husband have endangered the career of the French head of the International Monetary Fund and dismayed President Sarkozy as he seeks to put a French stamp on a new world financial order.
The news that Dominique Strauss-Kahn, 59, is being investigated in Washington over an alleged fling with a former subordinate has unsettled Mr Sarkozy, who has been working with him to form a new Bretton Woods pact on financial regulation.
When he visited President Bush at Camp David on Saturday, Mr Sarkozy presented a vision for this on behalf of the European Union that conflicts with US wishes. Although the romantic troubles of Mr Strauss-Kahn were known in Paris, some politicians suggested that the case had been leaked to the US media to undermine the French effort.
It is ironic that I mentioned Monicagate above because the WSJ has dredged up a past IMF investigation on Strauss-Kahn allegedly exhibiting favoritism to an intern he has ties to. Although the IMF did not find anything untoward, it does make you wonder if the WSJ is on the Strauss-Kahn bashing bandwagon for one reason or another. As in many international organizations, circumspection and prudence seem to be the order of the day:
The managing director's connection with Emilie Byhet was a focus of discussions this summer among a handful of IMF board members, who were fielding complaints from staffers about arbitrary personnel decisions. At the time, the staff was being reduced by about 500 slots. An IMF spokesman said that "there is no evidence of favoritism in this case," in which Mr. Strauss-Kahn's office recommended Ms. Byhet for the slot...
While research interns are usually Ph.D. candidates in economics, Ms. Byhet had a master's degree in public policy and communications. She listed her first "professional experience" as an "internship with the campaign team of Mr. Dominique Strauss-Kahn."
I've got to hand it to Pakistani President Asif "Give Me $100B" Zardari--he seems wilier than I thought. Taking a page straight out of the power games handbook, he appears to be playing off two countries vying for regional influence, China and the US. The latest off the rumor mill suggests Pakistan is looking for more than a nuclear power deal with old friend China. Supposedly, Pakistan is asking China to help it raise money as its balance of payments situation worsens. Note, however, that China is just one of the parties Pakistan is looking to for short-term relief given the magnitude of its problems; others include the IMF and regional lender the Asian Development Bank (ADB). Let us begin with the Daily Telegraph on China embarking on a so-called "bailout diplomacy":
Beijing, which has already made billion dollar investments in Pakistan, will use 'bail-out diplomacy' to further enhance its burgeoning power in the geo-strategically sensitive region. President Asif Zardari has been on a fund-raising visit to China as Pakistan faces the prospect of possibly defaulting on massive loans as its foreign reserves have plummeted.
The government announced that Mr Zardari will visit China every three months "to promote economic integration between the two countries". China, which is known as Pakistan's "all-weather friend", has undertaken building nuclear power stations in Pakistan as well as large infrastructural projects such as developing a port on the key Strait of Hormuz at Gwadar...China has long been one of Pakistan's closest political and economic partners, with Beijing looking to Islamabad as a counterbalance to its regional rival India.
Pakistan moved closer to a balance of payments crisis this week as the rupee slumped to a record low after the central bank reported it had barely enough foreign currency to cover six weeks of imports. Pakistan, which is struggling to control an escalating militant threat amid US missile strikes on its northwestern frontier with Afghanistan, requires an immediate commitment of at least $2 billion to restore confidence in the country.
China has so far not yet given any firm commitments on loans, though there were uncorroborated media reports that Mr Zardari asked China for close to $3 billion...
Pakistan can raise $40 billion to $50 billion from international donors to recover from the current economic crisis, says a former World Bank vice-president Shahid Javed Burki. "There's an appetite in the world for helping Pakistan," he told Dawn newspaper. "What we need to do is to come up with credible programmes that can translate this interest into financial assistance." Pakistan announced on Saturday that Chinese bankers would be visiting soon to assess Pakistan's needs, and companies had pledged to invest $1 billion by next June...
The country's newly appointed economic adviser, Shaukat Tarin, allayed fears of an economic default by saying that there was no risk of Pakistan defaulting on international debts. "I am very confident that I have plans to make sure, whatever it takes that we should build our reserves and that we do not default," said Mr Tarin a day after returning from overseas visits to Washington and Beijing to drum up support for the Pakistani economy. "Now, there is no danger," he added.
Mr Tarin, said he planned to bridge a financing gap for the balance of payments deficit in the fiscal year ending June 30, 2009, mainly through other multilateral lenders including the World Bank and Asian Development Bank. Pakistan should be able to stand on its own feet after two years, and growth should be sustainable and production-led, rather than consumption-led and import induced, added Mr Tarin.
In a longer article also discussing possible IMF funding and the Pakistan-China nuclear deal, the Financial Times makes a similar allusion to additional financial help from the PRC for Pakistan:
Shah Mehmood Qureshi, the foreign minister, who has just returned from China, where he spent the previous four days accompanying president Asif Ali Zardari on a diplomatic visit, said China had agreed to widen the scope of its economic and nuclear energy cooperation with Pakistan. “They [China] have agreed to help Pakistan more than the resource gap” said Mr Qureshi without specifying the Chinese commitment in dollar terms.
A Pakistani finance ministry official said China had offered to help Pakistan avoid a default in its external payments with an initial offer of a soft loan of $500m. “This offer is open ended. When there is a tough crunch, the Chinese will help us” added the finance ministry official.
US influence at the IMF needs little discussion; it's Pakistan leaning more heavily on China that should intrigue us all in forthcoming days. Will China be trying to build regional influence via "bailout diplomacy"? Conversely, will Pakistan desire soft loans from the PRC more than conditionality-filled ones from the IMF? Perhaps Pakistan will just take from all comers as it cannot afford to be choosy right now.
The commonsense answer to the question above is in the affirmative. Although both countries are crunched for credit, Hungary has the advantage of being an EU member, albeit not yet one adopting the common currency. Ukraine, on the other hand, is in a bind. Its run-ins with Russia over energy imports means that country is not one to approach for financial help. OTOH, Ukranian membership in the EU is a distant proposition in comparison to those of several other nearby countries. Forced to fend off for itself, the Ukraine looks more likely to be first in line at the IMF cue. Even if Hungary's currency--the forint--isn't faring too well [see chart below], recent EU pledges of support seem to have arrested it from plummeting somewhat. From the Financial Times:
The mood in Europe was unsettled as Budapest received a €5bn credit facility from the European Central Bank and Kiev said it was seeking an IMF loan of up to $14bn to “stabilise Ukraine’s financial system”. It was the first time in the 15-month credit crunch that multilateral agencies such as the International Monetary Fund had taken steps that are likely to lead to a bail-out of continental European countries – a clear sign of the acute difficulties debtor nations face in raising finance from credit-starved markets.
“Many countries seem to be experiencing problems because of the repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks,” Dominique Strauss-Kahn, IMF managing director, told the Financial Times. “We are ready to support these economies and we are in discussions with a number of them.”
Hungary’s problems stem from foreign currency loans [which have become dearer to service given forint devaluation] and big budget deficits. Ukraine’s banks face difficulties repaying foreign credits as the current account is widening. Authorities in both countries insisted they were not in difficulties.
The European Central Bank on Thursday stole a march on the International Monetary Fund in extending support to a country in need of credit to cope with the global financial crisis. While the IMF had earlier indicated it was ready to help Budapest and remains ready to assist, the ECB on Thursday came up with a €5bn ($6.7bn, £3.9bn) credit line, to cover Hungarian banks’ acute shortage of euros.
In Budapest, the forint strengthened on news of the ECB’s intervention. But the forint’s 1.5 per cent rise against the euro reclaimed little of Wednesday’s 7 per cent plunge, the biggest daily decline in five years [that'd be the loooong blue line in the previous chart]. And shares fell 8.6 per cent, extending Wednesday’s steep 11.9 per cent drop.
In Kiev, currency and stock markets fell as Yulia Tymoshenko, prime minister, disclosed the IMF was ready to consider $3bn to $14bn as a special loan to stabilise Ukraine’s financial system. The hryvnia closed 3.1 per cent down against the US dollar while the PFTS share index dropped 5.2 per cent, making it almost 80 per cent down on the year. The market reactions highlighted not only scepticism about the planned interventions but general fears about the impact of the global crisis on emerging markets.
The ECB’s move signalled its willingness to extend help beyond the 15-country eurozone to other European Union members when financial stability is threatened. The Frankfurt-based institution has rarely made such loans in the past, and never before have they been made public.
Hungary’s central bank announced other measures to breath life into static government bond markets. Orsolya Nyeste, chief treasury economist at Erste Bank in Hungary, said: “The mood has improved because of the measures, but the markets are still digesting what has happened.”
Meanwhile, Gordon Baj-nai, economy minister, told the FT a recent revision of the 2009 budget showed the government was already committed to further spending cuts, taking the 2008 budget deficit to 3.4 per cent of gross domestic product. ”Our next task is to carry out structural reforms to improve competitiveness. First you need stability – and I’m now relaxed about that – and then we have to go further.”
Like the banana dispute, the beef hormone case is one of the longest running episodes to be litigated at the WTO's dispute settlement mechanism. The case is relatively straightforward to understand: nearly all beef raised by the US (and Canada) use growth hormones. However, in 1989, EU countries stopped acceptance of beef imports using these hormones. The EU has maintained that food safety concerns lie behind its refusal to import hormone-fed beef, while the US accuses the EU of protectionism plain and simple. Diplomatic wrangling then enters the picture. In 1995, the US took the EU to the WTO on this case, making it one of the first to be tried at the newborn institution. By 1997, the WTO ruled in favor of the US, stating the Europeans did not establish a scientific basis for banning such imports. The EU appealed but lost in 1998, paving the way for retaliatory tariffs on EU exports to the US including pork, French mustard, truffles, Roquefort cheese and fruit juices. Since 1999, the US has applied $116.8 million worth of such sanctions annually against the EU.
In 2003, the EU amended its ban on hormone-fed beef making it, from its point of view at least, WTO-compliant. Given this amendment, the EU took the US to the WTO in 2004, requesting that sanctions against it be lifted. In March 2008, however, the WTO found that the EU has not yet met conditions in the Sanitary and Phytosanitary Agreement (SPS) which would permit enforcing its ban. The EU filed an appeal in May on this ruling while the US made a cross-appeal pertaining to procedural matters. The long and the short of it is that while the US made some procedural errors in continuing to apply sanctions, these sanctions remain valid as per the original case.
If you're further interested, the WTO site has the case summaries involving the US and Canada. Meanwhile, the US Trade Representative offers a PDF press release concerning this latest episode. On this matter at least, I believe the Americans are far more convincing than the Europeans. Keep in mind that this saga is not yet over. The latest ruling still leaves unsettled the matter of whether the EU's amendments have made its treatment of hormone-fed beef WTO-consistent. It appears that the case will ramble on after the Bush administration is gone.
David Hale has an opinion piece in the current edition of TIME offering a counterpoint to my regular dollar-bashing fare. To say that I don't agree is putting it mildly. It all sounds too Cheneyesque to me in the "deficits don't matter" sense. His main arguments are these:
the dollar is not desirable but it's better than the alternatives (presumably other economies like those in the EU will fare worse);
unwinding of the carry trade boosts the dollar (assuming it was the main funding currency);
stabilizing the financial system will be good for the dollar - the budget deficit which will be run up to produce this result matter less;
the likes of China and Japan have no alternative but continue propping the dollar given their weak domestic consumption.
While I agree that deleveraging has benefited the dollar, it is fairly obvious that its strength should be measured not just against the euro. For instance, the Japanese yen was also a funding currency for the carry trade. And, over the period in question, it has gained against the dollar. My intuition is that given a spell of further carry trade unwinding, dollar weakness will resume. How sure is Hale that China and the rest would be glad to buy up the trillions of IOUs soon to emanate from America? We'll see soon...very, very soon.
The cost of stemming the financial crisis continues to soar. The U.S. Federal Reserve has already sunk more than $800 billion into the financial system...With the already lofty U.S. budget deficit now expected to top $1 trillion next year and recession a virtual certainty, you'd expect America's currency to be taking a beating.
Yet amid the shocking developments of the past few months, the dollar has surprisingly gained strength. It has rallied more than 16% against the euro since its trough in early July and made impressive advances against the Australian dollar, South Korea's won and other currencies. There's a fairly simple explanation for this: it's not that people want to own dollars, its just that they want to own the alternatives even less. There's certainly nothing mysterious about the dollar's recent strength against the euro. Between July 1, 2006, and July 1, 2008, the dollar lost 19% against the European currency because the Continent's economies were outpacing America's. That's changed as Europe grapples with its own banking calamities and slumping markets — hence the dollar has bounced back after a very bad run.
Less obvious is the support the dollar is getting from an unlikely quarter: global hedge funds and other nonbank financial entities. This shadow banking system has borrowed trillions of dollars to leverage its investments. But the crisis has triggered massive early loan repayments, and because these loans must be repaid in the U.S. currency, demand for the dollar has increased, driving up its value. It's not just hedge funds that are affected. Foreign banks, which hold $12 trillion in dollar assets and liabilities, are also in the process of deleveraging.
All this helps to explain why the dollar has been stronger lately. But with the U.S. Federal Reserve cutting interest rates again and the U.S. Mint running its printing presses overtime to fund rescue packages, won't the dollar tank soon? Probably not. As the Treasury Department's $700 billion bailout plan is implemented, banks should begin to be able to restructure their balance sheets and regain the capacity to make loans at interest rates that will be attractive at home and abroad. While a U.S. recession looks unavoidable, the stabilization of the financial system should allow a recovery to begin next year. That's good for the dollar, too.
But what's really good for the dollar is China, which has a couple of solid reasons to help maintain the stability of the U.S. currency. One is that China is one of America's biggest creditors; the country holds some $519 billion in U.S. Treasury bills (second only to Japan's $593 billion), and it doesn't want to see these investments eroded by a slumping dollar. In addition, China is increasingly worried that an economic slump in the U.S. and Europe will curtail its export growth, dealing the Chinese economy a serious blow. To keep the prices of its exports competitive, Beijing has reversed a policy begun three years ago that allowed its own currency, the yuan, to gradually increase in value relative to the dollar. After rising 6.4% during the first half of 2008, the yuan has been flat against the dollar since July.
Moreover, while currency markets are complex ecosystems, it seems unlikely that countries such as China and Japan that have already loaned America trillions will stop buying U.S. government debt any time soon. They have relatively few tools at their disposal to keep their economies on track other than tending to the dollar exchange rate. China recognizes it has little choice but to go on financing the ballooning U.S. budget deficit by expanding its foreign-exchange reserves from $1.8 trillion to $2.3 trillion over the next 18 months.
The message to dollar bears is clear: the grimmer the headlines are, the more misleading they can be. Selling the dollar short because of the financial crisis is not a sure bet. All economic news is relative, and right now the news is bad all over the world. Over the next several months, the greenback could even begin to look like a safe harbor in the midst of the global economic storm.
When nations find themselves in times of trouble, Mother Earth don't speak to thee. Silence and words of neglect: let it be, let it be. With countries left and right injecting oodles of money to shore up their financial institutions, it comes as no surprise that the mood for discussing climate change has taken a backseat. Unlike the costs of financial turmoil which are immediate and apparent, those of climate change take a longer time to manifest themselves in quite a few instances. Thus, do not be surprised if there will be more pleas along these lines in the future:
raise carbon caps;
loosen existing or forthcoming emissions regulations;
postpone multilateral talks on climate change
Unless you're a climate change skeptic, the question countries are faced with regarding the environment are indeed economic: stretched national finances will likely need to make tradeoffs in deciding whether to allocate funds on fixing dodgy banks and the like or meeting upcoming climate change standards. The EU is today's case in point, with many of its newer members now petitioning bigwigs in Brussels to give in a little while they some domestic troubleshooting. Is the EU's 20-20-20 plan still realistic? What is particularly interesting is how the EU itself is a microcosm of forthcoming multilateral talks. Like LDCs, Eastern European states suggest their wealthier Western counterparts are better placed to take up the slack because they need developmental space. Surely, it doesn't bode well for an inclusive climate deal to replace Kyoto which covered just industrialized countries.
