Africa Trying to Avoid “Lost Decade”

Sources:
Reuters
IRIN Africa

The World Bank said Wednesday that Africa must continue to invest in infrastructure projects, such as new roads and energy plants, or it could face the possibility of a “lost decade” of development. The term “lost decade” refers to the 1990s in Asia, where many Asian countries failed to invest in infrastructure amid the Asian financial crisis and had their economic growth stunted as a result. However, the source of funding for such infrastructure during the current global credit crisis is a question that many African countries are struggling with.

The theme of the upcoming summit of the Africa Union (Feb. 1-3 in Ethiopia) will be “infrastructure.” Optimism that Africa could survive the global credit crisis unscathed is beginning to wane. The crisis is causing a drop in demand for African exports and commodities, a drop in remittances from abroad and a drop in taxes collected domestically. The summit will focus on finding “flagship” infrastructure projects to coordinate and invest in.

But, amongst this economic turmoil, it is clear that continued infrastructure development must be a priority for Africa. When it comes to energy consumption, Africa uses about a third less than the world average, and according to the African Development Bank, it will cost about $37 billion a year until 2020 to provide universal access to electricity in Africa. While these facts are somewhat discouraging, some experts point out that Africa has the potential to tap vast amounts of clean energy like hydroelectric and geothermal power.

New infrastructure may also help battle growing unemployment in Africa. The International Labor Organization predicts that upwards of 50 million jobs could be lost in Africa in 2009. These loses would largely erase the gains that Africa has made in the past few years.

It is believed that China may continue to invest heavily in African infrastructure projects. Where the money ultimately comes from is still up in the air, but as of now Africa appears to be committed to funding infrastructure even as the credit crisis wrecks havoc across the globe.

Questions:
1) Should other countries, such as the US, worry about how entrenched China is becoming in Africa? Do Western countries fear that large scale infrastructure funding will appear to be some form of neocolonialism?
2) Before the current crisis hit the globe many emerging economies in Africa provided some of the highest investment returns. Credit is extremely tight now across the globe, but should investors continue to be weary of Africa given the increased gains in political stability throughout the continent?

South American Leaders Head to World Social Forum

"S. American leaders head to anti-Davos gathering" Guardian.co.uk
"World Social Forum 2009" Bank Information Center
World Social Forum Homepage
"Lula Shuns Davos Elite for Anti-Capitalist Jamboree With Chavez" Bloomberg.com

The World Social Forum has been meeting annually since 2001 to protest the World Economic Forum. In the World Economic Forum, which is being held this week in Davos, Switzerland, business leaders and 41 heads of state are gathering to discuss world economic issues. The World Social Forum is being held in the Brazilian Amazon during the same time (January 27th to February 1st) to call attention to the downsides of a world run by the excesses of capital. Venezuelan President Hugo Chavez said that the World Social Forum will show the planet how to make "a better world, distinct from capitalism." This year’s forum is titled “Another World Is Possible.”

The World Social Forum's website describes the forum as "an open meeting place were social movements, networks, NGOs and other civil society organizations opposed to neo-liberalism and a world dominated by capital or by any form of imperialism come together to pursue their thinking, to debate ideas democratically, for formulate proposals, share their experiences freely and network for effective action. . ."

Brazilian President Luiz Inacio Lula da Silva, along with the presidents of Venezuela, Bolivia, Ecuador, and Paraguay, headed to the World Social Forum today to protest the World Economic Forum. This is Lula's first social appearance at the Forum in three years. In addition to the South American presidents, approximately 100,000 activists are expected to attend this year's Forum.

President Lula, a former trade union leader, took a risk by turning down his invitation to the World Economic Forum. Brazil is the world’s tenth-largest economy, and in the past, Lula represented Brazil at the World Economic Forum. As the head of emerging-markets research at RBC Capital Markets explained, Lula's skipping Davos may be a "missed opportunity" to raise the profile of Brazil. In his words, skipping Davis "may play well with the local electorate but it certainly doesn’t help Brazil internationally."

President Lula does not seem to mind the criticism. His government spent 78 million reais (USD34.4 million) to bring groups from 59 countries to the World Social Forum.

Questions:
1) Should President Lula attempt to attend both the World Social Forum and the World Economic Forum? Only the World Social Forum? Only the World Economic Forum? Why?
2) Should global economic leaders be concerned about Lula's choice? Why or why not?

U.S. Shock Continues: Home Prices at Record Low; Consumers Still Not Confident

Sources: Financial Times, US House Price Freefall Continues; New York Times, Home Price Index Fell Again in Nov.

For the twenty-eighth consecutive month, Standard & Poor’s U.S. home price index in twenty of the largest metropolitan areas in the U.S. fell in November, down 18.2% from the prior year. At the same time, consumer confidence fell in January to 37.7% (down from 38.6% in December 2008).

Since the housing market peaked in July 2006, home values have fallen 25%, and analysts say the market is “nowhere near” bottoming out—so the drops are likely to continue. November’s decline is the sharpest year-on-year decline since records began in 1968—the median home price was $175,400, down 15.3% year-on-year. But analysts say that November’s drop was not as bad as they expected.

The continued drop in home prices have brought bargain hunters back to the housing market, resulting in an increase to 6.5% of home sales in December (though still down 3.5% from last year). Some analysts predict that sales will continue to rise over the next year. While gasoline and energy prices have gone down, unemployment is at 7.2% and could top 9% by the end of the year. Americans are finding their retirement accounts are depleted, and still-rapidly-falling home prices all make the U.S. economic crisis still very real.

Questions for Discussion:
It is now clear that falling home prices are one of the initial causes of the current financial crisis. What can stop home values from falling? Should the government do something? Or is there a more market-based approach that can stop the hemorrhaging?

Icelandic Prime Minister Turns Over Reigns to Leftist Coalition

Sources: Wall Street Journal, Financial Times

After yesterday’s resignation of Icelandic Prime Minister Geir Haarde, President Olafur Ragnar Grimsson asked opposition leaders to set up a new leftist coalition between the Left-Greens and the Social Democrats. In Iceland, the president, as the Head of State, can dissolve Parliament to hold new elections. The move marks the end of 17 years of right-wing leadership that transitioned the country from a fishing economy to a banking giant within the span of a generation. However, the quick shift to a privatized free-market economy ultimately led to the country’s downfall. Haarde cited cancer as the reason for his resignation but public protests over the handling of the country's financial meltdown no doubt contributed.

The economic crisis has prompted a marked increase in political support for left leaning parties such as the Social Democrats and especially the Left-Greens. Now the third largest party in Parliament, support for the Left-Greens has surged to a 28.5% minority stake in the government since the banking meltdown last fall, according to a recent poll by the Market and Media Research Agency. The two minority parties may struggle to form a coalition, as they differ on major issues such as EU membership and whether to accept IMF aid; the Social Democrats support the IMF plan while the Left-Greens want to renegotiate it.

Left –Green party leader Sigfusson hopes to boost environmentally friendly small and medium-sized industries instead of focusing on the aluminum and fishing industries, Iceland’s two major exports. At a press conference yesterday, he also relayed that he has no plans to privatize Iceland's three major banks, which were nationalized last October, and hopes to return the country to a traditional Nordic economy with a public-private balance.

