Egypt's World Beggary Tour 2013 Goes On

♠ Posted by Emmanuel in , at 4/28/2013 09:38:00 AM
The rise and millennia-long fall of the Egyptian Empire continues apace. From the giddy heights of empire catalogued in the Bible to its present penury, Egypt has come a long way--down, that is, with no end in sight. The latest humiliation of course is being flat broke after the "Arab Spring" broke its back financially as tourism and FDI have disappeared due to the very poor law and order situation in the country. That is, the very essential thing a country needs to move forward--political order--is elusive post-Mubarak.

What is happening should be known to almost all readers by now. Losing foreign exchange and unwilling to give up on politically popular food and energy subsidies in a context where even more civil unrest would emerge if these are removed, Egypt is going around the world--begging bowl in hand--to cadge foreign exchange to tide it over. But, for how long can it last without an IMF deal which would unlock further emergency funding? This being the IPE Zone, the "international" aspect comes from its never-ending search for money to tide it over, while the political one comes from its leadership delaying much-needed changes to set it on a more sustainable path in fear of losing in the polls. In a number of simple steps, then:
  1. Egypt's foreign exchange reserves have been dwindling since the Arab Spring events since the emergent lack of political order has hurt tourism and FDI;
  2. The natural lender would be the IMF but the institution is exceedingly unpopular at home due to Egypt being a repeat borrower during the Mubarak years;
  3. Moreover, the IMF is asking for long-desired reforms to do away with foreign exchange-sapping food and energy subsidies;
  4. Knowing the political fallout from scrapping these subsidies, the Muslim Brotherhood-dominated leadership has been wary of doing so while its leadership position remains tenuous;
  5. Something the Brothers are awaiting to secure their leadership is another landslide victory in parliamentary elections set to be re-run in H2 2013 (a definite date has not yet been set);
  6. In the meantime, Egypt is cadging any and all countries--especially energy exporters whose pricey products have caused the country so much difficulty in the first place such as Qatar, (supposedly) Libya and so on. 
The difficulty in lending to Egypt is that, on its own, it cannot conceivably repay its recent loans. It is banking on the IMF coming in after (a) the Brotherhood presumably wins parliamentary elections. With a firmer political base and to please the IMF, it is hoped that Egypt can then (b) remove these subsidies which will almost certainly result in even wider mass riots. It is further hoped that an IMF seal of approval will lead to (c) both tourist revenues and FDI coming back. That's a lot of "ifs" and "buts"--not encouraging stuff for would-be lenders. Before the IMF comes in, though, Egypt is using its recent loans to literally waste on rather pointless government spending including the aforementioned food and energy subsidies that do nothing to put in on a more sustainable economic path. Meanwhile uncertainties abound. It seems the latest cadging target is none other than Russia:
During a meeting in a Black Sea resort city, Egypt's president and members of his government turned to Russian President Vladimir Putin and asked for a sizable loan, according to Putin aide. Egypt's Mohammed Morsi appealed to Moscow and Cairo's past ties, recalling how the former Soviet Union stepped in to finance the building of the Aswan High Dam in the 1960s after the United States abruptly withdrew from the project, according to Russian media. 

Still, the Russians' response seemed rather equivocal: We'll talk later. Egypt has been knocking on doors around the region seeking billions of dollars in loans, bond purchases and grants, trying to fill rapidly draining coffers so it can keep power stations running and bakeries churning out cheap bread for the country's millions of poor. 
The AP gets most big picture details right:
The most crucial piece of aid, a $4.8 billion loan from the International Monetary Fund, has been delayed by months of negotiations over how Egypt will reduce its massive system of subsidies, which the poor rely on for cheap fuel and food but which suck up large portions of the budget. The government has taken some limited steps, but many economists believe it is postponing extensive reforms until after parliament elections to avoid austerity measures that could hurt Morsi's majority Muslim Brotherhood party at the polls. The problem is: No date has been set for elections, and they won't be held until the fall at the earliest. That could mean months of economic limbo, with foreign lenders and donors reluctant to give unless there is a clear economic plan. Securing the IMF loan is considered key to boosting investors' confidence in Egypt and unlocking further aid.

In the meantime, the government has been seeking injections of cash. Overall, Egypt has sought or is in talks for more than $30 billion since the fall of Mubarak — the vast majority since Morsi was inaugurated in June, according to a compilation by The Associated Press of what has been announced. In an email, an official in the president's office could not confirm exact numbers but said the figure is "close to accurate." The official, who was not authorized to talk to reporters and spoke on condition of anonymity, did not give further comment on economic policy...