Like trade negotiations, those for climate change are fraught with peril. While I wish the upcoming UN-sponsored Ponzan Climate Change Conference well, I think the minds of many attendees will be on other issues. Perhaps a global economic slowdown means reduced carbon emissions via less burned fuel and the like regardless of the outcome of these negotiations. Then again, others suggest that slowdowns only have temporary positive effects. Anyway, to the Associated Press:
The global financial crisis could hardly come at a worse time for nations seeking a new agreement on climate change that — on top of everything else — will cost tens of billions more dollars. As Western governments muster more than a trillion dollars to bail out ailing financial institutions, poor countries wonder if there will be any money to rescue them from the predicted ravages of global warming.
Signs of stress on climate issues emerged at a European Union summit in Brussels on Wednesday. Even as the bloc's leaders agreed to stick to ambitious plans to cut greenhouse gases by 20 percent by 2020, but there were deep divisions over how to share the reductions.
Eight eastern European countries said they already made great cuts in carbon emissions since emerging from communism in the late 1980s and that "should be recognized" now. Italy and Germany also sought exemptions for key industries from pollution restrictions, saying they cannot accept new burdens.
And a prominent business lobby said Europe can ill afford to lose any competitive edge because of carbon issues. Competitiveness "is an important subject that has to be taken into account when any European package is implemented to reduce CO2 emissions," said Ernest-Antoine Seilliere, president of BusinessEurope, which represents 20 million companies.
In an unusual coalition of interests, the leaders of Poland, Hungary, Romania, Bulgaria, Slovakia, Latvia, Lithuania and Estonia issued a statement urging the EU to balance the wish for a cleaner environment against "the need for sustainable economic growth" [there's an obvious misnomer here...]
The statement was the latest shot in a long-running internal battle among the EU countries on how to reach the joint target of reducing carbon pollution by 20 percent by 2020. The former Communist countries say they should shoulder less of the burden than their more economically advanced neighbors.
The leaders of Britain, Luxembourg and the European Commission urged the 27-nation EU to hold firm to the carbon-cutting target. "This is not the time to abandon a climate change agenda," British Prime Minister Gordon Brown, saying the two issues were linked.
EU Commission President Jose Manuel Barroso said dealing with climate change "is not a luxury we now have to forego. Saving the planet is not an after-dinner drink, a 'digestif' that you take or leave. Climate change does not disappear because of the financial crisis," he said as the two-day summit convened.
The market meltdown came as climate negotiators head into a crucial year of talks on an agreement to control pollution, which scientists blame for changes that already have begun to occur in the world's climate and which they warn could become catastrophic. Negotiators reconvene in Poznan, Germany, in December to begin the final phase of talks on an accord to be concluded in December 2009, with much of the discussion focused on funding.
Cost estimates start at $200 billion a year to finance the switch to low carbon economies and to help developing countries adapt to the effects of global warming, from expanding deserts to rising sea levels that threaten coastal populations.
Some climate campaigners see a bright side to the financial crisis. Somehow, the amount needed to fight climate change doesn't seem as unrealistic as it once did after the astronomical amounts governments committed almost overnight to support banks.
"A month ago people would still be shocked at that figure," said Donald Pols, of the World Wildlife Fund for Nature, who calculated an annual $380 billion bill for climate change by 2030. "You have now proven that it's possible" to raise huge resources in the face of a crisis. Pols said the economic restructuring called for under the bailout agreements opened opportunities for more investment in renewable energy and "green" businesses. The money injected into the banking system was meant to be invested, he said. Governments have broken the taboo against intervention in the markets and should have a voice in directing those investments.
Kevin Conrad, the chief climate negotiator for Papua New Guinea and an influential voice at the climate talks, warned that "weak countries" would use the financial crisis to escape responsibilities. "In life, we have to figure out how to do more than just one thing," he said in a telephone interview from New York. He expected the financial discussions at the next round of talks in Poznan to be "an uphill battle. The financial crisis doesn't make it any easier, but there is a critical mass of countries still pushing for progress."
On Tuesday, the finance ministers of 30 countries met in the Polish capital of Warsaw for informal talks to prepare for the Poznan conference. The U.N. climate chief, Yvo de Boer, said the ministers concluded that "the current financial turmoil should not be an excuse to slow down action on climate change."
I am absolutely gobsmacked that Technorati indicates no one has yet linked to this webpage on the IMF site concerning informal principles arrived at by the International Working Group of Sovereign Wealth Funds (SWFs). My surprise is great considering that there are entire blogs dedicated to SWFs and others who cover the topic far more intensively than I do. Anyway, the group's membership is composed of developed countries and LDCs, the latter to which most SWFs belong to with the notable exception of Norway. Ostensibly, this group was convened to develop guidelines on how SWFs can be responsible players in global economic governance via independence, transparency, and accountability.
Being cynical old me, these are mostly code words for Western intervention in the affairs of LDCs in another guise. Given the massive size of some of these entities, many industrialized countries are justifiably concerned about how these can be used to achieve geopolitical objectives which may have little to do with investing in the sense SWFs were originally intended for--preserving and enhancing sovereign wealth. From my upcoming guide, "SWFs for Dummies":
Independence - us Westerners don't like you foreigners using SWFs to further your national objectives by buying our firms in the defense, transportation, energy, and natural resource sectors. Your financial interests in them may diminish our "national security," although we don't feel the need to define these considerations too specifically; Transparency - insofar as us Westerners cannot really regulate the activities of your SWFs, we would at least appreciate it if you could tell us what they're investing in so we can take action if necessary (nevermind that we don't demand similar levels of transparency from our hedge funds); Accountability - us Westerners know that you authoritarian regimes can pretty much use your SWFs to invest in whatever you please. Maybe you should be more "democratic" so that the populace can have greater discretion about where their sovereign wealth is invested in.
Unsurprisingly, the wording of the final document is noncommittal given the parties involved in its writing. It was non-binding from the outset to ensure that LDCs would participate. This makes me wonder what the whole point of the exercise was other than to get the point across that the West was vigilant about SWFs. In any event, my argument does not and will not change: the laissez-faire agenda of free trade and free capital flows which the IMF has studiously espoused appears to stop at the water's edge for LDCs. Sure it's fine for LDCs to accumulate industrialized countries' sovereign debt, but when it comes to buying equity and possibly ownership stakes in Western firms, it's a different story.
Ah well...read the PDF document for yourselves and see if it's as pointless as I make it to be. Pay special attention to the Generally Accepted Principles and Practices (GAPPs) on pp. 7-9. Certainly, it doesn't help reduce the perceptions of many that the IMF plays with a stacked deck when it comes to these matters. As a teaser, here are the stated objectives and purposes of the Santiago principles:
Sovereign wealth funds (SWFs) are special-purpose investment funds or arrangements that are owned by the general government. Created by the general government for macro-economic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets. SWFs have diverse legal, institutional, and governance structures. They are a heterogeneous group, comprising fiscal stabilization funds, savings funds, reserve investment corporations, development funds, and pension reserve funds without explicit pension liabilities. Appendix I discusses the definition of an SWF in more detail, and Appendix III contains short descriptions of SWFs in the International Working Group of Sovereign Wealth Funds (IWG).
As well-established institutional investors, SWFs have been undertaking cross-border investing for many years. Their investments have helped promote growth, prosperity, and economic development in capital-exporting and -receiving countries. In their home countries, SWFs are institutions of central importance in helping to improve the management of public finances and achieve macroeconomic stability, and in supporting high-quality growth. SWFs also bring substantial benefits to the global markets. Their ability in many circumstances to take a long-term view in their investments and ride out business cycles brings important diversity to the global financial markets, which can be extremely beneficial, particularly during periods of financial turmoil or macroeconomic stress.
Recently the rapid accumulation of foreign assets in some countries has resulted in the growing number and size of SWFs. Various projections suggest that their presence in international capital markets is set to increase further. As a result of the SWFs’ increasing level of assets invested in public and private equity holdings, they are exercising greater influence on corporate governance practices.
The IWG recognizes that SWF investments are both beneficial and critical to international markets. For that purpose, it will be important to continue to demonstrate—to home and recipient countries, and the international financial markets—that the SWF arrangements are properly set up and investments are made on an economic and financial basis. The generally accepted principles and practices (GAPP), therefore, is underpinned by the following guiding objectives for SWFs:
i. To help maintain a stable global financial system and free flow of capital and investment; ii. To comply with all applicable regulatory and disclosure requirements in the countries in which they invest; iii. To invest on the basis of economic and financial risk and return-related considerations; and iv. To have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability
I come to this tale of overly aggressive male managers leading Iceland to the poorhouse from a slightly different angle. During the course of my research, I have gone through quite some literature on microfinance. One of the more striking things about microfinance is that lenders often prefer lending to women borrowers as they are usually more responsible when entrusted with money. Women tend to allocate funds for socially productive purposes such as health, education, and household management while men are prone to spending on less productive things such as--how should I put this--wine, women, and song.
It would be an interesting cross-cultural study to see if these findings about lending to women generalize across cultures. Sometime ago (on second thought, make that a long time ago), Michael Edwardes coined the term "macho management" to describe testosterone-driven business cultures which emphasized risk-taking and aggressiveness over stewardship and long-term outlook. That Edwardes headed the doomed British Leyland pretty much says it all. It is interesting that the Financial Times article below discusses how many of the banking elite in Iceland were young male MBAs out to prove themselves to the world. It's a fascinating sociological exercise: did "Viking culture" updated for the Roaring Noughties doom Iceland to its current mess? There's a raftload of studies in the management literature suggesting less homogeneous teams are less prone to "group think" (let's buy up Blighty!) Not only would having more women in the upper echelons of management been more equitable, but it may have also seen to it that excessive risk-taking now rocking Iceland wasn't taken to such extremes:
Iceland has turned to two women to rebuild its financial system after the banking empire built by its young, male business-schooled elite collapsed. ElÃn Sigfúsdóttir and Birna Einarsdóttir are set to become chief executives of New Landsbanki and New Glitnir respectively, the nationalised banks created by the Icelandic government in the wake of the crisis [I love the "New" part].
One government minister said their appointments were an attempt to signal a new culture within the banking system. Landsbanki, Glitnir and Kaupthing – infamous for their aggressive international expansion – collapsed last week under the weight of their debt, leaving the Icelandic economy on the brink of bankruptcy.
Recriminations have been flying in Iceland over who is to blame, with the British government a popular target. But many have also criticised the young and predominantly male bankers whose “eyes became bigger than their stomachs”, as one banker conceded. “Now the women are taking over,” said one government official. “It’s typical, the men make the mess and the women come in to clean it up.”
The government created New Landsbanki last week and put Ms Sigfúsdóttir in place. New Glitnir was being formed on Monday, with Ms Einarsdóttir widely expected to take the top job. The banks’ new chief executives were both promoted from within the ranks of the failed banks: Ms Sigfúsdóttir has been head of corporate banking at Landsbanki since 2003 and Ms Einarsdóttir became head of domestic commercial banking at Glitnir last summer. The women are expected to curb the bonus-driven risk-taking culture that has taken hold in Iceland over the past five years.
The nationalised banks will focus solely on domestic operations, keeping money flowing around Iceland’s hobbled economy. A New Kaupthing is also planned. Their first task is to begin trading the Icelandic krona, an activity that all but ceased last week, leaving most Icelandic groups unable to pay suppliers.
The three failed banks’ foreign assets are being sold off but there is little idea how much money will be raised as they face firesale prices. When asked if the new banks would return to foreign expansion, Geir Haarde, Iceland’s prime minister, told the FT: “It’s too early to tell, but not in the same big way as before.”
It's also worth pondering if B-schools have glorified "macho management." Certainly, there is no lack of sporting and combat metaphors in the business realm.
I find it utterly unremarkable that China's sovereign wealth fund, the China Investment Corporation (CIC), has had $5.4B frozen in a money market account gone bad. Sometime ago, the Reserve Primary Fund caused much turmoil among money market funds when it "broke the buck" or had its net asset value (NAV) fall below 1.00. It turns out that it had invested in Lehman Brothers debentures--not a very wise move. Now, the Financial Timesreports that the Reserve Primary Fund's largest institutional investor is none other than the CIC.
This is just the latest in a line of lousy investments from the PRC in general and the CIC in particular. Name a bad investment and China probably has it: heavy dollar allocation, $340B in Agency bonds, Flint--I mean Blackstone shares, Morgan Stanley shares, and now this Reserve Primary Fund. I've probably said this before, but if you're a budding hedge fund manager, you can't do much better doing the opposite of whatever China does for its "investing." Isn't the whole point of a sovereign wealth fund to preserve and enhance capital for future generations? Doubling down on your bets by investing in America seems like a surefire money loser to me. The results speak for themselves as the concept of "portfolio diversification" is lost on these guys. CIC better wish it gets a good amount of the fund's depleted capital. Then again, authoritarian regimes are usually immune to public criticism. Just don't let them get too many guns, I suppose
China’s $200bn sovereign wealth fund, which has made a series of loss-making investments in Western financial institutions since last year, could have as much as $5.4bn frozen in a failed US money market fund account.
A subsidiary of China Investment Corp was the biggest institutional investor in the $62bn Reserve Primary Fund, the first money market fund in 14 years to see its net asset value fall below $1 last month, according to US regulatory filings reported by agencies.
Stable Investment Corp, which is registered at the same address as the CIC office in Beijing and shares employees with the fund according to the reports, held 11.1 per cent of Reserve Primary’s shares, or around $5.4bn worth, at the start of September.
A CIC spokesperson declined to comment on ”market rumours” and refused to confirm that Stable Investment Corp, was a subsidiary of the fund. News of yet another disastrous investment by the sovereign wealth fund is likely to trigger public outrage and further strengthen a political backlash in China, where the government has refused to allow any major offshore financial sector investments this year.
CIC, which was established just over a year ago, invested $3bn in US private equity firm Blackstone and more than $5bn in Morgan Stanley last year, only to watch their shares drop more than 70 per cent since.
Until recently many investors considered money market funds to be almost as safe as bank accounts and before Reserve Primary, the oldest such fund in the US, only one small money market fund had ever ”broken the buck” by dropping below $1. Reserve Primary’s loss was triggered on September 16 when it was forced to value $785m worth of Lehman Brothers debt securities at zero in the wake of the investment bank filing for bankruptcy protection.
The fund was inundated with withdrawal requests and ended up releasing $10bn at $1 per share before its shares dropped to 97 cents and it froze redemptions, according to Bloomberg. It is now in the process of liquidating its assets and was expected to make an initial distribution of $20bn to remaining investors on Monday, according to reports...
Stable Investment, the CIC subsidiary, has also invested around $5.9bn in three other money market funds, according to documents filed with the SEC, Bloomberg reported. That includes $2.1bn in the Invesco Aim Liquid Assets Portfolio, $2.3bn in the JPMorgan Prime Money Market Fund and $1.5bn in Deutsche Asset Management’s DWS Money Market Trust.