Discussion:
1. How can a coalition government aid Iceland socially and politically?
2. Besides those listed here, what problems do you foresee for Iceland’s leftist coalition?
3. In a global recession, can a bankrupt economy afford to prioritize sustainable development and the environment? Why or why not?

The Spanish government makes official the collapse of the Spanish economy.

Sources: Financial Times: Britain and Spain: a tale of two house market bubbles; Spanish unemployment surges above 3 millions. Diario El Mundo: The Crash of 2008. Diario Expansion: The OCDE warns of “big risks” to the Euro Zone; The Spanish Government forecast a 1,6% decrease in the GDP and a 5,8% public deficit in 2009.Diario El Economista: Brussels forecast an increment of 19% in the Spanish unemployment rate. Sofia A. Perez & Jonathan Westrup: Finance and the Macro-Economy: The Politics of Regulatory Reform in Europe.


On January 16, the Spanish Government made public its economic forecast for 2009: an unemployment rate of 15.9% (which means that more than 730,000 workers will lose their jobs this year, resulting in a total of almost 3 million unemployed people), a decrease of 1.6% in the Spanish GDP and a public deficit that will reach 5.8% of the GDP. In short, the Spanish Government made official the catastrophic economic situation that is facing the country that reportedly was, during the last two decades, one of the fastest growing economies in Western Europe. What is worse, the European Commission forecasts a deeper decline for the economy for 2009: a decrease of 2% in the Spanish GPD, a deficit of 6.2% of GDP and an increase to 16.1% for the unemployment rate, which could reach 19% in 2010. What caused the dramatic downturn in the Spanish economy?

Both the economic analysts and the Spanish government have agreed about the causes of the disaster. The current crisis―the worst that Spain has faced since the nineties―originated from the combination of two main factors: a worldwide financial crisis that began in the United States and the collapse of the Spanish housing market. In the last two decades, in conjunction with Spain’s accession into the European Union, the housing market has been the most important business in Spain. Even in the first months of 2008 this sector made up 17.9% to the total Spanish GDP and more than the 13% of the total employee population. The real estate and land speculation (the so-called “housing market bubble”) has been the main cause of the collapse of the housing market. Basically, land speculation was caused by the corruption among development companies and city councils as well as misunderstanding by the vast majority of Spaniards of the future of the Spanish housing market. During the last decade, it was more profitable for people to buy houses than to rent them, because the monthly mortgage payments were similar to the monthly rental costs. In fact, since the beginning of the 21st century, only 15% of Spanish citizens were renting their houses, making Spain the European country with the most real estate owners.

In 2008, the housing market collapse in Spain coincided with the subprime mortgage crisis in the United States. This in turn intoxicated the global financial system, causing a climate of distrust between the banks. Spain, as the rest of the world, is affected by this financial crisis and is now having difficulties obtaining liquidity in the economy, affecting companies as well as households. The economy has been hit also by inflation, which reached almost 5% in 2008. The inflation was mainly caused by the increase in the price of crude oil, as well as by an incredible increase in food prices. In fact, the Spanish CPI reached 5.3% in July 2008. The policy of the European Central Bank, on which Spain depends, has mainly focused its fight against inflation and has imposed high interest rates. These measures have affected the Spanish mortgages subject to the Euribor (the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank) because the monthly payments that the households have had to make have increased substantially, and have caused flow of credit to dry up. As the Spanish government admitted, the mortgage debt of the Spanish households reached 700.000 million Euros in 2008.

As a consequence of the liquidity shortage, household incomes have dropped dramatically, inducing the decline in consumption, and ultimately the decline of the Spanish economy and the loss of thousands of companies and jobs. The OECD and the European Union both project that this year will be worse than 2008 for the European economies. They forecast a decrease of 1.9% of the Eurozone’s GDP and an unemployment rate of 10% in the Eurozone for 2009, but they hope for some recovery at the beginning of 2010. For its part, the Spanish Government has projected a 1.2% growth for the economy in 2010, although it has also forecasted that the country will face a public deficit of more than 3%, even in 2011. Having in mind that after the crisis of the nineties the Spanish government intensified its supervisory role over the financial market (mainly in order to adjust the country to European Union economic policies) it is clear that it will face a great challenge in order to return the country to normality. There is no doubt that Spain will face a long and exhausting period of unemployment and recession.

Questions:
1) Do you think that the Spanish government should focus primarily in reducing the unemployment rate?
2) The beginning of the economic recovery for the European Union in general is estimated to happen in the beginning of 2010. Do you think that Spain could recover that fast?

World Bank says foreign direct investment to decline 31 percent in 2009

Sources: Bloomberg—Emerging Markets Face $180 billion Investment Decline

World Bank—MIGA Tackles Declining FDI Levels and Growth Prospects in Vulnerable Economies

 

Developing nations worldwide could face drops in foreign direct investment (FDI) of more than 30 percent in 2009 as investors and creditors tighten their belts, according to recent reports by the World Bank and others.  This could threaten the gains in growth made over the past decade, as FDI is often a key factor in the speed of growth and development in emerging economies.  Accordingly, the World Bank’s Global Economic Prospects Report has already predicted that growth in the developing world will slow from 7.9 percent in 2007 to 4.5 percent this year as a result of the after effects of the global financial crisis.

The amount of FDI inflow a country attracts is heavily influenced by both the rate of economic growth in the nation (almost certain to contract in 2009 for the vast majority of emerging economies) and the availability of credit for investors.  The current global financial and economic crisis has greatly reduced the availability and cost of credit for investors and corporations who might otherwise want to expand into emerging markets.  Additionally, the international financial market outlook has made many investors hesitant to take on risks, even if they can secure financing, and this failure of confidence does not seem likely to turn around in the near future. 

Thus, the World Bank Group, and particularly the Multilateral Investment Guarantee Agency (MIGA), which is the principle institution charged with promoting FDI in developing nations, are taking a proactive stance to try to improve investor and lender confidence.  MIGA’s primary tool to increase investor and lender confidence in emerging economies is as a provider of political risk insurance and guarantees.  Political risk insurance can be taken out by the investor against the risk of currency transfer restrictions, expropriation, domestic turbulence, and breach of contract with the government.  A MIGA guarantee helps secure financing from hesitant banks and can greatly reduce financing costs as well.  The World Bank and MIGA are making it a priority to restore confidence in financial markets so as to enable potential private investors to invest in the future of developing countries.

Discussion: Is political risk insurance, which does not insure against currency devaluation, enough to jumpstart FDI in the developing world?  MIGA is currently exploring other solutions to cure the crisis of confidence and to respond more quickly in a future crisis, what are some options? 

Libyan Leader Gaddafi Threatens to Nationalize Oil and Violate OPEC Regulations

Sources: UPDATE 2- Gaddafi Says Looks At Oil Firm Nationalization, Reuters UK; Gaddafi Threat to Nationalize Energy Assets, Financial Times

Colonel Muammer Gaddafi, the Libyan leader, has threatened to nationalize oil reserves and violate OPEC production quotas as a measure against low oil prices.