With revenues down, the government has been burning through its foreign currency reserves, which have fallen to just $13.4 billion, a third of the pre-uprising level. Much of that has gone to propping up the currency and importing fuel and wheat for the subsidy system. Egypt spends some $14.5 billion a year in subsidizing fuel and $4 billion in food subsidies, the bulk of which goes to bread. Nearly half of Egypt's 90 million people live near or below the poverty line of $2 a day. 
They have no pride for Brother Morsi will beg anywhere, anytime, anyhow. Such is the fate of modern-day Egypt. I'll bet the Pharaohs are turning in their graves:
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EU-US FTA & the Lameness of 'Cultural Exception'

♠ Posted by Emmanuel in ,, at 4/24/2013 04:21:00 PM
There is already a certain desperation to the idea that trade can significantly be boosted between the US and EU FTA when they already have exceptionally low tariff levels. What more substantial trade barriers can be removed? Are these dynamic and growing markets? The answers, of course, are "few" and "no." Despite there being a number of obstacles to even this smallest of possible achievements--especially agriculture--one of the more interesting ones concerns trade in "audiovisual industries."

Today, I came across two interesting articles on US entertainment. The first concerns American firm director Michael Bay "apologizing" for his movie Armageddon. Alike the vast majority of US-based productions, Bay's films have next to no artistic merit despite having commercial appeal. So it's schlock, but it's schlock that finds a ready audience of gullible folks worldwide of the lowest common denominator variety [explosions! special FX! naked people! cussing!] I myself prefer watching documentaries, but that's beside the point.

Another article deals with the latest resurrected and utterly ridiculous trade grievance of the Europeans. It may seem to you that I usually side with the Europeans in trade disputes with Americans, but that's not always the case--especially over the non-issues of GM food, hormone-fed cattle, and so on. Here we have another blatant form of European protectionism waiting in the wings over the supposed cultural erosion that will occur if American films are allowed unfettered access to European markets:
The cultural exception has its roots in 1993 when a furor erupted as Hollywood, notably led by late MPAA chief Jack Valenti, wanted to include the audiovisual industries in the GATT (General Agreement on Tariffs and Trade) negotiations. Europe, led by France, balked. Member states claimed that including the arts would threaten their quota and subsidy systems and put them in danger of total Hollywood hegemony. Hours from the deadline, a deal was struck and Europe got its way.

In their current petition, Euro filmmakers say 20 years ago, “the cultural exception burst onto the international scene, leading to the recognition of a specific status for audiovisual works as they are not just goods like any others and must therefore be excluded from trade negotiations.” The group calls the proposed negotiations mandate “a renunciation,” “a capitulation” and “a breaking-point” which would “reduce culture to nothing more than a commodity.” The group further argues that the trade negotiations appear “strikingly like a conscious desire to bring European culture to its knees.”
The most vociferous opponents of this so-called cultural invasion are (surprise!) the French:
But that wasn’t quite good enough for France’s external commerce minister Nicole Bricq and culture minister Aurélie Filippetti, who said, “France has placed a sine qua non condition on its accord for trade negotiations with the United States: The full respsect of the cultural exception and in particular the pure and simple exclusion of audiovisual. The draft mandate must therefore be modified” to erase De Grucht’s “ambiguity.” They added, “France will not compromise. The exclusion of audiovisual services is not negotiable. A policy statement is not enough.”
This argument is quite frankly moronic in exactly the same way that French authorities acting as "guardians" of French language is: In a free market, no thought police are supposed to disapprove of your (exceedingly poor) taste in (lowbrow) American fare for as long as your (deplorable) viewing habits harm no one else. If people want to watch garbagey American films and don't hurt anyone in the process, then they ought to be free to do as they damn well please.