* Lest you think the IPE Zone has gone all NC-17 on you, I can explain the title. One of the things left behind by the Brits when Hong Kong was handed over to the Chinese was, er, a lot of Brits. To this day, that great city of enterprise remains a destination for many expats seeking better fortunes elsewhere. Thus, my expatriate friends working in Hong Kong's financial services industry self-deprecatingly refer to themselves as FILTH--"Failed In London, Try Hong Kong." A famous study by Dutch anthropologist Geert Hofstede of a seemingly homogeneous group--managers at IBM--found that there were still distinct cultural differences even within that organization. So it is fortunate for FILTH that Hong Kong-based employers may offer them a second chance at employment. Call it a cultural thing, but even big international banks operating in Hong Kong do not subject their employees to the same binge and purge hiring patterns prevalent in the US and UK. Even in hypercompetitive HK, loyalty still means something.
It goes without saying that there may be a lot more FILTH plying their trade in the Far East soon. The process began when many had their bonuses reduced significantly, but now it's time to bid them adieu. The good folks at Reutersalert us to a study by the Centre of Economics and Business Research (CEBR) indicating that up to 62,000 financial sector jobs are going the way of the 5.25" floppy disk through 2009. With asset securitization, originate and distribute, and the rest of financialization's innovations going out of fashion, so too are the jobs associated with them. While these innovations have set the world reeling as of late, it's only human to feel sorry about London bankers' jobs disappearing. If there's any consolation for them, Hong Kong (as well as other places in the Far East) beckon:
The credit crunch will cost London 62,000 financial jobs in 2008 and 2009, wiping out the hiring gains of the past decade, a British economics consultancy group said in a report on Monday. The number of professionals in London's financial industry -- Europe's biggest -- will drop by 28,000 this year from the 2007 level and a further 34,000 jobs will go next year, said the Centre for Economics and Business Research (CEBR). Only 291,000 will work in the industry in 2009, it added.
"The chances for a strong bounce-back ... from 2010 onwards appear to be slim," CEBR said. It is unclear how many jobs have already been cut this year, a spokesman for CEBR said.
The worst-hit sector will be corporate finance, likely to slash more than half of its 15,000-strong workforce in the next two years. The derivatives business will be a close second, with employment shrinking by 46 percent over the same period. In investment banking, more than 10,000 jobs -- or almost one-sixth -- will disappear over this and next year.
CEBR's job estimates also include equities and bonds businesses, foreign exchange, fund management, insurance and professional services. Those still in work will be paid much smaller bonuses, with the 2008 London payout down 42 percent on last year, the consultancy said last week.
For a site which purports to be the IPE Zone, some readers may be dismayed by the number of posts devoted to the US in recent weeks. I offer two justifications which should satisfy most: First, given that the US is the world's largest export market, many countries are going to be affected by a consumer-led slowdown in the land of the free. From East Asia (South Korea) to Latin America (Mexico), things will get more difficult. Export-oriented growth models are great--so long as you have someone to export to. Second, it is undeniable that the US is a bellwether for trends in economic governance, whether others like it or not. Not so long ago, the Varieties of Capitalism literature was all the rage in Britain. However, given how heavily the US (and the UK) are now meddling in market affairs, it is fair to say that liberal market economies in the neoliberal mold are dissipating even in the very places which spawned them and pushed them elsewhere. If these countries in the vanguard are retreating from the excesses of one interpretation of laissez-faire, then others will be less likely to follow.
I've come across an interesting op-ed in TIME which neatly lays out the case against America consumers continuing their jihad on fiscal sanity. Here, Nancy Gibbs reminds that as opposed the mindless consumerism which has brought household debt outstanding to over 100% of US GDP, the country was founded on principles of thrift and sacrifice--neither of which characterizes it much anymore. George W. Bush urging Americans to go shopping in the wake of 9/11 illustrated how much the US economy has become dependent on megaconsumption, nevermind its deleterious effects on the pocketbook, the waistline (Americans are purportedly fattest people on Earth), and the environment (the US was, until recently, the largest greenhouse gas emitter). Needless to say, America telling other countries to follow its example of "financialization" have often fallen on deaf ears as the reflected image of today's US isn't an attractive one.
Simply put, the US needs some "structural adjustment" away from (unsustainable levels of) consumption, currently accounting for over 70% of its GDP. It will be a painful process, and neither of the current candidates promise much in the way of necessary belt-tightening of America's excesses even as the country's bill is now coming due with spectacular effect. Whether the US can weather painful adjustments is anyone's guess. Thrift needs to restart at the grassroots level, and it will be interesting to see if that can happen. More likely, it will have to happen:
American greatness--the vision of the founders, the courage of the pioneers, the industry of the nation builders--reflected a mighty faith in the power of sacrifice as a muscle that made young nations strong. Banks were like gyms for the soul: the first savings banks in Boston and New York were organized as charities, where "humble journeymen" could exercise good judgment, store their money and not be tempted to waste it on drink. Architect Louis Sullivan carved the word THRIFT over the door of his "jewel box" bank nearly a century ago, for it was private virtue that made public prosperity possible...
Somewhere along the way, thrift did not just stop being a value; it became a folly. Saving was for suckers; you'd miss the ride, die leaving money on the table when you could have lived it up. There are no pockets in a shroud, as the saying goes. We once saved about 15% of our income. By the roaring '80s the rate was 4%; now we're in negative numbers. Bob Hope liked to joke that "a bank is a place that will lend you money if you can prove that you don't need it." But that too changed as easy credit bloomed and usury became another of those vices that had somehow lost its juice. The average American has nine credit cards with a total $17,000 balance. We borrow against our houses and pensions to live in a way that dares us to actually grow old. "Never invest in any idea you can't illustrate with a crayon," Fidelity mastermind Peter Lynch advised, but we embraced all kinds of investments about which we understood nothing except the hollow promise that they would never fail. When the economy began to swoon we kept spending, effectively sending ourselves rebate checks from accounts already way overdrawn, as if it would make us feel better to buy a new TV and charge it to our kids. States fund their schools, which among other things are meant to turn children into responsible adults, by selling lottery tickets...
There's no way to tell during this current distress whether we're repenting or just retrenching. Thrift store sales are up. Cars are shrinking. P. Diddy retired his private jet to save on gas. In hard times, people often rediscover the peace that prudence brings, when you try to spend a little less than you have because tomorrow might be worse. But that feels almost un-American; we're optimists by nature, and we've been living large for so long that solvency feels like a sacrifice. It will take some sustained character education--and leadership--to understand that morning in America is more likely to come again if we prepare for midnight.
Like for so many other spendthrifts, the midnight hour has come to America.
I previously proposed playing a fun parlor game called "How Much More Will Sammy the Beggar Owe in 2009?" At that time, my head was already spinning while trying to come to grips with America running a trillion and a half dollar deficit. Imagine my reaction when economist David Greenlaw suggested that the US deficit could run closer to $2 trillion. In the time since I wrote the initial post, all sorts of newfangled costs have been added to the tab. These include the following:
- commitments to purchase short-term commercial paper in that now-dormant market; - states unable to raise funds in the moribund muni bond market cadging Sammy; - underestimated costs in recapitalizing banks; - massive pork [oink, oink] dished out while passing bailout legislation.
Such a monstrous deficit would represent an estimated 12.5% of GDP--over twice the previous record set during the Reagan years. Given that the US government is now effectively the mortgage market, the commercial paper market, and the municipal debt market all rolled into one, this state of affairs is not very surprising. I am in agreement with Chris Martenson on this matter: the dollar rally will soon prove inexplicable given the oodles of debt which will soon emanate from every pore of Sammy the Beggar's spendthrift hide. The figures are certainly mind-boggling as we play this scary guessing game. Certainly, neither presidential candidate looks nor sounds like the thrifty money manager America needs as it downsizes its expectations for the future. Pssst...treasuries, anyone? From Bloomberg:
The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.
Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.
``I always assumed they would be asking for more money along the way if it was necessary, and it looks like it's going to be necessary,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. ``At the moment, there's nothing happening here that's positive for the budget. Nothing.''
The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.
That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. ``The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. ``The supply will trigger some elevation in yields...''
Payments the government allocated to keep vital companies solvent are beginning to look insufficient. AIG, the giant insurance company that was taken over by the government in mid-September, said this week it may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion the government already loaned it to stave off bankruptcy. ``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG...
California, Alabama and Massachusetts are urging the Fed and Treasury to include their securities in rescue plans designed for banks and businesses. The $2.66 trillion U.S. market for state and city bonds has been all but frozen since Lehman Brothers Holdings Inc., weighed down by losses in mortgage-backed bonds, declared history's largest bankruptcy on Sept. 15.
California has said it needs to sell as much as $7 billion in notes to maintain its schools, health system and other public services. The Bush administration said it is reviewing the states' financial positions...
Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.
Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary -- and will likely turn out to increase the measure's cost. Spending beyond the amount set in last week's bill would require further Congressional approval.
``We have to recapitalize the banks,'' Phelps told Bloomberg Television this week. ``I don't imagine that there's enough money in the first Paulson plan to be able to do all that needs to be done in that direction.''
The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.
Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government's debt limit to more than $11.3 trillion from $10.6 trillion.
On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.
Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog. The rescue legislation ``creates a mask for all sorts of fiscal irresponsibility,'' said Bixby. ``It covers up a multitude of sins.''
Oh dear, posts about more LDCs taking it on the chin aren't ones I look forward to writing about at all. Still, since it is my solemn duty to inform beloved IPE Zone readers, this freak show must reported even if it makes my stomach churn. Before reading on, cue up The Champs' "Tequila" for this is another blast from the past. Indeed, the so-called "Tequila Crisis" of 1994 is similar in its general features to the crashes now being experienced in debt-swilling countries like the US, UK, and Iceland.
I wish things were going better in present-day Mexico, but some things aren't going too well there, either. Mexico is quite dependent on its huge neighbor to the north as an export market; with the US swooning pretty hard, "decoupling" isn't likely as 80% of its exports are bound for America. Moreover, Mexico's balance of payments are likely to be hurt as remittances from Mexican laborers toiling in Estados Unidos dry up. Adding insult to injury, Bloomberg now reports that the country is busy defending the peso like in the bad old days, selling off reserves to prop up that currency unit. If you look at the chart above, the sudden upward spikes have been tamped down by episodes of Mexican intervention. However, Mexico cannot continue intervening at this rate as its $80-some billion stash can only go so far. Confidence isn't helped either by a large retailer going belly up:
Mexico's central bank sold a record $6.4 billion in the currency market today, stepping up its bid to quell a rout in the peso that threatens to bankrupt companies and ignite inflation in Latin America's second-biggest economy. Banco de Mexico has now sold $8.9 billion in three days, tapping into a near-record $84 billion of foreign reserves, after the peso plummeted to a record low. The peso gained as much as 4.7 percent after today's intervention, reversing an earlier tumble of as much as 6.1 percent. It has plunged 16.5 percent this month as investors sought the safety of U.S. dollars amid the worst financial crisis since the Great Depression.
``These are very extreme conditions,'' said Neil Dougall, head of emerging-market research for Dresdner Kleinwort Group in London. Policy makers ``needed to demonstrate very quickly that foreign exchange was available.''
Central bank Governor Guillermo Ortiz and Finance Minister Agustin Carstens are pumping dollars into the market as part of an effort to prevent the global crisis from eroding the finances of local companies. Controladora Comercial Mexicana SAB, the owner of supermarkets and Costco stores in Mexico, filed for bankruptcy reorganization yesterday after taking losses on currency derivatives.
The $6.4 billion Banco de Mexico sold today is the most in a single day, according to estimates by Gabriel Casillas, an economist with Banco UBS Pactual in Mexico City. Central bankers sold $3 billion in a first auction, $400 million in a second sale and $3 billion in a third auction. They began selling on Oct. 8 after the peso sank as much as 13.8 percent, its biggest intraday decline since the government abandoned a currency peg in 1994.
The peso was up 0.9 percent to 13.1018 per dollar at 1:50 p.m. New York time today, halting seven straight days of losses. It is down 25 percent from a six-year high reached on Aug. 4. The global crisis has caused ``panicking in Mexico,'' said Bertrand Delgado, a Latin America economist with New York-based IDEAglobal Inc. ``The peso is just falling too fast.''
Mexico was forced to abandon its peg in December 1994 after running low on foreign reserves, leading to a six-week, 45 percent plunge in the peso that became know as the ``Tequila Crisis.'' Reserves have since rebounded, almost tripling this decade amid a six-year rally in oil, the country's biggest export. They still ``aren't high enough to sustain'' the amount of dollars the central bank is selling, said Win Thin, a senior currency analyst with Brown Brothers Harriman & Co. in New York.
``Even during the Tequila Crisis, they weren't under this much pressure,'' Thin said. He said he doesn't expect Ortiz to raise interest rates to try to keep money in the country. ``They're running out of options...''
Mexico is bracing for an economic slowdown as the crisis crimps growth in the U.S., the buyer of 80 percent of its exports. President Felipe Calderon sent on Oct. 8 a revised 2009 budget proposal to congress that lowered forecasts for economic growth to 1.8 percent from 3 percent and cut the assumed price of oil exports to $75 a barrel from $80.30. Calderon also proposed the same day a stimulus package worth 1 percent of gross domestic product that includes spending on energy, infrastructure and education to help the crisis.
Mexico hopes for the best, but prepares for the worst.
The credit crisis has laid low two previously high-flying countries whose economies have been fueled by oodles of leverage: the UK may pony up $87B to protect its largest commercial banks, while Iceland is on the verge of seeking IMF help. Before getting to the current stories, a bit of history. Prior to the finalization of the UN Convention of the Law of the Sea (UNCLOS) in 1982, British fishing vessels regularly trawled what Iceland viewed as its waters. In particular, the UNCLOS provision for the creation of the Exclusive Economic Zone (EEZ) gave a country discretion over the natural and mineral resources for an area extending to 200 nautical miles from its coast. After UNCLOS, things cooled down between these two countries--but not forever. The International Herald Tribunediscusses the so-called "Cod Wars" and brings the UK vs. Iceland story up to date:
Fishing has been the focus of many clashes between Iceland and its European neighbors - most heatedly with Britain, in what became known as the Cod Wars of the 1950s to the 70s. The two countries clashed repeatedly over Iceland's move to extend exclusive fishing rights into waters that had long been trawled by British vessels, too.
Tension with Britain has flared anew during the current crisis. It centers on hundreds of thousands of accounts that Britons hold in online branches of the Icelandic banks; now they fear they will lose their money, and the British government wants Iceland to pay up. The government of Prime Minister Gordon Brown of Britain has used powers granted under anti-terrorism laws to freeze British assets of Landsbanki until the standoff is resolved.
"We do not consider this to be a particularly friendly act," Haarde said, adding that he had tried to defuse the situation in a telephone call with Brown on Thursday.
In a previous post, I noted how interrelated the UK and Iceland have become through Icelandic purchases of British firms and the large presence of Icelandic financial concerns there. Now that all hell has broken loose, many Brits are vulnerable. This is especially so for those who have deposits in Icelandic banks. As noted above, the British government recently resorted to using anti-terror provisions to freeze funds in Icelandic banks operating in the UK. Although losing your savings is indeed a terrorizing event, I doubt whether these provisions were used for their intended purposes. It seems Icelandic authorities have taken umbrage to being labeled as "terrorists," saying the UK is to blame for creating a crisis by using such laws to seize these banks' assets:
A diplomatic row broke out between Iceland and Britain Thursday over how to deal with hundreds of millions of pounds of British deposits trapped in collapsed Icelandic banks.
Prime Minister Gordon Brown said Iceland's failure to guarantee the deposits was "completely unacceptable." "This is fundamentally a problem of an Icelandic registered company (and) Icelandic registered financial services authority -- they have failed not only the people of Iceland, they have failed the people of Britain," he told the BBC.