In both a video conference with Georgetown University and a Spanish press conference, Gaddafi claimed that oil prices would have to rebound before the threat of energy nationalization was removed. Specifically, he told Georgetown students that oil prices would have to reach $100 per barrel.

Gaddafi also told Georgetown students that Libya would not adhere to OPEC regulations because of his nation’s dependence on oil revenues. He did not detail how and when Libya might derogate from OPEC quotas, however.

Most recently, during a dinner in Tripoli, he made comments regarding nationalization that were seemingly directed at executives of the Spanish company Repsol, the largest single investor in Libya’s hydrocarbons sector.

Gaddafi has also indicated through the Libyan press that he hopes that the country’s top executive and legislative bodies should vote to nationalize oil firms in the next few days.

The Libya economy’s loss in revenue due to low oil prices has been compounded by the fact that the government entered into billions of dollars of contracts to improve infrastructure when oil prices were high. This in addition to the global economic crisis has Gaddafi worried that nationalization might be necessary.

Discussion: Do you think that these are empty threats? How would nationalization affect hydrocarbon investment into countries like Libya in the future? How do you think OPEC will respond to violations of its production quotas?

Hungary Feels the Pain of Economic Tightening

Sources: Associated Press, Hungary's Central Bank Cuts Key Interest Rate; Bloomberg, Hungary's Forint Falls for Fifth Week on Recession, Rate Cuts; The Guardian, Hungary Wage Deal Poses Risk to 2009 Budget; Bloomberg, Hungary to Reduce Cost of Labor as Economy Heads to Recession; Bloomberg, Hungary Secures $518 Million EIB Loan for Development Projects

The Hungarian currency, the forint, fell to a record low last week in reaction to expectations that the central bank will continue its policy of lowering interest rates to control the current recession. Though this policy has helped to slow inflation and has been successful in bringing it down to a manageable level, the resulting currency depreciation is the greatest so far in European emerging markets. So far this year, the forint has already fallen 8.4%, reaching a rate of 289.87 forint per euro.

The Hungarian government has expressed an intention to work with the central bank to manage the currency, but low investor confidence in emerging markets overall is a major challenge. Hungary also suffers from the failing European economy, as it depends on the export of goods to eurozone countries.

The European Commission expects that the Hungarian economy will contract 1.6% in 2009, which puts it behind its Eastern and Central European neighbors. This forecast, which is worse than expected for the year, necessitates a budget re-write by the Hungarian government. One issue that particularly concerns the IMF is a wage deal that the government struck with unions for the 2009 budget that would in the IMF's view jeopardize Hungary's economic recovery. The IMF, World Bank, and European Union negotiated a $25.6 billion loan with Hungary in October 2008, and the IMF will conduct a review of Hungary's implementation of its plan in early February. Though Hungary is generally complying with agreed-upon adjustments, the wage deal is a sticking point, and the Hungarian Prime Minister noted today that the cost of labor will be one focus in redrawing the 2009 budget.

Hungary also announced today that it has reached an agreement with the European Investment Bank for an additional $518 million loan. This is a twenty-five year loan that is intended to help Hungary implement development projects co-financed by the European Union, in areas such as research and development and financing of small- to medium-sized businesses.

Questions:

1) Is it possible that external loans will put Hungary back on the path to economic recovery and eventually growth, or is the interconnectedness of markets and Hungary's dependence on Western Europe too great an obstacle?
2) Should those lending money to Hungary, such as the IMF, take a greater role in the budgetary process and in setting macroeconomic policy as a condition of the loans?

Proposals By Administration and Federal Reserve Raise Questions of Nationalization of Banking Industry

Fed Weighs Options on Credit Markets Supports, Financial Times
Nationalization Gets a New, Serious Look, New York Times

Amid troubling economic announcements of thousands of job cuts and disappointing corporate earnings reports, the Obama economic team and the Federal Reserve continue to face difficult decisions of formulating a continuing strategy to fight the financial crisis.

The aggressive plans for financial industry bailout and financial stimulus of the Obama Administration--as detailed this weekend by Obama Advisor Lawrence Summers and Treasury Secretary designate Timothy Geithner--had already drawn criticism from conservative politicians and economists for being too expensive and so broad as too essentially represent the nationalization of the American banking industry.

Despite ardent rejection of any notion of nationalization by Administration officials and Democratic congressional leaders, questions and fears regarding nationalization will not likely be quelled by an anticipated series of proposals coming out of the Federal Reserve. It is expected that the Federal Reserve will announce increased commitment to relieving banks and institutions of toxic assets, as well as possible investments in the credit card, student loan, auto loan, and small business loan markets. Other policies believed to be under consideration by the Fed include bailout purchases of toxic assets from Fannie Mae and Freddie Mac and purchases of Treasury bonds.

Discussion questions:
1)Does the Obama Administration's proposed bailout/stimulus plan equal nationalization? Does it go far enough?
2) What degree of coordination should the Federal Reserve and the Administration have in addressing the current financial crisis?
3)Should the Federal Reserve pursue strategies of investing in Government Sponsored Enterprises and federal financial stability in general through the purchase of toxic assets and bonds?

Treasury Nominee Hints at Bailout Tweaks

Sources: Financial Times, Geithner Pledges ‘Dramatic’ Action; Washington Post, Geithner Says Financial Plan Due in Weeks

In a hearing last week before the Senate Finance Committee, President Obama’s nominee for the Security of the Treasury, Timothy Geithner, said that the Obama administration’s “dramatic” plan to respond to the economic crisis will be ready for public scrutiny in a few weeks.

Without offering any specific insight to the plan, Geithner said that the plan will do more to strengthen financial institutions and enable them to lend to small businesses, college students, car buyers, and real-estate buyers, providing more substantial support to the credit markets. The Obama team could be basing its credit-market-enhancing plan on the Federal Reserve’s Term Asset-backed Securities Lending Facility, a program that combines equity from the Treasury with loans from the Fed to provide investors with low-cost funding to purchase securities comprised of cash flow from consumer loans.

Obama’s plan is said to be a “re-tooling” of the original $700-billion bailout plan that Congress passed in October and will include provisions requiring institutions receiving government money to document increased lending. Geithner said the Obama team is considering a “broad range of proposals” to stimulate and reform the government’s approach to the banking industry.

Geithner also said that government experts are working to compile labor studies to help build a plan to strengthen the failing U.S. auto industry. He also mentioned that he will work China to ensure flexible currency regimes, something that will require “substantial[] engagement” on his behalf.

Questions for Discussion: Do you think Geithner’s preview of Obama’s economic plan is on the right track? Is there enough information to judge its potential for success? What changes would you suggest?

China's currency "fundamentally misaligned"?

Sources: China hits back over renminbi comments, Financial Times; IMF in discord over renminbi, Financial Times; Obama Skeptical of Chinese Currency Value, Center for International Finance and Development

 The International Monetary Fund (IMF) is debating whether it should declare the renminbi, China’s currency, to be “fundamentally misaligned” after Barack Obama’s designated Treasury Secretary Tim Geithner accused China of “manipulating” the currency’s value (for more about Geithner’s statement, go here). Some IMF economists have concluded that China’s exchange rate created “a risk of disruptive adjustment,” but were not willing to say that China was purposely causing the problem. The value of China’s currency has been cause of international tension for several years now, so much so that the IMF’s executive board has refused to discuss the Chinese economy since 2006. Refusing to discuss the issue highlights the politically controversial nature of the problem among its member countries, especially in light an IMF resolution in 2007 to increase its oversight of the member countries’ exchange rates.