So here's a (backhanded) salute to Michael Bay and other directors of proto-garbage American entertainment from the IPE Zone. I certainly wouldn't want to watch their brand of Ameritrash, but I will strongly support the right of others to watch it. Heck, I'll even encourage you to play the archetypal American entertainer Whitney Houston's rendition of the Star Spangled Banner while you're at it ;-)
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Of Profits & Reconciliation: Kaesong Industrial Complex

♠ Posted by Emmanuel in at 4/21/2013 12:01:00 PM
They say the road to hell is paved with good intentions, and that certainly seems to be the case here: opened in 2004 as a manifestation of the late Roh Tae Woo's "sunshine policy" of South towards North Korea, it was hoped Kaesong Industrial Complex would herald closer economic ties between the two Koreas. Located in the North near the now-legendary 38th parallel, this (quasi-) export processing zone was modelled in part on the example of other successful EPZs in the region. Through trials and tribulations you are all well aware of including North Korea's penchant to throw tantrums every so often, Kaesong has not really lived to its billing. Not only has South Korean investment there been (wisely as it turns out) somewhat limited, but closer economic ties leading to better political ones did not emerge.

That said, there have been some South Korean investors who saw potential advantages in low-cost labour north of the border. It could even have led to knowledge transfer helpful to north Korean development. Many of them poured not-insubstantial savings into facilities in Kaesong, only to be stung this year as occasional short-lived evacuations and closures since 2004 have now led to full-scale desertion of the industrial estate. Can you say "mass expropriation"?
The South Korean entrepreneurs who invested up to 10 years and millions of dollars in the Kaesong industrial complex, a symbol of economic collaboration between the Koreas that is now shuttered by the North, have little more than hope to cling to as assembly lines sit idle day after day. They say they want to go back to work. The sooner the better. They say they cannot abandon their investments in factories, or the cheap North Korean labor that helped them put aside misgivings about doing business with the South's unpredictable neighbor. Some were just getting over their beginners' mistakes and were starting to see the fruits of their work. 
But North Korea has been unrelenting in its decision to bar South Koreans from entering the factory city just inside its border, and withdraw the 53,000 North Korean workers who manned assembly lines. As the lockout enters a third week, customers of the South Korean companies are growing impatient and losses are mounting. Some businesses are quietly mulling giving up on Kaesong altogether.
"We have built the Kaesong industrial complex by the sweat of our brows, believing in guarantees that we would be able to work freely," said Han Jae-kwon, chief of the association of South Korean factories in Kaesong. "We find the reality tragic and sad that we are unable to travel to our own factories." The Kaesong complex has been nearly deserted since early April, when Pyongyang pulled the plug on its last significant economic link with the South. Most of the nearly 900 South Korean managers and entrepreneurs left soon after. Some 200 remain and are getting by on whatever food they had stored.
It does not seem fair that positively-minded South Koreans who went there for non-economic reasons--especially a desire to bring about reconciliation--are being punished for their efforts. When only one side wants to talk it over regarding Kaesong, that's not going to work as firms located there keep losing international business. But then again, how did the saying go about the road to hell? One certainly hopes they will recoup their investments when North Korea again relents on its comic-fantasist-Leninist-Marxist stylings, but the damage has been irreparably done to the idea that the hermit nation would interfere less with this project that seemed so promising all those years ago.

UPDATE: Employing North Korean style hyperbole--don't ask me why--South Korea has made an ultimatum on re-opening Kaesong and releasing the South Korean managers held captive there:
After weeks of threatening rhetoric from the North, South Korea on Thursday promised its own unspecified "grave measures" if Pyongyang rejects talks on a jointly run factory park shuttered for nearly a month. The park in the North Korean border town of Kaesong is the most significant casualty so far in the recent deterioration of relations between the Koreas. Pyongyang barred South Korean managers and cargo from entering North Korea earlier this month, then recalled the 53,000 North Koreans who worked on the assembly lines.

South Korea's Unification Ministry on Thursday proposed working-level talks on Kaesong and urged the North to respond by noon Friday, warning that Seoul will take "grave measures" if Pyongyang rebuffs the call for dialogue. In a televised news conference, spokesman Kim Hyung-suk refused to say what those measures might be. Some analysts said Seoul would likely pull out the roughly 175 South Korean managers who remain at the complex.
UPDATE 2: On 2 May, aside from "repatriating" the remaining South Korean managers these past few days still keeping guard over their firms' plant, property and equipment, South Korea has decided to lend these pioneering firms emergency aid. Call it an unexpected but most certainly welcome form of "political risk insurance" insofar as outright grants cannot be given:
South Korea has offered 300 billion won ($272.41 million) million in special loans to companies affected by Pyongyang's decision last month to close a jointly run industrial zone in North Korea, a government official said on Thursday. A government taskforce will provide the assistance from May 6 in the form of loans with interest rates of 2 percent. More than 120 South Korean businesses have invested in the border complex at Kaesong.