His Icelandic counterpart Geir Haarde had earlier expressed anger at Britain's use of anti-terror laws to freeze Icelandic assets in Britain, and said he had made his views clear to Chancellor Alistair Darling in a telephone call. "That was not very pleasant. I'm afraid that not many governments would have taken that very kindly, to be put in that category and I told the Chancellor that we were not pleased with that...I could not regard us in any way as the people that this act is supposed to apply to -- terrorists," Haarde told a news conference.
Brown remained unrepentant, saying he had been left with no other option. "I think the public ... will understand that when people's savings and deposits are at risk, we are entitled to take the action that is necessary to seize the assets if we are not going to get any other way of making it clear that people... will find that their savings and deposits are safe," he told Sky television. "Now we took that action -- I don't apologise for it. I think it is the right thing to do in the circumstances."
British officials have said repeatedly this week that they were having difficulty "getting complete clarity" from Icelandic authorities on how British savers were exposed and whether they would be able to recover their deposits. It emerged Thursday that 108 British local councils had a total of 799 million pounds on deposit with Icelandic banks [my emphasis].
Most of them will be able to continue to provide services, but the British government said it would help any councils with short-term cash flow problems on a case-by-case basis. The British government has pledged to protect the deposits of all British retail savers with those banks, but has not extended this guarantee to corporate investors.
The British government's actions chiefly concern two entities: First, an online bank, Icesave [is it just me or the name just dripping with irony?] a subsidiary of Landsbanki, Iceland's second largest bank. Going to their website tells us that Icesave has been iced--probably for good--and directs us to a notice by HM Treasury. The notice then cites the icing of another Landsbanki subsidiary, Heritable. Funds there have been transferred to Britain's Dutch buddies:
Heritable is regulated by the FSA. The FSA has determined that Heritable no longer meets its threshold conditions, and is likely to be unable to continue to meet its obligations to depositors. The FSA concluded that it is in default for the purposes of the Financial Services Compensation Scheme. The Treasury has used the Banking (Special Provisions) Act 2008 to ensure a resolution that preserves financial stability and provides protection and continuity of business for depositors.
Heritable’s retail deposit business has been transferred to ING Direct, a wholly-owned subsidiary of ING Group. ING Direct is working to rapidly ensure that it is business as normal for all customers.
This action by the Tripartite Authorities protects savers’ money and provides certainty for retail depositors. The transfer of the retail deposit book has been backed by cash from HM Treasury and the Financial Services Compensation Scheme.
The remainder of Heritable’s business has been put into administration. Any retail depositors eligible to claim under the Financial Services Compensation Scheme whose business has not been transferred to ING will be paid out in full through the Financial Services Compensation Scheme.
What the UK and Iceland are fighting over is who will now pay to reimburse the deposit holders at the Landsbanki subsidiaries. Reports mention that the first GBP 16,000 should be paid out by Icelandic regulators as part of their deposit insurance scheme, with the UK topping off the rest to the amount of GBP 50,000. Further complicating matters, the UK has more recently guaranteed savers not just GBP 50,000, but the entire deposit amount:
The savings provider is not covered by the financial regulator's compensation scheme. Instead, the first £16,000 of a customer's savings deposits is covered by the Icelandic regulator, with the UK service making up the rest, up to the current £50,000 deposit guarantee limit.
Following Landsbanki's nationalisation earlier this week, Iceland's government seems to have broken this commitment. "The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here," Mr Darling said.
"Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it," he added. "The British scheme would top that up to £50,000, but people over and above that would lose out...But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."
It will be interesting to see how this dispute plays out. to say the least. Ah, the joys of "Anglo-Saxon" economic governance. In the meantime, someone should tell John McCain about these enemies of freedom so he can issue a bellicose statement ASAP.
For what it's worth, I almost exclusively follow global economic carnage on Bloomberg, not CNBC. Aside from the latter's mindless cheerleading, I also take exception to it describing New York as "the financial capital of the world." By far more yardsticks of trading activity, London and not New York properly holds that claim...or does it still? For good reasons, I deliberately chose to go to the (relatively) affordable second British city of Birmingham. It's significantly less expensive to live in than London, where the prices of so many things have been inflated by the presence of petrodollar-laden Mideast oilers, Russian oligarchs, and--at least until recently--fatcat bankers.
TIME now has a good report on how the masters of haute finance have been laid low in the Britsh capital. Heck, if it means a less expensive trip to London for me, it may not be all that bad. Still, one thing is left unmentioned here: I wonder how the the city's dwindling coffers will affect its hosting of the 2012 Olympic Games. They're hardly cheap, y'know. Estimates place the Games' cost to London at GBP 9B, with political wrangling now ongoing over these funds. Already, the Olympic village may require a bailout of a cool billion pounds as sources of private capital disappear. Anyway here's part of the article -
All this activity has made the City — the square mile around St. Paul's Cathedral that is the heart of the old financial district, and the gleaming towers of the new financial district in the docklands area — a powerful motor not just for London but for British prosperity. In 2007, financial services accounted for 10.1% of the U.K.'s gross domestic product, up from 5.5% in 2001. Add in professional services linked to finance, such as accounting, law and management consultancy, and the total rises to 14%. And that's for Britain as a whole. For London, finance has been even more important: It now accounts for almost one-fifth of the city's total output, and perhaps as much as one-third if professional services are included. That's far more even than New York, where financial services are about 15% of the local economy...
The City has been through enough slumps to know what to expect next: layoffs, shrinking bonuses for those lucky enough to keep their jobs, and a new frugality over expenses. This will inevitably have repercussions on housing prices, but also on other types of consumer spending that boomed along with the City. They range from fancy restaurants and overpriced cappuccino bars to pricey vacations, bespoke suits and aromatherapy massages that the financiers and their legions of support staff could once readily afford.
The coming downturn is already shaping up as different — and tougher — than some previous ones. That's because the financial crisis is taking place at the same time as a real estate downturn, a conjunction that is unusual; in the past, one has often followed the other, but it's rare for them to happen simultaneously. And the problems are being exacerbated by an explosion of household debt in Britain over the past decade, which now leaves people especially vulnerable. Buoyed by rising property prices, households ratcheted up their borrowing to a massive 173% of disposable income, vs. 106% in 1995. That's way above even that paragon of profligacy, the U.S., where household debt amounts to 139% of income.
Oxford Economics, which specializes in regional forecasts and advises the British government, expects 110,000 jobs to be cut in London between this year and 2010 as the city's economy contracts — although if the credit crunch is protracted, it predicts that the number could rise to almost 150,000 next year alone. Real estate is already reeling. Plans for two huge new skyscrapers in the City have been shelved, and the price of prime residential houses in central London has dropped by 12% so far in 2008, according to realtors Savills, while sales volume is down by 50% in some areas like Clapham and Fulham. That's just the start. Vincent Tchenguiz, one of the biggest property moguls in the U.K., believes the real estate downturn will last five to seven years. "It's obvious that with a crippled financial sector the consequences won't be too good," he says. "London was helped by strong international markets, but as they're now gone, we'll see some stress."
We usually associated luxury products with conspicuous consumption little concerned with such things as energy conservation (think big-engined luxury cars, private jets and yachts, etc.), animal rights (think making fur coats out of endangered species or shark's fin soup), and the like. For some reason I can no longer remember, I was led to the World Wildlife Fund (WWF) UK site where I found this recent work entitled "Deeper Luxury." The WWF's goal is to prod luxury goods manufacturers to become more cognizant of social and environmental objectives that us little people fret about, e.g., "quality and style when the world matters." Most of the luxury brand makers surveyed did not perform very well, although L'Oreal does better than the rest likely since it has acquired The Body Shop [click for larger image]:
Read for yourselves and think if luxury and environmental concern are mutually exclusive things; I leave you with some of the WWF's arguments in favor of the idea they aren't so:
Myth 1: “Luxury is about conspicuous personal indulgence, so it can never be moral” Wrong! Luxury is about being and having the very best. Products that cause misery or environmental damage, now or in the future, are no longer considered by affluent consumers to be best in class. They do not feel luxurious to the more ethically and environmentally concerned consumers of today.
Myth 2: “Luxury consumers in new markets do not care about ethics or the environment” Wrong! As new markets mature, their more affluent citizens increasingly follow international trends, including awareness and concern over social and environmental issues, and a desire for their purchases to provide meaningful experiences. In certain regions, this arises not only from international influences, but also from local sets of values, such as lien in China. (See “Challenge 1”, Chapter 3).
Myth 3: “Brands cannot tell consumers what to care about” Wrong! Brands tell consumers what to care about all the time, both directly and by implication or demonstration. Examples include models selected for their body shape, fashion and personal care tips in the media, and advertising.
Myth 4: “Luxury brands can only build in value through materials, design and marketing” Wrong! Value can be provided via benefits to the people, communities and environment affected by production, marketing and distribution. These benefits help to build the intangible value of the brand. This implies and requires a high level of collaboration between marketing, design and other business functions.
Myth 5: “Heritage will maintain luxury brand value” Wrong! 50 years hence, what a luxury firm does today will be part of its heritage, and another company that is created today will also have a heritage. A company’s heritage from the 19th or 20th centuries will not stay the same, but will be interpreted on the basis of contemporary values and the company's activities during the 21st century. Luxury brands need to see heritage as an evolving phenomenon, and work at contemporary heritage creation, by being pioneering in shaping the future.
Myth 6: “Legal action is the best way to address counterfeiting” Wrong! Changes in technology and communications, combined with the promotion of labels by luxury brands, mean that counterfeiting will continue in the face of legal challenges. Therefore, luxury brands must reconsider their emphasis on logos, and seek to connect with deeper values.
Myth 7: “Luxury brands have less impact on society than other companies, so need offer nothing more than philanthropy and compliance” Wrong! Luxury goods involve diverse supply chains that have impacts on communities and nature throughout the world. Various stakeholders, including investors, increasingly expect verifiable and comparable information on social and environmental performance, resulting from a systematic approach. In many cases, non-luxury consumer goods companies outperform luxury brands in aspects of corporate sustainability (see Chapter 5).
Many Western companies had generally positive experiences offshoring their backroom operations to Indian firms. These positive experiences led them to think, "Why the !%$^ should we hire these outsourcing firms when we ourselves can set up shop in India?" For a time, the likes of Tata Consulting Services (TCS), Infosys, and Wipro were given pause by the entry of Western companies in their backyard, luring away employees with higher salaries and more benefits. However, it now appears that the Americans and the Europeans have been nowhere near as much a threat to the indigenous industry as some had feared.
Today, I bring you a case in point: especially after the subprime crisis inflicted major damage on the balance sheets of big banks, some have started selling off their backroom operations en masse. Some think this outsourcing gig is simple: get a high-speed communications line to the US or Europe going, buy some computer equipment, hire comparatively inexpensive LDC labor, and off you go. As Citigroup and many other MNCs are finding out, matters are not that simple. When it comes to offshoring, it's better to leave things to the pros--Indian firms. From Bloomberg:
Citigroup Inc., reeling from $61 billion in credit-related losses, agreed to sell its back-office unit in India for $505 million to Tata Consultancy Services Ltd. as the deepening financial crisis forces banks to raise funds. As part of the accord, Citigroup will award orders worth $2.5 billion over 9 1/2 years to Mumbai-based Tata Consultancy, India's largest software-services provider said in an e-mailed statement today.
The sale may help Chief Executive Officer Vikram Pandit fund acquisitions such as the proposed purchase of Wachovia Corp.'s branch operations. The deal allows Tata Consultancy to more than double its number of back-office workers, helping the company widen its lead over Infosys Technologies Ltd. and Wipro Ltd.
``We view this as a positive move for Tata Consultancy,'' Diviya Nagarajan, a Mumbai-based analyst at JM Financial Ltd., said in an e-mailed note to clients. The deal gives the Indian provider ``much needed visibility and stability with a top client in the context of the current demand environment,'' she wrote.
Citigroup Global Services Ltd., formerly known as E-serve International, employs 12,000 back-office workers that offer transaction processing and customer services for the New York- based financial firm's businesses globally, according to its Web site. Tata Consultancy employed about 8,000 back-office workers, N.V.K. Raman, head of Tata's back-office outsourcing unit, said in a February interview...
In 2004, General Electric Co. sold 60 percent of its Indian back-office unit, now Genpact, for $500 million to buyout firms General Atlantic LLC and Oak Hill Capital Partners LP. British Airways Plc sold its controlling stake in WNS Holdings Ltd. in 2002.
Citigroup has the largest amount of losses tied to the collapse of the mortgage market with $61 billion, followed by Wachovia Corp.'s $53 billion, according to data compiled by Bloomberg. Globally, asset writedowns and credit losses have cost the world's biggest banks and securities firms a combined $593 billion, according to Bloomberg data.
TCS's press release about the acquisition is also available online. I am kind of confused by Tata's terminology about what it's acquiring, calling it "Citigroup Global Services Limited (CGSL), the India-based captive business processing outsourcing (BPO) arm of Citi." Although the terms outsourcing and offshoring are sometimes used interchangeably, I have a slightly different interpretation of them: Outsourcing means contracting things previously done in-house to another firm--it can be done by another firm in the same country or another country. Offshoring, however, means having these tasks done in another country; that is, these tasks may still be done by the same firm, but in a different location.
Using Emmanuel-speak®, what's happening here is that Citigroup's offshored but in-house operations will now become outsourced offshore operations (as they have been sold to another firm). There is a meaningful distinction here that I believe should be followed to avoid semantic confusion.
During his time as first gentleman to then-President Benazir Bhutto, new Pakistani President Asif Zardari was dogged by accusations of corruption. Because of this alleged fondness for kickbacks on government contracts, he was called "Mr. Ten Percent" by his critics. Once more, I do not believe that I am in a good position to ascertain the veracity of these claims. However, a more recent action of his has given me reason to pause. Like in the past, it involves Mr. Zaradari and money. A lot of money.
Standard and Poor's downgraded Pakistan's sovereign credit rating to CCC+ from B on Monday:
Pakistan's credit rating was cut by Standard & Poor's, which doubts about the country's ability to meet $3 billion in debt-servicing costs as terrorism risks grow and investors flee emerging markets.
The nation's long-term foreign-currency rating was cut two levels to CCC+ from B, with a negative outlook, the U.S. rating company said in a report today. The rating may be lowered further if the government fails to stop the growing external imbalances, the report said...
``It is not a good sign for future foreign inflows,'' said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. ``This will halt efforts by Pakistan to raise funds from international financial markets and it will have to seek funds from bilateral or multilateral lenders.''
Pakistan is the world's riskiest government borrower, according to credit-default swap prices from CMA Datavision, with investors concerned by a deterioration in security that saw 53 people killed in a bomb attack on the Islamabad Marriott hotel last month.
``The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough,'' S&P said in the statement...Pakistan is running short of money to repay state debt. Its foreign-exchange reserves have dropped 67 percent in the past year to about $4.7 billion, S&P estimated.
Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note.
The Daily Telegraph further suggests that after subtracting the country's forthcoming liabilities, Pakistan's reserves amount to closer to $3 billion:
Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion - enough to buy about 30 days of imports like oil and food. Nine months ago, Pakistan had $16 bn in the coffers.
The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy...
While Mr Musharraf's prime minister, Shaukat Aziz, frequently likened Pakistan to a "Tiger economy", the former government left an economy on the brink of ruin without any durable base.
The Pakistan rupee has lost more than 21 per cent of its value so far this year and inflation now runs at 25 per cent. The rise in world prices has driven up Pakistan's food and oil bill by a third since 2007.
Efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, while the government has also failed to raise loans on favourable terms from "friendly countries".
Therefore, like Iceland, Pakistan is on the brink of a balance of payments crisis. Like other stories in this genre, the elements are similar: Foreign investors are flooding out of the country as the investment climate deteriorates (especially the law and order situation). In turn, foreign capital fleeing the country puts pressure on the country's foreign exchange reserves. Fears of an impending BOP crisis has caused the currency, the Pakistani rupee, to decline steadily [see chart above]. In the past, we all knew how stories like this would end: with a bailout package from the IMF. Like with the Iceland case, however, Pakistan seems keen on staving off an IMF package. Since the Asian financial crisis, many developing countries have accumulated massive reserves to avoid having to turn to the IMF and the perceived harshness of its conditionalities. These are quite unpopular, especially those involving "belt-tightening" measures (more on this later). Unfortunately for Pakistan, it is not one of the LDCs which have built up sizable reserves.
Instead of borrowing from the IMF to tide Pakistan over, then, what's Zardari's financial strategy? A Wall Street Journalinterview with the man had him saying that the international community should give Pakistan a grant--not a loan--of $100 billion. My reaction is the obvious one: given his checkered history, why exactly should others entrust this fellow to administer $100B? We can debate all day about the past allegations of corruption leveled against him, but there is certainly no available evidence that he is capable of using such a huge amount wisely.
I have met so many talented and intelligent people from Pakistan that it disturbs me that this country is left with such a fate. Involvement with America's war on terror certainly has not benefited the country a whole lot. Nevertheless, asking a lot of money primarily to wage a Bushian war on terror seems the wrong way to go:
Mr. Zardari seems to hope that, with the intelligence problem out of the way, a new era of cooperation can open up with the U.S. "We want to be able to share [U.S.] intelligence," he says. "We need helicopters, we need night goggles, we need equipment of that sort." He stresses the need for precision and finesse in fighting Islamic militants, rather than large-scale military force. "My eventual concept is that we should be taking them on as they are, as criminals." Of Osama bin Laden he says, "the minute I make anybody my enemy, he becomes as big as I am."
In recent weeks there have been reports that Pakistan has deployed F-16s against tribal insurgents, in part because the army's own frontier troops have been routinely routed in ground fighting. Their problems aren't simply tactical. "What kind of a joke is this that I cannot pay my security personnel more than the Talibs are paying?" he asks. "Those terrorists are paying their soldiers 10,000 rupees; I'm paying seven or six thousand rupees..."
It's a classic chicken-or-egg situation: would so-far elusive economic progress in Pakistan make less turn to the Taliban and its likes, or would economic progress come more as the result of fixing the insurgency situation first? I subscribe to the notion that addressing situations that breed instability and discontent such as a lack of viable economic alternatives comes first. See Somalia and Afghanistan, for instance. Zardari says:
Speaking of the attack, Mr. Zardari again brings the subject around to his economic problem. "If I can't pay my own oil bill, how am I going to increase my police?" he asks. "The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful."
Is this the man the world should give $100B to in grants, never to be repaid? Read the WSJ interview. His plea is reprinted here:
Mr. Zardari shows no signs that he is stepping into that role diffidently. In an interview last Saturday with The Wall Street Journal, held under tight security at a midtown Manhattan hotel, he crafted his phrases in a tone of command. Pakistan's war, he says, is "my war," its fighter jets "my F-16s," its Intelligence Bureau "my IB." When he discusses Pakistan's economic crisis -- the central bank has about two months' worth of foreign currency reserves left to pay for the country's imports of oil and food -- he says he looks to the world to "give me $100 billion..."
"I need your help," he says more than once. "If we fall, if we can't do it, you can't do it." In asking for the help -- and $100 billion is no small request, even (or particularly) in the age of AIG -- Mr. Zardari is keen to insist that it not be described as aid. "Aid is proven through the researches of the World Bank . . . [to be] bad for a country," he says. "I'm looking for temporary relief for my budgetary support and cash for my treasury which does not need to be spent by me. It is not something I want to spend. But [it] will stop the [outflow] of my capital every time there is a bomb. . . . In this situation, how do I create capital confidence, how do I create businessmen's confidence?"
10/9 UPDATE: Pakistan has now lowered bank reserve requirements in a bid to improve domestic liquidity. Also, its central bank has been intervening to try and prop up the rupee. Are they trying to forestall the inevitable? We'll find out soon enough.
Wow, things are moving fast. If you thought the previous movements of the Icelandic krona were wild, look at what's happened today as it begins competing with the Zimbabwean dollar in the plunging currency sweepstakes. [Again, don't adjust your monitor; this chart is for real. If anything else, the article below suggests it may be understating the extent of krona decline.] Hot on the heels of nationalizing its third largest bank, Glitnir, Iceland has now nationalized its second largest bank, Landsbanki. The largest Icelandic bank, Kaupthing, has been given EUR 500 million by the government.
Meanwhile, Iceland is now negotiating a EUR 4B loan from Russia to help with its balance of payments difficulties. That it is approaching Russia instead of other NATO member countries is suggestive of the depth of its troubles as traditional friends no longer want to help. The FT says Iceland is not necessarily shifting its geopolitical alignment eastwards. Still, some questions:
Is Iceland embarrassed to become the first developed IMF borrower since the UK in 1976?
Is Iceland fearful of seeking IMF help after seeing what happened to Asian financial crisis borrowers?
Is Russia trying to buy regional influence if it loans Iceland?
And, get this: Iceland is attempting to peg the krona to a currency basket. Despite IMF personnel arriving on the scene, Iceland still seems to think there's an easier way out. It's Steve Hanke in Indonesia all over again! Of course, the natural question is whether Iceland can successfully defend such a peg given such measly--make that non-existent--reserves. Somehow, I don't think these moves are confidence-inspiring at all. From Bloomberg:
Iceland sought a 4 billion-euro ($5.43 billion) loan from Russia, pegged the slumping krona to a basket of currencies and took control of its second-biggest bank to stem a collapse of the financial system. Central bank Governor David Oddsson said an announcement earlier today in Reykjavik that the Russian loan had been agreed upon was incorrect and talks were ``ongoing.'' Russian Finance Minister Alexei Kudrin confirmed that ``we have a request from the Icelandic government'' and said Russia's reaction is ``positive...''
About 90 percent of the external debt was generated by the three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf. The government took control of Landsbanki today, following the nationalization of Glitnir on Sept. 29. It also loaned 500 million euros to Kaupthing and guaranteed domestic deposits.
Prime Minister Geir Haarde said at a press conference he was ``disappointed'' that ``we have not received the kind of support we requested from our friends.'' He declined to name countries Iceland may have approached for a loan [cue the NATO countries], adding that the nation ``will absolutely not default on its foreign debt.''
International Monetary Fund spokesman William Murray confirmed that a mission had been sent to Iceland, declining to say how long it has been there or the substance of its discussions. The Washington-based lender sends missions at the request of host countries.
``We are increasingly convinced that the Icelandic authorities cannot resolve the situation without outside help,'' said Lars Christensen, senior currency strategist at Danske Bank A/S in Copenhagen. ``We therefore find it most likely that the crisis will have to be solved with the support of the IMF and perhaps some contribution from the Nordic governments.''
The central bank said it pegged the krona against a basket of currencies at a rate equivalent to 130 per euro. According to Nordea Bank AB, the krona traded at 200 to the euro as of 11:39 a.m. in Reykjavik. That's 53 percent weaker than the peg implies.
``I'm deeply surprised -- this peg is not credible at all,'' said Christensen. ``A credible peg needs a credible set of measures to stabilize the economy and we haven't seen that yet.''
UPDATE 10/9: Iceland's largest bank, Kaupthing, has been nationalized as well. Thus, all three of the country's banks are now owned by the state.
[WARNING: This is a rather morbid post. However, events recounted here are symptomatic of larger troubles. Those seeking uplifting tales amidst financial meltdown are advised to skip it.]
A few days ago, the Wall Street Journal suggested that Metallica's new album Death Magneticmay serve as the soundtrack to the subprime mess. Of course, I beg to differ: Megadeth's "Foreclosure of a Dream" is a far better soundtrack to this symphony of destruction. Now, two separate incidences have pointed me in the direction of yet another on-topic heavy metal evergreen, Ozzy Osbourne's "Suicide Solution." It seems downscaling the American dream of home ownership is hard for some, even if its affordability becomes out of the question due to past excesses. Note that the financial distress suffered by both parties aren't necessarily due to taking out subprime loans, but are related to the subprime crisis nonetheless.
With apologies to Robert Shiller, there is something darkly American about these displays of self-destructive behavior. First is the widely reported story of a 90-year old woman attempting to take her life after being threatened with foreclosure. She has since been allowed to keep her home:
Fannie Mae said it will set aside the loan of a woman who shot herself as sheriff's deputies tried to evict her from her foreclosed home. Addie Polk, 90, of Akron, Ohio, became a symbol of the nation's home mortgage crisis when she was hospitalized after shooting herself at least twice in the upper body Wednesday afternoon.
On Friday, Fannie Mae spokesman Brian Faith said the mortgage association had decided to halt action against Polk and sign the property "outright" to her. "We're going to forgive whatever outstanding balance she had on the loan and give her the house," Faith said. "Given the circumstances, we think it's appropriate..."
Neighbor Robert Dillon, 62, used a ladder to enter a second-story bathroom window of Polk's home after he and the deputies heard loud noises inside, Dillon said. "I was calling her name as I went in, and she wasn't responding," he said. He found her lying on a bed, and he could see she was breathing. He also noticed a long-barreled handgun on the bed, but thought she just had it there for protection. He touched her on the shoulder. "Then she kind of moved toward me a little and I saw that blood, and I said, 'Oh, no. Miss Polk musta done shot herself,' " Dillon said...
In 2004, Polk took out a 30-year, 6.375 percent mortgage for $45,620 with a Countrywide Home Loan office in Cuyahoga Falls, Ohio. The same day, she also took out an $11,380 line of credit. Over the next couple of years, Polk missed payments on the 101-year-old home that she and her late husband purchased in 1970. In 2007, Fannie Mae assumed the mortgage and later filed for foreclosure.
This unfortunate incident has been followed up by a UCLA MBA taking his life along with those of his wife, three kids, and mother-in-law. From the LA Times:
The 45-year-old Porter Ranch financial manager [Karthik Rajaran] who once made more than $1.2 million in a London-based venture fund had lost his job. His luck playing the stock market ran out. On Sept. 16, he bought a gun. He wrote two suicide notes and a last will and testament. And then, sometime between Saturday night and Monday morning, he killed his wife, mother-in-law and three sons, and took his own life.
"This is a perfect American family behind me that has absolutely been destroyed, apparently because of a man who just got stuck in a rabbit hole, if you will, of absolute despair, somehow working his way into believing this to be an acceptable exit," said LAPD Deputy Chief Michel Moore. "It is critical to step up and recognize we are in some pretty troubled times."
In a letter addressed to police, Rajaram blamed his actions on economic hardships. A second letter, labeled "personal and confidential," was addressed to family friends; the third contained a last will and testament, Moore said. The letter to police voiced two options: taking his own life, or killing himself and his entire family. "He talked himself into the second strategy," Moore said. "That that would be the honorable thing to do..."
When police entered the home in the gated, Spanish-style community, they first found the gunman's mother-in-law, Indra Ramasesham, 69, dead in a downstairs bedroom. His wife and three sons -- Krishna, 19, a sophomore at UCLA majoring in business economics; Ganesha, 12; and Arjuna, 7, all named after Indian gods and warriors -- were discovered in various upstairs bedrooms, all shot in the head, some with multiple gunshot wounds...
He also sold his house in 2006, a calculated decision even though his wife, a bookkeeper at a pharmacy, did not want to move, their former neighbors said. He sold the house for $750,000, making a sizable profit on a home the couple purchased in 1997 for $274,000.
"The market was going down and he wanted to get out before the bottom dropped out," Karns said. "I talked to him last December and he said, 'I feel I did a good thing by selling when I did.' "
Commentators (like me) often decry those taking out HELOCs and flipping homes as symptomatic of the housing bubble's excesses. What I gather is that the 90-year old woman took out a home equity loan while the LA businessman flipped his house. Something we need to figure out is the extent to which these folks are victims of the times or harbingers of them. If you look at the pictures on the LA Times site, also parked in the LA home are two hulking SUVs. As economists and others have suggested, the subprime crisis is likely to permanently alter the suburban (GMC Suburban?) way of life. Worse, events have demonstrated that Uncle Sam is in no position to help those who, like himself, have taken on excess debt. Some are not coping as well as hoped for, but the downsizing of America for past debt-fueled excesses is well underway.
Those who've visited this blog more than once know exactly what I mean here: I cannot help but conclude that China's recurrent protests over the US selling arms to Taiwan are purely cosmetic given the PRC's reluctance to stick it to America where it hurts. I needn't belabor this state of affairs excessively. Given America's gaping trade deficit, one of the industries where it maintains a sizable lead is in selling weaponry. Selling products designed to cause death and destruction has not always been a universally welcome endeavor. (Indeed, you can argue that instability owing to the US-led "war on terror" has stimulated worldwide demand for arms.) Given America's limited export options, however, the Bush administration has been pushing arms sales pretty hard:
The Bush administration is pushing through a broad array of foreign weapons deals as it seeks to rearm Iraq and Afghanistan, contain North Korea and Iran, and solidify ties with onetime Russian allies.
From tanks, helicopters and fighter jets to missiles, remotely piloted aircraft and even warships, the Department of Defense has agreed so far this fiscal year to sell or transfer more than $32 billion in weapons and other military equipment to foreign governments, compared with $12 billion in 2005.
The trend, which started in 2006, is most pronounced in the Middle East, but it reaches into northern Africa, Asia, Latin America, Europe and even Canada, through dozens of deals that senior Bush administration officials say they are confident will both tighten military alliances and combat terrorism.
“This is not about being gunrunners,” said Bruce S. Lemkin, the Air Force deputy under secretary who is helping to coordinate many of the biggest sales. “This is about building a more secure world.”
The surging American arms sales reflect the foreign policy tides, including the wars in Iraq and Afghanistan and the broader campaign against international terrorism, that have dominated the Bush administration. Deliveries on orders now being placed will continue for several years, perhaps as one of President Bush’s most lasting legacies.
A recurrent sore point in the US-China relationship is America acting as, yes, gunrunner to Taiwan. Ever since the US sought a rapprochement with China, the issue has flared from time to time. With a $6.43B sale of American arms to Taiwan being mooted, the regular process has started of Chinese bellyaching. As usual, China cites its series of communiques with the US in regard to these sales which can be differentially interpreted. Nevertheless, the amount being contemplated now is somewhat larger compared to past purchases. From our favorite official publication, China Daily:
China on Saturday denounced the US government's decision to sell arms worth of about US$6.5 billion to Taiwan. Foreign Ministry spokesman Liu Jianchao said the Chinese government and people firmly opposed this action which seriously damaged China's interests and the Sino-US relations.
The US government, in spite of China's repeated solemn representations, on Friday notified the Congress about its plan to sell arms to Taiwan, including Patriot III anti-missile system, E-2T airborne early warning aircraft upgrade system, Apache helicopters and other equipment.
Chinese Vice Foreign Minister He Yafei has summoned the charge d'affaires of the US Embassy to China to raise strong protest against the US move, according to spokesman. China firmly opposes to arms sales by the United States to Taiwan, said Liu, noting that this has been a consistent and clear stance of China.