 Because China does not borrow from the IMF, the international financial organization lacks the power to force China to change its exchange rate policies. However, an IMF declaration that China’s currency is “fundamentally misaligned” would be another tool the U.S. and other member countries could use to put pressure on China to let its currency rise in value in the international markets. The United States wants this to happen because a country with under-valued currency has a competitive edge in international markets. The country is able to undercut the prices of other countries exports, offering its own goods at cheaper rates.

Record trade surpluses over the last three months, in spite of the global financial crisis, provide fuel to the United States’ claims and indicate that the renminbi is still undervalued. China has denied Geithner’s manipulation claims and accused the United States of merely exploiting the issue to implement stronger protectionist policies in its international trading.

 Questions

(1) Do you think China is actually manipulating the value of its currency to gain an advantage in its international trading?

(2) If China is manipulating the renminbi, what should the United States and the rest of the world do about it?

(3) Why is the IMF hesitant to discuss the Chinese currency issue and what would happen if it did?

Global Financial Crisis is Having a Negative Effect on Africans Working Abroad

Sources:
Wall Street Journal
AFP

The Organisation for Economic Cooperation and Development (“OECD”) and the International Labour Organisation are now estimating that the world-wide unemployment number could reach a record 210 million people by the end of 2009. As the financial crisis wrecks havoc on economies throughout the world, many African emigrants working abroad are the first ones to loss their jobs. Stefano Scarpetta, a top unemployment specialist at the OECD, warned that "the first workers to be affected are the temps," and that immigrants, in particular, were at high risk of losing their jobs.

Spain offers an example of how the global financial crisis is affecting African emigrants. Many of Spain’s foreign workers come from Africa, but now that times are difficult, jobs are going to native Spaniards before African foreigners. During Spain’s last decade of booming growth, foreigners were encouraged to come supply labor in the agricultural and construction industries. The boom is now over, and Spain is facing a 14% unemployment rate. With more foreign workers than there are jobs available, Spain is offering to pay the foreign workers a lump-sum in order to encourage them to return to their home countries for at least three years.

The job prospects are not much better at home, however. Only some 1,400 foreigners took Spain’s offer and moved home. Many people, instead choose to live in the streets or in shelters as they try to weather the current economic hardships in their adopted Spain. Spain is but one country that is faced with too many foreign workers, and shows us just how far the reach is of the global credit crisis.

Questions:
1) During the height of foreign supplied labor in Spain, the country gave amnesty to over 500,000 illegal foreign workers. Now that there is a shortage of jobs, these foreign workers are the first to be fired. Do you think this experience will make Spain more cautious about allowing foreign workers into the country in the future?
2) If more African emigrants cannot find work in their new countries how will they be able to send remittances back to their home country? Remember, remittances are often a big part of many developing countries’ economy.

IMF Announces 2009 Will Be Worse Than Expected

Sources: IMF, World Faces Deepening Crisis, IMF Chief Warns; Daily Times, IMF Chief Warns World Faces Deepening Crisis

Last week, IMF Managing Director Dominique Strauss-Kahn announced that the credit crisis will continue to spread and slow down the global economy. In November 2008, the IMF predicted that the crisis would considerably affect developed economies, but that emerging markets would be able to weather the crisis during the start of 2009 and thus help strengthen the global economy. Strauss-Kahn now recognizes that the crisis has affected emerging economies such as China, India, and Brazil, and has promised that by January 28, the IMF will release new predictions for 2009 in a press conference in Washington, D.C. The new forecast will reflect the toll that the crisis has taken in emerging markets and the expected toll that it will take in other regions that have not yet been affected.

Where in late 2008 Strauss-Kahn expressed optimism for 2009, the Managing Director currently hopes for recovery in early 2010. Strauss-Kahn's statements also reveal that prospects will not only decrease in the U.S. and Europe, but will now look bleak in emerging economies as well. The crisis' effects on emerging economies is especially significant, given the history of expansion that these countries were experiencing until recently.

In terms of possible solutions to the continuing problems related to the crisis, Strauss-Kahn emphasized the importance of governments injecting funds into their economies. In his view, national governments have not spent enough money on stimulus packages. He specifically referred to Europe as one region in which stimulus spending was "behind the curve." In fact, the IMF is now proposing that countries who are in a position to do so combine forces to inject approximately $1.2 trillion into their respective markets. According to IMF officials, stimulus spending elicits greater reactions than tax cuts.

Strauss-Kahn concluded his comments by stating that he expects more countries to seek the IMF's assistance in the coming months; specifically, he expects Latin American countries to seek aid relatively soon. He described those countries as being on the verge of experiencing their own serious reactions to the crisis. Strauss-Kahn also predicted that if the crisis continues over the next six months (which he admitted was likely) the IMF will need more money, about $150 billion, to provide countries with the resources to cope with the credit crisis.

Obama Skeptical of Chinese Currency Value

Sources:
NY Times - Geithner Hints at Harder Line on China Trade
Wall Street Journal - Chinese Ministry Denies Geithner's Currency Claims
Forbes - China, New U.S. Administration Make Yuan First Row


President Obama's nominee for Treasury secretary, Timothy Geithner, made waves in the financial world on Thursday when he stated that Obama believes China is manipulating its currency. The charge of manipulation is significant both because the Bush administration studiously avoided making that claim during its time in office and because a U.S. law requires an investigation and possible trade sanctions if a country is found to be intentionally engaging in currency manipulation in order to gain a trade advantage.

The Chinese currency, the yuan, has steadily appreciated against the U.S. dollar by 16% in the past few years after China eased a previous strict band of currency fluctuation. However, with the Chinese economic growth rate slowing and exports dropping, the yuan's exchange rate with the dollar has leveled off. An undervalued and low currency value helps a country's exports because its goods are then cheaper for foreign purchasers.

Geithner's signal to the Chinese from Obama indicates that the new President may take a harder and more protectionist line toward trade, a philosophy that Obama had indicated on the campaign trail. At the very least, Obama may call more attention to other countries' potential unfair practices and violations of trade regulations. Such a move would be heavily supported by U.S. manufacturers and unions, many of whom allege that China's artificially low yuan value gives China a wrongful comparative advantage over U.S. manufacturers.

An official from China's Ministry of Commerce responded to Geithner on Saturday and denied all accusations of currency manipulation. U.S. officials must be careful of antagonizing their biggest trading partner, however, as China holds a vast reserve of U.S. Treasury bills and has therefore been financing the ballooning U.S. government debt.


Discussion:
1. How does the U.S. government control the dollar's exchange rate?
2. Do any U.S. domestic interests benefit from a devalued yuan?
3. Could Geithner's comments serve another purpose than antagonism, sparking a new starting point for dialogue with China?