"The government is currently trying to provide tailored support for these businesses and once we finish determining the current status of the companies, we will continue to make more support available," said Suh Ho, a director-general at the Unification Ministry which deals with inter-Korean affairs. Suh said cash handouts to the companies were legally impossible and that loans - money for which will be taken out of various government funds - were the only available solution in the short-term.
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Arab Spring F1 (Ep III): 2013 Bahrain Grand Prix

♠ Posted by Emmanuel in , at 4/19/2013 06:15:00 PM
For a third consecutive year, we have controversy over whether the Bahrain Grand Prix should proceed. In 2011, it was famously cancelled despite attempts by F1 bigwigs to insulate this event from the turmoil that engulfed the region via the Arab Spring of protests against authoritarian regimes (alike that of Bahrain)[1, 2, 3]. Despite many conscientious F1 drivers saying that F1 is simply a sport while what's going on in the country is a life-or-death matter to some, the race went ahead anyway in 2012.

This year, the protesters are back in action. To be sure, the protesters are smart in understanding that the travelling circus that is F1 has few peers in attracting the world's attention to their cause annually. They have barricaded routes to the F1 track, forcing the government to again vow for the safety of F1 personnel. Why waste such an opportunity to score easy publicity? On the other hand, F1 bigwigs are sticking to the tack they've had since last year: Instead of marginalizing the protesters as nuisances, their approach is to position the hosting the race as part of the reconciliation process. Which, of course, is rather superficial insofar as it is the government the protesters are up in arms against who pay Formula one its fees. As the saying goes, he who has the gold...
Activists have demanded that F1 bosses cancel the race due to Bahrain's poor human rights record. The race which was first run in Bahrain in 2004 was cancelled two years ago following the forcible clearance of an iconic Manama landmark, Pearl Roundabout. In the unrest that followed more than 50 people died, hundreds were arrested and thousands dismissed from their jobs. Last year's race went ahead in an atmosphere of heightened security. One protester was shot dead by police...

But in a joint statement on Friday, motorsport's world governing body and Formula One management said this year's race should proceed as planned. The Federation Internationale de l'Automobile (FIA) and Formula One Management (FOM) said they "also strongly believe sport can often be a force for good and that the staging of the Grand Prix in Bahrain will come some way in helping soothe some of the issues which have been raised in the media". Protests were reported across the kingdom on Thursday night, with demonstrators chanting "No Formula on Bahrain's occupied land", according to AFP news agency.
Protesters blocked roads with burning tyres, and police responded with tear gas and stun grenades.
I am still undecided on the matter of who's in the right here, but rest assured that the govenment's intentions to use the race as a showcase for Bahrain all those years ago has since backfired ever since protests spread throughout the Middle East. Indeed, the balance of public relations is arguably negative nowadays with no end in sight as this race is held year in and year out.

UPDATE: Being ever so politically incorrect, F1 ringleader Bernie Ecclestone has labelled Bahrain's leaders "stupid" for hosting the grand prix and in the process giving protesters free publicity as described above.
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LDC Marketing Lessons Selling to Brokebank Yanks

♠ Posted by Emmanuel in , at 4/17/2013 05:27:00 PM
Here's an interesting feature I somehow missed given my interest in the intersection between marketing and international political economy. Nowadays the "American Dream" is a punch line to a sick joke only the most delusional and gullible of USA#1 cheerleaders actually fall for. (And the joke's on you, buddy, as they would say.)  But once upon a time, there was a shining idea of "America" before the world crushed its spirit of smug self-superiority. In reality, 20% of these impecunious wastrels are now worth less than zero.

Those were the days: In the commercial realm there was Raymond Vernon's "product life cycle" theory (PLC) in which the most advanced products would emanate from a highly industrialized nation (like the United States) before being sold as exports to other nations including less developed ones. Eventually, they would even be made there as the "lead" nation moved on to ever-newer innovations.

Unlike ever-decreasing living standards in the US of A, however, there is still lively debate about whether it continues to innovate. That said, it is no longer a given that whatever new products are developed in the USA and other developed countries will eventually "trickle down" to LDCs. For, the implicit assumption underlying PLC is that developed countries remain the most dynamic and cutting-edge of markets. Simply stated, when America and Europe are quite broke, there is not a whole lot of folks to buy all this innovation. It's all a bit Marxist in logic, but hey, I guess he was right about something after all.