The US government's agreement on arms sale to Taiwan severely violated the principles set in the three joint communiques between China and the United States, especially the communique on the US arms sales to Taiwan signed on August 17, 1982, grossly interfered in China's internal affairs, endangered Chinese national security, and disturbed the peaceful development of cross-Strait relations, Liu stressed. "It is only natural that this move would stir up strong indignation of the Chinese government and people," he said. "We sternly warn the United States that there is only one China in the world, and that Taiwan is a part of China," Liu said...
China urged the United States to recognize that it is seriously harmful to sell arms to Taiwan, Liu said, noting that the United States should honor its commitment to stick to one-China policy, abide by the three China-U.S joint communiques, and oppose the so-called "Taiwan independence".
Liu said the United States should immediately take actions to correct its mistakes, cancel the proposed arms sale, stop military links with Taiwan, and stop disturbing the peaceful development of cross Strait relations, so as to prevent further damage to the Sino-US relations and the peace and stability across the Taiwan Strait. China reserved the right for taking further measures, he noted...
Speaking of US-China relations, the China Daily carried an article today refuting the rumor that China's intends to foot $200 billion of the $700 billion Paulson plan:
The central bank has denied media reports that China will buy up to $200 billion worth of US treasuries to help Washington combat the deepening financial crisis. Bai Li, spokesman for the People's Bank of China, said that "it is the first time I have ever heard about such rumors". According to Hong Kong media reports, China will initially spend $70-80 billion to buy US treasury bonds.
Bai said the official stance has been published on the central bank's website, which did not mention any such purchase. The statement merely said China welcomes Washington's $700 billion bailout plan; and will cooperate with the international community to ensure financial security.
Putting 2 and 2 together, the "further measures" China can take simply involve showing America who owes whom: if the PRC were really serious about putting America in its place, then it should signal that it has had enough of funding America's deficits while the US keeps selling Taiwan weaponry. Dumping some of its $1.8 trillion reserve hoard on the open market would more likely result in Dow Jones 3600 than thirty-six thousand. You may say this is asking for trouble. I say this should be done to keep America honest about the economic reality of relying on a country that doesn't share its worldview (and learn not to borrow so much).
Until China does so, commenter LeeHKG in the bailout story has the final word on Chinese wimpiness, here in the context of taking its objections to US arms sales to a meaningful level:
Funny how Americans are always mocking us when in fact we're the ones who are propping up their economy. It's about time we Chinese wake up from being stupid and retarded!
If the Chinese keep buying American Treasuries like a blindly loyal dog, without regard to its geopolitical (helping arm Taiwan) or economic (getting a guaranteed haircut) implications, then there's no one to blame other than itself. Being taken for a chump is not my idea of fun.
The notion of "creative destruction" suggests that industries which have lost their economic relevance should be allowed to go gently into the good night. However, political-economic considerations usually mean that they aren't allowed to do so. In this day and age of resource scarcity, the rising price of fuel has endangered the airline and the automobile industries. First, folks are more reluctant to use these modes of transportation as a result of higher fuel prices. Second, airlines and automakers also need to deal with tighter environmental regulations whether they welcome them or not.
A few days ago, US automakers successfully claimed $25B worth of government funding to supposedly help meet higher fuel economy standards. I consider it a cynical ploy given that these automakers have led the fight so far against higher standards. Moreover, if they were really environmentally concerned, then they wouldn't have sold so many monster SUVs in past years that cannot be moved of dealers' lots nowadays. The French government claimed to be appalled by this bailout. However, it is now apparent that rent-seeking is not confined to America: the heavyweights of the European automobile industry including BMW, Mercedes-Benz, FIAT, Ford Europe, General Motors Europe, Jaguar Land Rover, Porsche, PSA Peugeot Citroën, Renault, Toyota Motor Europe, Volkswagen and Volvo are now maneuvering for subsidized EU loans to the tune of €40 billion (about $55B). Unsurprisingly, car sales are also tanking in Europe.
Why, that's over twice what Detroit is asking for. Like Detroit, tight credit conditions have made working capital hard to come by. Also like Detroit, EU carmakers believe it's necessary to cope with increasingly stringent environmental standards for their products. Also, part of the money is to be used to provide motorists incentives to trade their older, high carbon emission vehicles for newer ones that do not emit as much. All this makes me wonder: aren't people sending a market signal that cars are becoming unattractive transportation propositions? Unlike in America, you can pretty much get wherever you want to go using public transportation. Oh well, on to the "beggar thy EU" strategy, invoking the number of jobs the industry provides, etc:
The European automobile manufacturers are deeply concerned about the evolving financial crisis and the consequent drop in consumer confidence and economic growth. The economic downturn adds to already extensive pressure on car production in Europe, due to increasingly stringent regulatory requirements, in particular the pending CO2-reduction legislation, and could represent a serious backlash to the transition to low-emission vehicles on Europe’s streets.
Manufacturers ask that various measures should be considered by EU policy makers to ensure the future of car manufacturing in Europe and reinforce the momentum in consumer demand for fuel-efficient vehicles.
* A low-interest loans package (40 billion EUR) to help secure a sustainable market for current and newly developed fuel-efficient technologies * Incentives to scrap vehicles of over 8 years old, during a period of 36 months, to accelerate fleet renewal
The above would provide conditions under which the objectives of the CO2 legislation as currently debated by the European Parliament and the EU member states could become more realistic, enabling manufacturers to achieve the desired results. Details of this conceptual proposal will have to be worked out in the weeks to come.
“Car makers face increasingly hesitant consumers and call on governments to respond, stimulate the economy, relieve the credit crunch and restore consumer confidence. Only then will consumers have the means and the confidence to invest in new vehicles”, said Christian Streiff, President of the automobile industry’s trade association, ACEA, and CEO of PSA Peugeot Citroën. “The proposed loans-package will give an important and welcome signal to consumers and financial markets.”
As evidenced at the Paris auto show, which opened over the weekend, the car industry is delivering increasingly lower CO2 levels in new cars. This is the result of and will further involve huge investments in new technologies and R&D. Over the past decade, new car CO2 emissions have already been cut by 14%, an achievement that has not been equalled by any other industry. ”We will continue our work but do believe that the governments can do more to support our already significant investments and growing number of achievements,” said Streiff.
A scrapping scheme for older cars is a further important way of accelerating the take-up of fuel-efficient technologies and renew the car fleet on Europe’s roads, which has a clear environmental benefit. In the EU15, cars older than 8 years represent 36% of the existing fleet. Their replacement with new cars would result in CO2 savings of 20 megatonnes per year, or 4.5% of total passenger car emissions. There would also be a significant reduction on emissions of nitrogen oxide and particulate matter.
The European automotive industry is key to the strength and competitiveness of Europe...They provide direct employment to more than 2.3 million people and support another 10 million jobs in related sectors. Annually, ACEA members invest €20 billion in R&D, or 4% of turnover.
The 1997/98 Asian financial crisis retro elements are truly, madly, deeply disturbing. Although Asian countries are now armed to the teeth with whopping levels of foreign exchange reserves to prevent a recurrence of those tumultuous days, I believe that the extreme levels of export reliance they have gone to build those reserves have come at a price. Very simply, who will all these Asian exporters sell to as America's consumer-driven economy hits the wall?
Today we revisit South Korea, one of the countries famously hit by crisis. As its foreign exchange reserves dwindled to nothing, it was forced to resort to the IMF. After years of exporting boatloads of stuff to hyperconsuming Americans and others, South Korea's reserves stand at about $240 billion. Still, its reserves have been declining in recent months as the country has tried to stem rising inflation by propping up the Korean won. Reuters now warns that things may be getting worse for the country as it has slid into a current account deficit for the first time since the Asian financial crisis. Declining export performance has in turn encouraged foreign investors to leave the country, worsening its balance of payments. Moreover, Korea has since become a heavily "financialized" economy with high levels of consumer indebtedness and high loan to deposit ratios compared to other countries in the region.
Ultimately, $240B should be enough to see the country through, though it will get a scare as it tries to sort out its current problems. It will be important to figure out if there are other export markets available. Once again, it begs the question of whether financial sophistication is so wonderful if it means increased vulnerability to credit events and the like:
South Korea urged banks on Monday to sell foreign assets to raise dollars and promised to use its currency reserves to shield lenders from the financial crisis engulfing the United States and Europe...
"Recently our financial institutions have begun experiencing troubles in securing foreign-exchange liquidity," [FinMin] Kang said at a meeting with executives from local commercial banks. "The government judges that we need to deal with the situation preemptively, while assuming the worst-case scenario." He did not elaborate on what preemptive action might include.
Kang repeated an earlier government pledge to give banks access to the country's foreign exchange reserves, the world's sixth largest at nearly $240 billion. "Banks need to take measures themselves such as selling foreign-currency securities and other assets to secure foreign exchange liquidity," Kang said...
South Korea looks more vulnerable than many Asian nations to the credit squeeze triggered by U.S. mortgage defaults last year that has triggered bank failures and nationalisations in the United States and Europe.
"This rush for foreign currency has been heightened not only due to the global credit squeeze but also because Korea has seen its current account falling sharply in recent months, even as investment outflow continues," analysts at UBS said in a note. "Although we are not expecting a banking crisis in Korea, the credit crunch is likely to be most severely felt in Korea among Asian economies given the highly leveraged Korean corporate and households."
Household debt in Korea has hit 82 percent of gross domestic product and 148 percent of disposable income. The bank loans-to-deposits ratio is at 139 percent after a lending spree between 2002 and 2007. Most Asian countries have loans-deposit ratios below 100 with Malaysia at around 74 percent and the Philippines at 57 percent.
The loans-to-deposit ratio of the four biggest Korean banks -- Kookmin Bank, Woori Finance Holdings, Shinhan Financial Group and Hana Financial Group -- ranged between 135-177 percent in the first quarter of 2008, Moody's Investors Service said.
"The current difficulties are a result of the global liquidity squeeze rather than risk issues at individual banks," said spokesman You Jung-youn at Kookmin, the biggest lender. "It is more about the country risk."
The government has spent almost $25 billion since March to support the won, which has lost 26 percent since December and appears headed for its worst year since the 1997-1998 Asian financial crisis when capital fled the region.
Korea is also on track to post its first annual current account deficit since that crisis and foreign investors notched up net stock sales of 30 trillion won ($24.57 billion) this year, already the highest on record. But analysts said comparisons with the Asian financial crisis were overblown. "It's different from the previous crisis because foreign reserves are now more than enough to cover short-term foreign debt," said Lim Ji-won, economist at JPMorgan Chase.
South Korean debt maturing in less than a year is worth about $210 billion. [A measure of reserve adequacy known as the Greenspan-Guidotti rule is being able to cover (usually external) debt due within a year.]
The euro slumping below $1.35 as a result of troubles with European financial institutions requiring national bailouts such as Hypo Real Estate in Germany has occupied the attention of currency watchers. However, a far more dramatic move has been made by the Japanese yen, which has strengthened by almost ¥5 against the US dollar in a 24-hour period. Do not adjust your monitor settings; this chart is for real [click for a larger image]. What explains the yen's very spectacular move? Further unwinding of (risky) carry trades funded with yen or Swiss francs--that's for sure. This is illustrated in some way by Icelanders who stand at the edge of the precipice:
Deepening the bite for many Icelanders is that during the good times, many borrowers opted for "basket" loans tied to the yen and Swiss franc, even for auto purchases. Those loans have become disasters, as borrowers need to find ever more fast-devaluing kronur to meet loan payments.
Bottom line: the dollar is not a "safe haven." If such were the case, the yen would be even safer yet. Bloomberg continues with the carry trade unwinding due to deleveraging story:
Japan's currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.
After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $584 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.
After understandably taking a beating as a reserve currency due to its near zero yield in recent years, the yen is making a small comeback in that role:
The percentage of currency reserves held in yen by foreign central banks increased for a third straight quarter through June, according to the International Monetary Fund.
Yen now accounts for 3.4 percent of global reserves, compared with 2.8 percent a year earlier, the lowest amount since at least 1999. The dollar is the world's largest reserve currency at 62.5 percent, IMF figures show. Morgan Stanley strategists said in their Oct. 2 report that the yen may overtake the pound, which is No. 3 at 4.7 percent, in ``coming quarters.''
``There are many risks in the United States and Europe,'' said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has $54.1 billion in assets and is Japan's eighth-biggest life insurance company. ``Fund managers are starting to shift their money to yen. They are starting to overweight yen in terms of currency allocation.''
Among the four main negotiators for the Doha Round in recent years, the EU's Peter Mandelson had by far the most name recognition prior to assuming his post. America's Susan Schwab, Brazil's Celso Amorim, and India's Kamal Nath did not really match Mandelson in this department. It is then with considerable consternation that the EU powers-that-be have selected a relatively obscure politician to replace Mandelson after he accepted New Labour's gambit to shore up declining support at home. Picture this: a little-known lady is chosen to vie for a very important post at a critical juncture. In America, you have the gaffe-prone "hockey mom" Sarah Palin becoming a candidate for the second highest office in the land as the country is headed for a full-blown recession. Meanwhile, in Europe, Baroness Catherine Ashton is now--you guessed it--the candidate to occupy the second most important EU post as trade commissioner while international trade talks teeter on the brink of oblivion.
Like most of you, I did not know of Catherine Ashton prior to her being chosen for this post. Thus, I cannot say what sort of job she'll do. EARTHTimes offers this profile on her:
Catherine Margaret Ashton, the 52-year-old British Labour politician set to succeed Peter Mandelson as European Union (EU) trade commissioner in Brussels, has held a number of middle-ranking posts in the British government. She has been responsible for issues including education, justice, equality and human rights.
As leader of the House of Lords, a position to which she was promoted by Prime Minister Gordon Brown in 2007, Ashton was a key figure in securing the parliamentary passage of the Lisbon Reform Treaty through the upper house of the British parliament.
Ashton was given a life peerage under the previous government of Tony Blair in 1999 and has since then been known as Baroness Ashton of Upholland, taking the title from her native town of Upholland, in the northern county of Lancashire. In 2001, Ashton was made parliamentary under-secretary of state in the Department for Education and Skills, where she dealt with issues ranging from school policies to a ban on smacking by childminders. In 2004, she took up a similar role at the Department for Constitutional Affairs, dealing with human rights, equality and justice issues...
Other than helping secure the Lisbon Agenda through the House of Lords, I can't really point to anything significant that suggests she has worked on EU and/or trade issues (shades of Palin?) Although it's not wise to make a quick judgment of what she'll be able to do in her new role, it may have been rash to choose someone who, on the surface, is new to this sort of thing (Palin, anyone?) While EC President Manuel Barroso has been quick to back her, the trade negotiation set is not so sure if she's the right woman for the job due to her relative obscurity at a critical juncture. From Reuters:
The naming of a largely unknown, junior British politician on Friday as new EU trade chief is a setback to efforts to reach an early deal on the World Trade organization's (WTO) Doha round, trade diplomats said.
Catherine Ashton's appointment as European Trade Commissioner, replacing Peter Mandelson, prompted incredulity among the Geneva trade community. "It doesn't give you a lot of confidence that anything can be pulled together," said one influential WTO ambassador, adding that prospects for a deal had shifted since yesterday. The poor reception towards Ashton was attributed to her inexperience and lack of profile.
[Mandelson] was widely respected as master of the trade brief and a driving force behind efforts to liberalize trade in the Doha round, launched in late 2001. "Mandelson's departure at this juncture, when we are so delicately poised, is clearly a huge setback," India's WTO ambassador Ujal Singh Bhatia told Reuters. "He provided great leadership to the Doha process and took many risks to take the talks forward. He will be sorely missed." In an interview with Reuters shortly after he was appointed to his new position, Mandelson said time had run out for an early Doha breakthrough.