More Bad News for South Africa

Sources:
Financial Times
All Africa
Bloomberg

South Africa’s economic prospects may be dimming amid the global credit crisis. A recent post described Fitch’s lowering South Africa’s credit prospects, and more evidence points to potential bad times ahead for the country. South Africa’s economy relies heavily on exporting its commodities, particularly precious metals, and commodity prices have plunged recently. In addition to the price drop, global demand for its commodities have also dropped.

Another big concern is their high unemployment rate. Right now it sits at 23%, and the mining industry is expected to lose an additional 14,000 jobs. The slump in demand for their precious metals is also affecting some of their other industries. Richemont, a Swiss luxury brand, said that it is facing the toughest financial conditions it has ever faced and that their recent performance "debunks the myth that when times get tough, the rich go shopping".

South Africa has maintained since the beginning of the global credit crisis that they were insulted from its reach. Many factors have been in their favor. For one, their banking industry is heavily regulated which prohibited their banks from buying the credit derivatives that have wrecked havoc on Western economies. However, the global credit crunch will make it hard for the country to finance its current account deficit of 8%. South Africa’s currency, the Rand, is also losing value, which also exasperates its account deficit problem. Whether the country wants to admit it or not, the cards appear to be stacked against economic growth.

Questions:
1) Gold typically does well in bad times as people view it as a safe investment. If this is true, then why has demand for South Africa’s precious metals been decreasing?
2) Though the global credit market is tight, South Africa’s banking system appears to be in good shape. Can South Africa’s banking system provide the necessary credit to help spur industries and new employment?

World Bank Predicts Slow Growth in the Middle East

Sources: World Bank Sees Slower Mideast Growth, Financial Times; MENA Growth in 2009 to Slow to 3.9%-World Bank, Arabian Business.com

In December the World Bank predicted that economic growth in the Middle East and North Africa, excluding the Arab Gulf nations, will slow to less than four percent in 2009. This prediction can be attributed to the global financial crisis—-which extended its reach into the MENA region—and a subsequent decline in oil prices.

Specifically, the World Bank’s 2009 Global Economic Prospects report indicates that the MENA region will grow by 3.9 percent in 2009, compared to 5.8 percent in 2008.

The World Bank concludes that the global financial crisis is likely to affect developing countries in several ways. The biggest impact will be from slowing investment growth. However, there will also be a decline in international trade and a drop in oil prices.

Naturally, the greatest issue facing the region is the uncertainty surrounding the outlook for oil prices. In December, oil prices fell below $40. Although prices have been steadily rising, unless they can reach $65-$75 per barrel fairly quickly, the World Bank indicated that a quick economic recovery in the MENA region is unlikely.

Discussion: How do you think that autocratic governments in the MENA region will deal with this decline in economic growth? Will this decline be likely to negatively affect domestic social programs? Or will governments jaded by the Western origins of the crisis be deterred from international investment and spend more domestically?

Chile's Copper Industry Tarnishes

BHP Delays $6.75 Billion Escondida Expansion on Slump (Update2) Bloomberg.com

Chile’s Copper Windfall Props Up Spending as Ecuador Defaults Bloomberg.com

"BHP Biliton, dueña de Minera Escondida, anuncia 2 mil despidos en Chile" El Mercurio

"Anglo American paraliza parte de su producción minera en Venezuela" America Economica.com

Chile is the world's largest producer of copper, and copper has been called "the engine of Chile's economy". Like many Latin American countries, raw materials make up a large portion of Chile's gross domestic product (GDP). Copper accounts for approximately one quarter of government revenue in Chile, and the government sets its budget based on copper price forecasts. Unfortunately for Chileans, its "copper engine" is slowing as copper prices have fallen dramatically in light of the global economic slowdown. Mining companies are beginning to reduce operations in Chile as copper prices have fallen 68 percent from their May 2008 record highs.

Today Australian-based BHP Billiton Ltd., the world’s largest mining company, announced it will delay $6.75 billion in projects at its Escondida copper mine in Chile. BHP also announced a cut of 2000 jobs in Chile, 2300 jobs in Australia, and 1650 jobs in the United States. Those layoffs represent 6 percent of BHP's global workforce.

Escondida is the world's largest copper mine, producing one quarter of the copper from Chile. Output at the mine is already down approximately 12 percent from last year. Diego Hernandez, president of BHP's base metals division, explained that the price of copper will stay "relatively low" over the next 12 to 18 months, and that BHP "can withstand this level of prices."

BHP is not the only mining company scaling back in Chile. London- based Antofagasta Plc also said this month it fired workers at two copper mines in Chile. In December, BHP, US-based Freeport-McMoRan Copper & Gold Inc., and UK-based Anglo American Plc placed $3.1 billion USD of Chilean projects on hold.

The Chilean government assures its citizens they have little to fear. Their government is still in the black, because it set its 2008 budget based on a copper price forecast of $1.37 a pound, less than half the average 2008 copper price. Copper is currently trading at approximately $1.43 USD per pound. Also, the government saved over $28 billion USD when copper prices were higher, so state-run services will not face spending cuts in the near future.

Chile is not the only Latin American country affected by the mining industry slowdown. Yesterday Anglo American temporarily halted production at its biggest nickel mine in Venezuela.

Questions:
1) What type of risks does a country face when its revenue is heavily dependent on raw materials?
2)How can that country minimize those risks?

President Obama Faced With Major Bank Rescue Decisions from Day One

Obama Urged to Move Swiftly to Rescue Banks, New York Times
Obama Team Considers New "Bad Bank" , Financial Times

As the world's attention turns to the pomp and ceremony of the Inauguration of the new President of the United States, the financial community is increasing the fervency of its calls for quick and significant action to rescue the increasingly vulnerable banking community. While the need for some action to save troubled banks, like Citigroup and Bank of America, is widely acknowledged, there are a number of different proposals for what specific steps should be taken.

In a recent speech, Federal Reserve Chairman Ben Bernanke outlined three options for a bank rescue plan : 1) an extension of the TARP philosophy, by which the government would purchase troubled assets from the banks; 2) government provision of guarantees of bank assets and agree to absorb certain losses related to troubled assets; 3) the formation of a "bad bank" that would use stock or cash to purchase declining assets. Great Britain recently chose to employ the third "bad bank" strategy in its efforts to limit the expansion of the crisis in the banking industry.

Whichever strategy or combination of strategies they decide to pursue, President Obama and his administration will have a number of factors to consider when making their decision, including the possible--if not probable--disagreements between major players like Treasury Secretary designate Timothy Geithner and Chairman Bernanke and the likely imposition by Congress of conditions and limitations on the use of the remaining bailout money.

Discussion Questions:
1) Should the government offer further direct, financial assistance to banks?
2) If yes, what is the best way for the government to approach a further rescue of struggling banks?
3) Should a certain portion of federal rescue money be dedicated to foreclosure relief?

IMF Issues Policy Recommendations for Its Future and the Future of the Global Economy

Sources: IMF-The IMF and Its Future

IMF-Crisis Lessons for the IMF

This December, Dominique Strauss-Kahn, managing director of the IMF, took the time to lay out the Fund’s policy advice for economies struggling with the effects of the financial crisis, as well as its recommendations for the role of the IMF in preventing future crises.  Mr. Strauss-Kahn focused on three goals that need to be attained in order to regain economic and financial stability: restoring stability to financial markets, supporting aggregate demand, and providing financial support to Crisis-hit countries.