Hence, the latest trend given (a) moribund consumer markets in the West and (b) dynamic, fast-growing markets in the developing world is that more innovations are emanating from the latter. What's more, since products coming from LDCs obviously are better attuned to the needs and wants of consumers of more modest means, hard-up Western consumers are increasingly becoming targets for products designed for LDCs and not the other way around as PLC theory and the like would suggest. Let us first remind ourselves of how badly America "existence" stinks before moving on to the opportunity...
But even in one of the world's richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to “downshift”, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984.
In response, marketing to what I call Brokebank Yanks is not an entirely new skill. Firms from both developed and developing nations have become adept at meeting the needs of marginal-income consumers for the longest time, so why not transfer these valuable skills to hard-up America? It is an eminently transferable skill:
Adjusting to this new world can be hard. Companies have long assumed that America would always be a land of mass affluence and upward mobility. But the American economy was undergoing a structural shift even before the 2007 financial crisis, with galloping rewards at the top and stagnation for many of the rest. Some economists expect the malaise to last for years. Few companies have thought much about the implications of this...

The optimists' complacency creates opportunities for nimbler and gloomier competitors. It also creates an opening for companies from the emerging world, many of which have frugal innovation in their DNA. TracFone Wireless, a subsidiary of Carlos Slim's América Móvil, has sold more than 3m phones in America since 2008 to pre-paying customers. MedicallHome, a Mexican company that provides medical advice over the phone for $5 a month, as well as access to its network of 6,000 doctors, is expanding north of the border. Emerging giants such as India's Tata and China's Haier regard America as a natural market for their frugal products. The bottom of the pyramid is wider than most people realise. Firms that offer ultra-low prices will find themselves as much in demand in Detroit as in Delhi.
I guess you might as well make the best of what's around even if America is increasingly becoming a dissipated wasteland. Make no mistake: there is still money to be made if you're smart enough to cater to the American nouveaux pauvres (newly impoverished) as the Economist calls them. Those Brokebank Yanks are legion.
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The IMF is Unfair (Duh): Japan v Egypt

♠ Posted by Emmanuel in ,, at 4/15/2013 12:30:00 PM
That the IMF has special and differential treatment for developed countries over developing countries is an unoriginal criticism of the institution. For whatever reason, rich donor countries do not get long sermons about fiscal profligacy, burgeoning deficits, and the need for belt tightening. On the other hand, poor borrower countries are given long sermons about fiscal rectitude, out-of-whack deficits, and the need for austerity. In other words, the poor need to bear the brunt of socially dislocating and harmful policies, while the rich go scot-free.

The recent global financial crisis has been an opportunity for the IMF to prove otherwise. As its recently disgraced and departed former leader suggested, this is supposedly no longer the big, bad IMF that prescribed "structural adjustment" as a "one size fits all" remedy to financial crises globally. Hah! To demonstrate continuing unfairness, let's begin with Japan whose national debt is beyond an unthinkable 200% of GDP. Would they receive a gentle warning from the IMF? Heck no--they are being encouraged to run even larger deficits by having the central bank purchase long-term JGBs:
Christine Lagarde has welcomed the huge monetary stimulus plan unveiled by Japan and says it will help to boost global growth at a time when the outlook is already starting to improve...Christine Lagarde has welcomed the huge monetary stimulus plan unveiled by Japan and says it will help to boost global growth at a time when the outlook is already starting to improve.
Could this "IMF [Hearts] Megadeficits" stance have something to do with Japan constantly filling the international lender's coffers?
In November 2008, in the wake of the Lehman collapse, then prime minister Taro Aso – now finance minister and deputy to prime minister Shinzo Abe – offered the IMF up to $100bn in temporary funds, while calling on other member countries to inject additional permanent capital. And when the IMF asked member states for more capital last year to boost its firepower, Japan was first to commit. Its $60bn pledge was also the largest from any country, helping to lift the total loans available to the IMF above $1tn.