Ashton, a 51-year-old economist, previously held junior ministerial positions in the departments of Education and Skills, Constitutional Affairs and Justice, including responsibility for international trade in legal services.
Feel free to chip in if you know more about her. For the rest of us, we'll just have to wait and see what she brings to trade's biggest negotiating table.
What's a financial crisis without a fast-depreciating currency? In the place of Southeast Asian economies as per the Asian financial crisis, we now have the largely ignored story of Iceland. As the chart above depicts, the Icelandic krona (ISK) has devalued over 50% in little over four months' time and 20% in two weeks' time. Despite the USD being well and truly overbought against the ISK, the Icelandic currency's woes continue. How a lightly populated country few can point to on a map got into such a mess is a very interesting story of globalization.
Like (the area formerly known as?) Wall Street and the City of London, Iceland until recently was a big beneficiary of global liquidity provided by the Chinese and other countries running large external surpluses. Would-be Icelandic tycoons used cheaply available funding to buy up stakes in the rest of the world, especially Merrie Olde England. The Guardian offers a good backgrounder from which this excerpt is taken:
Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland's currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan. One of the country's three independent banks has been nationalised, another is asking customers for money, and the discredited government and officials from the central bank have been huddled behind closed doors for three days with still no sign of a plan. International banks won't send any more money and supplies of foreign currency are running out.
People talk about whether a new emergency unity government is needed and if the EU would fast-track the country to membership. On Friday the queues at the banks were huge, as people moved savings into the most secure accounts. Yesterday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.
This North Atlantic volcanic island, which is the size of Cuba, with a population of 320,000 - the size of Coventry's - is an unlikely player on the global financial stage. It is famous for its fish, geysers and for winning the UN's 2007 'best country to live in' poll. But Iceland built its extraordinary wealth on the crest of the worldwide credit boom and now the crunch is sweeping it away, bankrupting a people for whom the past eight years have been, for most of them and by their own admission, one long party.
The nation's celebrated rags-to-riches story began in the Nineties when free market reforms, fish quota cash and a stock market based on stable pension funds allowed Icelandic entrepreneurs to go out and sweep up international credit. Britain and Denmark were favourite shopping haunts, and in 2004 alone Icelanders spent £894m on shares in British companies. In just five years, the average Icelandic family saw its wealth increase by 45 per cent.
But, as a result of the international banking crisis, the billionaires who own everything from West Ham United football club to the Somerfield supermarket chain, Hamleys toy shops and the House of Fraser, are in trouble and the country is drowning in debt.
Iceland's cheap labour force, the Poles and Lithuanians, have left already - there's little point in sending home such a worthless currency, and the tourist season is over. Iceland is on its own.
As long as global credit flowed freely, Iceland itself became one large hedge fund--with its banks borrowing liberally to invest in equity stakes in European companies. The global credit crunch has seen to it that Icelandic banks cannot find such easy financing, and the now parlous state of Icelandic banks looks set to drag the entire country down via a slumping currency, high inflation, and other not-so-jollies. With a global slowdown in store, it is hard to imagine Icelandic concerns garnering sufficient returns to pay off their accumulated debts. And still things may get worse if Iceland's largest bank, Kaupthing, goes bust, taking Brits down too:
Kaupthing may be headquartered in Reykjavik, some 1,000 miles away from the City of London, but the financial volcano threatening to erupt on the island could send shockwaves down every High Street in Britain. The bank, whose liabilities are several times larger than Iceland's GDP, runs accounts for 150,000 Britons. Not only that, it is a key lender to some of Britain's biggest entrepreneurs, including the top chef and restaurateur, Gordon Ramsay and the property tycoon, Robert Tchenguiz, and bankrolls major retail chains from House of Fraser and Debenhams to Woolworths, Hamleys, Whittards of Chelsea and Karen Millen.
Yesterday the Icelandic government was desperately trying to stitch together a package that would restore confidence in the bank and prop up the country's ailing economy which is teetering on the brink after years of over-expansion by its banks.
Most of the British depositors in Kaupthing are safe - savings in the bank of up to £50,000 are guaranteed by the UK Government. But in Iceland, the population - known for their resilience and stoicism - are panicking. They are rushing to the banks in their snow-topped 4x4s to check that their savings are still there and stockpiling provisions in case the country's rampant inflation heads further out of control.
"Many people are angry. I think it is absurd that we are in this situation," says music student Katrin Hamilton, who has lived in Reykjavik her whole life. "People here are buying more freezers just so they can fill them with groceries..."
Iceland's complicated financial interests are so interconnected – with a small number of key investors owning cross-stakes in each other's institutions [sounds like keiretsu] – that the worst fear is a domino effect which will lead to the collapse of the country's economic system, potentially taking with it any number of high-profile British chains.
Some commentators have mooted that Iceland may soon need an IMF bailout--the first developed country to require one since the UK in 1976. I don't rule it out, and Iceland's fate certainly serves as another cautionary tale against excessive borrowing. Laissez faire, we hardly knew ye.
UPDATE: The WSJ writes that crisis talks over the weekend have yielded plans to raid mandatory pension funds invested abroad thought to amount to $16.5B. (Repatriating these funds would theoretically boost the krona.) Speaking of needing a bailout, the WSJ also says Iceland's forex reserves have dwindled to €2.0B. However, it may approach other Nordic countries before the IMF:
At marathon meetings at a guest house in Iceland's capital on Sunday, bankers and ministers discussed selling pension-fund assets held overseas and seeking assistance from central banks of other Nordic countries to provide liquidity, among other scenarios, according to people familiar with the situation...
Iceland's pension funds, to which private employers and the government are obliged to contribute, are well-funded and together hold about €12 billion ($16.52 billion) in assets, a good portion of it in foreign securities that could be sold to provide liquidity, also bolstering the ailing Icelandic krona.
Using pension plans, in effect, as a sovereign-wealth fund to rescue banks could create risks to future pension benefits. But other options are limited. The Central Bank of Iceland has about €2 billion in foreign-exchange reserves. Standard & Poor's and Fitch Ratings both cut Iceland's sovereign debt rating last week.
UPDATE 2 (10/17): See updated post on how Iceland has nationalized its second-largest bank, pegged its currency, and seeks EUR 4B from Russia.
Nobody ever said that Ricardo's notion of "comparative advantage" covers just legitimate enterprise. Two cases to illustrate this point are the burgeoning opium industry in Afghanistan (which is said to account for nearly half of the country's GDP) and maritime piracy off the coast of Somalia. As with many such cases, the roots are political-economic. After its invasion, Afghanistan has become a disembodied state, with a Western-installed figurehead serving merely as the "Mayor of Kabul" as opposed to being anyone with accepted authority throughout the country. Likewise, Somalia is a failed state without any sort of government as you and I would understand it. The resulting breakdown of law and order in both states has undermined whatever little legitimate industry both states had and has facilitated underground economies currently in the news for unwelcome reasons.
Lacking legitimate forms of livelihood, Afghans have turned to the comparatively advantageous trade of opium poppy cultivation. Although Afghanistan is not blessed with fertile land, opium is easy to grow. Outlying areas where the Afghan "government" has minimal presence and warlords hold sway present, shall we say, commercial opportunities. Given few other opportunities to earn a living, many have turned to poppy cultivation. The location of Afghanistan along the famed Silk Road of yore further enhances trade opportunities for illicit drugs.
While Somalia's geography is of course different, its story is much the same, adjusting for the context. Years of strife have largely finished off whatever fishing industry remained. Nowadays Somali pirates are fishers of men: not in the sense Christ intended but of kidnap for ransom (and other wholesome activities like extorting protection money). Like Afghanistan lying on the Silk Road, Somalia's long coastline by the Gulf of Aden serves as a geographically advantageous source of comparative advantage in conducting an underground economy. (The Gulf of Aden is an important waterway for transporting oil.) The seizure of a Ukrainian vessel flying a Belizean flag of convenience with, among other things, 33 T-72 tanks reportedly bound for South Sudan has captured world attention. Aside from the very interesting question of who exactly the customers for the tanks are, the pirates' stated intention to fight to the death against a flotilla of US Navy vessels adds cinematic elements to the story.
Popular Mechanicsdetails the cat-and-mouse game being waged between maritime authorities and the Somali pirates. Meanwhile, the Guardian has an interesting take on how an entire underground economy has emerged in Somalia centered on maritime piracy. Truly, it is Afghanistan at bay. Here are some excerpts, though read the whole thing if you have the time:
The drama in the Gulf of Aden is the latest and most dramatic of 50 serious attacks on ships in this region in the past year. And in the dusty little fishing ports and towns that dot the coastline, an entire economy has been privatised by the overlapping criminal enterprises whose business is the smuggling of weapons and people, obtaining 'taxes' and protection fees from the foreign fishing boats that ply Somalia's waters, and preying on the yachts and cargo vessels that sail off its coast.
'It is pretty Wild West,' says Alixandra Fazzina, an award-winning photographer who recently spent time in Somalia's lawless ports documenting the activities of the criminal gangs for a book. 'Fishing and taxes on fishing used to be the country's biggest source of revenue. Now they can't even fish. There are no ice factories and no government. So the fishermen have turned to piracy and people and weapons smuggling.'
State writ does not run here. There is no attempt by Mogadishu to fine those illegally fishing in the Gulf of Aden. So sea militias grew up that imposed their own ad hoc fines and taxes, a process that has transformed into outright hijacking and an economy based on criminality.
Boatyards produce not fishing boats but vessels intended for smuggling and piracy. Fuel suppliers and merchants equip the boats. Restaurants have grown up to feed hundreds of hostages taken from the tankers and carriers sailed into the waters around Eyl. Officialdom from top to bottom in areas like the autonomous Puntland exists solely to oil the wheels of organised crime. 'Some of these organisations are quite sophisticated,' says Fazzina. 'They'll use their own CB radio networks to organise the laundering of their money.'
Eyl has become the modern era's equivalent of Tortuga, the historic Haitian base of the notorious Welsh pirate Henry Morgan. It suddenly bustles with the pirates' go-betweens, the accountants and middlemen and negotiators in their four wheel drives, each time a new captive ship is sailed in. Around £17m has been raised in ransoms in the past 12 months.
Most of the money, usually 10-20 per cent of that demanded by the hijackers, is moved quickly along the line to the so-called 'Big Fish' in the clans - in the government of the provincial capital, in Mogadishu and in the Somalian diaspora in Nairobi and Dubai where those behind the piracy are allegedly to be found.
TIME recently interviewed the pirate captain Sugule Ali who is currently demanding a $20M ransom for relinquishing control of the ship. His explanation for engaging in piracy is that fishing has become an unviable occupation, turning former fishermen into bandits of the high seas:
We were forced into this work," he argues, speaking from the Faina's bridge at anchor off the village of Hobyo. "We were fishermen. I used to work in the sea every day. But ships from other countries fish our coasts illegally, destroy our nets and fire on whoever approaches them. We were refused the right to fish. They even dump toxic waste. We couldn't work. So we decided to defend ourselves." Ali insists that piracy would stop if the pirates' fundamental grievances were addressed. "If the world stops stealing our property and harming us, we have a solution," he said. "We will stop the piracy and go back to our normal jobs."
UPDATE: Despite the headline-grabbing events related to Faina, Somalia "only" ranks fourth in the International Maritime Bureau's rankings of high risk areas in 2008 after Nigeria, Indonesia, and Tanzania. However, none of those other countries have degenerated to relying on maritime piracy as a main source of livelihood.
Sometime ago, I audited a graduate-level course at the University of Birmingham on Political Risk Analysis (PRA). In a nutshell, the perspective taken in PRA is of a foreign investor determining, you guessed it, the political risks involved in investing abroad. From the course description:
Political risk analysis evaluates the political context in which political actors take into account not only government policies towards the economy, for example regulatory regimes, but also other potential risks such as political violence, corruption, organised crime, human rights abuses, and environmental risks. Actors in both public and private sectors must attempt to assess the political risks attached to a particular country, policy area, or both, when investing their resources in that region, country or policy area.
I don't mean to toot my alma mater's horn too loudly [honk-honk], but Brum is one of the few universities in the UK (and probably the world) which offers such a course. How likely is it that a Hugo or Evo or Vladimir will expropriate your investment? Like all investors, knowing whether you can recoup your money when times get rough is an important consideration.
What brought my PRA days back to mind were recent events in India that pose challenges to would-be investors. India's physical infrastructure is famously in need of improvement--its roads, ports, and airports have suffered from previous neglect. India's services-focused growth is partly attributable to associated difficulties in linking the country to the global supply chain. Something with much clearer PRA elements, though, is the country's continuing tradition of militant labor. A while back, I discussed how Ratan Tata's plant to produce the "one lakh car" in Singur was endangered by farmers accusing Tata in cahoots with the local government of unjustly taking away their land. It has now come to pass that Tata has written off its $350 million investment in the Singur plant and will look elsewhere. From the WSJ:
Tata's decision underlines a thorny issue for manufacturing investors in India: poor local communities -- sometimes backed by political or environmental activists -- are often suspicious of industrial projects planned for their regions, despite the promise of job creation and stimulation of local economies.
Although it has invested more than $300 million in its West Bengal factory, about an hour's drive from Kolkata, Tata said it had decided to relocate production of its $2,500 Nano minicar to another locale. The company said several Indian states expressed interest, but added that it hadn't yet selected an alternative site. The West Bengal site was expected to eventually generate almost 20,000 jobs...
Protesters were demanding that more than 300 acres of the 1,000 acre site be returned to farmers who were forced by the state government to give up land. "We don't see any change" to the opposition, Mr. Tata said. The relocation "was done for the well-being of our employees, safety of our contractors and vendors."
Not knowing all the facts on the ground, I cannot disallow the possibility that the land was indeed taken away in an unjust manner. However, given Tata's generally good CSR reputation and the seeming characterization of any industrial initiative in India as exploitative in the full Marxist sense, I am beginning to wonder if they're mainly cases of the "standing up for one's rights" or of something else. Here's a dead serious case in point - a manager for a foreign multinational was recently chased and killed by an angry mob:
The last moments of Lalit Kishore Chaudhary, chief executive of a multinational auto parts company in India, were filled with terror. On Monday, the quiet and dedicated 47-year-old businessman was hunted through Graziano Trasmissioni India’s plant on the outskirts of Delhi by an angry mob. His assailants had forced their way through the entrance gate with a truck to embark on what his company described as a hunt for white-collar workers.
“He tried to escape the mob by locking himself into one of the offices. The locked door was broken. He tried to escape again by jumping out of the window and was beaten to death at the very point he landed,” Graziano told the Financial Times.
For 10 years, the company’s factory in Greater Noida ran smoothly. The Italian multinational was part of a wave of foreign interest from Europe, the US and Japan that identified big savings in tapping Indian engineering skills. Now the plant is closed and the owners, the Swiss industrial group Oerlikon, are pondering whether to keep it that way.
The frenzied killing of Mr Chaudhary in an industrial zone has plunged the business community into shock. His murder by former employees armed with hammers and metal bars is sharply at odds with India’s image of opening up to foreign capital and non-violent [Gandhian, I presume] protest, whether political or industrial.
It also asks uncomfortable questions about India’s labour relations, striking a blow to a sector at the forefront of the country’s foreign investment drive. A torrent of disapproval has poured from prominent Indian business associations and people, including Nandan Nilekani, chairman of Infosys, the outsourcing company. Mr Nilekani said no dispute could be settled by “murdering an adversary”.