To further the objective of restoring stability and confidence to financial markets, he emphasized that government intervention in the markets should be “clear, comprehensive, and cooperative between countries.” He said that governments currently face politically tough conditions resulting from “bailout fatigue” because past interventions have not been adequately transparent. 

The IMF’s position on fiscal stimulus is that for most, but not all, countries it is absolutely necessary in order to pull the global economy out of its deep decline.  Not only is fiscal stimulus warranted for those countries that can afford it, but such measures should also be “large and diversified.”  The IMF’s current position is that a global fiscal stimulus should be at least 2 percent of global GDP ($1.2 trillion) in order to be effective in increasing global growth.

Finally, the Director highlighted the IMF’s efforts to provide liquidity for emerging economies hit hard by the after-effects of the financial crisis, including direct lending agreements and a short-term liquidity facility available to nations with strong fiscal track records.  But, as the G20 meeting in November addressed, the IMF has limited capital reserves on hand to lend to troubled economies, though Strauss-Kahn emphasized that it has enough “for now.”  He also praised Japan’s offer of $100 billion and encouraged other nations with large reserves to follow their lead so that the Fund can adequately assist any country, no matter how large, if necessary.

The speech also addressed the IMF’s vision for how it can play an important role in preventing a future crisis.  Strauss-Kahn praised the use of the G20 format as a more representative forum for necessary cooperation and stated the IMF’s intention to coordinate increasingly with other international organizations, like an expanded Financial FSF and the G20 forum.  The IMF sees its role, apart from the macroeconomic assessments for which they have traditionally been responsible, as increasingly one of an early warning system-to identify potential problems and give recommendations for how to remedy them before they become crises.  Ultimately, however, early warnings are only useful when heeded and it remains to be seen if world leaders will be more responsive in the wake of this global crisis.

Discussion: What kind of role can the IMF play in a new and improved international financial regulatory structure?  Would a more direct regulatory function be more effective?  What do you see as the prospects for more international coordination and cooperation in financial regulation?

Tanzania Postpones Issuing Sovereign Bond; Can a New “Vulnerability Fund” Help?

Sources:
Bloomberg
Reuters Africa

Tanzania’s Finance Minister Mustafa Mkulo cited the global credit crisis as the reason the east-African country will postpone issuing its first sovereign bond offering. Tanzania planned to use the proposed $500 million sovereign bond sale to fund necessary infrastructure projects, such as building new power plants and roads. The country is currently experiencing electricity shortages and Mkulo stated that “[t]hese projects are needed in order to steer [Tanzania’s] economic development.”

However, the global credit crisis has increased borrowing costs forcing Mkulo to look elsewhere for the funds. Mkulo said that Tanzania is in the process of working with the African Development Fund to secure funding and that he will make an announcement as soon as February about potential alternative sources.

One potential source could be a new “vulnerability fund” proposed by World Bank President Robert Zoellick. Zoellick met with Arab leaders this Monday, and stated that emerging economies need support but cannot afford their own bailout packages or budget deficits. He will urge follow G20 countries at this April’s meeting to set up a fund for "investment in infrastructure projects that can create jobs while building a foundation for future productivity and growth".

Regardless of the current struggles Tanzania faces in trying to raise funds for infrastructure, its economic analysts are still predicting decent growth prospects for the country. Though demand for Tanzania’s vast diamond and gold mines have decreased due to the credit crisis, the country expects a 7% growth rate fueled by expansion in its telemarketing and tourism industries.

Questions:
1) What type of projects do you think the vulnerability fund will choose to give money to?
2)Do Tanzania’s relative strong growth prospects hurt its chances of securing money from such a fund?

Russian Currency Continues to Fall as Recession Looms

Sources: Bloomberg, Ruble Falls Most in 10 Years This Week After Five Devaluations; Pravda, Russia's Economy May Not Grow in 2009 At All; The Moscow Times, Putin Orders Budget Revised at $41 Oil

The downward slide of the ruble shows no signs of stopping, reaching its lowest point relative to the dollar since 1998, the year of Russia's financial crisis and Great Default, on Friday. The Central Bank's strategy is not to greatly devalue the currency all in one sweep, but instead to adjust in increments, seventeen times in the last two months alone. Though Russia had the benefit of large foreign currency reserves at the start of this crisis, it cannot afford to use them defending the ruble indefinitely. The Central Bank reported on Thursday that reserves have fallen to $426.5 billion since August, a twenty-nine percent decrease.

The currency is expected to continue its decline for some time before its rate relative to the dollar bottoms out, and this is not Russia's only economic concern. With $80 billion of foreign debt due this year and few refinancing options in the shaky global financial climate, Russian companies may be in trouble. The price of the main oil blend that Russia exports is down sixty-eight percent and falling from a record high in July, and Russian economists are looking at recession for a country that appeared almost untouchable as late as the middle of last year.

Finance Minister Kudrin admitted today that the rate of inflation is expected to reach thirteen percent in 2009, while the growth rate is expected to slow to a rate of zero to two percent. Kudrin expects that the peak of the crisis for Russia will occur in 2009, and stated that Russia is willing to increase the budget deficit in this period, as long as it does not exceed four to five percent of the GDP. The slowing of growth comes from a rate of six percent in 2008, which was lower than expected due to the arrival of the global financial crisis in Russia late in the summer.

Prime Minister Putin ordered a revision of the current budget on Monday to take into account these unexpected slowdowns in the economy, particularly the fall in the price of oil. The existing budget assumes a $95 per barrel price, whereas the revisions will assume $41 per barrel. This change is extremely important, as oil revenues account for forty percent of the Russian budget, bringing in both taxes and export duties. The government will have to shift focus from an expected budget surplus to a deficit, and cut spending accordingly. However, some of the Reserve Fund – a fund created from the high oil-and-gas-driven surpluses of recent years – will be spent in 2009 to accommodate this shift.

Questions:

1) Do you think Russia is doing enough in response to the crisis, or should leaders consider a more drastic one-time devaluation and/or major spending cuts instead of a gradual approach?
2) Will the Reserve Fund, the National Wealth fund, and foreign currency reserves be sufficient to provide a cushion for such a drastic shift in the Russian economic situation, or will low oil prices eat up these reserves and create a situation for Russia similar to that of the 1990s?

China growing at slowest pace in 7 years

Sources: China GDP Growth May Cool to Slowest Pace in 7 Years, Bloomberg; China’s Zhou flags risks to 2009 growth goals, Forex News

China’s exports collapsed in the fourth quarter, causing its expansion rate to drop to its slowest pace in seven years. The Asian country’s gross domestic product grew by only 6.8 percent this last year and that growth rate has fallen by 9 percent in the last three months. China's growth rate in 2007 was 13 percent. The slowed growth rate has put pressure on the Chinese government to introduce new stimulus measures to prevent the drop from further undermining economic growth in Asia.