“When the global economy faced its darkest hours, you stood by your fellow global citizens,” Ms Lagarde told a Tokyo forum last July. Japan’s actions, she said, had helped “stave off an even more dire global economic collapse”.
Yes, whatever--on to a national debt that's 300% of GDP (with IMF approval to boot). From Japan as a prime example of a rich nation that gets a free pass, let's turn our attention to Egypt as a repeat customer that gets a bum rap. I am certainly not a fan of the Islamist regime currently in power that has next to no understanding of world politics, international finance and so forth, but the contrast in how it is treated is stark given that the heart of the matter in both cases deals with fiscal irresponsibility. Does the IMF gladly advocate pump priming and other neo-Keynesian measures for Egypt? No. Instead, it's a Washington Consensus-like diet of killing subsidies, austerity and so forth that's held up a $4.8B deal:
Egypt is stalling on the terms of a $4.8 billion International Monetary Fund loan to help it fight a deepening economic crisis, and no deal is likely while an IMF team is in Cairo, diplomats said on Sunday. The IMF mission is set to leave on Tuesday after nearly two weeks of talks, and negotiations may continue on the sidelines of this week's IMF ministerial meetings in Washington, they said...

An IMF programme could help stabilise Egypt's economy in the rocky transition to democracy since the 2011 overthrow of former President Hosni Mubarak, unlocking up to $15 billion in aid and investment to improve a dismal business climate. But diplomats and politicians say Islamist President Mohamed Mursi had yet to endorse required tax increases and subsidy cuts that prompted him to halt implementation of an earlier IMF deal in December, two weeks after it was agreed in principle. "The mission said it is waiting until now for the government to present some of the roadmap related to reforming the economic system," Abdullah Badran of the hardline Islamist Nour party told Reuters after meeting the IMF team...
The news article also has interesting commentary on Egypt being too important to fail in Western eyes resulting in less harsh conditionalities than would otherwise be demanded by the IMF. That said, many Egyptians are clamouring for the ever-elusive conditionality-free loan. At this point, even the IMF is baulking at the suggestion. Just as before, I expect it all to end rather badly. Nevertheless, I am flummoxed by the suggestion that Japan can get away and is even encouraged to run megadeficits while Egypt gets the stick while its people are clearly suffering the effects of economic turmoil.

It's an unfair world where deficits matter for some but not for others according to international financial institutions, but hey, it was like that long before I got here. 
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"Overfinance": Iceland, Cyprus...Now Luxembourg?

♠ Posted by Emmanuel in , at 4/10/2013 02:46:00 PM
The modern world has enabled many things to grow far larger than they ought to be through rather unnatural processes. Below is an alleged photo of a 30 pound "goldfish" supposedly caught in a lake in France. I still cannot believe my eyes so many weeks after first seeing this photograph, but if it's real and not Photoshopped, I am truly gobsmacked.

In a similar way, financial crises in Europe are roiling countries whose banking sectors have grown unnaturally large relative to the "real" economy. What does it matter if your financial services industry is unusually large compared to GDP? Well, go ask Iceland from a few years back or Cyprus now. Interestingly enough, the tiny country of Luxembourg which has the highest GDP per capita in the world according to some is being placed in the same category. Despite Luxembourg having an AAA credit rating, however, several European Union members have complained about its status as a low-tax destination alike Lichtenstein or Cyprus. I've even coined a term for the phenomenon that you, dear readers, ought to appreciate: "overfinance."

Now there's another "giant goldfish" sort of complaint going on among EU members that with a similarly outsized financial services sector, Luxembourg is another Cyprus-in-waiting. Luxembourg naturally disdains the comparison--we're a different case, we're special, etc--but the concern is understandable: In one sense it's highly derivative of portfolio theory or that an economy should not put all of its eggs in one basket since, if that industry becomes moribund, it will take the rest of the nation along with it. Hence the usual calls for economic diversification. But still...
As the European Union's wealthiest country, Luxembourg could have been forgiven for thinking that it would never find itself on the bloc's financial risk list. With just half a million people living on a tiny patch of lush land nestled between Belgium, France and Germany, Luxembourg is as tranquil as a buzzing financial center gets. Still, some of Europe's regulators and politicians have started wondering aloud whether its banks might be holding the 17-nation eurozone's next ticking bomb.

Following the chaotic bailout for Cyprus last week, European officials have been drawing worrying comparisons between the two countries' oversized financial industries. Mario Draghi, president of the European Central Bank, cautioned on Thursday that "the recent experience shows that countries where the banking sector is several times bigger than the economy are countries that, on average, have more vulnerabilities." 

"Financial shocks hit these countries stronger, simply because of the size of their banking sector." The increased scrutiny has taken Luxembourg's government by surprise and put it on the defensive. It has rejected calls to shrink its country's main source of wealth to a more manageable size, claiming that its banking industry is much more secure than Cyprus's and any crackdown would not only harm its own economy but that of the wider eurozone...