Others have expressed shock that a severe breakdown in law and order could take place in an industrial hub that is also home to LG, Samsung, Yamaha and Honda. “[Graziano] is not a high- profile company,” said Jayant Bhuyam, deputy director general of the Confederation of Indian Industry. “It’s not in the badlands stuck out in the country. It’s near the capital.”
By contrast, the killing has sown discord in the government. Oscar Fernandes, the labour minister, was forced to apologise for remarks in which he appeared to defend the actions of the rioters. His response that the attack “should serve as a warning for management” betrayed an antipathy towards foreign capital that lurks behind India’s transformation from a largely agrarian economy to a fast-industrialising one.
Kamal Nath, the commerce and industry minister and India’s trade negotiator, swiftly set about setting the record straight. Describing the violence as a “stray occurrence”, Mr Nath said it was “completely at variance with the Indian culture and tradition of peace”.
The police have arrested 136 people and are pledging to reveal on Tuesday the names of those charged with murder. But they face sharp criticism for failing to prevent Monday’s attack and being ill-equipped to tackle labour unrest...“There has been a big outcry by investors. If this is the state of affairs, they say, we should be quite worried. There are concerns that no foreign investment will come.”
The Italian government is now investigating the matter and the plant has since reopened. However, along with its weak physical infrastructure, these two incidences sow doubts about the viability of Indian manufacturing. PRA is important in knowing the probabilities that these issues will arise, with often dire consequences.
10/8 UPDATE: Tata has decided to move the Nano plant to Gujarat. According to Tata, production will not be delayed much in the process. From the Economic Times:
Tata Motors will take at least one year to construct the mother plant. Much of the machinery currently located in Singur will be moved to the new location at Sanand. “A lot of the assets will be relocated,” Mr Tata told ET earlier in an interview.
Mr Tata said he plans to stick as close as possible to his deadline for launching the Nano. Earlier, the Tata Group had said that it plans to launch the Nano in October-December 2008. It is possible that this might slip to January-March 2009, a senior Tata Motor official said. The first batch of Nanos will be rolled from ‘makeshift’ facilities located in Tata Motors’ existing factories in Pune and Pantnagar. Initial production volumes will be lower because of the delay caused by the events at Singur.
The reaches of the credit crunch are engulfing the world. California faces the prospect of being unable to pay state workers due to tight credit and a lackluster rating to the tune of $7B. India's nascent consumer culture is taking a hit. Even Asia, the world's fastest growing region, is feeling the pinch. The French do everyone one better, naturellement, in the pessimistic scenario category by depicting a world on the edge of the abyss. So much for the subprime crisis being "contained"--or even being contained to America for that matter.
The British press is all agog that erstwhile EU Trade Commissioner Peter Mandelson is coming home to Blighty to try and revive the UK's economic fortunes as Business Secretary. This will be his third go-around as a cabinet minister To put things mildly, things have not gone very well for PM Gordon Brown since taking the reins of power from Tony Blair. Like Blair and Brown, Mandelson is, of course, one of the principal architects of New Labour (or whatever is left of it). Way back in 1994, Mandelson throwing support to Blair was instrumental in making the latter New Labour's standard bearer before Brown, causing Brown's continuing dislike of Mandelson.
Brussels is, in many ways, European political purgatory, a place to send friends of dubious allegiance or foes with excess ambition to in order to rid them from domestic politics. It is an indication of how bad things are that Brown is effectively recalling Mandelson from Brussels for what looks to be New Labour's last stand: if it doesn't get its act economic act together in the British public's eyes, the Tories look more than set to consign New Labour to the dustbin of history.
It's front-page news: the Telegraph, Times, Financial Times, Guardian, and Independent are all over it. So too is the BBC, among others. As Mandelson was twice a Labour cabinet member under Blair, resigning both times for controversial reasons, he is not exactly the most calming political choice. News of Brown's cabinet reshuffle is sort of drowned out by the continuing Mandelson / New Labour soap opera, but when the going gets tough, the tough get going. There are few remaining Labourites with a measure of clout with the Confederation of British Industry (CBI) and other business groups as Mandelson, so he is the last roll of the dice for Brown in attempting to shore up confidence in his economic management.
The US has in recent years been driven by a housing boom and excessive consumer spending, with the former fueling the latter via home equity loans and the like. There is likely no country which so mirrors the US in its political economy than the UK. Deflating housing bubble? Check. Slowing debt-fueled consumption as household finances hit the wall? Check? Highly developed financial infrastructure facilitating both? Check. It will be interesting to see what Mandelson can do to remedy the damage done. I wish him well, but like the US, I think the UK cannot avoid a long, hard spell after years of partying like there's no tomorrow.
I have finally gotten around to watching the movie Battle in Seattle (BiS), which dramatizes the titular event that occurred nearly a decade ago. I was a bit apprehensive before watching it as the film's reviews have been rather mixed. Indeed, its average score of 55 is just one point more than the toilet-humor laden Zohan. Given the weightiness of BiS's topic, I was rather expecting a more earnest treatment of the subject matter. My expectations were far from met. A common refrain of the press reviews is that the movie does not do much in explaining the workings of the WTO. Having watched the movie, I can now say that its faults are worse than that: its errors of omission in inadequately explaining what the WTO does pale in comparison to its errors of commission in tarring the WTO with far-fetched sins it couldn't possibly have committed.
The opening two and a half minute montage makes accusations against the WTO that are subsequently recycled throughout the movie without much examination. Among other things:
- the WTO harms the environment;
- the WTO harms organized labor (in the United States);
- the WTO harms those in poor countries;
In trying to make the WTO an all-purpose villain, this film begins its descent into incomprehension. Like a certain famous American's worldview, there are no ambiguities here: either you're with us (who love life values) or with the WTO. Plus, anything remotely related to trade is reason enough to tar the WTO, nevermind the lack of an apparent connection--sort of like tying the Iraqi invasion to the 9/11 attacks, for instance. The image above [click to enlarge] is taken from the movie as the narrator states, "despite the problems and the criticism, the WTO continues to grow." Let's examine some of these claims:
(1) It states small bananas growers (in the Carribean) were "crushed" by large corporations. This, of course, is in reference to the never-ending "banana wars" [1, 2, 3]. While it is true that Chiquita Brands has been one of the principal parties to this case, even more vociferous have been the continuing claims of poor Latin American countries like Ecuador, Guatemala, Honduras, and Panama. On what grounds is it just for the EU to maintain preferential treatment for ACP countries at the expense of these developing Latin countries also exporting bananas? Also, does the fact that another large corporation, Dole Foods, supported the ACP's position invalidate the Carribean countries' claim by associating with an evil multinational? The film's Bushian simplicity does it no favors. There are competing claims here by poor countries against each other that cannot be determined by a simplistic "anything concerning the WTO is bad" decision rule.
(2) Now we get to "False [Milk] Labels Kill Babies." Making it appear as if the WTO condoned false labeling that killed babies is pure fantasy. More importantly, no one else seems to have made a similarly wild accusation. Given that every sort of conspiracy theory appears on the Internet, that's no mean feat. Why do you need WTO wherewithal to sell mislabeled milk? Moreover, doesn't the WTO promote sanitary and phytosanitary standards (SPS) to minimize such incidences?
(3) Last in this image is "Infant Mortality Rate Increases due to Fraudulent Marketing." This refers to the still-ongoing controversy of Nestle marketing infant formula when health experts advocate breast feeding in the interest of infants' health. Again, this has virtually nothing to do with criticisms of the WTO. If you look at the picture, the caption itself declares powdered milk manufacturers started marketing milk in LDCs during the Seventies. Since the film at least gets something correct in stating the WTO was formed in 1995, how does it become embroiled here? Given a search engine, even my eight-year old nephew could debunk this piece of pure invention. (2) and (3) describe a major failing of this movie: given that there are so many controversies surrounding the WTO--many of them legitimate--why not discuss those instead of dreaming up unrelated criticisms?
Further demonstrating the film's ineptitude, even the attempt to depict these as Internet stories on a protest site circa 1999 fall flat. What self-respecting activist against global corporate takeover would have registered his or her site "http://www.infantmortality.com"? Shouldn't it be "http://www.infantmortality.org"?
The rest of the movie similarly does little to explain the workings of the WTO, although there are some attempts:
(4) About twenty minutes in, protagonist "Django" played by Andre 3000 of the rap group Outkast mentions the shrimp-turtle case as an instance of the WTO harming the environment. Of course, this superficial treatment ignores important details about the case. Poor countries such as India, Malaysia, Pakistan, and Thailand were the ones that brought the United States to the WTO's Dispute Settlement Mechanism to contest America not importing shrimp from countries where fishers did not use nets that had escape hatches for accidentally caught turtles as these nets were costly to LDC fishermen. Again spoiling the movie's simplistic blanket argument that the WTO harms the environment, labor, and poor countries, shrimp-turtle places (rich country) environmental regulations against the interests of poor countries, just as the banana case (1) pits the interests of developing countries against other LDCs'.
(5) Speaking of labor, "Django" also mentions a "Million working-class jobs outsourced" in reference to US labor. Again, there may be conflicting interests here: organized labor in America versus livelihoods for the poor in the developing world. Why is outsourcing so terrible if those who may gain jobs at their expense are persons of lesser means in poor countries? We get no intelligent discussion of this conflict; after all, the "WTO is bad," right?
The simple truth is this: the WTO could not be made into an all-purpose villain since the participants in the Battle of Seattle hardly represented a unified agenda. Rather, many worked at cross purposes. Organized labor is first and foremost about keeping jobs in America than about the environment or labor concerns in LDCs. In turn, those from developing countries--even way back in 1999--have been wary of labor and environmental standards being included in trade agreements as backdoor protectionist measures. After all, would any trade ever take place if these standards did not allow LDCs developmental leeway? From TIME even before the protests began:
The largest bloc, made up of 77 developing countries, stands virtually united against efforts by wealthier countries to influence environmental and labor laws in developing countries. As for human rights: "There's an Asian consensus that human rights should not be linked to trade," says economist M.G. Quibria of the Asian Development Bank in Manila. In the view of developing countries, trade-pact clauses involving labor and the environment amount to backdoor protectionism.
That makes it awkward for many U.S. protesters, who say they are out to help the Third World, not just clean up the planet, end child labor and promote human rights. Venezuela and Brazil successfully challenged as discriminatory a U.S. law that set stringent environmental regulations for refineries that make gasoline for export.
(6) The closing credits demonstrates this film's powers of invention: Did you know that the WTO was responsible for the war in Iraq? The filmmakers seem to think so [see image to the right]. Being something less than a dyed-in-wool conspiracy theorist (let me "think": maybe Iraq was attacked to become enmeshed into the WTO's webs of evil), I decided to check the WTO's membership rolls. It turns out Iraq isn't even a WTO member, and it hardly looks like it will become one soon.
I have listed only six clear mistruths, half-truths, and non sequiturs the film makes about the WTO. There are many more. As an IPE instructor, I do not believe that I should influence students in one direction or another: They should be able to figure out for themselves whether the WTO confers benefits or otherwise, and consider ways to make it function more fairly. I would do them no favors by inventing that the WTO condones mislabeled milk products, is complicit in the powdered milk controversy, or waged war against Iraq. Any student of mine who suggested any such inanity would get a failing mark straight away. I do not teach creative writing. My criticisms of the movie are on logical grounds, not ideological ones.
Near the end of the movie, Django tells his fellow protesters, "A week ago nobody knew what the hell the WTO was...now they still don't know what the WTO is--at least they know it's bad." It is no surprise that after watching this movie for an hour and a half, you probably won't know what the WTO is, either. Instead, you could have spent your time far more productively by reading backgrounders on the WTO from the organization itself on the pro- side and sites offering coherent criticisms like the Global Policy Forum (listed elsewhere on this blog) on the anti- side. Not only would you actually learn about how the WTO actually functions, but you would also be better equipped to make an informed opinion of the WTO's virtues or lack thereof. I am not the world's biggest WTO fan, having poked fun at its leadership and questioned its moribund state. That said, it would be far below me to try and profit by slandering the organization on tarted up and indefensible accusations.
Ultimately, Battle in Seattle explains the WTO as clearly as Reform School Girls explains the US prison system. If you want to know more about the organization, this is the last place to look.
10/21 UPDATE: Aside from the aforementioned indifferent critical reception, the movie's box office performance is next to negligible. After more than a month in limited release, this movie has yet to clear $1 million at the box office worldwide. Its take in America is barely $200,000. In addition to being inaccurate, Battle in Seattle is a critical and commercial failure.
There's another interesting angle on globalization's pre-eminent economic relationship in the pages of the Financial Times. This story is familiar to virtually all: Asian exporters--especially China--helped keep the good times rolling in the US by providing inexpensive imports to America (lowering inflation) and lending it funds to indulge in a debt-driven spending binge. To make an analogy with drug prevention rhetoric, it often takes two to create a system of dependence. The US, of course, plays the role of the debt junkie, needing around $2.8B each business day in liquidity injections to fund its habit [aaaaahh]. OTOH, Asian exporters (and Mideast oilers) keep providing the US with needlesfull of, shall we say, the good stuff. This analogy, BTW, is quite good in explaining erratic US behavior.
America's funders have a lot at stake at the moment. As the FT article notes, these countries have agitated for the US to bail out the likes of Fannie Mae and Freddie Mac given that foreign holdings of agency bonds approach one trillion dollars. And now we have the matter of a $700B bailout that will ultimately be funded by the likes of the Chinese anyway, provided they are willing to buy more Treasuries. America would be best advised that this is no sure thing [1, 2]. Still, it begs the question better than in the Fannie/Freddie case: who exactly is bailing out whom? China, not the US, would be more accurately said to be bailing out troubled US financial institutions. Given that China doesn't really hold that many, if any, corporate bonds as compared to Treasuries and agency bonds, I think it would be best advised to stay away from US sovereign debt should the $700B bailout plan somehow clear the House.
My view has always been that things will just get worse for these countries if they mindlessly indulge American profligacy. America's addiction makes it a menace to itself and the entire world. Like with any other addict, the debt-addled Uncle Sam needs someone to impose cold turkey ASAP. Hence, the $168B economic stimulus package was quite frankly mindless, the $700B bailout witless, and plans to reduce interest rates Stateside brainless. Isn't it easy money care of foreigners that got America into trouble in the first place? It doesn't take an Einstein to figure more of the same will do nothing to cure what ails America.
Do view the entire article as it provides a concise summary of the main talking points as well as a video interview of Stephen Roach. Meanwhile, below are what I found to be interesting quotes from the perspective of Chinese commentators. This is rather gratuitous, but this is your country [show them an egg]...this is your country on oodles of foreign debt. Any questions?
Did America hang itself with Asian rope? I put this to a Chinese official last week and, quick as a flash, he responded: “No. It drowned itself in Asian liquidity...”
There has been a cautious reappraisal in parts of Asia too. “More people understand that America is not as great as it was 10 years ago,” says Shen Dingli of Fudan university in Shanghai. “This is not a time for China to be on a par with America. But the relative shift of the centre of gravity does bring China more confidence...”
US woes bounce back in other ways, too. In August, Japan recorded its first seasonally adjusted monthly trade deficit in a quarter of a century after shipments to the US slid 22 per cent. Net exports are not expected to contribute anything at all to Chinese growth this year. “China feels the same pain as America,” says Prof Shen. “It is not a case of: ‘Your loss is my win,’ but rather: ‘You lose, I lose...’ ”
Chinese citizens, whose consumption accounts for a measly third of national output – against 70 per cent in the US – could certainly spend more. But Beijing, which has already taken steps to prick the housing bubble, appears in no hurry to encourage reckless spending. Says Mr Fang: “I’m not sure you should encourage people to borrow in order to spend. That is what bankrupted the US.”