The decreased demand for Chinese exports has not only hurt the Chinese economy, but is causing problems throughout Asia. China imports large quantities of parts and materials from other Asian countries, such as Taiwan and South Korea. Because the demand for Chinese exports has dropped, China’s demand for the parts and materials necessary to produce those exports has also slowed. The decreased demand in the Chinese markets for exports from other Asian countries has worsened the problems faced by other Asian countries during the current global financial crisis. Japan, for example, shipped 19 percent of its exports to China in 2007 and, since it is experiencing a decrease in Chinese demand for those exports this year, its economy is slowing in conjunction with China’s. Other countries hurt by the lack of Chinese demand include Taiwan, which shipped 36 percent of its exports to China and South Korea, which shipped 25 percent.

The Chinese government has promised to take more measures to shore up its economy. It has already laid out a 4 trillion yuan ($585 billion) stimulus package, which was unveiled in November, and the central bank is considering adding more interest rate cuts to the 5 it has implemented since September. Experts also expect that the government will reduce reserve requirements for banks, which will allow them to lend more money to stimulate the Chinese economy. The experts hope that if the Chinese economy improves, the economies of other Asian countries will follow suit.

Questions

(1) What steps can China take to bolster its economic growth?

(2) What will an ailing Asian economy mean for the United States and the rest of the world?

(3) What steps can other Asian countries, such as Japan, South Korea and Taiwan, take to reduce their dependence on the Chinese demand for their exports and improve their own economic prospects?

Mexican President Calderon Meets with Obama to Discuss Crime Fighting and Economics

Obama Meets with Mexican Leader Calderon CNN
Mexican president likely to find support for drug war in Obama meeting; immigration tougher Star Tribune
Mexican President talks economics with Obama AFP
As Drug Cartels Fight for Control, Killing Coming Faster in Mexico's Murder Capital on the U.S. Border Latin American Herald Tribune

On Monday, January 13, Mexican President Felipe Calderon met with President-elect Barack Obama in Obama's first face-to-face talks as President-elect with a foreign head of state. The meeting is a tradition representing the special relationship between Mexico and the United States - since 1980, U.S. presidents have met with their Mexican counterparts before taking oath. Security and economy were priorities, and immigration policy was also discussed.

A key point of discussion was the ongoing "drug war" that is escalating in Mexico, particularly in border cities as Mexican law enforcement attempts to crack down on organized crime and as drug cartels vie for territory. Drug-related homicides doubled in Mexico last year. In Mexico's most violent city, Ciudad Juarez, 1600 homicides related to organized crime were reported last year, and 51 homicides were already registered in early January. President Calderon asked the U.S. to further cooperation in countering insecurity along the border, including better regulation of firearm sales in U.S. border towns. Approximately 2,000 weapons are smuggled from the U.S. into Mexico every day. In December, the U.S. Justice Department called Mexican cartels the biggest organized crime threat to the United States. As explained by Calderon, "The more secure Mexico is, the more secure the United States will be...This common problem of organized crime, terrorism, drug trafficking, which is an international problem, we can fight together." Last year the U.S. extended Calderon's administration a 197 million dollar aid package to help fight crime, and U.S. officials have praised Calderon's fight against the cartels and capture of top drug kingpins. The aid is part of a three-year, 1.6 billion dollar program, the Merida Initiative, for Mexico and other Central American and Caribbean nations to fight organized crime.

Obama will likely be receptive to that message, said Michael Shifter, a vice president at the Inter-American Dialogue. "This isn't an issue that he has focused a lot of attention on up until now," added Shifter. "But he's going to understand that if Mexico really deteriorates or if the violence spills over into the border states, this is a war that he really has to deal with."

Calderon also expressed concerns regarding the flailing U.S. economy, which has already began to severely effect the Mexican economy. Mexican banks and business had avoided most of the risks that got U.S. banks into trouble. However, the close trading relationship between the two countries and the dependency of many Mexicans on remittances sent by family members working in the U.S. means that any U.S. economic slowdown will inevitably flow into Mexico. Calderon's office stated, "The two economies are complementary, so they can only operate and prosper if they are sensible and they responsibly integrate the economic factors that affect their competitiveness."

Additional points of discussion included Obama's expressed interest in reforming the North American Free Trade Agreement (NAFTA) and immigration reform. However, given the current emphasis on the economic slowdown in organized crime violence, these two issues hold a lower priority for the two leaders.

Questions:
1) Aside from funding, how best can U.S. law enforcement aid Mexican law enforcement in its fight against drug cartels?
2) Is there anything the Obama administration can do specifically to minimize the impact of the U.S. economic crisis on Mexico? Does the U.S. have a responsibility to do anything to minimize such impact?

U.S. Auto Bailout Forces Canada's Hand

Sources:

Financial Times - Detroit Bailout Casts Shadow on Canada's Plants

New York Times - Canada Agrees to Its Own Auto Bailout

Financial Times - Canada Unveils Auto Bailout Plan

Canada has agreed to a C$4 billion bailout of its auto industry, demonstrating the radiating consequences of the U.S.-origin crisis but also of the U.S. government's response to the crisis. Although Prime Minister Stephen Harper had previously resisted such a bailout, passage of an auto bailout plan in December in the U.S. seems to have forced Harper's hand.

Auto manufacturing, especially for the U.S. "Big Three" of General Motors, Chrysler, and Ford, is the biggest sector of Canada's manufacturing sector and a substantial portion of its overall economy. In fact, the Canadian auto industry makes up a larger portion of Canada's economy than the auto industry does in the U.S. In recent years, the Canadian province of Ontario has overtaken Michigan as the largest auto industry in North America.

When U.S. policymakers agreed to a $17.4 billion deal for the U.S. auto industry in December, there were indications that the Big Three would downsize operations in Canada and move to the U.S. unless a similar emergency loan program was enacted by the Canadian government. Auto jobs, including manufacturers and suppliers, number 400,000 in Ontario alone, and the Canadian government agreed on its own bailout plan shortly after the U.S. plan was finalized.

The Canadian package, in response to U.S. action, illustrates the collateral consequences of even domestic rescue packages. In the fallout of the global financial crisis, large government bailouts may force other nations to act in order to retain their industry's comparative advantage. 

The Canadian auto industry, of which 90 percent is destined for export, has also seen its healthcare comparative advantage erode in the past several years. The transfer of the U.S. automakers' healthcare programs to a joint trust run by the United Auto Workers (UAW) union last year had already weakened Canada's advantage of nationalized healthcare.

The Canadian auto bailout, which will come from the federal government and the province of Ontario, will stipulate that Canada retain its 20% share of overall North American production. In the case of GM, the bailout loans will be made in exchange for company stock, and Chrysler will put up its Canadian assets as collateral for the loans.

Discussion:

1. Is it sustainable for countries to match or exceed the bailout programs of other countries in order to retain a competitive environment?

2. What will be the long-term effect of the auto bailout on the U.S. industry?

U.S. Banks Still in Trouble--and Obama Has a Mess on His Hands

Sources: Financial Times, Bank Shares Plunge on Wall Street; Washington Post, Continued Bank Losses Complicate U.S. Rescue; New York Times, Bank of America May Receive More Bailout Money; New York Times, JPMorgan Reports Slim Profit in Tough Quarter

Predictions that 2009 could be a worse year for banks than 2008 was are ringing true so far this week. Bank of America’s market price plunged on Thursday morning as calls for government intervention grew louder, and several firms are announcing worse-than-expected losses in 2008’s fourth-quarter.