In comparison, the balance sheets of the banks in Luxembourg have swollen to about 22 times the country's annual economic output of 44 billion euros — making it Europe's richest country per capita. The country is also the world's second-largest center for investment funds, with about 3,800 funds holding assets worth €2.5 trillion ($3.2 trillion) — about 55 times the country's gross domestic product. It has 141 banks based there, with five of them domestic institutions and the remainder being mainly divisions of foreign banks. "There are no parallels between Cyprus and Luxembourg, and we don't allow any parallels to be forced on us," Prime Minister Jean-Claude Juncker said last week. "Cyprus is a special case; other financial hubs in Europe don't have these problems."
Just as the UK keeps complaining that the EU is trying to suffocate its financial services industry, so does Luxembourg:
Stung by the comparison with Cyprus and concerned for the future of its banking industry, Luxembourg's leaders have begun to fight back. They have accused EU officials, and Germany in particular, of bullying smaller countries and seeking to "strangulate" its financial industry — which represents 27 percent of the country's annual economic output, a third of the tax revenues and employs 20 percent of the workforce. German Finance Minister Wolfgang Schaeuble, representing Europe's biggest economy, openly wondered last month whether a business model relying too heavily on banks can still be seen as viable after the Cyprus debacle. That immediately prompted an outcry in Luxembourg.

"Germany does not have the right to define the business models for other countries in the EU," said Foreign Minister Jean Asselborn. Luxembourg's government says its financial sector "acts as an important gateway for the euro area by attracting investments, thus enhancing the eurozone's competitiveness as a whole while being effectively supervised".

The government rejects the idea of looking at the size of its financial sector only in relation to its GDP. "What matters are primarily two aspects: while the first aspect touches on the quality and solidity of the financial sector, the second element relates the size of the financial sector not to a national economy but to the euro area or single market as a whole," it said.
And there is still lingering resentment about how Luxembour's financial services industry grew so large in the first place. Call it "overfinance" meets "giant goldfish":
The success of Luxembourg's financial sector was initially fueled by lax regulation, secrecy and low taxes. This made it a popular tax haven and money-laundering spot. The country later changed many of its laws following pressure by its European partners. But critics say the financial industry still lacks the necessary transparency.

"The name Luxembourg always comes up when companies try to move profits across borders, through the so-called aggressive tax planning, to avoid paying taxes," said the president of the German tax inspectors' association, Thomas Eigenthaler. "It lacks transparency and quite often there's nothing we can do about it." Luxembourg rejects those charges and says it complies with all relevant laws. But on that front too, the pressure is increasing. 

In the wake of the publication of details on wealthy people's offshore bank accounts by several international media this week, some of which included references to shell companies based in Luxembourg, Frieden is now signaling the country's willingness to agree for the first time to automated information exchanges with other countries' tax authorities. "Unlike in the past, we no longer strictly reject that idea. We want a strengthened cooperation with the foreign tax authorities," he was quoted as telling Germany's FAS newspaper. 
Tax cheaters never win, eh?
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Loser's Lament: Delta Air Sues US Ex-Im Bank

♠ Posted by Emmanuel in ,, at 4/05/2013 05:02:00 PM
The hapless and pathetic US carrier Delta Airlines seems less interested nowadays in running a viable business than in taking on quixotic wild goose chases. A few months ago it made the headlines by buying an oil refinery to help bring its costs under control. Nevermind that it's the cost of crude oil that's particularly high and not that of refining it, but hey, it made for a pretty good 5-minute publicity stunt if it did not neccessarily improve Delta's bottom line.

Now we have another act of desperation with virtually no chance of paying off: Delta has filed a case against the American Export-Import Bank for allegedly providing "subsidies" to foreign carriers it is in competition with by offering export finance to Boeing when it sells jetliners abroad. Aside from the sheer chutzpah of believing that the US government would prioritize the interests of a constant drag on its purse alike the airline industry at the expense of a viable export industry alike commercial jet exports, the term "subsidy" is arguably being abused here.