Even JPMorgan’s “good” news did not help the situation in the markets. The firm announced that its fourth-quarter losses were not as bad as analysts had feared—and reported a $702 million profit in what many analysts predicted would be the toughest quarter of the year. JPMorgan still has many challenges to overcome, most notably related to orchestrating two complex mergers at once (Bear Stearns and Washington Mutual).

That major banks are still in trouble and wreaking havoc in the global markets is bad news for the incoming Obama administration, who had publicized plans to allocate what remains of the $700-billion bailout (which Congress passed in October 2008) to aid struggling small businesses, homeowners, and municipalities. The first part of the bailout program funding went to replacing the money that major financial institutions lost in 2008—but with those firms reporting worse-than-expected fourth-quarter losses, many of them are looking to the government for another round of help. Obama advisors are planning on devoting the second half of the original bailout and an $850-billion stimulus package to restoring health to financial markets and the slumping economy.

Congress has yet to approve the last half of the bailout for TARP (Troubled Asset Relief Program), despite the Obama administration’s urging it to do so. Many lawmakers are upset over the Bush administration’s management of the program; the Senate is set to vote on the measure today. Meanwhile, members of Obama’s administration are working on a way to overhaul the management of the global financial system.

Questions for discussion:

Do you think major financial institutions, which have already received hundreds of billions of dollars in federal aid, should receive additional bailout money? Will a stimulus package aimed at consumers and small businesses be more useful? Where is the money going to have the biggest impact?

IMF European Leader Hopes Crisis Is A "Wake Up Call" For Emerging Europe

Sources: IMF Survey, IMF Helping Counter Crisis Fallout in Emerging Europe; Reuters, Emerging Europe Facing Significant Slowdown

In October 2008, the IMF predicted that the credit crisis would start "hitting" emerging European markets. While emerging European economies had not been significantly exposed to the U.S. subprime mortgage market, the IMF argued that the fact that Western European banks were exposed to U.S. toxic assets was enough to indirectly affect emerging Europe. Prior to the outbreak of the crisis, emerging Europe had been experiencing a period of economic expansion.

Last week, Marek Belka, the head of the IMF's European Department, spoke about how the IMF is planning to advise emerging European economies in the coming year. The IMF has already spent more than $39 billion in emergency loans to the region, reaching out to countries like Hungary, Ukraine, Belarus, and Latvia.

According to Belka, emerging Europe should focus both on responding to the current crisis and on reforming its economic institutions so that it is better equipped to respond to future crises. In his view, the current crisis has served as a sort of "wake up call" for the region, one he hopes will lead to more cooperation amongst emerging European governments in the area of economic policy formulation.

Belka expressed a desire to coordinate with the European Union (EU), the World Bank, and the European Bank for Reconstruction and Development to help emerging European economies. He also stated that the IMF would be willing to provide external financial assistance to emerging European countries. He was optimistic about the IMF’s use of external assistance in Hungary and Latvia, and expressed hopes that it would be successful in other countries.

As for concerns that the current crisis will permanently hinder growth in emerging Europe, Belka argues that emerging European countries have been resilient in the reforms they have made thus far and will probably continue on that path in the future. Belka even raised the possibility that emerging European markets may respond better and faster than other, more established, European markets.

With regards to major policy goals for 2009 in emerging Europe, Belka stated that at the moment he is concentrated on helping the region respond to the changes that have and will be made to its economic and political structures to respond to the crisis. Among these changes are increased public debt and increasing government involvement in the public sector.

Greece’s Hard Knocks: Street riots lead to S&P downgrade

Sources: Financial Times, Wall Street Journal, Wall Street Journal

Today the credit rating agency Standard & Poor (S&P) announced that it has downgraded Greece’s credit rating from A to A-, citing public sector debt and a lack of competition to meet performance standards set by other EU competitors. The Greek deficit has climbed to over 14%, the highest in the eurozone, while its debt to gross domestic product ratio hit 94%, second only to Italy. S&P further noted that Greece’s incompetency in sticking to the proposed budget and poor policies, such as social transfers, the public wage bill, and interest payments on public expenditures, are negatively affecting the Greek economy.

Last Friday, S&P put Greece on 'credit watch' along with Portugal and Spain, but Greece was the only one of the three to get downgraded so quickly. The rating change had negative consequences on Greece’s finances as well as on the EU as a whole. Greek stocks plummeted and the euro took a hard hit, ending the day at a 5% decline. The move sparked grave concern among the other weaker economies of the EU, including aforementioned Portugal and Spain, as well as Ireland, who was downgraded to 'negative outlook' last week.

This bad news comes on the tail of last month’s riots, which were rooted in opposition towards Prime Minister Costas Karamanlis but incited by the alleged police murder of a 15-yr-old boy in the streets of Athens. Ten thousand protesters marched through Athens to protest Karamanlis’s economic policies and the government’s handling of the crisis. The riots may have pushed the already fragile economy over the credit rating tipping point.

Discussion:
Do you think S&P should have given Greece more time to stabilize or was it right to downgrade Greece’s rating so quickly after the warning? Scholars are increasingly citing the credit agencies as a principal cause of the financial crisis. What political and business pressures do you think influenced S&P’s quick decision to drop Greece’s rating?

Singapore's last village to be demolished

Raising the Dead in Crowded Singapore, Los Angeles Times; Urban Singapore Prepares to Gobble Up Its Last Village, The New York Times; Singapore should not be as crowded as Hong Kong: Lee, Reuters

Singapore is just one village away from complete urbanization. The tiny island nation has slated its very last village, Kampong Buangkok, for demolition and redevelopment. Kampong Buangkok is the only remaining trace of Singapore’s rural beginnings. It has 28 one-story homes and about three football fields worth of land covered with tropical trees, fruits and flowers and a tiny stream. The small village stands in stark contrast to the massive apartment buildings surrounding it on all sides and the highway less than 200 feet away.  According to Singapore’s Urban Redevelopment Authority, the village’s land will be used to provide future housing, schools and other neighborhood facilities. The village’s inhabitants will be relocated into government housing, like 90 percent of Singapore’s population.

 The village’s redevelopment is part of a larger effort by the Singaporean government to make room for Singapore’s rapidly growing population on the nation’s less than 300 square miles of land. According to a U.N. study in 2003, Singapore is the third most densely populated nation in the world, behind Hong Kong and Macau. Its population has grown from 1.6 million in the 1960’s to 4.8 million today and is projected to grow by 40 percent more by 2050, to 6.5 million.  With so many people to provide for, the government is working hard to create more space on the tiny island. It’s tearing down older neighborhoods to rebuild them in more space-efficient ways, razing landmarks, emptying cemeteries (and cremating or relocating the bodies in order to make use of the land) and making itself larger by dumping landfill into the sea, growing its original 224 square miles to 299 square miles.

(1) What are the pros and cons of being a purely urban nation?

(2) What other steps might Singapore take to provide for its rapidly growing population?