How does export finance effectively reduce the purchase price of aircraft to foreign carriers? That is the question Delta will have to build a case on. Export finance is exceedingly common especially in countries with sizeable exports. And, of course, the WTO would not entertain a case in which a domestic firm sued its own government--it's always a government taking a case against another country or countries on behalf of a firm domiciled in its boundaries. At any rate, here's to Delta for the comic relief in an otherwise bleak Stateside airline industry:
Delta Air Lines Inc has sued the Export-Import Bank of the United States over loan guarantees given to support purchases of Boeing Co's widebody planes by certain foreign airlines, according to a court filing. Delta said that Ex-Im bank's subsidies to foreign airlines, including Emirates Airlines, Etihad Airways and Korean Air Co Ltd, to help them buy Boeing planes would cause adverse economic effects on airlines and their employees.

Delta said in the filing that the bank did not properly analyze the adverse economic impact and has requested the district court in Washington D.C. block any loan guarantees...In a complaint filed in federal court in Washington D.C. late on Wednesday, Delta said one of the types of exports that Ex-Im Bank subsidizes is the export of aircraft by U.S. manufacturers, especially ones made by Boeing.

"In 2012, the bank's total exposure to outstanding financial commitments was $106.6 billion. About 46 percent of this amount was for air transportation loans and loan guarantees, more than the three next largest industrial sectors combined," Delta said in the filing.

Delta said the Ex-Im Bank loan guarantees help lower the cost of capital for foreign airline companies. "These foreign airlines will recoup their investment in their new aircraft faster or reduce ticket prices on competing routes without adversely impacting their relative rate of return on those investments," Delta said in the filing. Delta argued that unsubsidized U.S. airlines will be forced to respond by "reducing their prices and reducing or altogether eliminating their capacity to serve those routes where they compete with bank-subsidized foreign airlines."
The whole point of trade finance is to make goods alike American-made jetliners available for purchase in LDCs where commercial finance is not sophisticated enough. To brand this kind of activity "illegal" would hurt any number of American exporting industries by precedent.

Why would the US sacrifice substantial exports to satisfy the (protectionist) interests of an utterly substandard airline like Delta? Even in present-day America, rewarding mediocrity has its limits.
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Obama's Anti-China Free Trade Area of Free People [sic]

♠ Posted by Emmanuel in at 4/02/2013 06:31:00 AM
Question: What do you get when you cross the EU-US FTA with the Trans-Pacific Partnership?
Answer: The Free Trade Area of Free People (FTAFP)[sic]

During the Cold War, older readers will remember that the United States began funding pro-democracy propaganda via Radio Free Europe, Radio Free Asia, and so forth. Now that the Cold War is over, we are, er...supposedly returning to that same sort of mentality from the Yanks. Or, at least news sources are telling as alike the Financial Times. Maybe it was a slow day at the world's premier financial newspaper, but it too has succumbed to this temptation of portraying US FTA initiatives as those meant to "bandwagon against" China in the economic realm.

I am honestly wary of this characterization since it, first of all, brings us back to the framing of trade as inherently conflictual when it's supposed to be mutually beneficial as per the theory of comparative advantage. Moreover, hasn't China pursued FTAs of its own especially in Asia that pointedly exclude the US and other Western nations? At any rate, an argument being marshaled is of China's exclusion helping to appease trade-phobic American lawmakers:
But much of the substance of the EU talks and of TPP points to China. The agenda includes state subsidies for business and protecting intellectual property – precisely the sorts of issues that are becoming huge bones of contention with Beijing. If the US can get enough important countries to sign up, it hopes to establish global trading standards that China would feel obliged to respect. On Capitol Hill, where free trade is not an easy sell in an era of unemployment of more than 7.5 per cent, the China angle is being used to rally support. “This is very much part of our China strategy,” an aide to a leading Republican senator puts it, talking of the discussions with the EU. 
And speaking of my admittedly, ah, tortured title, there is supposedly an emergent coalition of the WTO-plus trade willing to paraphrase a former American leader:
TPP and the US-EU trade talks represent an alternative strategy, an attempt to forge fresh rules by appealing to smaller groups of like-minded nations, in this case working around China rather than with Beijing. Supporters say this is not an abandonment of global institutions such as the World Trade Organisation but simply a realistic assessment of how to get things done.
You're either with us or against us in trade. Where have we heard something similar before? That said, I am doubtful whether joining up the TPP and US-EU FTA really is an American goal to isolate China in trade. After all, both American-led initiatives are hardly done deals and both face formidable obstacles to completion, so we cannot even begin to speculate about their merger.

That said, you must admit that Free Trade Area of Free People [sic] has a nice ring to it.
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